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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _____________
Commission file no. 1-11140
OPHTHALMIC IMAGING SYSTEMS
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(Exact name of Registrant as specified in its charter)
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California 94-3035367
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
221 Lathrop Way, Suite I, Sacramento, CA 95815
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (916) 646-2020
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value
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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 /X/ 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. / /
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The issuer's revenues for its most recent fiscal year was $4,895,301.
The aggregate market value of the voting and non-voting common stock of
the issuer held by non-affiliates as of October 31, 2000, was approximately
$754,734 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 31, 2000, there
were 8,138,305 issued and outstanding shares of issuer's common stock.
Traditional Small Business Disclosure Format (check one): Yes No /X/
PART I
Item 1. Description of Business.
(a) Business Development
Ophthalmic Imaging Systems (the "Company" 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
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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
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 March 7, 1999, OIS and Premier entered into a Manufacturing
Agreement (the "Manufacturing Agreement"), whereby Premier was to manufacture
the majority of the Company's products at its facilities in Irvine, California.
As a result of the Manufacturing Agreement, Premier came to own certain
inventory of OIS products and materials (the "Premier Inventory") used in the
manufacture of certain OIS products.
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 would 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, would 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.
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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 came to own
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.
In February 2000, Premier notified the Company that it was considering
seeking protection under the U.S. Bankruptcy Code and the Company thereupon
terminated the Merger Agreement on February 17, 2000. In March 2000, Premier
filed a voluntary petition for protection and reorganization under Chapter 11 of
the U.S. Bankruptcy Code.
In addition, by letter dated February 17, 2000, Premier made a demand
for the repayment by the Company of certain intercompany debt allegedly owed to
Premier, which Premier claimed exceeded $2 million. Such debt arose from a
promissory note in the principal amount of $500,000, dated April 30, 1998, plus
accrued and unpaid interest thereon and additional advances in the approximate
amount of $1,608,000 (the "Premier Note," and the Premier Note and the
additional amounts owed to Premier are referred to as the "Premier Debt"). OIS
asserted defenses and offsets to the Premier Debt, which Premier disputed.
Premier also alleged that Company breached the Manufacturing Agreement
and therefore owed Premier an additional amount in excess of $850,000 for the
purchase of certain inventory, pursuant to the Agreement. The amount of the
claim was subsequently reduced to $625,000. OIS asserted defenses to this
allegation, as well as made claims against Premier under the Manufacturing
Agreement.
In July 2000, the Company, Premier and MediVision Medical Imaging Ltd.,
an Israeli corporation ("MediVision"), entered into a series of definitive
agreements relating to the transfer of Premier's ownership interests in the
Company to MediVision in exchange for cash and MediVision stock, with respect to
which MediVision stock Premier has certain put rights
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pursuant to a Put and Call Agreement between MediVision and Premier. In separate
but related transactions, (i) MediVision loaned the Company $260,000 as
short-term funding for continued operations pursuant to the terms of a Loan and
Security Agreement between MediVision and the Company and memorialized by a
Secured Promissory Note (the "Short-Term Note"); and (ii) upon the closing of
the transactions contemplated under the agreements in August 2000 (the
"Closing"), MediVision, pursuant to the terms of a Securities Purchase Agreement
between the Company, MediVision and Premier (the "Securities Purchase
Agreement") and a Working Capital Funding Agreement between the Company and
MediVision (the "Working Capital Agreement"), committed to loan up to $1,500,000
to the Company, which loan is convertible, at MediVision's option, into
additional shares of the Company's common stock and is memorialized by a Secured
Convertible Working Capital Note (the "Working Capital Note"). MediVision has
certain registration rights with regard to the stock of the Company it acquired
under the Securities Purchase Agreement and the Working Capital Agreement
pursuant to a Registration Rights Agreement between MediVision and the Company.
Pursuant to the agreements, among other things: (i) the Company's entire debt
owed to Premier, calculated at an approximate book value of $2,100,000 million,
was converted per the agreements in favor of Premier into shares of the
Company's common stock at a conversion price of $0.55 per share; and (ii)
MediVision purchased all of the stock of the Company then held by Premier,
including 150 shares of the Company's Series B Preferred Stock which was
converted by its terms into shares common stock, and 3,832,727 shares of common
stock issued pursuant to the conversion of the Premier debt.
In connection with the Closing, Premier and the Company executed mutual
waivers and releases of claims, thereby releasing each other from any and all
claims, whether known or unknown between them, including, among other things,
all disputes related to the Premier Note, the Manufacturing Agreement, and the
$500,000 Termination Fee.
The Company has experienced operating losses for each fiscal year since
its initial public offering in 1992. At August 31, 2000, the Company had an
accumulated deficit in excess of $14,000,000 and its current liabilities
exceeded its current assets by more than $1,300,000. 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.
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(b) Business of Issuer
Products
WinStation Systems
The Company's WinStation systems and products, delineated by
resolution, are primarily used by retina specialists and general
ophthalmologists to perform a diagnostic test procedure known as fluorescein
angiography. This procedure is used to diagnose and monitor pathology and
provide important information in making treatment decisions. Fluorescein
angiography is performed by injecting a fluorescent dye into the bloodstream. As
the dye circulates through the blood vessels of the eye, the WinStation system
connected to a medical image capture device called a fundus camera, takes
detailed images of the patient's retina. These digital images can provide a
"road map" for laser treatment.
Over the past 35 years, fluorescein angiography has been performed
using photographic film which requires special processing and printing. The
Company's WinStation systems allow for immediate diagnosis and treatment of the
patient. Images are automatically transferred to a database and permanently
stored on 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.
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.
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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.
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 at an average per unit selling
price of approximately $21,000. Of total cameras worldwide, including new and
previously-owned, a significant number are suitable to be interfaced with
Company digital imaging systems.
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Currently the Company knows of six manufacturers of fundus cameras.
These manufacturers produce a total of 13 models, and the Company 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. 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.
Sales, Marketing and Distribution
The Company utilizes a direct sales force in marketing its products
throughout the United States and Canada. At August 31, 2000, the direct sales
force consisted of a marketing manager located at the Company's headquarters as
well as four 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.
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 is currently in discussion with MediVision with respect to
co-marketing and selling whereby, among other things, MediVision will distribute
the Company's products in certain international markets and the Company will
continue to utilize ophthalmic distributors in certain other international
markets. Management believes that such arrangements could result in increased
revenues principally from sales of the Company's products to customers outside
of the United States as well as certain cost efficiencies to the Company. There
can be no assurance, however, that an acceptable arrangement, if any, will be
reached or, if reached, will result in the anticipated benefits.
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Manufacturing and Production
The Company is primarily a systems integrator with proprietary
software, optical interfaces and electronic fundus camera interfaces. The
Company also manufactures its DFI optical head and, in prior years, manufactured
the optical head for its Glaucoma-Scope(R) product. Certain components are
subcontracted to outside vendors and assembled at OIS. The Company inventories
and assembles components in a 9,675 square foot facility located in Sacramento,
California. For production of certain components of its products, the Company's
manufacturing strategy is to use subcontractors to minimize time and reduce
capital requirements.
During the third quarter of fiscal year 1999, the Company entered into
the Manufacturing Agreement, whereby Premier began assembling and manufacturing
the Company's products. As a consequence of the termination of the Merger
Agreement in February 2000 and Premier's filing for protection under the U.S.
Bankruptcy Code in March 2000 and the related furlough of the preponderance of
its workforce, however, Premier discontinued producing the Company's products
under the Manufacturing Agreement and the Company resumed manufacture and
assembly of its products in its facilities in Sacramento, California commencing
at the end of the second quarter of 2000. The Company expended considerable
resources and incurred significant delays in production and product deliveries
in connection with the outsourcing arrangements under the terminated
Manufacturing Agreement, including efforts to resume manufacture and assembly of
its products in its facilities in Sacramento, California.
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.
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.
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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, among other things, increased deposits from
customers. Peripheral products such as monitors, printers and optical laser disk
drives also carry the original manufacturer's warranty.
In the North American market, in order to insure quality control and
the proper functioning of its products on-site at a doctor's office, the Company
generally 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 sold.
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.
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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, 2000 and 1999, were approximately $323,500 and $896,000,
respectively. While the Company has focused its recent research and development
efforts on new digital image capture products and reducing cost configurations
for its current products, the extent and focus of future research and
development efforts will depend, in large measure, on direction from MediVision,
including potential collaborative projects between MediVision and the Company.
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.
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
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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 the Company 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.
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
classification of the Company's products require, among other things, annual
registration, listing of devices, good manufacturing practices, labeling and
prohibition against misbranding and adulteration. Further, because the
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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.
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, 2000, the Company has not received any product
liability claims and is unaware of any threatened or pending claims. To the
extent that product liability claims are made against the Company in the future,
such claims may have a material adverse impact on the Company.
Employees
As of August 31, 2000, the Company had 23 employees, of which 22 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.
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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. The Company has
no current plans to renovate, improve or develop any of its leased facilities.
The Company does not have, and does not foresee acquiring, any real estate or
investments in real estate, and is not engaged in any real estate activities.
