FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1999
Commission File Number: 1-11140
OPHTHALMIC IMAGING SYSTEMS
(Exact name of registrant as specified in its charter)
California 94-3035367
(State of Incorporation) (IRS Employer Identification No.)
221Lathrop Way, Suite I, Sacramento, CA 95815
(Address of principal executive offices)
(916) 646-2020
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes XX No
As of April 14, 1999, 4,155,428 shares of common stock, at no par value, were
outstanding.
<PAGE>1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>2
Ophthalmic Imaging Systems
Condensed Balance Sheet
February 28, 1999
(Unaudited)
<TABLE>
<S> <C>
Assets
Current assets:
Cash and equivalents $ 130,939
Accounts receivable, net 678,583
Inventories, net 660,554
Prepaid expenses and other current assets 67,216
--------------------
Total current assets 1,537,292
Furniture and equipment, net of accumulated
depreciation and amortization of $973,874 354,863
Other assets 18,662
====================
$ 1,910,817
====================
Liabilities and Stockholders' Equity
Current liabilities:
Borrowings under line of credit $ 148,694
Borrowings under note payable to, and unsecured
advances from significant shareholder 1,471,769
Accounts payable 461,786
Accrued liabilities 1,523,367
Accrued warrant appreciation right 280,554
Deferred extended warranty revenue 89,549
Customer deposits 270,336
Capitalized lease obligation and other notes payable 8,939
--------------------
Total current liabilities 4,254,994
Capitalized lease obligation and other notes payable,
less current portion 18,550
Commitments
Stockholders' deficit:
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 issued and outstanding 10,462,604
Deferred compensation (136,060)
Accumulated deficit (12,689,271)
--------------------
Total stockholders' deficit (2,362,727)
====================
$ 1,910,817
====================
</TABLE>
See accompanying notes.
<PAGE>3
Ophthalmic Imaging Systems
Condensed Statements of Operations
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three months ended February 28, Six months ended February 28,
1999 1998 1999 1998
------------------ ----------------- ----------------- -----------------
Net revenues $ 1,860,053 $ 1,468,157 $ 3,350,287 $ 3,370,034
Cost of sales 1,077,985 1,068,831 2,050,406 2,316,427
------------------ ----------------- ----------------- -----------------
Gross Profit 782,068 399,326 1,299,881 1,053,607
Operating expenses:
Sales and marketing 400,153 446,239 925,540 953,057
General and administrative 223,928 929,940 523,792 1,253,358
Research and development 262,999 189,437 470,913 401,705
------------------ ----------------- ----------------- -----------------
Total operating expenses 887,080 1,565,616 1,920,245 2,608,120
------------------ ----------------- ----------------- -----------------
Income (loss) from operations (105,012) (1,166,290) (620,364) (1,554,513)
Other expense, net (21,926) (19,750) (63,936) (28,879)
================== ================= ================= =================
Net income (loss) $ (126,938) $ (1,186,040) $ (684,300) $ (1,583,392)
================== ================= ================= =================
Shares used in the calculation of basic
net income (loss) per share 4,155,428 3,908,206 4,155,428 3,906,817
================== ================= ================= =================
Basic net income (loss) per share $ (0.03) $ (0.30) $ (0.16) $ (0.41)
================== ================= ================= =================
Shares used in the calculation of diluted
net income (loss) per share 4,155,428 3,908,206 4,155,428 3,906,817
================== ================= ================= =================
Diluted net income (loss) per share $ (0.03) $ (0.30) $ (0.16) $ (0.41)
================== ================= ================= =================
</TABLE>
See accompanying notes.
<PAGE>4
Ophthalmic Imaging Systems
Condensed Statements of Cash Flows
Increase (Decrease) in Cash and Equivalents
(Unaudited)
<TABLE>
<S> <C> <C>
Six months ended February 28,
1999 1998
-------------------- -------------------
Operating activities:
Net loss $ (684,300) $ (1,583,392)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 66,192 60,540
Stock option compensation expense 55,240 63,028
Net (increase) decrease in current assets
other than cash and equivalents (185,996) 549,156
Net (decrease) increase in current liabilities
other than short-term borrowings 327,067 931,728
-------------------- -------------------
Net cash (used in) provided by operating activities (421,797) 21,060
Investing activities:
Purchases of furniture and equipment (9,663) (95,963)
Net increase in other assets (11,277) (9,088)
-------------------- -------------------
Net cash used in investing activities (20,940) (105,051)
Financing activities:
Principal payments on notes payable (318) (2,048)
Net proceeds from borrowings under note payable to
and unsecured advances from significant shareholder 9,289 --
Net proceeds from (repayments of) line-of-credit
borrowings 50,519 (195,051)
Net proceeds from sale of common stock -- 213,750
-------------------- -------------------
Net cash provided by financing activities 59,490 16,651
-------------------- -------------------
Net decrease in cash and equivalents (383,247) (67,340)
Cash and equivalents at beginning of period 514,186 142,300
==================== ===================
Cash and equivalents at end of period $ 130,939 $ 74,960
==================== ===================
</TABLE>
See accompanying notes.
