-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EKqPnY50GOS8wfkjRGBKpZSIsGKjehCo8Dw2Ksd+X7k0xC1eLuP4TGIWddbd7JGy tXoTXu82oVNcPfEEm0l8SQ== 0000910680-01-000209.txt : 20010330 0000910680-01-000209.hdr.sgml : 20010330 ACCESSION NUMBER: 0000910680-01-000209 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPHTHALMIC IMAGING SYSTEMS INC CENTRAL INDEX KEY: 0000885317 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 943035367 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-11140 FILM NUMBER: 1584106 BUSINESS ADDRESS: STREET 1: 221 LATHROP WAY STE 1 CITY: SACRAMENTO STATE: CA ZIP: 95815 BUSINESS PHONE: 9166462020 MAIL ADDRESS: STREET 1: 221 LATHROP WAY STREET 2: SUITE 1 CITY: SACRAMENTO STATE: CA ZIP: 95815 10KSB 1 0001.txt FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM September 1, 2000 TO December 31, 2000 Commission file no. 1-11140 OPHTHALMIC IMAGING SYSTEMS - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter)
California 94-3035367 - -------------------------------------------------------------- ------------------ (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 221 Lathrop Way, Suite I, Sacramento, CA 95815 - -------------------------------------------------------------- ----------------------- (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
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. / / The issuer's revenues for the transitional period were $1,180,642. The aggregate market value of the voting and non-voting common stock of the issuer held by non-affiliates as of February 28, 2001, was approximately $369,524 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 February 28, 2001, 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 2 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 8 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. 3 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 4 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 December 31, 2000, the Company had an accumulated deficit in excess of $15,000,000 and its current liabilities exceeded its current assets by more than $2,000,000. 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. 5 (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. 6 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. 7 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 December 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. 8 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. 9 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. 10 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 4-month periods ended December 31, 2000 and 1999 were approximately $156,000, 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, one of which such projects has been recently undertaken. 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 11 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 12 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 December 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 December 31, 2000, the Company had 26 employees, all of which 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. 13 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 transition period ended December 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. 14 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.
4-Months Ended December 31, 2000 Fiscal Year 2000 ---------------------------------- ---------------------------------- High Low High Low Ask Bid Dividend Ask Bid Dividend ---------------------------------- ---------------------------------- First Quarter ................0.45 0.21 -- 1-1/2 1/2 -- Second Quarter................0.31 0.16 -- 1-1/4 3/8 -- Third Quarter................. -- -- -- 1/2 0.18 -- Fourth Quarter................ -- -- -- 0.80 0.20 --
On February 28, 2001, the closing price for the Company's common stock, as reported by the Nasdaq OTC Bulletin Board, was $.17 per share and there were approximately 141 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 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. 15 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 October 2000 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"). At the 1998 Annual Meeting of the American Academy of Ophthalmology (the "1998 AAO Meeting") held during October 1998, 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. 16 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 and Premier's filing for protection under the U.S. Bankruptcy Code in March 2000, 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. Also, 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 December 31, 2000, the Company had an accumulated deficit in excess of $15,000,000 and its current liabilities exceeded its current assets by more than $2,000,000. 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. 17 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 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 the 4-Month Period Ended December 31, 2000 to the 4-Month Period Ended December 31, 1999 Revenues The Company's revenues for the 4-month period ended December 31, 2000 were $1,180,642, representing a decrease of approximately 29% from revenues of $1,660,300 for the 4-month period ended December 31, 1999. The reduced revenue levels during the 2000 period reflect the adverse impact of a number of factors as noted above, including diversion of substantial Company efforts and resources to acquisition, reorganization and integration matters in connection with the Closing of the transactions with MediVision, as well as continued delays in delivery of certain of the Company's products associated with resumption of manufacture and assembly efforts in Sacramento, California following termination during 2000 of the Manufacturing Agreement with Premier. As also previously noted, another contributing factor to the reduced revenue levels during the 2000 period was the continued diversion of significant resources and management efforts to the negotiation of the failed Stock Purchase and Merger Agreements with Premier over the past two years. A reduction in its new order bookings following the termination of the Merger Agreement and Premier's subsequent filing for bankruptcy protection further adversely impacted revenues for the 2000 period. Lastly, the resignation during fiscal 2000 of certain of the Company's sales, marketing and executive management personnel adversely effected the Company's ability to market its products (reference is made to the Company's Form 8-K filed on March 17, 2000 summarizing the executive management resignations). 18 Revenues from sales of the Company's DFI and DSLI low-cost, lower-margin digital imaging products accounted for approximately 32% of the Company's revenues during the 4-month period ended December 31, 2000 versus approximately 25% of the Company's revenues during the comparable 1999 period. Unit sales of these products to date, and 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 The Company reported a negative gross margin of approximately 12% for the 4-month period ended December 31, 2000 as compared to a gross margin of approximately 27% in the comparable period of 1999. The 2000 gross margin percentage reflects the adverse impact of approximately $440,000 related to the charge off of potential excess and/or obsolete inventory and nonrecurring warranty related reserves. In addition, significantly reduced revenues, higher support costs and fixed expense levels representing a higher percentage of revenues during the 4-month period ended December 31, 2000 versus the comparable period of 1999, also contributed to the lower gross margin percentage during 2000. Sales, Marketing, General and Administrative Expenses Sales, marketing, general and administrative expenses accounted for approximately 94% of revenues for the 4-month period ended December 31, 2000 as compared to approximately 58% for the 4-month period ended December 31, 1999. Expenses were $1,115,403 in 2000 as compared to $962,913 in 1999, representing an increase of approximately 16%. The principal contributing factors to the increased expenses in 2000 were: (i) higher salaries and expenses related to increased headcount resulting from recruitment efforts undertaken subsequent to the Closing of the transactions with MediVision for management and other personnel, including consultants, in this and other areas; and (ii) increased professional, administrative and other costs in connection with or as a consequence of the transactions with MediVision. These increased costs more than offset the impact of reduced commissions and other expenses associated with significantly reduced revenue levels during the 2000 period versus the comparable period of 1999. Research and Development Expenses Research and development expenses of $155,874, or approximately 13% of revenues, during the 4-month period ended December 31, 2000 were essentially flat with expenses of $156,400, or approximately 9% of revenues, during the comparable period of 1999. 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, one of which such projects has been recently undertaken. Other Income (Expense) Other expense was $51,003 during the 4-month period ended December 31, 2000 versus $50,961 during the comparable period of 1999. These amounts were comprised principally of interest expense associated with borrowings from MediVision and Premier during 2000 and 1999, respectively, as well as interest expense during both periods in connection with a stock appreciation right granted to the Company's bank discussed in further detail below. Interest income in both periods was insignificant. 