Item 3. Legal Proceedings.
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.
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.
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, 2000
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.
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<PAGE>
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>
<CAPTION>
Fiscal Year 1999 Fiscal Year 2000
---------------------------------- ----------------------------------
High Low High Low
Ask Bid Dividend Ask Bid Dividend
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
First Quarter ................3/4 3/8 -- 1-1/2 1/2 --
Second Quarter................13/16 3/8 -- 1-1/4 3/8 --
Third Quarter.................9/16 0.33 -- 1/2 0.18 --
Fourth Quarter................1-7/16 0.33 -- 0.80 0.20 --
</TABLE>
On October 31, 2000, the closing price for the Company's common stock,
as reported by the Nasdaq OTC Bulletin Board, was $7/16 per share and there were
approximately 144 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.
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 would 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 was not transferable by Premier. For every share of Series B Preferred
Stock purchased by Premier, Premier would 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
15
<PAGE>
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.
In August 2000, at the Closing, Premier sold to MediVision, 5,964,485
shares of common stock of the Company and the 150 shares of Series B Preferred
Stock, which shares of Series B Preferred Stock were immediately converted by
MediVision into 150 shares of common stock of the Company.
Item 6. Management's Discussion And Analysis Or Plan Of Operation.
General
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 the Company, 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 the Company 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 primary target market for the
Company's digital angiography systems, including the WinStation 1400 and
WinStation 3000 systems introduced at the recently concluded 2000 Annual Meeting
of the American Academy of Ophthalmology (the "2000 AAO Meeting") held during
the first quarter of fiscal 2001 in Dallas, Texas, has been retinal specialists.
In an effort to expand its role in the ophthalmic imaging field by
developing products and applications targeted at the broader markets of general
ophthalmology and optometry, the Company has applied significant resources in
recent years to the development of two ocular imaging devices, the Digital
Fundus Imager (the "DFI") and the Digital Slit Lamp Imager (the "DSLI").
16
<PAGE>
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 that product.
The Company, however, had limited financial and operational resources
to meet the demand resulting from the introduction of this product. In that
regard, 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.
In addition, the Company agreed with Premier on certain co-marketing
and selling arrangements and the two companies began 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.
The Company entered into these arrangements in anticipation of the
Merger Agreement, discussed in further detail below, and consummation of the
transactions contemplated thereby.
In February 2000, however, Premier informed the Company of its
inability to pursue acquisition of the Company under the Merger Agreement and
its intentions to seek voluntary bankruptcy protection under Chapter 11 of the
U.S. Bankruptcy Code. The Company responded by terminating the Merger Agreement.
As a consequence of the termination of the Merger Agreement in February
2000, Premier's filing for protection under the U.S. Bankruptcy Code in March
2000 and the related furlough of the preponderance of its workforce, the
co-marketing and selling arrangements between the companies became non-effective
and Premier discontinued producing the Company's products under the
Manufacturing Agreement. The Company resumed manufacture and assembly of its
products in its facilities in Sacramento, California commencing toward the end
of the second quarter of fiscal 2000 but incurred increased costs and
significant delays in production and product deliveries as a result of these
failed arrangements.
In addition, the Company noted a reduction in its new order bookings
following the termination of the Merger Agreement and Premier's subsequent
filing for bankruptcy protection. In addition, certain of the Company's sales,
marketing and executive management personnel resigned their positions during
2000, which further adversely impacted the Company's ability to generate new
order bookings during the latter half of fiscal 2000.
In July 2000, the Company, Premier and MediVision entered into a series
of agreements, discussed in further detail below, the closing of which in August
2000 resulted in, among other things, transfer of majority voting control of the
Company from Premier to MediVision, conversion to shares of the Company's common
stock of the debt owed to Premier and capital commitments to the Company by
MediVision of $1,500,000.
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, 2000, the Company had an accumulated deficit in excess of
17
<PAGE>
$14,000,000 and its current liabilities exceeded its current assets by more than
$1,300,000. 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.
MediVision and Premier Transactions
On February 25, 1998, the Company and 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. In
August 1998, however, 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 and the Company thereupon terminated the Stock
Purchase Agreement. 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 demand was not pursued at the
time because of a revival of plans for merger of the companies.
On October 21, 1999, the Company and Premier entered into an Agreement
and Plan of Reorganization (the "Merger Agreement") whereby, upon requisite
shareholder approval, the Company would have become a wholly-owned subsidiary of
Premier.
Also on October 21, 1999, the Company and Premier entered into two
stock purchase agreements 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 with each share carrying the voting power of 1,000
shares of the Company's common stock, at a per share price of $25 in exchange
for Premier's cancellation of certain of the Company's debt in the aggregate
amount of $3,750.
In February 2000, Premier notified the Company that it was considering
seeking protection under the U.S. Bankruptcy Code and the Company thereupon
terminated the Merger Agreement on February 17, 2000. In March 2000, Premier
filed a voluntary petition for protection and reorganization under Chapter 11 of
the U.S. Bankruptcy Code.
As a result of the foregoing transactions, at the time of its
bankruptcy filing, Premier owned 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.
On July 13, 2000, the Company, Premier and MediVision entered into a
series of definitive agreements relating to the transfer of Premier's ownership
interests in the Company to MediVision in exchange for cash and stock (the
"MediVision Investments"). In separate but related transactions, MediVision
loaned the Company $260,000 as short-term funding for continued operations and,
upon the closing of the transactions contemplated under the agreements in August
2000 (the "Closing"), MediVision has committed to loan up to $1,500,000 to the
Company, which is convertible at MediVision's option into shares of the
Company's common stock. Pursuant to the agreements relating to the MediVision
Investments, among other things: (i) the Company's entire debt owed to Premier,
calculated at an approximate book value
18
<PAGE>
of $2,100,000, was converted per the agreements in favor of Premier into shares
of the Company's common stock at a conversion price of $0.55 per share; and (ii)
MediVision purchased all of the stock of the Company then held by Premier,
including 150 shares of the Company's Series B Preferred Stock which were
converted by their terms into shares of common stock, and 3,832,727 shares of
common stock issued pursuant to the conversion of the Premier debt.
In addition, at the Closing, Premier and the Company executed a mutual
waiver and release of claims, thereby releasing each other from any and all
claims, whether known or unknown between them, including the $500,000
Termination Fee claimed by the Company against Premier.
As a result of the foregoing transactions, MediVision currently owns
approximately 73% of the Company's outstanding common stock.
Results of Operations
Comparison of Fiscal Year Ended August 31, 2000 to Fiscal Year Ended
August 31, 1999
Revenues
The Company's fiscal 2000 revenues were $4,895,301, representing a
decrease of approximately 22% from revenues of $6,243,305 in fiscal 1999. A
number of factors contributed to the significantly reduced revenue levels during
fiscal 2000, including: (i) delays in delivery of the Company's products
associated with the outsourcing of the manufacture and assembly of the Company's
products during the first six months of the year under the Manufacturing
Agreement with Premier as well as the disruptive impact on production efforts
during the third quarter resulting from the termination of the Manufacturing
Agreement; (ii) management's efforts being directed to the negotiation of the
failed Merger Agreement with Premier as well as subsequent acquisition matters
during the period and less time devoted to the generation of sales; and (iii) a
reduction in the Company's new order bookings following the termination of the
Merger Agreement and Premier's subsequent filing for bankruptcy protection. In
addition, certain of the Company's sales, marketing and executive management
personnel resigned their positions during 2000. While certain of the executive
management personnel continued to work with, and provide consulting services
for, the Company as independent contractors, these resignations resulted in
reduced selling resources during the year. Reference is made to the Company's
Form 8-K filed on March 17, 2000 summarizing the executive management
resignations. Lastly, the fiscal 2000 revenue levels were negatively affected by
the allocation of the Company's reduced selling resources away from its core
WinStation products. Some selling resources were allocated during the period to
EyeSys products in support of terminated co-marketing and co-selling
arrangements with Premier. Higher concentrations of available selling resources
were also allocated to the Company's DFI and DSLI products during the year.
Introduced at the 1998 AAO Meeting, revenues from sales of these low-cost
digital imaging products accounted for approximately 14% of the Company's fiscal
2000 revenues versus approximately 3% of the Company's 1999 revenues. Unit sales
of these products to date, and
19
<PAGE>
corresponding revenues, have been below management's initial expectations for a
variety of reasons, including those noted above 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
Gross margins were approximately 37% in fiscal 2000 as compared to
approximately 38% in fiscal 1999. The 1999 gross margin percentage reflects the
impact of a one time adjustment during the last quarter of the year to reduce
the carrying value of certain potential excess and obsolete inventory, which
more than offset the impact on the fiscal 2000 gross margin percentage of fixed
costs absorption over substantially lower revenue levels during fiscal 2000
versus 1999. The Company also expended considerable resources during both fiscal
2000 and 1999 in connection with the outsourcing arrangements under the
terminated Manufacturing Agreement, including efforts to resume manufacture and
assembly of its products in its facilities in Sacramento, California commencing
at the end of the second quarter of 2000. Costs associated with these efforts,
together with delays in the timely delivery of certain of its products under and
subsequent to termination of the Manufacturing Agreement also have adversely
impacted gross margins during both periods.