<PAGE>5
Ophthalmic Imaging Systems
Notes to Condensed Financial Statements
Three and Six Month Periods ended February 28, 1999 and 1998
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed balance sheet as of
February 28, 1999, condensed statements of operations for the
three and six month periods ended February 28, 1999 and 1998 and
the condensed statements of cash flows for the three and six
month periods ended February 28, 1999 and 1998 have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and
footnote disclosures required by generally accepted accounting
principles for complete financial statements. It is suggested
that these condensed financial statements be read in conjunction
with the audited financial statements and notes thereto included
in the registrant's (the Company's) Annual Report for the Fiscal
Year Ended August 31, 1998 on Form 10-KSB. In the opinion of
management, the accompanying condensed financial statements
include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Company's
financial position and results of operations for the periods
presented. The results of operations for the period ended
February 28, 1999 are not necessarily indicative of the
operating results for the full year.
Certain amounts in the fiscal 1998 financial statements have
been reclassified to conform with the presentation in the fiscal
1999 financial statements.
Note 2. Net Income (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings
per Share". Statement 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 very similar to the previously reported fully
diluted earnings per share. All net income (loss) per share
amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128
requirements.
<PAGE>6
Note 2. Net Income (Loss) Per Share (continued)
The following table sets forth the computation of basic and
diluted income (loss) per share:
<TABLE>
<S> <C> <C> <C> <C>
Unaudited Unaudited
Three Months Ended Six Months Ended
February 28, February 28,
1999 1998 1999 1998
=============== =============== ============== ===============
Numerator for basic and diluted
net income (loss) per share $ (126,938) $ (1,186,040) $ (684,300) $ (1,583,392)
=============== =============== ============== ===============
Denominator for basic net income
(loss) per share:
Weighted average shares 4,155,428 3,908,206 4,155,428 3,906,817
Effect of dilutive securities:
Employee stock options -- -- --
--
Warrants and other -- -- --
--
--------------- --------------- -------------- ---------------
Dilutive potential common shares -- -- --
--
=============== =============== ============== ===============
Denominator for diluted net
income (loss) per share 4,155,428 3,908,206 4,155,428 3,906,817
=============== =============== ============== ===============
Basic net income (loss) per share $ (.03) $ (0.30) $ (0.16) $ (0.41)
=============== =============== ============== ===============
=============== =============== ============== ===============
Diluted net income (loss) per $ (.03) $ (0.30) $ (0.16) $ (0.41)
share
=============== =============== ============== ===============
</TABLE>
Note 3. Short-Term Borrowings
In April 1995, the Company entered into a revolving line of
credit agreement (the "Credit Agreement") with its bank (the
"Bank") which, after several amendments, matured in November
1997.
In November 1997, the Company entered into an accounts
receivable credit agreement (the "Agreement") with the Bank, and
all amounts outstanding under the Credit Agreement were
considered to be the initial advance under the Agreement. The
Agreement allows for up to an 80% advance rate on eligible
accounts receivable balances, and the maximum borrowing base
under the Agreement is $1.2 million. The Bank has full recourse
against the Company and the Agreement remains in effect from
year to year unless terminated in writing by the Company or the
Bank. Borrowings under the Agreement bear interest at the Bank's
prime lending rate plus 4%. In addition, the Bank will charge
monthly an administrative fee equal to the greater of 1/2% of
the average daily balance for the month or $1,200. Under the
terms of the Agreement, borrowings are secured by substantially
all of the Company's assets. At February 28, 1999, approximately
$148,694 in principal was outstanding under the Agreement.
<PAGE>7
Note 4. Note Payable to Related Party
On April 30, 1998, the Company executed a promissory note (the
"Note") in favor of Premier Laser Systems, Inc., a California
corporation ("Premier"). Borrowings against the Note are
available to the Company in the form of periodic advances. The
maximum principal amount available under the Note is $500,000,
which principal amount outstanding, together with any and all
accrued interest, is payable the earlier of (i) written demand
by Premier or (ii) April 30, 1999. Under the terms of the Note,
borrowings bear interest at the rate of 8 1/2% per annum, are
secured by substantially all of the Company's assets and are
subordinate to borrowings against the accounts receivable credit
line with the Company's Bank (see Note 3). Premier also has made
certain unsecured advances to the Company which are not covered
by the Note.
At February 28, 1999, approximately $1,559,000 in principal and
interest was outstanding under the Note and unsecured advances.
The Company and Premier are currently in discussions, among
other things, to establish mutually acceptable repayment terms.
In that connection, there is disagreement between Premier and
the Company as to whether the Company is entitled to the
$500,000 Termination Fee and whether such Termination Fee can be
used as an offset to the Company's debt to Premier.
Note 5. Stock Purchase Agreement
In August 1998, the Company was notified by Premier that Premier
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, dated
February 25, 1998, with the Company ("Stock Purchase
Agreement"). As a result, the Stock Purchase Agreement was
terminated and the Company made a demand for payment from
Premier of $500,000 as a termination fee (the "Termination Fee")
pursuant to the Stock Purchase Agreement. The Termination Fee,
however, is the subject of a disagreement between the companies.
Accordingly, the Company has not recognized the Termination Fee
in its financial statements.
Note 6. Subsequent Events
In March 1999, the Company and Premier entered into a
manufacturing agreement ("Manufacturing Agreement") whereby
Premier will manufacture the majority of the Company's products.
The Manufacturing Agreement will terminate upon the earlier of:
(i) material breach by either party, which breach is not cured
within thirty (30) days written notice thereof; (ii) ninety (90)
days written notice by the Company to Premier; (iii) one hundred
eighty (180) days written notice by Premier to the Company; or
(iv) mutual written agreement of the parties.