19 Net Loss The Company incurred a net loss of $1,465,756, or $0.18 per share, during the 4-month period ended December 31, 2000 compared to a net loss of $725,672, or $.17 per share, during the 4-month period ended December 31, 1999. The per share figures are basic amounts in accordance with Financial Accounting Standards No. 128 (see Note 1 of Notes to Financial Statements included in Item 7 of this Form 10-KSB). The 2000 figures reflect the adverse impact on revenues and corporate operations attributable to diversion of substantial Company resources and management's attention to acquisition, reorganization, integration and related matters during the period preceding and immediately following the Closing of the transactions with MediVision. The results of operations for 1999 reflect, in large measure, the negative impact resulting principally from delays in delivery of the Company's products during the period under the Manufacturing Agreement with Premier, as well as higher than normal costs and professional fees and expenses in connection the contemplated transactions with Premier, 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. Following the Closing of the transactions with MediVision, the Company is redirecting its attention and resources to core marketing, selling and corporate operations issues. As a direct result of these efforts, the Company introduced at the recently concluded 2000 AAO Meeting its newest products, WinStation 1400 and WinStation 3000 digital imaging systems, both of which offer significantly higher resolution than the Company's existing line of digital imaging products. At the meeting, the Company received a number of purchase commitments for its products, including its WinStation 1400 and WinStation 3000 systems. The market's initial reception to these new products has been positive and the Company is hopeful that these products will contribute substantial future revenues. There can be no assurance, however, that there will be market acceptance of these products or that any market acceptance will result in significant future unit sales or revenue contribution. The results of operations do not include any amounts with respect to a potential contingent liability in connection with the collection of taxes from the Company's customers, which amount has been estimated on the basis of numerous factors and assumptions that might, in the least favorable combination, reach $1,700,000. 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 11 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 15% and 17% of the Company's net sales for the 4-month periods ended December 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. 20 Liquidity and Capital Resources The Company's operating activities used cash of $1,026,156 in the 4-month period ended December 31, 2000 as compared to $39,222 in the comparable period of 1999. The cash used in operations during 2000 was expended principally to fund the net loss during the period. This amount was partially offset principally by increases in certain reserve levels, including increased accrued liabilities resulting from nonrecurring warranty related charges, and reduced inventory levels resulting from the charge off of potential excess and/or obsolete inventory. The cash used operations during the 4-month period ended December 31, 1999 was expended principally to fund the loss during the period. This amount was substantially offset by principally customer deposits from orders generated at and shortly after the 1999 Annual Meeting of the American Academy of Ophthalmology and increased accounts payable and accrued liability levels. 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 $57,359 during 2000 as compared to $7,293 during 1999. The Company's primary investing activities consist of equipment and other capital asset acquisitions. The Company anticipates certain continued 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 $864,129 in financing activities during the 4-month period ended December 31, 2000 as compared to $81,094 during the comparable period of 1999. The principal sources of cash from financing activities during the 2000 period were borrowings under the Working Capital Note, discussed in further detail below and in Note 6 of the Notes to Financial Statements included in Item 7 of this Form 10-KSB. The cash generated from financing activities during the 4-month period ended December 31, 1999 resulted from the exercise of stock options by the Exercising Directors during the period as well as an increase in the amount of borrowings under the credit facility with Imperial Bank (the "Bank") which was terminated during the year ended August 31, 2000. In addition, pursuant to certain stock purchase agreements with respect to the Company's Series B Preferred Stock, Premier purchased 150 shares of the Company's Series B Preferred Stock at a per share price of $25 in exchange for Premier's cancellation of a portion of the Company's debt in the aggregate amount of $3,750. As discussed further in Note 6 and Note 8 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. 21 In addition, as discussed further in Note 6 and Note 8 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 December 31, 2000, the Company had recorded approximately $1,488,000 in principal and interest outstanding under the Working Capital Note and the Company and MediVision are currently in negotiations to, among other things, increase the principal amount under the Working Capital Note. On December 31, 2000, the Company's cash and cash equivalents were $36,574. Management anticipates that additional sources of capital beyond those currently available to the Company will be required to continue operations and 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 December 31, 2000, the Company had accrued approximately $228,581 in contingent liability under the stock appreciation right. Notwithstanding the foregoing, the recent transactions between the Company and MediVision 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. Item 7. Financial Statements. The Company's financial statements for the transitional period are attached hereto. 22 OPHTHALMIC IMAGING SYSTEMS FINANCIAL STATEMENTS FOR THE FOUR-MONTH PERIOD ENDED DECEMBER 31, 2000 AND THE YEAR ENDED AUGUST 31, 2000 AND INDEPENDENT AUDITOR'S REPORT 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 December 31, 2000, and the related statements of operations, stockholders' deficit, and cash flows for the four-month period ended December 31, 2000 and the year ended August 31, 2000. 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 December 31, 2000, and the results of its operations and its cash flows for the year ended August 31, 2000, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the financial statements, current liabilities exceed current assets by $2,013,324. In addition, the Company has a history of losses from operations resulting in an accumulated deficit of $(15,885,130). 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 11 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. February 16, 2001 F-1 OPHTHALMIC IMAGING SYSTEMS BALANCE SHEET DECEMBER 31, 2000
2000 ------------------ ASSETS Current assets: Cash and cash equivalents $ 36,574 Accounts receivable, net of allowance for doubtful accounts of approximately $152,000 336,156 Inventories (Note 2) 391,510 Prepaid expenses and other current assets 82,176 ------------------ Total current assets 846,416 ------------------ Furniture and equipment, at cost, net (Note 3) 211,988 Other assets 10,295 Total assets $ 1,068,699 ==================
F-2 OPHTHALMIC IMAGING SYSTEMS BALANCE SHEET (Continued) DECEMBER 31, 2000
2000 ------------------ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 604,918 Accrued liabilities (Note 4) 1,193,297 Accrued warrant appreciation right 228,581 Deferred extended warranty revenue 132,660 Customer deposits 388,894 Notes payable to related party (Note 6) 302,451 Capitalized lease obligation (Note 5) 8,939 ------------------ Total current liabilities 2,859,740 ------------------ Capitalized lease obligation, less current portion (Note 5) 10,434 Note payable to related party, less current portion (Note 6) 1,456,100 ------------------ 1,466,534 Total liabilities 4,326,274 ------------------ Commitments and contingencies (Notes 7 and 11) Stockholders' deficit (Note 8): 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 (3,049) Accumulated deficit (15,885,130) -------------------- Total stockholders' deficit (3,257,575) ------------------- Total liabilities and stockholders' deficit $ 1,068,699 ==================
The accompanying notes are an integral part of these financial statements. F-3 OPHTHALMIC IMAGING SYSTEMS STATEMENT OF OPERATIONS FOR THE FOUR-MONTH PERIOD ENDED DECEMBER 31, 2000 AND THE YEAR ENDED AUGUST 31, 2000
DECEMBER 31, AUGUST 31, 2000 2000 ------------------ ------------------ Revenues: Net sales $ 1,180,642 $ 4,571,182 Cost of sales (Note 1) 1,324,118 2,633,600 ------------------ ------------------ Gross (loss) profit (143,476) 1,937,582 ------------------ ------------------ Operating expenses: Sales and marketing 660,279 1,569,220 General and administrative 455,124 1,093,387 Research and development 155,874 323,454 ------------------ ------------------ Total operating expenses 1,271,277 2,986,061 ------------------ ------------------ Loss from operations (1,414,753) (1,048,479) Other income (expense): Interest income 234 143,833 Interest expense (51,237) (329,753) ------------------ ------------------ Total other income (expense) (51,003) (185,920) ------------------ ------------------ Net loss before extraordinary item (1,465,756) (1,234,399) ------------------ ------------------ Extraordinary item (Note 12): Gain on forgiveness of debt 62,836 ------------------ ------------------ Net loss $ (1,465,756) $ (1,171,563) ================== ================== Basic loss per share before extraordinary item $ (.18) $ (.28) =================== ================== Basic loss per share $ (.18) $ (.26) =================== ================== Shares used in the calculation of net loss per share 8,138,305 4,430,413 ================== ==================