Sales, Marketing, General and Administrative Expenses
Sales and marketing and general and administrative expenses accounted
for approximately 52% of revenues for the fiscal year ended August 31, 2000 as
compared to approximately 46% for the previous fiscal year. Expenses were
$2,536,340 in fiscal 2000 as compared to $2,868,089 in fiscal 1999, representing
a decrease of approximately 12%. The principal contributing factors to the
decreased expenses in fiscal 2000 were lower costs associated with significantly
reduced revenue levels and the impact of resignations during the year of certain
sales, marketing and executive management personnel discussed previously.
Subsequent to the Closing of the transactions with MediVision, the Company has
hired a Director of Operations and has undertaken recruitment efforts for
management and other personnel in this and other areas.
Research and Development Expenses
Research and development expenses decreased by approximately 64% to
$323,454, or approximately 7% of revenues in fiscal 2000 from $895,605, or
approximately 14% of revenues in fiscal 1999. While the Company has focused its
recent research and development efforts on new digital image capture products
and reducing cost configurations for its current products, the extent and focus
of future research and development efforts will depend, in large measure, on
direction from MediVision, including potential collaborative projects between
MediVision and the Company.
Interest Income
Interest income was $143,833 during fiscal 2000 versus $1,659 during
fiscal 1999. The substantial increase in the fiscal year 2000 amount resulted
from interest income recorded in
20
<PAGE>
connection with products sold to Premier as well as expenditures made by the
Company for or on behalf of Premier for, among other things, purchase of
inventory components and certain selling and marketing expenses. Interest
expense accounted for $329,753 and $181,867 in fiscal years 2000 and 1999,
respectively. During both years, interest on inventory purchased and borrowings
from and other advances by Premier was the major component of interest expense.
Net Loss
The Company incurred a net loss of $1,171,563, or $0.26 per share,
during fiscal 2000 compared to a net loss of $1,242,840, or $.30 per share,
during fiscal 1999. The 2000 figures include an extraordinary gain of $62,836,
or $0.01 per share, resulting principally from the write-off of the recorded
amount of the Premier debt in excess of the amount calculated in connection with
the conversion of said debt into shares of the Company's common stock previously
discussed (see Note 14 of Notes to Financial Statements included in Item 7 of
this Form 10-KSB). 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 14 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).
Some negative impact on fiscal year 2000 earnings was attributable to
continuing diversion of the Company's resources and management's attention to
acquisition matters during the year. The results of operations for fiscal 2000
reflect the adverse impact on revenues and corporate operations resulting from
delays in delivery of the Company's products associated with the outsourcing of
the manufacture and assembly of the Company's products under the Manufacturing
Agreement with Premier during the first two quarters, as well as the disruption
resulting from termination of the Manufacturing Agreement and return of
production to the Company's facilities in Sacramento, California. In addition,
the Company incurred higher than normal costs and professional fees and expenses
in connection with the failed Merger Agreement and subsequent related
activities, including the transactions with Premier and MediVision, 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. Further, the significantly decreased sales levels during fiscal
2000, the preponderance of which decrease resulted during the latter half of the
year, and corresponding results of operations reflect concern about the
Company's financial stability evidenced by a reduction in its new order bookings
following the termination of the Merger Agreement and Premier's subsequent
filing for bankruptcy protection.
At the recently concluded 2000 AAO Meeting, however, the Company
received a number of purchase commitments for its products, including its
WinStation 1400 and WinStation 3000, both introduced at the meeting. These
newest systems both offer significantly higher resolution than the Company's
existing line of digital imaging products.
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
21
<PAGE>
favorable combination, reach $1,500,000. 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).
Export Sales
Revenues from sales to customers located outside of the United States
accounted for approximately 10% and 14% of the Company's net sales for the years
ended August 31, 2000 and 1999, respectively.
Seasonality
The Company's most effective marketing tool is the demonstration and
display of its products at the annual meeting of the American Academy of
Ophthalmology held during the fall of each year, with a significant amount of
the Company's sales orders generated during or shortly after this meeting.
Accordingly, the Company expends a considerable amount of time and resources
during the first quarter of its fiscal year preparing for this event. As a
consequence, the Company's revenues and profitability typically decrease during
the periods prior to and following the annual meeting.
Liquidity and Capital Resources
The Company's operating activities used cash of $1,491,246 in fiscal
2000 as compared to $215,532 in fiscal 1999. The cash used in operations during
2000 was expended principally to fund the net loss during the year. Additional
uses of cash included payments to certain raw materials, component and other
vendors and accelerated purchasing activity resulting in increased inventory
levels in connection with the resumption of manufacturing and assembly
operations in Sacramento after the terminated manufacturing Agreement with
Premier. 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 as
well as a significant increase in customer deposits.
Net cash used in investing activities was $13,994 during fiscal 2000 as
compared to $27,974 during fiscal 1999. The Company's primary investing
activities consist of equipment and other capital asset acquisitions. The
Company anticipates certain near-term capital expenditures in connection with
its plans to upgrade its existing management information and corporate
communication systems. The Company anticipates that related expenditures, if
any, will be financed from borrowings under existing arrangements with
MediVision, if available, or other financing arrangements, if any, available to
the Company.
The Company generated cash of $1,583,193 in financing activities during
fiscal 2000 as compared to using cash of $92,673 during 1999. The principal
sources of cash from financing
22
<PAGE>
activities during 2000 were borrowings under the Short-Term Note and the Working
Capital Note, discussed in further detail below, and increased advances from
Premier in connection with inventory purchases under the Manufacturing Agreement
(see Note 7 of the Notes to Financial Statements included in Item 7 of this Form
10-KSB). To a lesser extent, the Company also generated cash from the exercise
of stock options by the Exercising Directors during the period as well as the
purchase by Premier of shares of the Company's Series B Preferred Stock. 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.
As discussed in further detail in Note 4 of the Notes to Financial
Statements included in Item 7 of this Form 10-KSB, an accounts receivable credit
agreement (the "Credit Agreement") entered into by the Company with Imperial
Bank (the "Bank") on July 13, 1999 was terminated during the year.
Additionally, as discussed above and further in Note 7, Note 9 and Note
13 of the Notes to Financial Statements included in Item 7 of this Form 10-KSB,
in connection with the transactions contemplated by the MediVision Investments,
the entire amount of the Company's debt owed to Premier, calculated at an
approximate book value of $2,100,000, was converted per the agreements in favor
of Premier into shares of the Company's common stock at a conversion price of
$0.55 per share.
In addition, at the Closing, Premier and the Company executed a mutual
waiver and release of claims, thereby releasing each other from any and all
claims, whether known or unknown between them, including the $500,000
Termination Fee claimed by the Company against Premier.
Also, as discussed further in Note 7 and Note 9 of the Notes to
Financial Statements included in Item 7 of this Form 10-KSB, on July 21, 2000,
the Company executed a promissory note in favor of MediVision (the "Short-Term
Note"). The Company has borrowed the maximum principal amount of $260,000
available under the Short-Term Note, and the Company is currently in discussions
with MediVision with regard to reclassifying amounts currently owing under the
Short-Term Note to amounts owing under the Working Capital Note discussed in
further detail below.
Lastly, as discussed further in Note 7 and Note 9 of the Notes to
Financial Statements included in Item 7 of this Form 10-KSB, in connection with
the Closing in August 2000 of the transactions contemplated by the MediVision
Investments, the Company executed a second promissory note in favor of
MediVision (the "Working Capital Note"). The maximum principal amount available
under the Working Capital Note is $1,500,000, which principal amount
outstanding, together with any and all accrued interest, is payable by August
31, 2003, except that any principal and accrued but unpaid interest amount
outstanding is convertible at any time at MediVision's option into shares of the
Company's common stock at a conversion price of $0.80 per share. Under the terms
of the Working Capital Note, borrowings bear interest at the rate of 9.3% per
annum, are secured by substantially all of the Company's assets. On August 31,
23
<PAGE>
2000, the Company had recorded approximately $628,000 in principal and interest
outstanding under the Working Capital Note.
On August 31, 2000, the Company's cash and cash equivalents were
$255,960. Management anticipates the Company's existing cash balances together
with ongoing collections of its accounts receivable and available borrowings
under the Working Capital Note should be adequate to meet its liquidity and
capital requirements in the immediate term. In light of the termination of the
Credit Agreement and the absence of favorable credit terms with several of its
vendors, however, additional capital will likely be required to continue
operations and to procure inventory necessary to meet current and anticipated
demand for the Company's products. Substantial delays in the delivery of the
Company's 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 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. On August 31, 2000,
the Company had accrued approximately $227,740 in contingent liability under the
stock appreciation right.
Notwithstanding the foregoing, the recent transactions between the
Company, MediVision, and Premier will, in Management's opinion, significantly
improve the Company's financial condition and enhance Management's ability to
achieve profitable operations.