<PAGE>8
Note 7. Ability to Continue as a Going Concern
The Company has an accumulated deficit of $12,689,271 at
February 28, 1999. In addition, current liabilities exceed
current assets by $2,717,702 as of that date. These factors,
among others, may suggest that the Company could be unable to
continue as a going concern.
The principal and accrued interest on the Note, by its terms,
are due and payable on April 30, 1999. Although Premier has
indicated its willingness to negotiate a repayment schedule and
defer any default proceedings, there can be no assurance that
such negotiations will be successful and that the terms of the
Note will be revised or that default proceedings will be
deferred. In addition, even if the Note is renegotiated, there
can be no assurances that it will be on terms acceptable to the
Company or that the Company will thereafter be able to generate
sufficient liquidity from operations to meet its obligations as
they become due.
In addition, the Company is seeking sources of additional
capital to meet its current cash requirements, including debt
and other financing arrangements. There can be no assurance,
however, that any financing arrangements will be available and,
if available, can be obtained on terms favorable to the Company.
<PAGE>9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements below include statements that are "forward looking statements"
within the meaning of Section 21A of the Securities Act of 1933, as amended, in
Section 21E of the Securities Act of 1934, as amended, and is subject to the
safe harbor created thereby. Future operating results may be adversely effected
as a result of a number of factors enumerated in the Company's public reports.
Overview
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 primary target market for the Company's digital
angiography systems has been the retinal specialists who number approximately
2,000 in the United States (approximately 12%-13% of ophthalmologists in the
U.S.).
OIS 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 1998, the Company has applied 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 at the Annual Meeting of the American Academy of
Ophthalmology (the "AAO") in November 1998 (the "1998 AAO Meeting"), provide the
general ophthalmology and optometry markets with affordable diagnostic digital
imaging devices. The Company is focusing the majority of its current
development, marketing and sales efforts on its DFI and DSLI products, and
anticipates that it will commence delivering these products in the summer of
1999.
At the 1998 AAO Meeting, 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 increased demand that
may result from the successful introduction of this product. Accordingly, in an
effort to address the Company's manufacturing capacity limitations, the Company
has recently entered into a manufacturing agreement ("the Manufacturing
Agreement") with Premier Laser Systems, Inc., a California corporation and
holder of approximately 51.3% of the Company's outstanding common stock
("Premier"), whereby Premier will manufacture a majority of the Company's
products. Management believes that this arrangement will prove beneficial to the
Company because in the near-term Premier has agreed to provide such products at
its costs, which the Company believes will be less than the cost to the Company
to manufacture such products in-house. There can be no assurance, however, that
there will be favorable market acceptance of these products or that the
Manufacturing Agreement will continue to be beneficial to the Company.
<PAGE>10
In addition, the Company is also nearing agreement with Premier a potential
co-marketing and selling arrangement which would take advantage of Premier's
international distribution channels and its market position among general
ophthalmologists and optometrists through its EyeSys product line, while
providing the Company's sales force the ability to market and sell the EyeSys
products. Management believes that such an arrangement should also result in
certain cost efficiencies to the Company. There can be no assurance, however,
that an acceptable agreement, if any, will be reached.
The Company continues to experience a cash flow deficit and its liabilities
currently exceed its assets. In this regard, the Company, as of February 28,
1999, owed Premier in excess of $1.5 million. In addition to seeking additional
sources of financing, the Company is in current discussions with Premier, among
other things, to structure a repayment schedule for its debt beyond the April
30, 1999 due date. These discussions will include, among other things, offset of
a $500,000 termination fee which the Company believes it is owed under the terms
of the Stock Purchase Agreement dated February 25, 1998 by and between the
Company and Premier ("Stock Purchase Agreement"). The Company is hopeful that it
can reach an agreement with Premier which would significantly improve the
Company's liquidity.
Notwithstanding the Company's efforts to achieve cost savings and to make more
cash available for its operations through the Manufacturing Agreement, potential
co-marketing and selling arrangement and the restructuring of certain of its
debt with Premier, there can be no assurance that the Company will be successful
in its efforts or that such arrangements can be obtained on terms favorable to
the Company. Failure to achieve one or more of these objectives may have an
adverse effect on the Company's ability to continue as a going concern or
realize the full potential benefits from timely delivery of its new products.
The Company's results of operations have historically fluctuated from quarter to
quarter due to a number of factors and are not necessarily indicative of the
results to be expected for any future period or expected for the fiscal year
ending August 31, 1998. There can be no assurance that revenue growth or
profitability can be achieved or sustained in the future.
The following discussion should be read in conjunction with the unaudited
interim financial statements and the notes thereto which are set forth elsewhere
in this Report on Form 10-QSB. In the opinion of management, the unaudited
interim period financial statements include all adjustments, all of which are of
a normal recurring nature, that are necessary for a fair presentation of the
results of the periods.
Results of Operations
The Company incurred a net loss of $126,938, or $.03 per share, for the second
quarter of fiscal 1999 as compared to a net loss of $1,186,040, or $.30 per
share, for the second quarter of fiscal 1998. The Company incurred a net loss of
$684,300, or $.16 per share, for the first six months of 1999 versus a net loss
of $1,583,392, or $.41 per share, for the comparable period of 1998. The per
<PAGE>11
share figures are basic amounts in accordance with Financial Accounting
Standards No. 128 (see Note 2 of Notes to Condensed Financial Statements
included in Item 1 of this Form 10-QSB).