The accompanying notes are an integral part of these financial statements. F-4 OPHTHALMIC IMAGING SYSTEMS STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE FOUR-MONTH PERIOD ENDED DECEMBER 31, 2000 AND THE YEAR ENDED AUGUST 31, 2000
SERIES B COMMON STOCK PREFERRED STOCK DEFERRED TOTAL -------------------------- ------------------------ COMPEN- ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT SATION DEFICIT DEFICIT ------------ ------------- ----------- ------------ ------------ ------------- ------------ Balance, September 1, 1999 4,155,428 $ 10,462,604 $ (94,133) $ (13,247,811) $ (2,879,340) Sale of preferred stock (Note 8) 150 $ 3,750 3,750 Conversion of preferred stock (Note 8) 150 3,750 (150) (3,750) Exercise of stock options at $.375 per share (Note 8) 150,000 56,250 56,250 Conversion of note payable to related party to stock (Note 8) 3,832,727 2,108,000 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) Stock option compensation expense 12,196 12,196 Net loss (1,465,756) (1,465,756) ------------ ------------- ----------- ------------ -------------- --------------- ------------ Balance, December 31, 2000 8,138,305 $ 12,630,604 - $ - $ (3,049) $ (15,885,130) $ (3,257,575) ============ ============= =========== ============ ============== =============== ============
The accompanying notes are an integral part of these financial statements. F-5 OPHTHALMIC IMAGING SYSTEMS STATEMENT OF CASH FLOWS FOR THE FOUR-MONTH PERIOD ENDED DECEMBER 31, 2000 AND THE YEAR ENDED AUGUST 31, 2000
DECEMBER 31, AUGUST 31, 2000 2000 ------------------ ------------------ Cash flows from operating activities: Net loss $ (1,465,756) $ (1,171,563) Adjustments to reconcile net loss to net cash used in operating activities: Accrued warrant appreciation right 6,841 (71,969) Depreciation and amortization 35,899 126,596 Stock option compensation expense 12,196 78,888 Net changes in operating assets and liabilities: Accounts receivable (178,157) 221,176 Inventories 233,515 (263,933) Prepaid expenses and other current assets 20,242 (2,440) Other assets (110) (2,800) Accounts payable 115,113 (105,609) Accrued liabilities 259,837 (367,984) Deferred extended warranty revenue (5,230) 48,498 Customer deposits (60,546) 19,894 ------------------ ------------------ Net cash used in operating activities (1,026,156) (1,491,246) ------------------ ------------------ Cash flows used in investing activities: Acquisition of furniture and equipment (57,359) (13,944) ------------------ ------------------ Cash flows from financing activities: Sale of common stock 60,000 Net proceeds from notes payable to related parties 866,338 1,529,311 Capitalized lease obligation (2,209) (6,168) ------------------ ------------------ Net cash provided by financing activities 864,129 1,583,143 ------------------ ------------------ Net (decrease) increase in cash and cash equivalents (219,386) 77,953 Cash and cash equivalents, beginning of the year 255,960 178,007 ------------------ ------------------ Cash and cash equivalents, end of the year $ 36,574 $ 255,960 ================== ==================
The accompanying notes are an integral part of these financial statements. F-6 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 the four-month period ended December 31, 2000 or the fiscal year 2000 comprised 10% or more of net sales. Revenues from sales to customers located outside of the United States accounted for approximately 15% and 10% of net sales during the four-month period ended December 31, 2000 and the year ended August 31, 2000, 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 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. Shipping and Handling Costs --------------------------- Shipping and handling costs are included with cost of sales. Advertising Costs ----------------- Advertising expenditures totaling approximately $80,000 and $89,000 for the year ended August 31, 2000 and for the four months ended December 31, 2000, respectively, have been expensed as incurred. 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 $1,000 and $11,000 during the four-month period ended December 31, 2000 and the year ended August 31, 2000, respectively. Cash paid for income taxes amounted to approximately $800 for the year ended August 31, 2000. F-8 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Statement of Cash Flows (Continued) ----------------------- 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. Cost of Sales ------------- Cost of sales for the four-month period ended December 31, 2000 includes approximately $440,000 related to the charge off of potential excess and/or obsolete inventory and nonrecurring warranty related reserves. 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 8 for pro forma disclosures of compensation expense. Reclassifications ----------------- Certain reclassifications have been made to the financial statements of the year ended August 31, 2000 to conform to the current period's presentation. 2. INVENTORIES
Inventories consist of the following as of December 31, 2000: Raw materials $ 380,643 Work-in-process 10,867 ------------------ $ 391,510 ================== 3. FURNITURE AND EQUIPMENT Furniture and equipment consist of the following as of December 31, 2000: Research and manufacturing equipment $ 602,386 Office furniture and equipment 556,469 Demonstration equipment 189,965 ------------------ 1,348,820 Less accumulated depreciation and amortization (1,136,832) ------------------- $ 211,988 ==================
The net book value of assets capitalized under capital leases (Note 5) is $13,433. F-9 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued)
4. ACCRUED LIABILITIES Accrued liabilities consist of the following as of December 31, 2000: Accrued compensation $ 285,395 Accrued warranty expenses 521,718 Other accrued liabilities 386,184 ------------------ $ 1,193,297 ================== See Note 8 for proforma disclosures of compensation expense. 5. CAPITALIZED LEASE OBLIGATIONS The Company leases certain office equipment under the terms of a capital lease. Payments of $740 with interest at 10.9% are due in monthly installments through June 2003. Future minimum lease payments are as follows: Year Ending December 31, ------------ 2001 $ 8,885 2002 8,885 2003 4,443 ------------------ 22,213 Less amount representing interest (2,840) ------------------ $ 19,373 ==================
6. 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 at that time. 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 an accounts receivable credit agreement then in effect with the Company's Bank. 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 under the Premier Note and other advances during the term of the Merger Agreement. F-10 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 6. NOTES PAYABLE TO RELATED PARTIES (Continued) 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 owed 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 8). 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 December 31, 2000, the Company had recorded approximately $271,000 in principal and interest outstanding under the Short-Term Note. 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 December 31, 2000, the Company had recorded approximately $1,488,000 in principal and interest outstanding under the Working Capital Note. At December 31, 2000, the Company and MediVision were in negotiations to, among other things, increase the principal amount under the Working Capital Note. F-11 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 7. 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 $19,000 during the four-month period ended December 31, 2000. 8. STOCKHOLDERS' EQUITY Common Stock ------------ Of the 11,861,695 shares of common stock authorized but unissued as of December 31, 2000, 2,204,097 shares are reserved for issuance under the stock option plans. 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. F-12 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 8. STOCKHOLDERS' EQUITY (Continued) MediVision and Premier Transactions (Continued) ----------------------------------- 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 6). 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 (2) 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. 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 $228,581, inclusive of interest, under the Appreciation Right at December 31, 2000, and it is reflected as a current liability on the accompanying balance sheet. The Appreciation Right was due on April 1, 1998. F-13 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 8. STOCKHOLDERS' EQUITY (Continued) Stock Option Plans ------------------ The Company has four stock-based compensation plans, which are described below. The Company applies APB 25 and related Interpretations in accounting for its stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123 requires use of option valuation models that were not developed for use in valuing stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. In 1992, the Company adopted a Stock Option Plan (the "Plan") under which the Board of Directors is authorized to grant options to key directors, executives, employees and others for the purchase of the Company's common stock at prices not less than the fair market value of the common stock on the date of grant. The term over which the options are exercisable, which may not exceed five years, is determined by the Board of Directors at the time of the grant. The maximum number of shares of the Company's common stock which may be optioned and sold under the Plan is 116,667, of which 11,667 options remained available for granting as of December 31, 2000. As of December 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 four-month period ended December 31, 2000. 