Its relationship with MediVision will provide the Company access to
resources in addition to working capital. As a direct consequence of the
MediVision transactions, the Company has undertaken certain gross margin
enhancement efforts, including improved production cost control and sustaining
engineering programs. In addition, Company and MediVision have begun
collaborative efforts with respect to design and implementation of certain
product development programs. Further, the relationship with MediVision could
assist the Company in reducing selling, general and administrative expenses,
particularly in connection with co-marketing and co-selling arrangements
currently contemplated with respect to certain international markets.
In these regards, the Company and MediVision are currently in
discussions with respect to, among other things, increasing available working
capital beyond the $1,500,000 under the Working Capital Note. Concurrent with
these discussions, the Company will continue to evaluate alternative sources of
capital to meet its cash requirements, including other asset or debt financing,
issuing equity securities and entering into other financing arrangements and is
hopeful that it will be successful in this regard. There can be no assurance,
however, that any of the contemplated financing arrangements described herein
will be available and, if available, can be obtained on terms favorable to the
Company.
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.
24
<PAGE>
Item 7. Financial Statements.
The Company's financial statements for fiscal year 2000 are attached
hereto.
<PAGE>
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, 2000, and the related statements of operations,
stockholders' deficit, and cash flows for the years ended August 31, 2000 and
1999. 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, 2000, and the results of its operations and its cash
flows for the years ended August 31, 2000 and 1999, 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 15 to the
financial statements, current liabilities exceed current assets by $1,363,939.
In addition, the Company has a history of losses from operations resulting in an
accumulated deficit of $14,419,374. 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.
November 10, 2000
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
BALANCE SHEET
AUGUST 31, 2000
2000
------------------
ASSETS
Current assets:
Cash and cash equivalents $ 255,960
Accounts receivable, net of allowance for
doubtful accounts of approximately
$141,000 157,999
Inventories (Note 2) 625,025
Prepaid expenses and other current assets 102,418
------------------
Total current assets 1,141,402
------------------
Furniture and equipment, at cost, net (Note 3) 190,528
Other assets 10,185
------------------
Total assets $ 1,342,115
==================
(Continued)
F-2
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
BALANCE SHEET
(Continued)
AUGUST 31, 2000
<TABLE>
<CAPTION>
2000
------------------
LIABILITIES AND
STOCKHOLDERS' DEFICIT
Current liabilities:
<S> <C>
Accounts payable $ 489,805
Accrued liabilities (Note 5) 933,460
Accrued warrant appreciation right 221,740
Deferred extended warranty revenue 137,890
Customer deposits 449,440
Notes payable to related party (Note 7) 264,067
Capitalized lease obligation (Note 6) 8,939
------------------
Total current liabilities 2,505,341
------------------
Capitalized lease obligation (Note 6) 12,643
Note payable to related party 628,146
------------------
640,789
------------------
Total liabilities 3,146,130
------------------
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; 8,138,305 shares issued and
outstanding 12,630,604
Deferred compensation (15,245)
Accumulated deficit (14,419,374)
-------------------
Total stockholders' deficit (1,804,015)
-------------------
Total liabilities and stockholders' deficit $ 1,342,115
==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------------ ------------------
Revenues:
<S> <C> <C>
Net sales $ 4,711,208 $ 6,011,825
Other revenue 184,093 231,480
------------------ ------------------
Total revenues 4,895,301 6,243,305
Cost of sales 3,083,986 3,892,243
------------------ ------------------
Gross profit 1,811,315 2,351,062
------------------ ------------------
Operating expenses:
Sales and marketing 1,442,953 1,783,146
General and administrative 1,093,387 1,084,943
Research and development 323,454 895,605
------------------ ------------------
Total operating expenses 2,859,794 3,763,694
------------------ ------------------
Loss from operations (1,048,479) (1,412,632)
Other income (expense) (Note 13):
Interest income 143,833 1,659
Interest expense (329,753) (181,867)
Total other income (expense) (185,920) (180,208)
------------------ ------------------
Net loss before extraordinary item (1,234,399) (1,592,840)
------------------ ------------------
Extraordinary item (Note 14):
Gain on forgiveness of debt 62,836 350,000
------------------ ------------------
Net loss $ (1,171,563) $ (1,242,840)
================== ===============
Basic loss per share before extraordinary item $ (.28) $ (.38)
================== ===============
Basic loss per share $ (.26) $ (.30)
================== ===============
Shares used in the calculation of net loss
per share 4,430,413 4,155,428
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED AUGUST 31, 2000 AND 1999
<TABLE>
<CAPTION>
SERIES B
COMMON STOCK PREFERRED STOCK DEFERRED TOTAL
----------------------- ------------------------ COMPEN- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SATION DEFICIT DEFICIT
----------- ----------- ----------- ----------- ------------- ------------- -------------
Balance,
<S> <C> <C> <C> <C> <C> <C>
September 1, 1998 $ 4,155,428 $10,462,604 $ (191,300) $ (12,004,971) $(1,733,667)
Stock option compensation
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)
Sale of preferred stock (Note 9) 150 $ 3,750
Conversion of preferred stock
(Note 9) 150 3,750 (150) (3,750)
Exercise of stock options at
$.375 per share (Note 9) 150,000 56,250
Conversion of note payable
to related party to stock
(Note 9) 3,832,727 2,108,000
Stock option compensation
expense 78,888 78,888
Net loss (1,171,563) (1,171,563)
----------- ----------- ----------- ----------- ----------- ------------- -----------
Balance, August 31, 2000 8,138,305 $12,630,604 - $ - $ (15,245) $ (14,419,374) $(1,804,015)
=========== =========== =========== =========== =========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------------ ------------------
Cash from operating activities:
<S> <C> <C>
Net loss $ (1,171,563) $ (1,242,840)
Adjustments to reconcile net loss to net cash
used in operating activities:
Accrued warrant appreciation right (71,969) 25,522
Depreciation and amortization 126,596 133,465
Stock option compensation expense 78,888 97,167
Loss on retirement of assets 2,771
Net changes in operating assets and liabilities:
Accounts receivable 221,176 127,809
Inventories (263,933) 326,317
Prepaid expenses and other current assets (2,440) (74,014)
Other assets (2,800)
Accounts payable (105,609) 158,484
Accrued liabilities (367,984) (73,901)
Deferred extended warranty revenue 48,498 (23,779)
Customer deposits 19,894 327,467
------------------ ------------------
Net cash used in operating activities (1,491,246) (215,532)
------------------ ------------------
Cash flows used in investing activities:
Acquisition of furniture and equipment (13,944) (27,974)
------------------ ------------------
Cash flows from financing activities:
Sale of common stock 60,000
Repayment of short-term borrowings (98,175)
Proceeds from notes payable to related parties 1,529,361 8,372
Capitalized lease obligation (6,168) (2,870)
------------------ ------------------
Net cash provided by (used in)
financing activities 1,583,193 (92,673)
------------------ ------------------
Net increase (decrease) in cash and cash equivalents 77,953 (336,179)
Cash and cash equivalents, beginning of the year 178,007 514,186
------------------ ------------------
Cash and cash equivalents, end of the year $ 255,960 $ 178,007
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
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 2000 or 1999 comprised 10% or more of net
sales.
Revenues from sales to customers located outside of the United States
accounted for approximately 10% and 14% of net sales during the years
ended August 31, 2000 and 1999, 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.
F-7
<PAGE>
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
------------------
Basic earnings (loss) per share (EPS), which excludes dilution, is
computed by dividing income (loss) available to common shareholders by
the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock, such as stock
options, result in the issuance of common stock which shares in the
earnings of the Company. The treasury stock method is applied to
determine the dilutive effect of stock options in computing diluted
EPS. However, diluted EPS are not presented when a net loss occurs
because the conversion of potential common stock is antidilutive.
Statement of Cash Flows
-----------------------
For purposes of the statement of cash flows, the Company considers
highly liquid investments with original maturities of three months or
less as cash equivalents.
Cash paid for interest amounted to approximately $11,000 and $19,000
during the years ended August 31, 2000 and 1999, respectively. Cash
paid for income taxes amounted to approximately $800 for each of the
years ended August 31, 2000 and 1999.
During the year ended August 31, 2000, the Company issued 3,832,727
shares of common stock with an aggregate value of $2,108,000 in lieu of
payment on a note payable to a related party.
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.
F-8
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. INVENTORIES
Inventories consist of the following as of August 31, 2000:
Raw materials $ 474,264
Work-in-process 20,905
Finished goods 129,856
------------------
$ 625,025
==================
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following as of August 31, 2000:
Research and manufacturing equipment $ 661,214
Office furniture and equipment 440,282
Demonstration equipment 189,965
------------------
1,291,461
Less accumulated depreciation
and amortization (1,100,933)
-------------------
$ 190,528
==================
4. SHORT-TERM BORROWINGS
The Company entered into an accounts receivable credit agreement (the
"Agreement") with a bank (the "Bank") in July 1999. The Agreement
allowed for up to an 80% advance rate on eligible receivable balances.