The 1998 amounts and, to a lesser extent, the 1999 amounts, reflect the adverse
impact on revenues and corporate operations resulting from efforts associated
with the terminated Stock Purchase Agreement. The Company has incurred
significant costs and professional fees and expenses in connection therewith,
while diverting a significant amount of the Company's resources and management's
attention and selling efforts away from the Company's core operations during
this period.
The Company's revenues for the second quarter of fiscal 1999 were $1,860,053,
representing an increase of approximately 27% from revenues of $1,468,157 for
the second quarter of fiscal 1998. Revenues for the first six months of fiscal
1999 were $3,350,287, or essentially flat versus revenues of $3,370,034 for the
comparable period of 1998. The increase in revenues in the 1999 second quarter
as compared to the 1998 second quarter was due primarily to lower than normal
revenues during the 1998 period. The 1998 second quarter revenues were adversely
impacted by the redirection of management's efforts from core operations to its
negotiations with Premier. During the 1998 AAO Meeting, the Company introduced
its low-cost digital imaging systems incorporating its recently developed ocular
imaging devices, the DFI and the DSLI. The Company received substantially more
purchase commitments for its products as compared to previous AAO meetings, with
significant purchase commitments for the newly introduced products, deliveries
of which newly introduced products are currently targeted to commence during the
fourth quarter of 1999.
Gross margins were approximately 42% during the second quarter ended February
28, 1999 versus approximately 27% for the comparable quarter of 1998. For the
six-month period ended February 28, 1999, gross margins were approximately 39%
as compared to approximately 31% during the comparable period of 1998. The
increase in gross margin percentage during the second quarter was partially
attributable to the significantly increased revenue levels during the second
quarter of 1999. In addition, the lower gross margins for the 1998 second
quarter reflect the adverse impact of increased reserves for potential field
upgrades recognized for certain systems delivered during the 1998 second
quarter. Further, the increase in such reserves for systems delivered during the
first half of 1998 was a principal factor for the lower gross margins for the
six-month period of 1998 as compared to the same period for 1999. The Company
continues to evaluate its expenses in this area consistent with current and
anticipated business conditions. The Company has recently entered into a
Manufacturing Agreement with Premier which management anticipates will provide
certain efficiencies, including personnel cutbacks, economies of scale from
increased unit production and other manufacturing efficiencies, which may result
in improved gross margins. However, this is a new arrangement and its impact is
not clearly ascertainable at this time.
As a percentage of revenues, sales and marketing and general and administrative
expenses accounted for approximately 34% of total revenues during the second
quarter of fiscal 1999 versus approximately 94% of total revenues during the
comparable second quarter of fiscal 1998. For the first six months of fiscal
<PAGE>12
1999 and fiscal 1998, such expenses accounted for approximately 43% and 65.5% of
total revenues for the respective six-month periods. Expense levels also
decreased to $624,081 during the second quarter of 1999 versus $1,376,179 during
the second quarter of 1998. For the first six months of 1999, expense levels
decreased to $1,449,332 from $2,206,415 during the comparable period of 1998.
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 quarter
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 cost
reductions realized during the first and second quarters of 1999 from the
termination of certain management personnel during the latter half of 1998. The
Company is currently considering marketing and selling alternatives in an effort
to reduce costs and/or improve efficiencies in this area, including
consolidating its current product offerings.
Research and development expenses, as a percentage of revenues, were
approximately 14% in the second quarter of 1999 versus approximately 13% in the
second quarter of 1998. For the first six months of fiscal 1999, such expenses
accounted for approximately 14% of total revenues as compared to approximately
12% during the comparable period of 1998. Expense levels increased in actual
dollar terms to $262,999 during the second quarter of 1999 from $189,437 in
1998. During the first six months of fiscal 1999, expense levels also increased
in actual dollar terms to $470,913 versus $401,705 in 1998. The Company intends
to focus its research and development efforts on its new digital image capture
products and reducing cost configurations for its current products. The Company
anticipates that research and development expense will be maintained at or above
current levels in the near term.
Other expense was $21,926 during the second quarter of fiscal 1999 versus
$19,750 during the second quarter of 1998. For the first six months of 1999 and
1998, other expense was $63,936 and $28,879, respectively. The primary
contributing factor to these increases was interest expense during 1999 versus
1998 associated with borrowings and unsecured advances from Premier, which
borrowings and unsecured advances were made after the first quarter of 1998 (see
Note 4 of Notes to Condensed Financial Statements included in Item 1 of this
Form 10-QSB).
Liquidity and Capital Resources
The Company's operating activities used cash of $421,797 during the first six
months of fiscal 1999 and generated cash of $21,060 during the comparable period
for 1998. The cash used in operations during the first six months of 1999 was
expended principally to fund the net loss during the period. This amount was
partially offset by increases in customer deposits and increases in accrued
liabilities, including accrued but unpaid interest associated with borrowings
from Premier (see Note 4 of Notes to Condensed Financial Statements included in
Item 1 of this Form 10-QSB). Cash generated from operating activities in the
first six months of 1998 resulted principally from the collection of accounts
receivable, increased revenue levels and increases in customer deposits and
accrued liabilities, the aggregate impact of which more than offset the net loss
for the period.