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 6,615 remained available for granting of options as of December 31, 2000. As of December 31, 2000, stock options to purchase 129,985 shares at exercise prices ranging from $.48 to $4.25 were granted and outstanding under the Option Plan. No options were exercised during the four-month period ended December 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 December 31, 2000. As of December 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. F-14 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 8. STOCKHOLDERS' EQUITY (Continued) Stock Option Plans (Continued) ------------------ In October 1997, the Company's Board of Directors approved a Nonstatutory Stock Option Plan (the "1997 Nonstatutory Plan") under which all officers, employees, directors and consultants may participate. The 1997 Nonstatutory Plan expires October 2002. Options granted under the 1997 Nonstatutory Plan are non-qualified stock options and will have a term of not longer than ten years from the date of grant. The exercise prices under the 1997 Nonstatutory Plan will be at 100% of the fair market value of the Company's common stock on the date of grant, unless otherwise specified in the option agreement. The maximum number of shares of the Company's common stock which may be optioned and sold under the Plan is 1,000,000, of which 618,000 options remained available for granting as of December 31, 2000. As of December 31, 2000, stock options to purchase 232,000 shares at exercise prices ranging from $.63 to $1.34 were granted and outstanding under the 1997 Nonstatutory Plan. None of the options granted under the 1997 Nonstatutory Plan were exercised during the four-month period ended August 31, 2000. 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, 1999 1,644,972 $ 1.39 Options granted 450,000 $ .48 Options canceled (315,627) $ 1.13 Options lapsed (335,000) $ 1.38 Options exercised (150,000) $ .38 ------------------ Balance, August 31, 2000 1,294,345 $ 1.25 Options granted 350,000 $ .38 Options canceled (66,000) $ .62 Options lapsed - $ - Options exercised - $ - ------------------ Balance, December 31, 2000 1,578,345 $ 1.09 ==================
The weighted average fair value of options granted during the four-month period ended December 31, 2000 and the year ended August 31, 2000 was $.38 and $.27, respectively. F-15 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 8. STOCKHOLDERS' EQUITY (Continued) Stock Option Plans (Continued) ------------------ The following table summarizes information about the stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable --------------------------------------------- --------------------------- Weighted Average Weighted- Weighted- Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Number Life Price Number Price - ---------------------- ---------- ----------- ------------ ----------- ---------- $ .31 - $ 1.37 1,184,345 1.0 year $ .54 404,991 $ .66 $ 1.38 - $ 3.00 308,500 7.2 years $ 2.27 301,719 $ 2.29 $ 3.01 - $ 4.50 85,500 1.7 years $ 4.37 83,833 $ 4.36 ----------- ----------- 1,578,345 790,543 =========== ===========
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 period ended December 31, 2000 and the year ended August 31, 2000, respectively; dividend yield of zero; volatility factors of the expected market price of the Company's common stock ranged from 141% to 154% for the four-month period ended December 31, 2000 and the year ended August 31, 2000; 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:
December 31, August 31, 2000 2000 ---------------- ----------------- Pro forma net loss $ (1,502,756) $ (1,273,739) ================ ================ Pro forma net loss per share $ (.18) $ (.29) ================ ================
F-16 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 8. STOCKHOLDERS' EQUITY (Continued) Stock Option Plans (Continued) ------------------ 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 four-month period ended August 31, 2000. For the four-month period ended December 31, 2000 and the year ended August 31, 2000, the amortized deferred compensation expense was approximately $12,000 and $78,000, respectively. 9. INCOME TAXES There was no provision (benefit) for income taxes during the four-month period ended December 31, 2000 and the year ended August 31, 2000. The significant components of the Company's deferred tax assets and liabilities are as follows: December 31, 2000 ------------ Deferred tax assets: Net operating loss carryforwards $ 3,122,000 Inventory reserves 1,011,000 Accrued warrant appreciation right 98,000 Payroll related accruals 96,000 Warranty accrual 224,000 Sales and accounts receivable reserves 102,000 Uniform capitalization 71,000 Deferred revenue 57,000 Depreciation 21,000 ------------------ Total deferred tax assets (4,802,000) Valuation allowance 4,802,000 ------------------ Net deferred taxes $ - ================== For the four-month period ended December 31, 2000, the valuation allowance increased by $552,000 to $4,802,000. F-17 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 9. INCOME TAXES (Continued) The principal reasons for the difference between the effective tax rate and the Federal statutory income tax rate are presented in the following table:
December 31, August 31, 2000 2000 ------------------- ------------------ Federal benefit expected at statutory rates $ (348,000) $ (398,000) Net operating loss with no current benefit 348,000 398,000 ------------------- ------------------ $ - $ - =================== ==================
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) became subject to a total annual limitation in the amount of approximately $107,000. During 1998 another change of ownership occurred when a shareholder acquired more than 50% of the Company's common stock (Note 9). The resulting limitation on net operating loss and tax credit carryforwards is approximately $421,000 per year. The change of ownership which occurred in August 2000, discussed further in Note 8, will result in additional limitation of net operating loss and tax credit carryforwards. The Company has at December 31, 2000, a net operating loss carryover of approximately $8,600,000 for federal income tax purposes which expires between 2007 and 2015, and a net operating loss carryforward of approximately $3,800,000 for state income tax purposes which expires between 2000 and 2005. Federal and state tax credit carryforwards of approximately $70,000 and $40,000 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. 10. 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 four-month period ended December 31, 2000 or the year ended August 31, 2000. During the four-month period ended December 31, 2000, there was no contribution made. For the year ended August 31, 2000, the Company made minimum top heavy required contributions in the amount of $20,609, pursuant to IRS Code Section 416(c). F-18 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 11. 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 that state. The inquiry was favorably resolved without any adverse consequences to the Company. The Company evaluates such inquiries on a case-by-case basis and will vigorously contest any such claims for payment of sales or use taxes which it believes are without merit. However, Management has prepared an analysis of sales to customers in those jurisdictions for which the Company does not collect sales or use taxes. Certain assumptions were made in the preparation of this analysis, including but not limited to: o The Company's customers have not remitted any sales or use tax to state or local taxing authorities. o Potential interest and penalties have been included on sales activity from the Company's inception. o Sales or use taxes have been provided at the effective tax rates for each taxing authority for which the Company may have had a sale. The analysis indicates maximum potential liability of $1,700,000. 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. 12. 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 6 and 8). F-19 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 13. UNAUDITED CONDENSED FINANCIAL STATEMENTS Condensed, unaudited financial statements for the four-month period ended December 31, 1999 are presented as follows: CONDENSED BALANCE SHEET December 31, 1999 (Unaudited) ASSETS
Current assets: Cash and cash equivalents $ 212,586 Accounts receivable, net 636,431 Inventories, net 331,751 Prepaid expenses and other current assets 38,841 ------------------ Total current assets 1,219,609 ------------------ Furniture and equipment, net of accumulated depreciation and amortization of $1,041,288 275,183 Other assets 11,266 ------------------ $ 1,506,058 ================== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Borrowings under line of credit $ 24,844 Borrowings under note payable to, and unsecured advances from significant shareholder 1,730,341 Accounts payable 673,410 Accrued liabilities 1,423,950 Accrued warrant appreciation right 302,770 Deferred extended warranty revenue 87,046 Customer deposits 756,143 Capitalized lease obligation and other notes payable 8,939 ------------------ Total current liabilities 5,007,443 ------------------ Capitalized lease obligation and other notes payable, less current portion 17,331 Stockholders' deficit: Preferred stock, without par value, 20,000,000 shares authorized; Series A Junior Participating Preferred Stock, without par value, 100,000 shares authorized; note issued or outstanding - Series B Preferred Stock; $.01 par value, 2,000 shares authorized; 150 shares issued and outstanding 3,750 Common stock, no par value, 20,000,000 shares authorized; 4,305,428 issued and outstanding 10,518,854 Deferred compensation (67,837) Accumulated deficit (13,973,483) -------------------- Total stockholders' deficit (3,518,716) ------------------- $ 1,506,058 ===================
F-20 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 13. UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF OPERATIONS For the Four-Month Period Ended December 31, 1999 (Unaudited)