Borrowings were secured by substantially all assets of the Company and
bore interest at the Bank's prime lending rate plus 10%. The minimum
monthly amount charged by the Bank was the greater of interest
calculated in accordance with the immediately preceding sentence or
$1,200. The Agreement remained in effect from year to year unless
terminated in writing by the Company or the Bank. By letter to the Bank
dated June 23, 2000, the Company confirmed the termination of the
Agreement effective upon earlier verbal notification to the Company by
the Bank that the Bank was no longer willing to make advances under the
Agreement. At August 31, 2000, no principal borrowings were outstanding
under the Agreement.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of August 31, 2000:
Accrued compensation $ 243,364
Accrued warranty expenses 270,927
Other accrued liabilities 419,169
------------------
$ 933,460
==================
F-9
<PAGE>
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 10.8% are due in
monthly installments through June 2003. Future minimum lease payments
are as follows:
Year Ending
August 31,
--------------------
2001 $ 8,880
2002 8,880
2003 7,400
------------------
25,160
Less amount representing interest (3,579)
------------------
$ 21,581
==================
7. NOTES PAYABLE TO RELATED PARTIES
On April 30, 1998, the Company executed a promissory note (the "Premier
Note") in favor of Premier Laser Systems, Inc. ("Premier"), a
California corporation and the Company's majority shareholder. The
Company 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 bore interest at 8.5% per annum, were secured by
certain of the Company's assets and were subordinate to borrowings
under the accounts receivable credit agreement with the Company's Bank
(see Note 4). Premier also made certain other advances to the Company
which were not specifically covered under the Premier Note.
On October 21, 1999, the Company and Premier entered into a Merger
Agreement whereby, among other things, the parties agreed that no
payments would be required with respect to certain amounts owing as
under the Premier Note and other advances during the term of the Merger
Agreement.
In February 2000, Premier notified the Company that it was considering
seeking protection under the U.S. Bankruptcy Code and the Company
thereupon terminated the Merger Agreement on February 17, 2000. In
March 2000, Premier filed a voluntary petition for protection and
reorganization under Chapter 11 of the U.S. Bankruptcy Code.
On July 13, 2000, the Company, Premier and MediVision Medical Imaging
Ltd. ("MediVision"), an Israeli company, entered into a series of
definitive agreements relating to the transfer of Premier's ownership
interests in the Company to MediVision including, among other things,
converting in favor of Premier the Company's entire debt owned to
Premier, calculated at an approximate book value of $2.1 million, into
shares of the Company's common stock at a conversion price of $0.55 per
share. This occurred in August 2000 in connection with the closing of
the transactions contemplated by the definitive agreements (the
"Closing"). In addition, at the Closing, Premier and the Company
executed a mutual waiver and release of claims (see Note 9).
F-10
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
7. NOTES PAYABLE TO RELATED PARTIES (Continued)
Also in connection with the definitive agreements, on July 21, 2000,
the Company executed a promissory note in favor of MediVision (the
"Short-Term Note"). The Company has borrowed the maximum principal
amount of $260,000 available under the Short-Term Note, which principal
amount outstanding, together with any and all accrued interest, was
payable the earlier of the closing or termination of the transactions
contemplated by the definitive agreements, October 13, 2000 or as
otherwise stipulated in the Short-Term Note. Under the terms of the
Short-Term Note, borrowings bear interest at the rate of 9.3% per annum
and are secured by certain of the Company's assets. At August 31, 2000,
the Company had recorded approximately $264,000 in principal and
interest outstanding under the definitive agreements. MediVision and
the Company are in discussions with regard to reclassifying amounts
currently owing under the Short-Term Note to amounts owing under the
Working Capital Note discussed in further detail below.
In further connection with the Closing in August 2000, the Company
executed a second promissory note in favor of MediVision (the "Working
Capital Note"). The maximum principal amount available under the
Working Capital Note is $1.5 million, which principal amount
outstanding, together with any and all accrued interest, is payable by
August 31, 2003 or as otherwise stipulated in the Working Capital Note,
except that MediVision may, at its option, at any time convert any
amount of principal and accrued but unpaid interest then outstanding
into shares of the Company's common stock at a conversion price of $.80
per share, which price is subject to adjustment upon the occurrence of
certain events set forth in the Working Capital Note. Under the terms
of the Working Capital Note, borrowings bear interest at the rate of
9.3% per annum and are secured by substantially all of the Company's
assets. At August 31, 2000, the Company had recorded approximately
$628,000 in principal and interest outstanding under the Working
Capital Note.
8. COMMITMENTS
Operating Leases
----------------
The Company leases its facilities under month-to-month leases. The
lease agreements require minimum lease payments of approximately $7,000
per month.
Rental expense charged to operations for all operating leases was
approximately $83,000 during the year ended August 31, 2000.
9. STOCKHOLDERS' EQUITY
Common Stock
------------
Of the 11,861,695 shares of common stock authorized but unissued as of
August 31, 2000, 2,214,627 shares are reserved for issuance under the
stock option plans.
F-11
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. STOCKHOLDERS' EQUITY (Continued)
MediVision and Premier Transactions
-----------------------------------
On February 25, 1998, the Company and 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. In August 1998, however, Premier notified the
Company that, due to a variety of factors, Premier would not be able to
close the transactions contemplated under the Stock Purchase Agreement
and the Company thereupon terminated the Stock Purchase Agreement. 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 demand was not
pursued at the time because of a revival of plans for merger of the
companies.
On October 21, 1999, the Company and Premier entered into an Agreement
and Plan of Reorganization (the "Merger Agreement") whereby, upon
requisite shareholder approval, the Company would have become a
wholly-owned subsidiary of Premier.
Also on October 21, 1999, the Company and Premier entered into two
stock purchase agreements 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 with each share
carrying the voting power of 1,000 shares of the Company's common
stock, at a per share price of $25 in exchange for Premier's
cancellation of certain of the Company's debt in the aggregate amount
of $3,750.
In February 2000, Premier notified the Company that it was considering
seeking protection under the U.S. Bankruptcy Code and the Company
thereupon terminated the Merger Agreement on February 17, 2000. In
March 2000, Premier filed a voluntary petition for protection and
reorganization under Chapter 11 of the U.S. Bankruptcy Code.
As a result of the foregoing transactions, at the time of its
bankruptcy filing, Premier owned 49-1/2% 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.
On July 13, 2000, the Company, Premier and MediVision entered into a
series of definitive agreements relating to the transfer of Premier's
ownership interests in the Company to MediVision. In separate but
related transactions, MediVision loaned the Company $260,000 as
short-term funding for continued operations and, upon the closing of
the transactions contemplated under the agreements in August 2000 (the
"Closing"), MediVision committed to loan up to $1.5 million to the
Company (Note 7). Principal amounts, together with any accrued but
unpaid interest outstanding in connection with the $1.5 million
commitment is convertible, at MediVision's option, into shares of the
Company's common stock. Also at the Closing, pursuant to the definitive
agreements, among other things: (1) the Company's entire debt owed to
Premier, calculated at an approximate book value of $2.1 million, was
converted per the agreements in favor of Premier into shares of the
Company's common stock at a conversion price of $0.55 per share; and
(ii) MediVision purchased all of the stock of the Company then held by
Premier, including 150 shares of the Company's Series B Preferred Stock
which were converted by their terms into shares of common stock, and
3,832,727 shares of common stock issued pursuant to the conversion of
the Premier debt.
F-12
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. STOCKHOLDERS' EQUITY (Continued)
MediVision and Premier Transactions (Continued)
-----------------------------------------------
In addition, at Closing, Premier and the Company executed a mutual
waiver and release of claims, thereby releasing each other from any and
all claims, whether known or unknown between them, including the
$500,000 Termination Fee claimed by the Company against Premier.
As a result of the foregoing transactions, MediVision currently owns
approximately 73% of the Company's outstanding common stock.
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 in 1996. The Company has accrued $221,740, inclusive
of interest, under the Appreciation Right at August 31, 2000, and it is
reflected as a current liability on the accompanying balance sheet. The
Appreciation Right was due on April 1, 1998.
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 11,667 options remained available
for granting as of August 31, 2000. As of August 31, 2000, stock
options to purchase 55,000 shares at exercise prices ranging from $1.00
to $2.75 were granted and outstanding under the Plan. No options were
exercised during the year ended August 31, 2000.
F-13
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
------------------
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 5,615
remained available for granting of options as of August 31, 2000 As of
August 31, 2000, stock options to purchase 130,985 shares at exercise
prices ranging from $.48 to $4.25 were granted and outstanding under
the Option Plan. No options were exercised during the year ended August
31, 2000.
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 350,000 options remained available for granting as
of August 31, 2000. As of August 31, 2000, stock options to purchase
685,000 shares at exercise prices ranging from $.31 to $4.50 were
granted and outstanding under the Nonstatutory Plan and none of the
granted options were exercised.
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 553,000 options
remained available for granting as of August 31, 2000. As of August 31,
2000, stock options to purchase 297,000 shares at exercise prices
ranging from $.38 to $1.34 were granted and outstanding under the 1997
Nonstatutory Plan. Options to purchase 150,000 shares at a per share
exercise price of $.38 granted under the 1997 Nonstatutory Plan were
exercised during the year ended August 31, 2000.