<PAGE>13
Cash used in investing activities was $20,940 during the first six months of
1999 as compared to $105,051 during the same period for 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 generated cash in the amount of $59,490 during the first six months
of fiscal 1999 as compared to $16,651 from financing activities during the same
period of fiscal 1998. The source of cash from financing activities during the
1999 period was principally proceeds from increased borrowings under the credit
facility with Imperial Bank (the "Bank") and, to a lesser extent, an increase in
the amount of borrowings under the note payable to and unsecured advances by
Premier. The source of cash from financing activities in 1998 was the net
proceeds from the exercise of certain warrants issued pursuant to a private
placement of the Company's common stock in November 1995, which amount was
significantly offset by net repayments of borrowings under the credit facility
with the Bank. Principal repayments on notes payable was negligible in both 1999
and 1998.
In November 1997, the Company entered into an accounts receivable credit
agreement (the "Agreement") with the Bank, and all amounts outstanding under a
matured revolving line of credit agreement with the Bank were considered to be
the initial advance under the Agreement. The Agreement allows for up to an 80%
advance rate on eligible accounts receivable balances, and the maximum borrowing
base under the Agreement is $1.2 million. The Bank has full recourse against the
Company and the Agreement remains in effect from year to year unless terminated
in writing by the Company or the Bank. Borrowings under the Agreement bear
interest at the Bank's prime lending rate plus 4%. In addition, the Bank will
charge monthly an administrative fee equal to the greater of 1/2% of the average
daily balance for the month or $1,200. Under the terms of the Agreement,
borrowings are secured by substantially all of the Company's assets. At February
28, 1999, approximately $149,000 in principal was outstanding under the
Agreement.
Additionally, 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, is payable the earlier
of (i) written demand by Premier or (ii) 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 substantially all of the Company's assets and are subordinate to
borrowings against the Agreement with the Company's Bank. Premier also has made
certain unsecured advances to the Company which are not specifically covered by
the Premier Note. Approximately $1,559,000 in principal and interest was
outstanding under the Premier Note and unsecured advances at February 28, 1999.
The Company and Premier are currently in discussions, among other things, to
establish mutually acceptable repayment terms. In that connection, there is
<PAGE>14
disagreement between Premier and the Company as to whether the Company is
entitled to the $500,000 Termination Fee and whether such Termination Fee can be
used as an offset to the Company's debt to Premier. While the parties continue
to discuss these issues, there can be no assurance that a final agreement
between the parties can be reached. In the event that no agreement can be
reached, if demand for payment is made by Premier or the obligation under the
Premier Note becomes due and payable, then the Company's ability to continue as
a going concern could be seriously jeopardized unless the Company is able to
obtain financing to make such payment.
At February 28, 1999, the Company's cash and cash equivalents were $130,939.
Assuming that no demand is made for payment of amounts owing under the Premier
Note, the Company believes that its existing cash balances together with ongoing
collections of its accounts receivable and available borrowing capacity under
the Agreement could be adequate to meet its liquidity and capital requirements
in the near term, except for any additional requirements that may be necessary
for increased development, manufacturing, and sales to support the DFI and DSLI
products. Further, demand for payment of amounts due under the alternative stock
appreciation right with the Bank could also result in the need for additional
cash. While no request for payment has yet been made, principal and interest
amounts due under the alternative stock appreciation right with the Bank, which
amounts were approximately $281,000 as of February 28, 1999, are also currently
due. If demand for payment were to be made by the Bank, then the Company would
also have to seek financing to make such payment, including, but not limited to,
debt or equity financing.
Further, although the Company has the ability to manufacture and market its DFI
and DSLI products, without an infusion of capital or other improvements in its
liquidity position, the Company may have difficulty in meeting any significant
demand for these products. In an effort to address this potential deficiency, in
March 1999, the Company and Premier entered into Manufacturing Agreement whereby
Premier will manufacture certain of the Company's products. In addition, the
Company and Premier are currently in discussions regarding co-marketing and
selling the companies' ophthalmic products as discussed above.
The Company will continue to seek sources of additional capital to meet its
current cash requirements, including debt and other financing arrangements.
There can be no assurance, however, that any financing arrangements will be
available and, if available, can be obtained on terms favorable to the Company.
<PAGE>15
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
The Company's Annual Meeting of Shareholders was held on
January 18, 1999. Matters voted upon at the meeting, and the
number of votes cast for and against each such matter, are
described below:
1. Election of directors:
R. Joseph Allen (2,700,044 shares in favor; and
3,888 shares withheld);
Daniel S. Durrie, M.D. (2,700,044 shares in
favor; and 3,888 shares withheld);
Randall C. Fowler (2,700,045 shares in favor; and
3,888 shares withheld);
Steven R. Verdooner (39,235 shares in favor; and no
shares withheld); and
Walt Williams (2,700,045 shares in favor; and 3,888
shares withheld).
2. A proposal to ratify the appointment of Perry-Smith
& Company LLP as the Company's auditors for the
1999 fiscal year (2,170,993 shares in favor; no
shares against; and no shares abstaining).
At the initial meeting of the recently elected Board held in
January 1999, Walt Williams was elected to serve as
Chairman.
<PAGE>16
ITEM 5. OTHER INFORMATION
In January 1999, the Company granted to each of its
non-employee directors options to purchase up to 50,000
shares (or 200,000 shares in the aggregate of all directors)
of the Company's common stock at an exercise price of $0.563
per share. These options were granted pursuant the Company's
1997 Nonstatutory Stock Option Plan and are subject to
certain vesting requirements. None of these options have
been exercised as of the date hereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the accompanying Index to
Exhibits below are filed as a part hereof and are
incorporated by reference as noted.