Net revenues $ 1,660,300 Cost of sales 1,215,698 -------------- Gross profit 444,602 -------------- Operating expenses: Sales and marketing 631,015 General and administrative 331,898 Research and development 156,400 -------------- Total operating expenses 1,119,313 -------------- Loss from operations (674,711) Other expense, net (50,961) -------------- Net loss $ (725,672) ============== Basic net loss per share $ (.17) ============== Shares used in the calculation of basic net loss per share $ 4,272,461 ==============
F-21 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 13. UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF CASH FLOWS For the Four-Month Period Ended December 31, 1999 (Unaudited)
Cash flows from operating activities: Net loss $ (725,672) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 31,359 Stock option compensation expense 26,296 Net increase in current assets other than cash and cash equivalents (166,778) Net increase in current liabilities other than short-term borrowings 795,573 ------------------ Net cash used in operating activities (39,222) ------------------ Cash flows used in investing activities: Purchases of furniture and equipment (3,412) Net increase in other assets (3,881) ------------------ Net cash used in investing activities (7,293) ------------------ Cash flows from financing activities: Net repayments of borrowings under note payable to and unsecured advances from significant shareholder (3,750) Net proceeds from line-of-credit borrowings 24,844 Net proceeds from sale of common stock 56,250 Net proceeds from sale of preferred stock 3,750 ------------------ Net cash provided by financing activities 81,094 ------------------ Net increase in cash and cash equivalents 34,579 Cash and equivalents at beginning of period 178,007 ------------------ Cash and cash equivalents, end of period $ 212,586 ================== Supplemental schedule of noncash financing activities: Reduction of borrowings under note payable to and unsecured advances from significant shareholder in exchange for inventory, net $ (263,239) ==================
F-22 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 14. ABILITY TO CONTINUE AS A GOING CONCERN For the four-month period ended December 31, 2000 and the year ended August 31, 2000, the Company incurred losses of $1,465,756 and $1,171,563, respectively, and at December 31, 2000, the Company had an accumulated deficit of $15,885,130. In addition, at December 31, 2000, current liabilities exceed current assets by $2,013,324. 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 6 and 8), will, in Management's opinion, significantly improve the Company's financial condition and enhance Management's ability to achieve profitable operations. Management believes the relationship with MediVision will provide the Company access to resources in addition to working capital described in Note 6. 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. Management believes 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. Management anticipates that 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-23 Item 8. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure. None of the principal accountant's reports on the financial statements for either of the past two years or the transition period contains an adverse opinion or disclaimer of opinion, and none 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 on December 31, 2000 (the "Current Management"): Name Age Position - ---------------------------------- --------------- --------------------------- Noam Allon 41 Director Gil Allon 39 Director Ariel Shenhar 35 Director 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 is a non-employee director of the Company and is also currently acting as its Chief Executive Officer. 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 Carmel Biosensors Ltd., an Israeli corporation engaged in the business of medical devices. 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 23 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. The Company believes that during the transition period ended December 31, 2000, its acting 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 representations of its directors and acting 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 None. During the transistion period ended December 31, 2000, no executive officers were employed by the Company. (b) Summary Option Grant None. During the transistion period ended December 31, 2000, no executive officers were employed by the Company. (c) Aggregated Option Exercises and Fiscal Year End Values None. During the transistion period ended December 31, 2000, no executive officers were employed by the Company. (d) Compensation of Directors The Board maintains three standing committees, an Audit Committee, a Compensation Committee and a Nominating Committee. During the transition period ended December 31, 2000, there were no committee meetings held separate and apart from any board meetings. Each of the directiors attended at least 75% of the Board meetings held during the transition period ended December 31, 2000. In support of the Company's operations and pursuant to certain directives, one non-employee director continues to provide executive management services to the Company, including acting as its Chief Executive Officer. For services rendered during the transition period ended December 31, 2000, the Company incurred charges, including expenses, in the amount of approximately $55,800, which charges have been included in the amount reported as outstanding at December 31, 2000 under the Working Capital Note discussed in further detail in Management's Discussion and Analysis or Plan of Operation included in Item 6 of this Transition Report on Form 10-KSB and Note 6 and Note 8 of the Notes to Financial Statements included in Item 7 of this Transistion Report on Form 10-KSB. In addition, another director also provides certain consulting services to the Company. For services rendered during the transition peiod ended December 31, 2000, the director earned consulting fees of approximately $7,500, plus expenses, of which approximately $1,500 remained accrued but unpaid as of December 31, 2000. No policy regarding compensation of the directors has been adopted by the Board, and, except as noted above, no director has been paid any compensation by the Company. None of the directors has been appointed to any of the three standing committees. 24 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 February 28, 2001, 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.
Amount and Nature Name and Address of Beneficial Owner of Beneficial Owner Percent of Class - ------------------------------------ ------------------------------- --------------------------- 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 -- -- (total of 4 persons) MediVision Medical Imaging Ltd. 5,964,635 (1) 73% P.O. Box 45, Industrial Park Yokneam Elit 20692 Israel
(1) 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 None. (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. 25 Item 13. Exhibits and Reports on Form 8-K A. Exhibits
Exhibit Footnote Number Description of Exhibit Reference - ----------- ------------------------------- ------------------ 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. 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)
26
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.
27
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. 10.40 Cooperation and Project Funding Agreement dated January 21, 2001, among Israel- United States Binational Industrial Research and Development Foundation, MediVision (25) and OIS. 11.1 Computation of net loss per share. (25) 23.1 Consent of Perry-Smith & Company LLP, Independent Auditors. (25) 27 Financial Data Schedule (for SEC use only). (25)
* 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 quarterly period ended May 31, 1997, filed on July 15, 1997. 28 (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. 29 (23) Incorporated by reference to the Company's Form 10-KSB for the fiscal year ended August 31, 1999, filed on November 29, 1999. (24) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended August 31, 2000, filed on December 13, 2000. (25) Exhibit filed herewith. B. Reports on Form 8-K. OIS filed a Company Report on Form 8-K with respect to the change of its fiscal year from August 31 to December 31. 30 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 March 26, 2001 - ----------------------------------- Noam Allon /s/ GIL ALLON Director March 26, 2001 - ----------------------------------- Gil Allon /s/ ARIEL SHENHAR Director March 26, 2001 - ----------------------------------- Ariel Shenhar /s/ JONATHAN ADERETH Director March 28, 2001 - ------------------------------------ Jonathan Adereth 31 EX-11.1 2 0002.txt COMPUTATION OF NET LOSS PER SHARE EXHIBIT 11.1 OPHTHALMIC IMAGING SYSTEMS CALCULATION OF NET LOSS PER SHARE The following table sets forth the calculation of basic and diluted loss per share for the four-month period ended December 31, 2000 and the year ended August 31, 2000:
December 31, August 31, 2000 2000 ------------------------------- Numerator for basic and diluted net loss per share $(1,465,756) $(1,171,563) =============================== Denominator for basic net loss per share: Weighted average shares 8,138,305 4,430,413 Effect of dilutive securities (1): Employee stock options -- -- Warrants and other -- -- ------------------------------- Dilutive potential common shares -- -- ------------------------------- Denominator for diluted net loss per share 8,138,305 4,430,413 =============================== Basic net loss per share $ (0.18) $ (0.26) =============================== Diluted net loss per share $ (0.18) $ (0.26) =============================== (1) No amounts are included, as amounts are anti-dilutive.