F-14
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
------------------
A summary of the status of the Company's stock option plans and changes
during the periods is presented below:
Weighted
Average
Exercise
Options Price
------------------ ----------------
Balance, September 1, 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
Options granted 450,000 $ .48
Options cancelled (315,627) $ 1.13
Options lapsed (335,000) $ 1.38
Options exercised (150,000) $ .38
------------------
Balance, August 31, 2000 1,294,345 $ 1.25
==================
The weighted average fair value of options granted during the years
ended August 31, 2000 and August 31, 1999 was $.27 and $.42,
respectively.
The following table summarizes information about the stock options
outstanding at August 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- -----------------------------
Weighted
Average Weighted- Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Number Life Price Number Price
------------------------------------ ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ .38 - $ 1.37 947,845 5.5 $ .65 509,845 $ .76
$ 1.38 - $ 3.00 260,000 1 $ 2.43 260,000 $2.43
$ 3.01 - $ 4.50 86,500 1.8 $ 4.37 80,531 $4.36
--------------- ---------------
1,294,345 850,376
=============== ===============
</TABLE>
F-15
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
------------------
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, 2000 and 1999, respectively; dividend yield of zero;
volatility factors of the expected market price of the Company's common
stock ranged from 141% to 154% 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,
------------------------------------
2000 1999
--------------- ------------------
Pro forma net loss $ (1,273,739) $ (1,515,840)
================ ==================
Pro forma net loss per share $ (.29) $ (.38)
================ ==================
Deferred compensation recorded for financial reporting purposes to
reflect the deemed fair value of the certain options granted to
non-employees is being amortized over the vesting period of the related
options. No such expense was required during the year ended August 31,
2000. For the year ended August 31, 2000 and 1999, the amortized
deferred compensation expense was approximately $78,000 and $97,000,
respectively.
F-16
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. INCOME TAXES
There was no provision (benefit) for income taxes during the years
ended August 31, 2000 or 1999.
The significant components of the Company's deferred tax assets and
liabilities are as follows:
2000
------------------
Deferred tax assets:
Net operating loss carryforwards $ 2,726,000
Inventory reserves 965,000
Accrued warrant appreciation right 95,000
Payroll related accruals 115,000
Warranty accrual 116,000
Sales and accounts receivable reserves 90,000
Uniform capitalization 73,000
Deferred revenue 59,000
Depreciation 11,000
------------------
Total deferred tax assets 4,250,000
Valuation allowance (4,250,000)
-------------------
Net deferred taxes $ -
==================
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>
<CAPTION>
Years Ended August 31,
-------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Federal benefit expected at statutory rates $ (398,000) $ (423,000)
Net operating loss with no current benefit 398,000 423,000
-------------- --------------
$ - $ -
============== ==============
</TABLE>
In connection with a private placement of the Company's common stock in
November 1995, 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.
F-17
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. INCOME TAXES (Continued)
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. The change of ownership
which occurred in August 2000, discussed further in Note 9, will result
in additional limitation of net operating loss and tax credit
carryforwards.
The Company has at August 31, 2000, a net operating loss carryover of
approximately $7,603,000 for federal income tax purposes which expires
between 2007 and 2013, and a net operating loss carryforward of
approximately $2,910,000 for state income tax purposes which expires
between 2000 and 2005. Federal and state tax credit carryforwards of
approximately $68,000 and $39,000 will begin to expire in 2002 and
2017, respectively. As a result of the annual limitations discussed
above, a substantial portion of these loss and credit carryovers may
expire without being utilized.
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, 2000 or 1999. During the years ended August 31, 2000 and
1999, the Company made minimum top heavy required contributions in the
amount of $20,609 and $19,219, respectively, pursuant to IRS Code
Section 416(c).
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.
F-18
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
12. CONTINGENCIES (Continued)
Collection of Taxes from Customers (Continued)
----------------------------------
The analysis indicates maximum potential liability of $1,500,000.
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. RELATED PARTY TRANSACTIONS
Interest expense includes $275,397 in interest charged on inventory
purchased from Premier during the year. Interest income includes
$140,949 in interest charged on products sold to Premier.
14. EXTRAORDINARY ITEM
In August 2000, at the Closing of transactions contemplated by certain
definitive agreements entered into in July 2000 by and among the
Company, MediVision and Premier, among other things, the Company's
entire debt owned to Premier, calculated at an approximate book value
of $2.1 million, was converted into shares of the Company's common
stock. The Company recognized as an extraordinary gain during fiscal
2000 the write-off of the recorded amount of the debt owed to Premier
in excess of the amount calculated in connection with the conversion of
said debt into shares of the Company's common stock (see Notes 7 and
9).
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).
15. ABILITY TO CONTINUE AS A GOING CONCERN
For the years ended August 31, 2000 and 1999, the Company incurred
losses of $1,171,563 and $1,242,840, respectively, and at August 31,
2000, the Company had an accumulated deficit of $14,419,374. In
addition, at August 31, 2000, current liabilities exceed current assets
by $1,363,939. These factors, among others, may indicate that the
Company will be unable to continue as a going concern for a reasonable
period of time.
Notwithstanding the foregoing, recent transactions between the Company,
MediVision, and Premier (see Notes 7, 9 and 13), will, in Management's
opinion, significantly improve the Company's financial condition and
enhance Management's ability to achieve profitable operations.
F-19
<PAGE>
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
15. ABILITY TO CONTINUE AS A GOING CONCERN (Continued)
The relationship with MediVision will provide the Company access to
resources in addition to working capital described in Note 7. As a
direct consequence of the MediVision transactions, the Company has
undertaken certain gross margin enhancement efforts, including improved
production cost control and sustaining engineering programs. In
addition, the Company and MediVision have begun collaborative efforts
with respect to design and implementation of certain product
development programs. The relationship with MediVision will further
assist the Company in reducing selling, general and administrative
expenses, particularly in connection with co-marketing and co-selling
arrangements currently contemplated with respect to certain
international markets.
While Management anticipates that the Company's current sources of
capital, including available borrowings under the Working Capital Note,
should be adequate to meet its liquidity and capital requirements in
the immediate term, additional capital will likely be required to
continue operations and procure inventory necessary to meet current and
anticipated demand for the Company's products.
In that regard, the Company and MediVision are currently in discussions
with respect to increasing available working capital beyond the $1.5
million under the Working Capital Note. Concurrent with these
discussions, management will continue to evaluate alternative sources
of capital to meet its cash requirements, including other asset or debt
financing, issuing equity securities and entering into other financing
arrangements. There can be no assurance, however, that any of the
contemplated financing arrangements described herein will be available
and, if available, can be obtained on terms favorable to the Company.
F-20
<PAGE>
Item 8. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure.
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 principles. There were no disagreements with Perry-Smith LLP on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure.
PART III
Item 9. Directors, Executive Officers, Promoters And Control Persons; Compliance
With Section 16(a) of the Exchange Act.
(a) Directors and Executive Officers
The following is a list of the names and ages of the Company's
directors and executive officers from March 17, 2000, the date of filing of the
Company's Current Report on Form 8-K, regarding the resignation of Mr. Steven R.
Verdooner as an officer and director of the Company and Steven C. Lagorio as an
officer of the Company, until the closing of the transactions with MediVision
and Premier, which are described in greater detail in the Business Development
section of Item 1 and in Management's Discussion and Analysis or Plan of
Operation section of Item 6 of this annual report (the "Previous Management"):
Name Age Position
-------------------------- --------------- ---------------------------
R. Joseph Allen 55 Director (1)
Daniel S. Durrie, M.D. 50 Director (1)
Randall C. Fowler 59 Director (1)
Walt Williams 64 President, Secretary, Director (2)
(1) R. Joseph Allen, Daniel S. Durrie, M.D., and Randall C. Fowler resigned
from the Board of Directors of the Company as of August 11, 2000, in
anticipation of the closing the transactions with MediVision and
Premier.
(2) Walt Williams remained as the sole member of the Board of Directors
until August 28, 2000, when the transactions with MediVision and
Premier were closed.
25
<PAGE>
R. Joseph Allen is the Chairman of the board of directors and Chief
Executive Officer of Allen & Caron, Inc., an investor relations firm. Mr. Allen
has served in these capacities since 1988. Prior to 1988, Mr. Allen held
management positions with General Automation, Inc., Allen and McGarvey, Bozell &
Jacobs Public Relations and Arco. Mr. Allen was a non-employee director of the
Company. He became a director of the Company in January 1999.
Daniel S. Durrie, M.D., is a certified ophthalmologist. Since 1990, Dr.
Durrie has been employed by Hunkeler Eye Centers, headquartered in Kansas City,
Missouri, where he has served as a Fellowship Director for both optometry and
ophthalmology since 1993, as its President from 1997 until 1999, and as its
Treasurer presently. Dr. Durrie also serves as an associate professor of
ophthalmology at the University of Kansas Medical Center in Kansas City,
Missouri. Dr. Durrie was a non-employee director of the Company. He became a
director of the Company in January 1999.