(b) None.
<PAGE>17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
undersigned has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPHTHALMIC IMAGING SYSTEMS
(Registrant)
By: /s/STEVEN R. VERDOONER
-------------------------------------------
Steven R. Verdooner,
Chief Executive Officer and Chief Financial
Officer (principal executive officer
and principal financial and accounting officer)
Dated: April 14, 1999
<PAGE>18
INDEX TO EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit Number Footnote
Description of Exhibit Reference
2.1 Stock Purchase Agreement, dated as of February 25, 1998, by and between Registrant (13)
and Premier Laser Systems, Inc.
3.1 Articles of Incorporation of the Registrant, as amended. *
3.1(a) Amendment to Articles of Incorporation (Certificate of Determination of Preferences (11)
of Series A Junior Participating Preferred Stock of Ophthalmic Imaging Systems).
3.2 Amended Bylaws of the Registrant. *
3.3 Amendment to Amended Bylaws of the Registrant dated January 28, 1998. (16)
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation, as amended, *
and the amended Bylaws of the Registrant defining the rights of holders of common
stock of the Registrant.
4.2 Specimen of Stock Certificate. *
4.3 Rights Agreement, dated as of December 31, 1997, between Registrant and American (10)
Securities Transfer, Inc., including form of Rights Certificate attached thereto.
4.4 Amendment to Rights Agreement, dated as of February 25, 1998, between Registrant and (14)
American Securities Transfer, Inc.
10.1 Lease Agreement, dated as of July 10, 1987, between the Registrant (as tenant) and *
Transamerica/Emkay Income Properties I, as amended on July 23, 1990 and June 11, 1991.
10.1(a) Seventh Amendment to lease effective as of July 18, 1996. (7)
10.2 Employment Agreement, dated March 27, 1992, between the Registrant and Dennis J. *
Makes.
10.2(a) Amendment dated June 30, 1993 to the Employment Agreement between the Registrant and (1)
Dennis J. Makes dated March 27, 1992.
10.3 Confidentiality Agreement, dated March 27, 1992 between the Registrant and Dennis J. *
Makes.
<PAGE>19
10.4 Confidentiality Agreement, dated March 27, 1992 between the Registrant and Steven R. *
Verdooner.
10.5 Confidentiality Agreement, dated March 27, 1992 between the Registrant and Richard *
Wullaert.
10.6 Consulting Agreement, dated January 23, 1992, between the Registrant and G. Peter *
Halberg, M.D.
10.7 Assignment dated October 23, 1990 of U.S. Patent Application for Apparatus and Method *
for Topographical Analysis of the Retina to the Registrant by Steven R. Verdooner,
Patricia C. Meade, and Dennis J. Makes (as recorded on Reel 5490, Frame 423 in the
Assignment Branch of the U.S. Patent and Trademark Office).
10.8 Form of International Distribution Agreement used by the Registrant and sample form *
of End User Software License Agreement.
10.9 Original Equipment Manufacturer Agreement, dated April 1, 1991, between the *
Registrant and SONY Medical Electronics, a division of SONY Corporation of America.
10.10 Original Equipment Manufacturer/Value Added Reseller Agreement, dated May 7, 1991, *
between the Registrant and Eastman Kodak Company.
10.11 The Registrant's 1992 Nonstatutory Stock Option Plan and sample form of Nonstatutory *
Stock Option Agreement.
10.12 Cross-Indemnification Agreement, dated February 14, 1991, among Dennis Makes, Steven *
Verdooner, and Richard Wullaert.
10.13 Key Man Life Insurance Policies in the amount of $1,000,000 for each of Dennis J. *
Makes and Steven R. Verdooner, with the Registrant as the named beneficiary.
10.14 Stock Option Plan. (1)
10.15 Rental Agreement dated May 1, 1994 by and between the Registrant and Robert J. (2)
Rossetti.
10.16 Security and Loan Agreement (with Credit Terms and Conditions) dated April 12, 1995 (3)
by and between the Registrant and Imperial Bank.
10.16(a) General Security Agreement dated April 12, 1995 by and between the Registrant and (3)
Imperial Bank.
<PAGE>20
10.16(b) Warrant dated November 1, 1995 issued by the Registrant to Imperial Bank to purchase (4)
67,500 shares of common stock.
10.16(c) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November (4)
1, 1995.
10.16(d) Registration Rights Agreement dated November 1, 1995 between the Registrant and (4)
Imperial Bank.
10.16(e) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated April 4, (6)
1996.
10.16(f) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated July 12, (7)
1996.
10.16(g) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November (7)
21, 1996.
10.16(h) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated June 3, (8)
1997.
10.16(i) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated August (9)
28, 1997.
10.16(j) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated October (9)
24, 1997.
10.16(k) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November (9)
3, 1997.
10.16(l) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November (9)
21, 1997.
10.16(m) Agreement of Purchase of Receivable (Full Recourse) dated November 18, 1997 between (9)
Registrant and Imperial Bank.
10.17 Employment Agreement dated November 20, 1995 between the Registrant and Steven R. (4)
Verdooner.
10.17(a) Amendment dated effective July 14, 1997 to Employment Agreement dated November 20, (16)
1995 between the Registrant and Steven R. Verdooner.
10.18 The Registrant's 1995 Nonstatutory Stock Option Plan and sample form of Nonstatutory (5)
Stock Option Agreement.