EX-10.40 3 0003.txt COOPERATION AND PROJECT FUNDING AGREEMENT COOPERATION AND PROJECT FUNDING AGREEMENT PREAMBLE Agreement made this 21st day of January, 2001, by and BETWEEN The ISRAEL-UNITED STATES BINATIONAL INDUSTRIAL RESEARCH AND DEVELOPMENT FOUNDATION, a legal entity created by Agreement between the Government of the State of Israel and the Government of the United States of America, and promulgated into law by the Israeli Knesset in 1978 under the title of the Law of the BINATIONAL INDUSTRIAL RESEARCH AND DEVELOPMENT FOUNDATION, effective May 18th, 1977, (hereinafter referred to as the "Foundation"), AND Medivision Medical Imaging Ltd. AND Ophthalmic Imaging Systems, Inc. severally and jointly (hereinafter collectively referred to as the "Proposer" and separately as the "Participants"). WHEREAS the Foundation has been established under an Agreement between the Government of the State of Israel and the Government of the United States of America to promote and support joint nondefense industrial research and development activities of mutual benefit to Israel and the United States, and WHEREAS the Proposer has heretofore submitted to the Foundation a proposal (hereinafter the "Proposal"), entitled "Computer Guided Laser Therapy" and on the basis of said Proposal has applied to the Foundation for certain funding assistance for the development of the products therein described (and hereinafter referred to collectively as the "Innovation"), and WHEREAS the Foundation has examined and duly approved the Proposal and is willing to provide certain funding for the implementation of the Proposal on the terms and conditions hereinafter set forth; Now therefore the parties hereto agree as follows: A. GENERAL A.1. The preamble to this Agreement shall be deemed an integral part hereof. A.2. The Participants shall be bound and obliged jointly and severally, as herein provided. A.3. The Executive Director of the Foundation is empowered by its Board of Governors to execute this Agreement and to perform all acts under the terms hereof on behalf of the Foundation. A.4. The following document is incorporated by reference and made a part of this Agreement: The Proposal, dated the 3rd day of November, 2000, as stamped with the Foundation's approval of the 6th day of December, 2000. Nonetheless, should any provision of said Proposal be inconsistent with any other provision of this Agreement, the provisions otherwise set forth in this document shall control. A.5 The following document is referenced, and is incorporated by reference only as portions may be specifically referred to and incorporated hereafter: BIRD Foundation Procedures Handbook 1997. B. PROJECT FINANCING B.1. The Foundation hereby agrees to fund, by Conditional Grant, the implementation of the Proposal in the maximum sum of $800,000 or 50% of the actual expenditures on the project, as contemplated in the Approved Project Budget set forth in Annex A hereto, whichever is less, and at the times and as may otherwise be set forth in Annex B hereto. B.1.1 The percentage of the actual expenditures on the project which the Foundation provides shall hereinafter be described as the "Foundation's pro rata share". 8.2. The Proposer shall provide in timely fashion all budgetary funds in excess of those provided hereunder by the Foundation. B.3. Proposer shall make payments to the Foundation based on Gross Sales derived from the sale, leasing or other marketing or commercial exploitation of the Innovation, including service or maintenance contracts, commencing with the first such commercial transaction. Such payments shall be made on the following basis: a) The Conditional Grant referred to in Sub. Sec. B.1. above (plus any other sums actually awarded to the Proposer by the Foundation in connection with the subject matter of the Proposal ("Other Sums")) shall be repaid in U.S. Dollars at the rate of 2.5% of the first year's Gross Sales, and, in succeeding years, at the rate of 2 5% of the Gross Sales until 100% of the Conditional Grant and Other Sums has been repaid, whereupon the repayment rate shall decrease to 2.5% of the Gross Sales, such repayments to be in equivalent dollars valued at time of repayment. The rate of change of value shall be that designated in Annex C hereto. b) When the Proposer shall have repaid the following maximum percentages in equivalent dollars valued at the time of repayment (Annex C) of the Conditional Grant and Other Sums in any of the following years following the first commercial transaction, no additional payments to the Foundation on account of the Conditional Grant and Other Sums shall be required. ----------------------------- ------------------------------ Years Following Termination Maximum Percentage of of this Agreement Conditional Grantand Other Sums to be Repaid ----------------------------- ------------------------------ ----------------------------- ------------------------------ 1 100 ----------------------------- ------------------------------ 2 113 ----------------------------- ------------------------------ 3 125 ----------------------------- ------------------------------ 4 138 ----------------------------- ------------------------------ 5 and more 150 ----------------------------- ------------------------------ B.3.1. The term "Gross Sales" shall include all specific export incentives or bonuses paid the Proposer on account of sale of the Innovation for export, but shall not include sums paid for commissions, brokerage, value added and sales taxes on the sale of the finished product, or transportation and associated insurance costs, if same have been included in the gross sales price. B.3.2. The Innovation shall be deemed to have been sold, marketed or otherwise commercially exploited if the Innovation, or any improvement, modification or extension of it is put to the benefit of a third party, whether directly or indirectly, and whether standing alone or incorporated into or cojoined with other hardware or processes, and for which benefit the said third party gives something of value. This provision shall not apply to transactions between the Participants or between the Participants and their parents or subsidiaries or affiliates. An "affiliate" is herein defined as any entity under common control, controlled by or controlling either of the Participants. Should such parent or subsidiary or affiliate resell the Innovation separately identified or incorporated in a system, the sales price shall be the price to third parties from the parent or subsidiary or affiliate making the sale, such sales price being defined by the same criteria as sales are defined for purposes of "Gross Sales" in Sub. Sec. B. 3.1. above. If the Innovation is a part of a product sold, marketed or otherwise commercially exploited, the sales price for purposes of payments according to Sub. Sec. B. 3. shall be the sales price of that product 3 multiplied by a factor whose numerator is the manufacturing cost of the Innovation and whose denominator is the manufacturing cost of the product. If there shall have been established a market price for the Innovation, such price shall be the basis for payments according to Sub. Sec. B. 3., notwithstanding the incorporation of the Innovation in another product. B.4. All payments due the Foundation shall be calculated on a semiannual calendar basis, and statements, certified by the companies' auditors, rendered with payment in and within 90 calendar days following the end of each semiannual period. Payments to the Foundation per Sub. Sec. B. 3. shall commence at the end of the semiannual period during which the first sale was made. All late payments shall bear interest at 1% more than the average prime rate prevailing at the Chase Manhattan Bank, N.Y.C. during the period from the date payment was due until actually made. B.5. Should any portion of the technology or Innovation developed in whole or in part under this Agreement be sold outright to a third party, one-half of all proceeds of the sale shall be applied as received until there has been full repayment to the Foundation of a sum equal to the percentage indicated in Sub. Sec. B. 3. b hereto of the Conditional Grant and Other Sums actually received by Proposer hereunder, in equivalent dollars valued at time of repayment (Annex C). If any such sale is (i) in exchange for a non-cash asset or (ii) part of the sale of a group of assets and no separate value is assigned by the parties to the portion of the technology or Innovation sold, the Proposer and the Foundation shall seek to agree: as to clause (i) the value of the asset received; and as to clause (ii) the portion of the consideration reasonably allocable to the sale. If no such agreement is reached within a reasonable time, the matter shall be resolved pursuant to Sub. Sec. M. 4. Payments due and not made following receipt of proceeds shall bear interest at 1% more than the average prime rate prevailing at Chase Manhattan Bank, N. Y. C. B.6. License agreements involving patented invention(s) or technology developed in whole or in part during this Foundation-supported project shall be subject to Annex F. C. CONDUCT OF THE PROJECT C.1. The Proposer agrees to do the work set out in the Proposal in accordance with good standards relevant to such undertakings, and shall expend funds received hereunder only in accordance with such Proposal and the requirements of this Agreement. 