Randall C. Fowler has been the Chairman of the Board, President and
Chief Executive Office of Identix Corporation, a biometrics technology firm
specializing in fingerprint-based identification and security systems, at
various times since he founded Identix in 1982. Mr. Fowler serves on the boards
of Identix, Amdec, Fingerscan Corporation and Sylvan Joint Venture. He holds a
number of technology patents related to biometrics and was an assistant
professor at San Jose State University from 1965 to 1968. In 1997 the San Jose
Business Journal named him Entrepreneur of the Year. Mr. Fowler was a
non-employee director of the Company. He became a director of the Company in
January 1999.
Walt Williams, an attorney and entrepreneur, has managed a private
legal practice between 1984 and 1988 and since 1996. From 1988 to 1995, he
served as Division Counsel to medical device subsidiaries of Pfizer, Inc., a
health care products company with 1995 earnings in excess of $1 billion. In
1981, Mr. Williams founded Diagnostic Services, Inc., a medical device company
located in San Diego, California, and served as its Chairman of the Board or
President from 1981 to 1984. He holds a B.A. and J.D. from the University of
Chicago. Mr. Williams served as a director and Chairman of the Board of OIS
since January 1999. Mr. Williams was a non-employee director of OIS. Upon the
resignation of Messrs. Verdooner and Lagorio as officers of the Company, Mr.
Williams acted as President and Secretary of the Company.
The following is a list of the names and ages of the Company's
directors and executive officers after August 28, 2000 (the "Current
Management"):
Name Age Position
---------------------------------- --------------- ---------------------------
Noam Allon 41 Director
Gil Allon 39 Director
Ariel Shenhar 35 Director
26
<PAGE>
Jonathan Adereth 53 Director
Noam Allon has served as the President, Chief Executive Officer and a
member of the Board of Directors of MediVision since MediVision's inception in
June 1993. Mr. Allon also currently serves as the President, Chief Executive
Officer and a member of the Board of Directors of MediVision's subsidiaries:
Camvision, Laservision and MediVision France. From 1992 to 1993, Mr. Allon
served as Vice President of Marketing and Sales of Fidelity Medical (Israel)
Ltd., an Israeli corporation engaged in digital x-ray imaging and archiving
systems. Mr. Allon received his B.Sc. in Computer Science with distinction from
the Technion Israel Institute of Technology in Haifa, Israel in May 1986.
Gil Allon has served as the Vice President, Chief Operating Officer and
a member of the Board of Directors of MediVision since MediVision's inception in
June 1993. Mr. Allon also currently serves as the Vice President, Chief
Operating Officer and a member of the Board of Directors of MediVision's
subsidiaries: Camvision and Laservision. From 1990 to 1993, Mr. Allon served as
General Manager of Guy Systems, an Israeli corporation engaged in the analysis
and development of information systems and general software. Mr. Allon received
his B.A. and M.Sc. in Computer Science, both with distinction, from the Technion
Israel Institute of Technology in Haifa, Israel in May 1987 and December 1989,
respectively, and his M.B.A. with distinction in Business Management from the
University of Haifa in September 1999.
Ariel Shenhar has served as a member of the Board of Directors of
MediVision since August 1994 and as its Vice President and Chief Financial
Officer since January 1997. Mr. Shenhar served as a member of the Board of
Directors of Fidelity Gold Real Estate Markets Ltd., an Israeli company engaged
in real estate, from 1994 to 1998, as an accountant at Nissan Caspi & Co.
Certified Public Accountants in Jerusalem, Israel in 1996, and at Witkowski &
Co. Certified Public Accountants in Tel Aviv, Israel from 1994 to 1995. From
1991 to 1994, Mr. Shenhar served as Export and Marketing Manager and a member of
the Board of Directors at Anispor International Trading Ltd., an Israeli
corporation engaged in the export of products, systems and turnkey projects in
the healthcare, agriculture and police equipment fields. From 1993 to 1994, Mr.
Shenhar also served as a member of the Board of Directors of Barton Planning &
Manufacturing Ltd., an Israeli corporation engaged in ironwork and machinery.
Mr. Shenhar received his B.A. in Economics and Accounting and his M.B.A. in
Finance from the Hebrew University in Jerusalem, Israel and June 1992 and June
1999, respectively, and has been a Certified Public Accountant since January
1997.
Jonathan Adereth has served as a member of the Board of Directors of
MediVision since July 1, 1999. Mr. Adereth currently serves also as a member of
the Board of Directors of E&C Medical Intelligence Ltd., an Israeli corporation
engaged in medical knowledge-based case management systems. In addition, Mr.
Adereth is a director of Eliav Ltd., an Israeli corporation engaged in medical
imaging systems. From 1994 to 1998, Mr. Adereth served as President and CEO and
as a member of the Board of Directors of Elscint Ltd., one of Israel's largest
medical equipment companies engaged in the development, manufacturing and
marketing of medical
27
<PAGE>
imaging products such as CT scanners, MRI systems and gamma cameras. Prior
thereto Mr. Adereth served as a senior officer of Elscint Ltd. in various
positions and capacities, including as Senior Vice President of Sales and
Marketing in 1994 and as Vice President of Sales, from 1986 to 1993. Mr. Adereth
received his B.Sc. in Physics from the Technion Israel Institute of Technology
in Haifa, Israel in May, 1973.
(b) Section 16(a) Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers and holders of more than
10% of the Company's common stock to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of the Company.
All four of the Company's previous non-employee directors, R. Joseph
Allen, Daniel S. Durrie, M.D., Randall C. Fowler and Walt Williams, were elected
onto the Board on January 18, 1999 at the Company's annual meeting of
shareholders. Although each director should have filed a Form 3 with the SEC
indicating his election to the Board within 10 days of becoming a director of
the Company, all four filed on November 10, 1999. Also, although Steven C.
Lagorio was appointed Chief Financial Officer on June 10, 1999, he filed his
Form 3 indicating his status as an executive officer of OIS on November 10,
1999. Likewise, Steven R. Verdooner has had Section 16(a) reporting obligations
since the Company's initial public offering in 1992. Subsequent to the initial
public offering, Mr. Verdooner received options to purchase common stock of the
Company. On December 23, 1999, Mr. Verdooner filed a Form 4 to report all option
grants received by him.
Except as indicated above, the Company believes that during the fiscal
year ended August 31, 2000, its officers, directors and holders of more than 10%
of its outstanding common stock complied with all Section 16(a) filing
requirements. In making these statements, the Company has relied upon the
written representations of its directors and officers.
No shares of common stock of the Company are owned beneficially by any
of the current directors.
Item 10. Executive Compensation.
(a) Summary Executive Compensation Table
The following table sets forth in summary form the compensation
received during each of the Company's last three completed fiscal years by the
Company's Chief Executive Officer and Chief Financial Officer.
28
<PAGE>
<TABLE>
<CAPTION>
Securities
Name and Other Annual Underlying
Principal Position Year Salary Bonus Compensation Options
------------------------- ------ --------- --------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Steven R. Verdooner, 2000 $ 66,346 $-- $35,136 (1) --
Chief Executive Officer 1999 $150,000 $-- $ 1,018 (2) 57,650
1998 $149,712 $-- $ 518 (3) --
</TABLE>
(1) This figure includes disability insurance premiums of $518, accrued
vacation pay of $28,848, and accrued sick pay of $5,770.
(2) This figure includes disability insurance premiums of $518, and
Glaucoma-scope (R) royalty payments of $500.
(3) This figure includes disability insurance premiums of $518.
(b) Summary Option Grant
During the fiscal year ended August 31, 2000, no individual grants of
stock options were made to the Company's Chief Executive Officer.
(c) Aggregated Option Exercises and Fiscal Year End Values
The following table sets forth information concerning the exercise of
stock options during the fiscal year ended August 31, 2000 all unexercised stock
options held by and the Company's Chief Executive Officer.
<TABLE>
<CAPTION>
No. of Securities Value of
Underlying Unexercised
Unexercised In-The Money
Options at FY-End Options
Shares Acquired Value (Exercisable/ (Exercisable/
Name on Exercise Realized Not Exercisable) Not Exercisable)
--------- ---------------------- ------------- ---------------------- ------------------
<S> <C> <C>
Steven R. Verdooner -- -- 145,983 / 0 --
</TABLE>
(d) Compensation of Directors
Prior to August 28, 2000, the Board maintained three standing
committees, an Audit Committee, a Compensation Committee and a Nominating
Committee. Each of the directors served on each of the three standing
committees. During the fiscal year ended August 31, 2000, there were no
committee meetings held separate and apart from any board meetings. Each of the
29
<PAGE>
Previous Management Directions attended at least 75% of the Board meetings held
during the fiscal year ended August 31, 2000 but before August 28, 2000.
Pursuant to Company policy, each Previous Management director received
$1,000 for each board meeting attended in person and $500 for each meeting
attended by telephone. Since no committee meetings were held separately from
general board meetings, no director was paid additional sums for attending
committee meetings. In addition, each Previous Management director was
reimbursed for costs associated with attended in person a board meeting. The
Previous Management directors had, on occasions, waived their non-employee
director fees for attending telephonic meetings.
In January 1999, each non-employee director received by Board
resolution an option grant to purchase up to 50,000 shares of OIS common stock.