<PAGE>21
10.19 The Registrant's 1997 Nonstatutory Stock Option Plan and sample form of Nonstatutory (12)
Stock Option Agreement.
10.20 Promissory Note dated April 30, 1998 from the Registrant to Premier Laser Systems, (15)
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.
10.21 Security Agreement dated April 30, 1998 by and between the Registrant and Premier (15)
Laser Systems, Inc.
10.22 Form of Indemnification Agreement dated January 23, 1998 between the Registrant and (16)
each of its directors, officers and certain key employees.
10.23 Manufacturing Agreement dated March 7, 1999 between the Registrant and Premier Laser (17)
Systems, Inc.
27 Financial Data Schedule (for SEC use only). (16)
</TABLE>
* Incorporated by reference to the Registrant's Registration
Statement on Form S-18, number 33-46864-LA.
(1) Incorporated by reference to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended August 31, 1993 filed on
November 26, 1993.
(2) Incorporated by reference to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended August 31, 1994 filed on
November 29, 1994.
(3) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-QSB for the quarterly period ended May 31, 1995
filed on July 14, 1995.
(4) Incorporated by reference to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended August 31, 1995 filed on
November 29, 1995.
(5) Incorporated by reference to the Registrant's Registration
Statement on Form S-8 filed on May 28, 1996, number 333-0461.
(6) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-QSB for the quarterly period ended May 31, 1996
filed on July 15, 1996.
(7) Incorporated by reference to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended August 31, 1996 filed on
November 29, 1996.
(8) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-QSB for the quarterly period ended May 31, 1997
filed on July 15, 1997.
<PAGE>22
(9) Incorporated by reference to the Registrant'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 Registrant's
Form 8-K filed on January 2, 1998.
(11) Incorporated by reference to Exhibit A of Exhibit 1 of the
Registrant's Form 8-K filed on January 2, 1998.
(12) Incorporated by reference to the Registrant'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 Registrant's
Form 8-K filed on March 9, 1998.
(14) Incorporated by reference to Exhibit 4.1 of the Registrant's
Form 8-K filed on March 9, 1998.
(15) Incorporated by reference to the Registrant'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 Registrant's Annual Report on
Form 10-KSB for the fiscal year ended August 31, 1998 filed on
December 15, 1998.
(17) Exhibit filed herewith.
March 5, 1999
VIA FACSIMILE (949/951-7218)
Premier Laser Systems, Inc.
3 Morgan
Irvine, CA 92618
Ladies and Gentlemen:
I am writing to confirm the following understanding between Premier
Laser Systems, Inc. ("Premier") and Ophthalmic Imaging Systems ("OIS"):
1. Manufacturing by Premier
o Premier will manufacture OIS's products ("OIS Products") listed on
Exhibit A hereto, at the prices as set forth in Exhibit A. This pricing is based
on OIS's and Premier's estimated cost of goods sold according to GAAP, including
without limitation labor, material, manufacturing overhead and anticipated
warranty-related costs ("COGS"). The pricing on Exhibit A will be adjusted from
time to time based on Premier's actual COGS, including, but not limited to, the
impact of engineering change orders mutually agreed by OIS and Premier. For a
period of six (6) months from the date of this letter, Premier will not: (i)
increase any prices set forth in Exhibit A; or (ii) charge a profit margin to
OIS. After six (6) months from the date of this letter, Premier and OIS shall
readdress the basis of the pricing, when to include such margin, and the amount
of such margin. Premier will notify OIS, in writing, sixty (60) days in advance
of the effective date of any price increase.
The foregoing not withstanding, at the end of 90 days from the date of
first delivery from Premier of an OIS Product ordered by OIS from Premier, OIS
and Premier agree to readdress the basis of the pricing in Exhibit A solely with
respect to the component thereof comprised of anticipated warranty-related
costs, and that any mutually agreed adjustment resulting therefrom will be
effected as soon as practicable on a prospective basis. Such adjustment may
include a change in the warranty portion of COGS and/or the party to be
designated with control over or responsibility for satisfaction of warranty
claims.
With respect to purchases from Premier by OIS of products and services not
included in Exhibit A, the pricing and other terms for such purchases will be
subject to the terms and conditions of the individual transactions and such
purchases are not contemplated under this agreement.
<PAGE>
o OIS will place firm, non-cancelable purchase orders ("P.O.") to Premier
at least thirty (30) days in advance of OIS' desired delivery date of OIS
Products, which P.O. will stipulate, among other things, the required delivery
method and destination of the OIS Products ordered. Premier will commence the
ordering of materials and manufacture of the OIS Products after receipt of
payment in full for an order. Payments may be made in cash and/or applicable raw
materials. To the extent that inventory is supplied by OIS to Premier, credit
for the value of said inventory, as mutually agreed, will be applied against
amounts charged by Premier to OIS for OIS Products ordered by OIS from Premier.