4 C.2. The Proposer agrees to comply with the Program Plan for the Innovation as set forth in Annex D hereto. C.3. The Proposer hereby appoints Ziv Popper as Israel Project Manager and Steve Verdooner as U. S. Project Manager for the implementation of the project during the period of this Agreement and in accordance with the Program Plan, Annex D. C.4. The Proposer shall not make substantial transfers of funds from one budget item to another, change key personnel or their duties and responsibilities or diminish their time allocated to the proposed work hereunder without prior written approval by the Foundation, which approval shall not be unreasonably withheld. C.4.1 Should any key person be absent from his work or should such absence be expected, for 90 days or more, or should there be any significant reduction in the total personnel force assigned the project under the Proposal, the Proposer shall forthwith notify the Foundation. D. REPORTING REQUIREMENTS D.1. The Proposer shall submit to the Foundation, in writing, the following reports: a. Interim fiscal and technical reports within 30 days following the expiration of the first 6-month period; b. Interim fiscal and technical reports within 30 days following the expiration of the second 6-month period; c. Interim fiscal and technical reports within 30 days following the expiration of the third 6-month period; d. final fiscal and technical reports within 60 days following termination of this Agreement. D.1.1. Such reports shall be in form and substance as provided in Formats for Technical and Fiscal Reports, BIRD Foundation Procedures Handbook 1997, Sections 1V.A. and B. D.2. Proposer shall provide, at its expense, briefings on the progress of the work hereunder within 45 days following request by the Foundation. Such briefings shall accord with the form and depth as the Foundation may reasonably request. 5 E. PUBLICATIONS E.1. In any publication in scientific or technical journals of data or other information derived from the work hereunder, or any publication related to the work, but not including product literature or manuals, the support of the Foundation shall be acknowledged. E.2. To the extent so required to permit the Foundation free dissemination of such publications or information which the Foundation is privileged to disseminate subject to the limitation of Sec. F. below, the Proposer shall be deemed hereby to waive any claim with respect to such dissemination for infringement of any Copyright it may have or may obtain. E.3. The Proposer shall furnish to the Foundation two (2) copies of all publications resulting from Foundation-supported work as soon as possible after publication. F. PROPRIETARY INFORMATION, INTELLECTUAL PROPERTY F.1. Proprietary information, clearly identified as such, submitted to the Foundation in the Proposal, in any report or verbally, or obtained by Foundation personnel observation pursuant to any request or briefing, shall be treated by the Foundation as confidential. At the request of Proposer or either Participant, a confidential disclosure agreement may separately be entered into by the parties. Nothing contained in the foregoing shall restrict the right of the Foundation to make public the fact of the Foundation's support for the project, and the identification of the Participants therein. The details of any such publication, however, shall be subject to approval by the Participants. F.2. The Proposer represents and warrants that, to the best of its knowledge, information and belief, the Proposer has good, valid and enforceable title to all of the Intellectual Property necessary for purposes of implementation of the Proposal, free and clear of all third party interests, or otherwise possesses adequate exclusive rights to use the Intellectual Property, (subject to the fact that no patent may have been obtained). To the best of the Proposer's knowledge, information and belief, no Intellectual Property used or Proposed to be used with respect to the Proposal infringes upon any Intellectual Property rights of others, and the use of such Intellectual Property with respect to the Proposal does not constitute an infringement, misappropriation or misuse of any intellectual property rights of any third party. 6 G. PATENTS AND ROYALTIES G.1. If Proposer or either of the Participants elects to apply for letters patent on any or all inventions resulting in whole or in part from performance of Foundation-supported activity, such applicant shall, at his own expense, so apply in the United States and in Israel, and in such other countries and at such times as he may deem appropriate. G.2. Unless Proposer or either Participant is making payments to the Foundation under Sec. B or Annex F hereto, a Participant who retains rights in an invention and who obtains a patent thereon in accordance with Sub. Sec. G. l., shall pay to the Foundation a royalty as set forth in Annex E hereto, on sales of any product embodying the invention or any product made by practicing the invention. The Foundation's rights hereunder shall apply whenever such patents are obtained and shall survive termination of this Agreement. H. RIGHTS OF THE GOVERNMENTS OF ISRAEL AND THE UNITED STATES H.1. Regardless of the patent rights acquired by Participants by mutual agreement or pursuant to Sub. Sec. G. l., the Governments of Israel and of the United States shall each have a nonexclusive, irrevocable, royalty-free license to make or have made, to use or have used, and to sell or have sold any such invention specified, throughout the world for all governmental purposes: provided, however, that in any contracting situation involving an invention made under this Agreement, the Government of Israel shall give preference to the Participant retaining the entire right, title, and interest in the invention in Israel, and provided that "governmental purposes" shall not include manufacture of such invention where it is commercially available at reasonable prices. Notwithstanding the foregoing, except for military purposes or in emergency situations, neither the Government of Israel nor the Government of the United States, nor the Foundation, shall have the right to sell or otherwise dispose of in any third country any product incorporating an invention or made by practicing an invention without the prior written permission of the Participant which has acquired the entire right and interest in the invention in third countries. Such Participant shall not withhold permission where appropriate royalties are paid by the Foundation or government(s) concerned. H2. In addition to the patent rights specified in Sub. Sec. H. l., the Foundation reserves for itself and the Governments of Israel and the United States the right to use the Innovation, technical information, data and know-how arising out of, or developed under, this Agreement for any noncommercial purpose, and without charge. 