-----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, WP3IYExSj6RkgMK7KaLJKJJtkpjwl5tVj/jeGrQ+taTWjNNYUe639dpLu1viglf4 7feyqSnDqLHGCZaQo3zCMA== 0000910680-01-500342.txt : 20010815 0000910680-01-500342.hdr.sgml : 20010815 ACCESSION NUMBER: 0000910680-01-500342 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11140 FILM NUMBER: 1712165 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 10QSB 1 f10qsb.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 --------------------------- FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 Commission File Number: 1-11140 OPHTHALMIC IMAGING SYSTEMS (Exact name of registrant as specified in its charter) California 94-3035367 (State of Incorporation) (IRS Employer Identification No.) 221 Lathrop Way, Suite I, Sacramento, CA 95815 (Address of principal executive offices) (916) 646-2020 (Issuer's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes XX No ------------- ------------- As of August 14, 2001, 8,138,305 shares of common stock, at no par value, were outstanding. Transitional Small Business Disclosure Format: Yes No XX ------------- ------------- OPHTHALMIC IMAGING SYSTEMS FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 2001 PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Condensed Balance Sheet as of June 30, 2001 2 Condensed Statements of Operations for the Three Months and Six Months ended June 30, 2001 and June 30, 2000 3 Condensed Statements of Cash Flows for the Three Months and Six Months ended June 30, 2001 and June 30, 2000 4 Notes to Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities and Use of Proceeds 17 Item 3. Defaults upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
Ophthalmic Imaging Systems Condensed Balance Sheet June 30, 2001 (Unaudited) ASSETS - ------ Current assets: Cash and equivalents $ 42,889 Accounts receivable, net 447,378 Inventories, net 328,696 Prepaid expenses and other current assets 47,872 ------------- Total current assets 866,835 Furniture and equipment, net of accumulated depreciation and amortization of $1,197,032 208,011 Other assets 10,601 ------------- $ 1,085,447 ============= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Notes payable to related party $ 381,570 Accounts payable 562,867 Accrued liabilities 1,390,623 Accrued warrant appreciation right - Deferred extended warranty revenue 129,034 Customer deposits 429,371 Capitalized lease obligation and other notes payable 8,939 ------------- Total current liabilities 2,902,404 ------------- Noncurrent liabilities: Capitalized lease obligation, less current portion 6,967 Notes payable to related party, less current portion 1,422,911 ------------- Total noncurrent liabilities 1,429,878 ------------- Total liabilities 4,332,282 ------------- Stockholders' deficit: Preferred stock, no par value, 20,000,000 shares authorized; none issued or outstanding - Common stock, no par value, 20,000,000 shares authorized; 8,138,305 issued and outstanding 12,630,604 Deferred compensation - Accumulated deficit (15,877,439) ------------- Total stockholders' deficit (3,246,835) ------------- $ 1,085,447 =============
See accompanying notes. 2 Ophthalmic Imaging Systems Condensed Statements of Operations (Unaudited)
Three months ended June 30, Six months ended June 30, 2001 2000 2001 2000 -------------- -------------- -------------- -------------- Net revenues $ 1,331,803 $ 928,476 $ 3,040,604 $ 2,519,096 Cost of sales 617,751 511,605 1,434,503 1,288,873 -------------- -------------- -------------- -------------- Gross profit 714,052 416,871 1,606,101 1,230,223 Operating expenses: Sales and marketing 384,240 299,860 915,557 748,948 General and administrative 311,318 289,600 585,984 569,728 Research and development 94,339 62,542 177,290 121,863 -------------- -------------- -------------- -------------- Total operating expenses 789,897 652,002 1,678,831 1,440,539 -------------- -------------- -------------- -------------- Income (loss) from operations (75,845) (235,131) (72,730) (210,316) Other expense, net (54,381) (52,795) (108,341) (75,532) -------------- -------------- -------------- -------------- Income (loss) before extraordinary item (130,226) (287,926) (181,071) (285,848) Extraordinary item - - 188,762 - -------------- -------------- -------------- -------------- Net income (loss) $ (130,226) $(287,926) $ 7,691 $ (285,848) ============== ============== ============== ============== Shares used in the calculation of basic net income (loss) per share 8,138,305 4,305,428 8,138,305 4,305,428 ============== ============== ============== ============== Basic income (loss) per share before extraordinary item $ (0.02) $ (0.07) $ (0.02) $ (0.07) Extraordinary item - - 0.02 - -------------- -------------- -------------- -------------- Basic net income (loss) per share $ (0.02) $ (0.07) $ - $ (0.07) ============== ============== ============== ============== Shares used in the calculation of diluted net income (loss) per share 8,138,305 4,305,428 8,138,305 4,305,428 ============== ============== ============== ============== Diluted income (loss) per share before extraordinary item $ (0.02) $ (0.07) $ (0.02) $ (0.07) Extraordinary item - - 0.02 - -------------- -------------- -------------- -------------- Diluted net income (loss) per share $ (0.02) $ (0.07) $ - $ (0.07) ============== ============== ============== ==============