Upon receipt of such payment or extension of credit, Premier will: (i) provide
OIS with the estimated delivery date for the OIS Products ordered; and (ii)
manufacture the requested products as soon as commercially practical.
o Premier agrees to pay to OIS all reasonable incidental expenses
(excluding salaries and related) incurred by OIS, including additional airfares,
lodging, subsistence, contractor fees and expenses and other
installation-related expenditures, resulting from Premier's failure to meet its
estimated delivery date, provided, however, that: (i) no such payment shall be
required if Premier provides to OIS ten (10) day prior written notification that
the estimated delivery date will not be met; and (ii) Premier shall not be
liable under any circumstances for consequential or indirect damages including
without limitation loss of profits.
o For a period of not less than sixty (60) days from the date of this
letter, Premier agrees to pay all incidental expenses (excluding salaries and
related) incurred by OIS to train and/or otherwise assist Premier personnel in
the manufacture of OIS Products, including airfare, lodging, subsistence,
contractor fees and expenses, if applicable, and other travel-related expenses,
as mutually agreed.
o Premier agrees to manufacture the OIS Products in compliance with GMP,
QSR and all other pertinent federal, state and international agency standards,
including, but not limited to, CE compliance.
o Shipment of the completed OIS Products shall be made F.O.B. Irvine.
Except for OIS Products shipped freight and related insurance charges and taxes
collect, which amounts are paid to the commercial carrier directly by a party
other than OIS or Premier, OIS shall pay shipping and related insurance costs,
except that Premier shall pay expediting and other related charges in excess of
the cost of the delivery method stipulated in the P.O. for delivery via methods
other than as specified in the P.O.
o Premier shall be responsible for all warranties concerning the OIS
Products for a period of not less than thirteen (13) months from the date of
shipment from Premier, including airfares, lodging, subsistence and other
reasonable incidental expenses (excluding salaries and related) incurred by OIS
with respect to its installers, field technicians or third party service
providers unless the warranty claim is a result of: (i) an OIS design problem;
or (ii) damage following delivery, including damage resulting from installation
by OIS.
Premier agrees to make its best efforts to comply with current OIS service
and support practices, including: (i) to effect in-plant in-warranty repairs
within forty eight (48) hours of receipt of products to be repaired at Premier's
facility; and (ii) to ship in-warranty replacement component parts on the date
requested, provided, however, that requests received after 3:00PM local time
will be filled the next business day.
o Premier shall carry product liability insurance concerning the OIS
Products manufactured by Premier. Such policy shall name OIS as an additional
insured with respect to such OIS Products.
2. Entire Agreement
This document sets forth the entire agreement and
understanding relating to the subject matters hereof, and supersedes all prior
discussions, agreements, understandings, representations and any oral agreements
as may have been entered into or made between Premier and OIS relating to such
subject matters.
3. Arbitration
Any dispute between the parties, whether relating to this
letter agreement or otherwise, shall be resolved by binding arbitration in
Orange County pursuant to the Rules of the American Arbitration Association.
4. Confidentiality
Each party agrees that except as otherwise provided herein, it
shall not disclose to any third party any information concerning the trade
secrets, methods, concepts, processes, procedures, or customers, or any other
confidential, financial, or business information of the other party which it
learns during the course of its performance of this Agreement, without the prior
written consent of the other party. This obligation of confidentiality shall not
apply to any information which (i) was known to the receiving party at the time
if receipt; (ii) was in the public domain at the time of receipt; (iii) becomes
public through no fault of the party obligated to keep it confidential; or (iv)
is required by applicable law to be divulged.
This provision shall survive the termination or expiration if
this Agreement.
5. Termination
This Agreement shall only be terminated: (a) upon material
breach by either party, which breach is not cured within thirty (30) days of
receipt of written notice thereof; (b) upon ninety (90) day written notice by
OIS to Premier; (c) upon one hundred eighty (180) day written notice by Premier
to OIS; or (d) by mutual written agreement of the parties. Upon any such
termination: (i) OIS shall purchase (at Premier's actual direct material cost)
all inventory maintained by Premier, including inventory procured under
non-cancelable purchase orders but not yet received, in connection with open
P.O.s for OIS Products; and (ii) Premier shall deliver to OIS said inventory,
together with all documentation related to OIS Products, including schematic
drawings, vendor lists, parts lists and bills of material.
<PAGE>
Assuming that this letter is consistent with your
understanding of our agreement, please execute this letter in the space provided
below to reflect your acceptance of the terms set forth above.
Sincerely,
/S/ STEVEN R. VERDOONER
Steven R. Verdooner
President and Chief Executive Officer
Ophthalmic Imaging Systems
The terms set forth in this letter
are accepted by Premier Laser Systems, Inc.
this 7th day of March 1999.
By: /S/ COLETTE COZEAN, Ph.D.
Name: Colette Cozean, Ph.D.
Title: President and CEO
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINACIAL INFORMATION EXTRACTED FROM THE FORM 10QSB FOR
OPTHALMIC IMAGING SYSTEMS FOR THE PERIOD ENDED FEBRUARY 28, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> FEB-28-1999
<CASH> 130,939
<SECURITIES> 0
<RECEIVABLES> 678,583
<ALLOWANCES> 0
<INVENTORY> 660,554
<CURRENT-ASSETS> 1,537,292
<PP&E> 1,328,737
<DEPRECIATION> (973,874)
<TOTAL-ASSETS> 1,910,817
<CURRENT-LIABILITIES> 4,254,994
<BONDS> 0
0
0
<COMMON> 10,462,604
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,910,817
<SALES> 1,860,053
<TOTAL-REVENUES> 1,860,053
<CGS> 1,077,985
<TOTAL-COSTS> 1,077,985
<OTHER-EXPENSES> 887,080
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,926
<INCOME-PRETAX> (126,938)
<INCOME-TAX> 0
<INCOME-CONTINUING> (126,938)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (126,938)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> 0
</TABLE>