Those options were granted pursuant to the Company's 1997 Nonstatutory Stock
Option Plan and were subject to certain vesting requirements. Those options were
canceled and substantially similar options were granted in May 1999. In October
1999, three of the Company's non-employee directors exercised their options,
each purchasing 50,000 shares of restricted common stock. The fourth director
did not exercise his options, and the options expired in connection with his
resignation from the Board.
In support of the Company's operations, including its introduction of
new products in fiscal year 2000, one Previous Management director provided
consulting services to the Company prior to August 28, 2000 pursuant to certain
Board resolutions. For services rendered during fiscal year 2000, the director
earned consulting fees of approximately $75,000, plus expenses, of which
approximately $3,000 remained accrued but unpaid as of August 31, 2000.
No policy regarding compensation of the Current Management directors
has been adopted by the Board, and no Current Management director has been paid
any compensation by the Company. None of the Current Management directors has
been appointed to any of the three standing committees.
Item 11. Security Ownership Of Certain Beneficial Owners And Management.
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of December 5, 2000, by (i) each
person who "beneficially" owns more than 5% of all outstanding shares of common
stock, (ii) each director and each executive officer identified above in Item
10, and (iii) all directors and executive officers as a group.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature
Beneficial Owner of Beneficial Owner Percent of Class
-------------------------------- ------------------------------- ---------------------------
<S> <C> <C> <C>
Steven R. Verdooner 190,023 (1) 2.3%
221 Lathrop Way, Suite I
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sacramento, CA 95815
R. Joseph Allen -- --
18300 Von Karman, Suite 410
Irvine, CA 92612
Daniel S. Durrie, M.D. 50,000 (2) 0.6%
5520 College Blvd., Suite 201
Overland Park, KS 66211
Randall C. Fowler 50,000 (2) 0.6%
510 North Pastoria Avenue
Sunnyvale, CA 94086
Walt Williams 50,000 (2) 0.6%
2040 Glasgow Avenue
Cardiff, CA 92007
Noam Allon -- --
221 Lathrop Way, Suite I
Sacramento, CA 95815
Gil Allon -- --
221 Lathrop Way, Suite I
Sacramento, CA 95815
Ariel Shenhar -- --
221 Lathrop Way, Suite I
Sacramento, CA 95815
Jonathan Adereth -- --
221 Lathrop Way, Suite I
Sacramento, CA 95815
Directors and Officers as a group 340,023 4.1%
(total of 9 persons)
MediVision Medical Imaging Ltd. 5,964,635 (3) 73%
P.O. Box 45, Industrial Park
Yokneam Elit
20692 Israel
</TABLE>
(1) Mr. Verdooner holds 44,040 shares of common stock and 145,983 options
exercisable
31
<PAGE>
within 60 days of October 31, 2000.
(2) These are restricted shares held upon exercise of options following
accelerated vesting as described in greater detail in the Company's
Form 8-K, filed on November 24, 1999.
(3) This is the number the shares of common stock beneficially held by
MediVision as reported in its Schedule 13D filed on September 12, 2000.
Item 12. Certain Relationships and Related Transactions
(a) Transactions with Executive Officers and Directors
The previously reported royalty arrangement between the Company and
Steven R. Verdooner has been recently canceled, and no payments to Mr. Verdooner
thereunder have been made or are contemplated to be made.
(b) Transactions with Security Holders
As discussed in greater detail in the Business Development section of
Item 1 and in Management's Discussion and Analysis or Plan of Operation section
of Item 6 of this annual report, the Company, Premier and MediVision entered
into a series of transactions which resulted in MediVision owning approximately
73% of the Company's outstanding common stock.
Item 13. Exhibits and Reports on Form 8-K
A. Exhibits
<TABLE>
<CAPTION>
Exhibit Footnote
Number Description of Exhibit Reference
----------- ------------------------------- ------------------
<S> <C> <C> <C> <C>
2.1 Stock Purchase Agreement, dated as of February 25, 1998, by and (13) (13)
Between OIS and Premier.
2.2 Agreement and Plan of Reorganization By and Among Premier, Ophthalmic Acquisition (18)
Corporation and OIS, dated as of October 21, 1999.
2.3 Series B Preferred Stock Purchase Agreement dated as of October 21, 1999 by and (19)
among OIS and Premier.
2.4 Agreement dated as of October 21, 1999 by and among OIS, Premier, Walt Williams, (20)
Daniel S. Durrie and Randall C. Fowler.
2.5 Securities Purchase Agreement dated as of July 13, 2000, by and among OIS, Premier (24)
and MediVision.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
3.1 Articles of Incorporation of OIS, as amended. *
3.2 Amendment to Articles of Incorporation (Certificate of Determination of (11)
Preferences of Series A Junior Participating Preferred Stock of OIS).
3.3 Amendment to Articles of Incorporation (Certificate of Determination of Preferences (21)
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 and American (10)
Securities Transfer, Inc., including form of Rights Certificate attached thereto.
4.3 Amendment to Rights Agreement, dated as of February 25, 1998, between OIS and (14)
American Securities Transfer, Inc.
4.4 Second Amendment to Rights Agreement, effective as of October 20, 1999, between OIS (22)
(22) 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. *
10.4 Assignment dated October 23, 1990 of U.S. Patent Application for Apparatus and *
Method for Topographical Analysis of the Retina to OIS 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 OIS 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 OIS 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 OIS as the named beneficiary.
10.11 Stock Option Plan (1)
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.12 Rental Agreement dated May 1, 1994 by and between OIS and Robert J. Rossetti. (2)
10.13 Security and Loan Agreement (with Credit Terms and Conditions) dated April 12, (3)
1995 by and between OIS and Imperial Bank.
10.14 General Security Agreement dated April 12, 1995 by and between OIS and Imperial (3)
Bank.
10.15 Warrant dated November 1, 1995 issued by OIS to Imperial Bank to purchase 67,500 (4)
shares of common stock.
10.16 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated (4)
November 1, 1995.
10.17 Registration Rights Agreement dated November 1, 1995 between OIS and Imperial Bank. (4)
10.18 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated April (6)
4, 1996.
10.19 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated July (7)
12, 1996.
10.20 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated (7)
November 21, 1996.
10.21 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated June (8)
3, 1997.
10.22 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated August (9)
28, 1997.
10.23 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated (9)
October 24, 1997.
10.24 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated (9)
November 3, 1997.
10.25 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated (9)
November 21, 1997.
10.26 Agreement of Purchase of Receivable (Full Recourse) dated November 18, 1997 between (9)
OIS and Imperial Bank.
10.27 Agreement of Purchase of Receivable dated July 13, 1999 between OIS and Imperial (23)
Bank.
10.28 The Company's 1995 Nonstatutory Stock Option Plan and sample form of Nonstatutory (5)
Stock Option Agreement.
10.29 The Company's 1997 Nonstatutory Stock Option Plan and sample form of Nonstatutory (12)
Stock Option Agreement.
10.30 Promissory Note dated April 30, 1998 from OIS to Premier Laser Systems, Inc. in the (15)
maximum amount of $500,000 due in full upon the earlier of (i) written demand by
Premier or (ii) April 30, 1999.
10.31 Security Agreement dated April 30, 1998 by and between OIS and Premier Laser (15)
Systems, Inc.
10.32 Form of Indemnification Agreement between OIS and each of its directors, officers (16)
and certain key employees.
34
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.33 Manufacturing Agreement dated March 7, 1999 between OIS and Premier. (17)
10.34 Working Capital Funding Agreement dated as of July 13, 2000 by and between (24)
MediVision and OIS.
10.35 Loan and Security Agreement dated as of July 13, 2000 by and between MediVision and (24)
OIS.
10.36 Put and Call Agreement dated as of August 2000 by and between MediVision and OIS. (24)
10.37 Registration Rights Agreement dated as of August 2000 by and between MediVision and (24)
OIS.
10.38 Secured Convertible Working Capital Note dated August 2000 from OIS to MediVision (24)
in the principal amount of $260,000.
10.39 Secured Promissory Note dated July 21, 2000 from OIS to MediVision in the principal (24)
amount of $1,500,000.
11.1 Computation of net loss per share. (24)
23.1 Consent of Perry-Smith & Company LLP, Independent Auditors. (24)
27 Financial Data Schedule (for SEC use only). (24)
</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.
(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
35
<PAGE>
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. 33
(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.
36
<PAGE>
(23) Incorporated by reference to Exhibit 10.27 of the Company's Form
10-KSB, filed on November 29, 1999.
(24) Exhibit filed herewith.
B. Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended August 31, 2000.
SIGNATURES
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Company and in the capacities and on
the dates indicated.
/s/ NOAM ALLON Director December 13, 2000
-----------------------------------
Noam Allon
/s/ GIL ALLON Director December 13, 2000
-----------------------------------
Gil Allon
/s/ ARIEL SHENHAR Director December 13, 2000
-----------------------------------
Ariel Shenhar
/s/ JONATHAN ADERETH Director December 13, 2000
------------------------------------
Jonathan Adereth
37