See accompanying notes. 3 Ophthalmic Imaging Systems Condensed Statements of Cash Flows Increase (Decrease) in Cash and Equivalents (Unaudited)
Six months ended June 30, 2001 2000 ------------------ ----------------- OPERATING ACTIVITIES: Net income (loss) $ 7,691 $ (285,848) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 60,200 63,491 Stock option compensation expense 3,049 39,444 Extraordinary gain on early exinguishment of debt (188,762) - Net (increase) decrease in current assets other than cash and equivalents (14,104) 497,010 Net increase (decrease) in current liabilities other than short-term borrowings 23,900 (95,409) ------------------ ----------------- Net cash (used in) provided by operating activities (108,026) 218,688 INVESTING ACTIVITIES: Purchases of furniture and equipment (56,223) - Net (increase) decrease in other assets (306) 2,474 ------------------ ----------------- Net cash (used in) provided by investing activities (56,529) 2,474 FINANCING ACTIVITIES: Principal payments on notes payable (3,467) (3,597) Proceeds from (repayments of) borrowings under notes payable to significant shareholders, net 174,337 (309,339) Net repayments of credit facility borrowings - (24,844) ------------------ ----------------- Net cash provided by (used in) financing activities 170,870 (337,780) ------------------ ----------------- Net increase (decrease) in cash and equivalents 6,315 (116,618) Cash and equivalents at beginning of period 36,574 212,586 ------------------ ----------------- Cash and equivalents at end of period $ 42,889 $ 95,968 ================== ================= SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: (Reduction) increase in aggregate debt payable to significant shareholders in exchange for inventory and other noncash transactions, net $ (58,477) $ 454,656 ================== =================
See accompanying notes. 4 Ophthalmic Imaging Systems Notes to Condensed Financial Statements Three and Six Month Periods ended June 30, 2001 and 2000 (Unaudited) Note 1. Basis of Presentation The accompanying unaudited condensed balance sheet as of June 30, 2001, condensed statements of operations for the three and six month periods ended June 30, 2001 and 2000 and the condensed statements of cash flows for the three and six month periods ended June 30, 2001 and 2000 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. It is suggested that these condensed financial statements be read in conjunction with the audited financial statements and notes thereto included in the registrant's (the Company's) Transition Report for the Four Months Ended December 31, 2000 on Form 10-KSB/A. In the opinion of management, the accompanying condensed financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial position and results of operations for the periods presented. The results of operations for the period ended June 30, 2001 are not necessarily indicative of the operating results for the full year. Certain amounts in the fiscal 2000 financial statements have been reclassified to conform with the presentation in the fiscal 2001 financial statements. Note 2. Net Income (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. 5 The following table sets forth the computation of basic and diluted income per share:
Unaudited Unaudited Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2001 2000 2001 2000 ---------- ----------- ---------- ---------- Numerator for basic and diluted net income (loss) per share $ (130,266) $ (287,926) $ 7,691 $ (285,848) ========== ========== ========== ========== Denominator for basic net income (loss) per share: Weighted average shares 8,138,305 4,305,428 8,138,305 4,305,428 Effect of dilutive securities: Employee/director stock options -- -- -- -- Warrants and other -- -- -- -- ---------- ---------- ---------- ---------- Dilutive potential common shares -- -- -- -- ---------- ---------- ---------- ---------- Denominator for diluted net income (loss) per share 8,138,305 4,305,428 8,138,305 4,305,428 ========== ========== ========== ========== Basic net income (loss) per share $ (0.02) $ (0.07) $ -- $ (0.07) ========== ========== ========== ========== Diluted net income (loss) per share $ (0.02) $ (0.07) $ -- $ (0.07) ========== ========== ========== ==========