7 H.3. In order that the rights of the Foundation and the Governments of Israel and the United States described herein shall be exercisable, the Participants agree that any component, element or other part of the system described as the "Innovation" in the Preamble to this Agreement, whose use is necessary to the full enjoyment of the Innovation, will be made available, at reasonable prices, by the Participants either as a commercially purchasable item, or by special arrangement, and will be sold to the Foundation and/or the Government of Israel and/or the Government of the United States, also at reasonable prices. H.4. Notwithstanding the above provisions of this Sec. H., it is understood and agreed that, so long as any software that comprises part or all of the Innovation is marketed by Proposer, by either Participant, or by others with the rights to market such software, neither the Government of Israel nor the Government of the United States shall have the right to obtain a license to use such software unless the license fee normally imposed in the ordinary course of business by either the Participants or by others with the rights to market such software is paid, and the standard license agreement is executed. I. REVOCATION OF AGREEMENT I.1. The Foundation may revoke any award, in whole or in part, for fundamental breach as defined in the laws of the State of Israel. I.2. Upon receipt of notice of revocation for fundamental breach, the Proposer may cure the default in and within thirty calendar days after the date of receipt of the notice. I.3. Notwithstanding any other provision in this Agreement to the contrary, the Foundation shall not be obliged to provide any further funding after notice until and unless the said default is cured and so demonstrated to the reasonable satisfaction of the Foundation. I.4. Should the Agreement terminate for reason of fundamental breach, in addition to the Foundation's rights under Sub. Sec. l.5., the Foundation and the Governments of Israel and the United States shall be entitled to all its rights pursuant to Sec. H. as may have vested on the date when all sums due the Foundation under Sub. Sec. l.5. are fully paid. I.5. If the Foundation shall revoke as aforesaid, all funds given Proposer per Sub. Sec. B.1. above shall become due immediately without need for demand. Such funds which do not, by terms of this Agreement, bear interest, shall be repaid with interest at 1% more than the average prime rate prevailing at Chase Manhattan Bank, N.Y.C., from date of notice of revocation. 8 I.6. The Proposer may not terminate this Agreement or abandon the project without the prior written consent of the Foundation, which consent shall not be unreasonably withheld. I.7. If upon termination of this Agreement for any reason, the entire budgeted sum has not been expended, the Proposer shall forthwith return to the Foundation its pro rata share of such unexpended portion. If not repaid forthwith, such sum shall bear interest as per Sec. l.5. J. SURVIVAL OF PROVISIONS Notwithstanding revocation or other termination of this Agreement, the following provisions shall survive termination of this Agreement: Sections B., D., E., F., G., H., 1.4., l.5., 1.7., K., L., N., Annex C, Annex E and Annex F. K. FINANCIAL RECORDS K.1. The Proposer shall maintain business and financial records and books of account for the work hereunder separate and apart from other business records of the Proposer. Such books and records shall be in usual and accepted form. K.2. Books and records of the work hereunder shall show Proposer's contribution. Upon request by the Foundation, the Proposer shall provide evidence of his compliance hereunder. K.3. The Foundation may examine, or cause to be examined, the financial books, vouchers, records and any other documents of the Proposer relating to this Agreement at reasonable times and intervals during the term of this Agreement and for a period of one (1) year following termination, or for so long as payments per Sub. Sec. B.3., Sub. Sec. B.3., or Annex F, or of patent royalties are due, or may become due the Foundation, whichever shall be the later. L. SUITS AGAINST THE FOUNDATION L.1. The Proposer shall defend all suits brought against the Foundation, its officers or personnel, indemnify them for all liabilities and costs and otherwise hold them harmless on account of any and all claims, actions, suits, proceedings and the like arising out of, or connected with or resulting from the performance of this Agreement by the Proposer, or from the manufacture, sales, distribution or use by the Proposer of the Innovation, whether brought by Proposer or its personnel or by third parties. L.2. The Proposer agrees that persons employed by it in connection with the research project shall be deemed to be solely its own employees and that 9 no relationship of master and servant shall be created between such employees and the Foundation, either for purposes of tort liability, social benefits, or for any other purpose. The Proposer shall indemnify the Foundation and hold it harmless from court costs and legal fees, and for any payment which the Foundation may be obliged to make on a cause of action based upon an employee-employer relationship as aforesaid. M. MISCELLANEOUS CONDITIONS M.1. The Foundation makes no representation, by virtue of its funding the work hereunder, or receiving any payments or royalties as a result of this Agreement, as to the safety, value or utility of the Innovation or the work undertaken, nor shall the fact of participation of the Foundation, its funding or exercise of its rights hereunder be deemed an endorsement of the Innovation or of the Proposer, nor shall the name of the Foundation be used for any commercial purpose or be publicized in any way by the Proposer except within the strict limits of this Agreement. M.2. The Proposer may not assign this Agreement or any of the work undertaken pursuant to it without the prior written consent of the Foundation, which consent shall not be unreasonably withheld. M.3. This Agreement shall be construed under the laws of the State of Israel. The forum for the resolution of any dispute arising from this Agreement shall be the State of Israel or Washington, D.C. in the U.S., as the moving party may elect. Execution of this Agreement shall be taken as submission to the forum selected pursuant to this Section. M.4. Unless the parties to a dispute shall agree otherwise, the dispute shall be referred to arbitration under rules of the Israel Arbitration Law if the forum is Israel, and under the rules of the American Arbitration Association if the forum is the U.S. M.5. Proposer undertakes to comply with all applicable laws, rules and regulations of the State of Israel and the United States of America, and will apply for and obtain all necessary licenses and permits for the carrying out of its obligations hereunder. M.6. Under Israeli law, no stamp duty is required on BIRD Foundation Cooperation and Project Funding Agreements. M.7. Notices, communications and reports shall be hand-delivered or mailed by prepaid first-class mail (airmail if transmitted internationally) addressed to: a. The Israel-U. S. Binational Industrial Research and Development Foundation 10 Office Address: Mailing Address: -------------- --------------- 3 Tevuot Ha'aretz Street P.O. Box 39104 Tel Aviv 69546 Tel Aviv 61390 Israel Israel b. Medivision Medical Imaging Ltd. Office Address: Mailing Address: -------------- --------------- Industrial Park P.O. Box 45 Yokneam Elite 20692 Yokneam Elite Israel Israel c. Ophthalmic Imaging Systems, Inc. Office Address: -------------- 221 Lathrop Way Suite I Sacramento, CA 95815 U.S.A. N. LIMITATION ON PAYMENTS Notwithstanding any other interpretation of this Agreement or the Annexes hereto to the contrary, Proposer's total obligation hereunder for payments to the Foundation shall not exceed the percentages indicated in Sub. Sec. B. 3. b) hereto of the total funds actually provided by the Foundation hereunder, in equivalent dollars valued at time of repayment (Annex C). O. EFFECTIVE DATE The effective date of this Agreement shall be the 1st day of November, 2000. Unless sooner terminated by the Foundation per Sec. l., this Agreement shall terminate 24 months following the effective date. Signed the dat and date above first given - --------------------------------- Executive Director (for the BIRD Foundation) - --------------------------------- Authorized Company Official (for Medivision Medical Imaging Ltd.) - --------------------------------- Authorized Company Official (for Ophthalmic Imaging Systems, Inc. 11 EX-23.1 4 0004.txt CONSENT OF PERRY-SMITH & COMPANY LLP INDEPENDENT AUDITORS' CONSENT We consent to incorporation of our report dated February 16, 2001 in this Form 10-K, relating to the balance sheet of Ophthalmic Imaging Systems as of December 31, 2000, and the related statements of operations, shareholders' deficit, and cash flows for the four months ended December 31, 2000 and the ended August 31, 2000. /s/ Perry-Smith LLP Sacramento, California March 22, 2001 EX-27 5 0005.txt AMENDED AND RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-KSB FOR OPHTHALMIC IMAGING SYSTEMS FOR THE TRANSITION PERIOD ENDED DECEMBER 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 4-MOS DEC-31-2000 AUG-31-2000 DEC-31-2000 36,574 0 488,156 152,000 391,510 846,416 1,348,820 (1,136,832) 1,068,699 2,859,740 0 0 0 12,630,604 0 1,068,699 1,180,642 1,180,642 1,324,118 1,324,118 1,271,277 0 51,237 (1,465,756) 0 (1,465,756) 0 0 0 (1,465,756) (0.18) (0.18)
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