Note 3. Notes Payable to Related Parties In July 2000, the Company, Premier Laser Systems, Inc. ("Premier"), a California corporation and the Company's then majority shareholder, and MediVision Medical Imaging Ltd. ("MediVision"), an Israeli corporation, 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 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, thereby releasing each other from any and all claims, whether known or unknown between them. Also in connection with the definitive agreements, in July 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 June 30, 2001, the Company had recorded approximately $283,000 in principal and interest outstanding under the Short-Term Note. MediVision and the Company are in 6 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 Company has borrowed the maximum principal amount of $1.5 million available under the Working Capital Note, 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 $0.80 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 all of the Company's assets. At June 30, 2001, the Company had recorded approximately $1,812,000 in principal and interest outstanding under the Working Capital Note. At June 30, 2001, the Company had recorded approximately $1,804,000 in aggregate debt owed to MediVision, which amount is net of approximately $291,000 in accounts receivable recorded in connection with sales of the Company's products to MediVision. In addition, at that date the Company and MediVision were in negotiations to, among other things, increase the principal amount under the Working Capital Note (see Note 6). Note 4 MediVision and Premier Transactions In February 2000, Premier, then a significant shareholder with majority voting control of the Company, notified the Company that it was considering seeking protection under the U.S. Bankruptcy Code and the Company thereupon terminated a merger agreement and rendered as non-effective a manufacturing agreement and certain other arrangements then in effect between the parties. In March 2000, Premier filed a voluntary petition for protection and reorganization under Chapter 11 of the U.S. Bankruptcy Code. In July 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 (see Note 3 and Note 6). At the Closing, among other things, 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. As a result of the foregoing transactions, MediVision currently owns approximately 73% of the Company's outstanding common stock. Note 5 Extraordinary Item 7 In March 2001, the Company reached agreement with Imperial Bank (the "Bank") to retire the aggregate amount of principal and interest previously recorded pursuant to a stock appreciation right granted to the Bank in connection with a credit agreement. Accordingly, the debt forgiven in the amount of $188,762 has been recognized as an extraordinary item in the financial statements for the quarter ended March 31, 2001. Note 6 Subsequent Event Subsequent to June 30, 2001, the Company and MediVision entered into Amendment No. 1 to the Working Capital Funding Agreement ("Amendment") whereby, among other things, the maximum principal amount of allowable borrowings pursuant to the Working Capital Funding Agreement entered into in connection with the Closing was increased by $1,000,000 to $2,500,000 (see Note 3). In connection with the Amendment, the Company executed in favor of MediVision a promissory note in the aggregate amount of $1,000,000 (the "Amendment Note"). Under the terms of the Amendment Note, all principal amounts outstanding, together with any and all accrued interest, is payable by August 31, 2003 or as otherwise stipulated in the Amendment 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 $0.185 per share, which price is subject to adjustment upon the occurrence of certain events set forth in the Amendment Note. Under the terms of the Amendment Note, borrowings bear interest at the rate of 9.3% per annum and are secured by all of the Company's assets. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements within the meaning of the federal securities laws. The Company intends such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended, and in Section 21E of the Exchange Act of 1934, as amended. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on its operations and future prospects include, but are not limited to, changes in: economic conditions generally and the medical instruments market specifically, legislative or regulatory changes affecting OIS, including changes in healthcare regulation, the availability of working capital, the introduction of competing products, and other risk factors described herein. These risks and uncertainties, together with the other risks described from time to time in reports and documents filed by OIS with the SEC should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. Indeed, it is likely that some of the Company's assumptions will prove to be incorrect. The Company's actual results and financial position will vary from those projected or implied in the forward-looking statements, and the variances may be material. Overview - -------- To date, the Company has designed, developed, manufactured and marketed ophthalmic digital imaging systems and has derived substantially all of its revenues from the sale of such products. The primary target market for the Company's digital angiography systems and related products has traditionally been retinal specialists. The Company introduced its newest line of digital angiography systems, the WinStation 1400 and WinStation 3000, at the 2000 Annual Meeting of the American Academy of Ophthalmology held in Dallas, Texas during the last quarter of 2000 ("2000 AAO Meeting"). These products have received considerable interest and the Company has received significant purchase commitments for these products. The Company commenced commercial delivery of these systems during the first quarter ended March 31, 2001. In recent years, the Company expended research and development efforts on product offerings and applications targeting the broader markets of general ophthalmology and optometry. Two such products resulting from these efforts, the Digital Fundus Imager (the "DFI") and the Digital Slit Lamp Imager (the "DSLI"), were introduced in the latter half of 1998, with the DFI receiving considerable interest. The Company, however, had limited financial and operational resources to meet the demand resulting from the introduction of the DFI. In that regard, during 1999, the Company entered into a manufacturing agreement (the "Manufacturing Agreement") with Premier Laser Systems, Inc. ("Premier"), a California corporation and the Company's majority shareholder at the time, whereby Premier began assembling and manufacturing the 9 Company's products, including the DFI and DSLI. In addition, the Company agreed with Premier on certain co-marketing and selling arrangements and the two companies began selling their ophthalmic products through a jointly managed EyeSys Vision Group. 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 subsequently resumed manufacture and assembly of its products in its facilities in Sacramento, California but incurred increased costs and significant delays in production and product deliveries as a result of these failed arrangements. The Company also noted a reduction in its new order bookings following the termination of the Merger Agreement and Premier's subsequent filing for bankruptcy protection. 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 of the debt owed to Premier to shares of the Company's common stock and capital commitments to the Company by MediVision of $1,500,000, which commitments were increased to $2,500,000 pursuant to an agreement entered into subsequent to June 30, 2001. The Company has experienced operating losses for each fiscal year since its initial public offering in 1992. At June 30, 2001, the Company had an accumulated deficit in excess of $15,000,000 and its current liabilities exceeded its current assets by approximately $2,036,000. The Company continues to experience cash flow pressures 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 10 "Termination Fee") as provided for in the Stock Purchase Agreement. The demand was not pursued at the time because of a revival of plans for merger of the companies. On October 21, 1999, the Company and Premier entered into an Agreement and Plan of Reorganization (the "Merger Agreement") whereby, upon requisite shareholder approval, the Company would have become a wholly-owned subsidiary of Premier. Also on October 21, 1999, the Company and Premier entered into two stock purchase agreements with respect to the Company's Series B Preferred Stock whereby, among other things, Premier purchased 150 shares of the Company's Series B Preferred Stock with each share carrying the voting power of 1,000 shares of the Company's common stock, at a per share price of $25 in exchange for Premier's cancellation of certain of the Company's debt in the aggregate amount of $3,750. In February 2000, Premier notified the Company that it was considering seeking protection under the U.S. Bankruptcy Code and the Company thereupon terminated the Merger Agreement on February 17, 2000. In March 2000, Premier filed a voluntary petition for protection and reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result of the foregoing transactions, at the time of its bankruptcy filing, Premier owned 49.5% of the Company's outstanding common stock and all 150 outstanding shares of the Company's Series B Preferred Stock, thereby giving Premier majority voting control. On July 13, 2000, the Company, Premier and MediVision entered into a series of definitive agreements relating to the transfer of Premier's ownership interests in the Company to MediVision in exchange for cash and stock (the "MediVision Investments"). In separate but related transactions, MediVision loaned the Company $260,000 as short-term funding for continued operations and, upon the closing of the transactions contemplated under the agreements in August 2000 (the "Closing"), MediVision has committed to loan up to $1,500,000 to the Company, which is convertible at MediVision's option into shares of the Company's common stock. This commitment was increased to $2,500,000 pursuant to an amendment executed subsequent to June 30, 2001. 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. 11 The following discussion should be read in conjunction with the unaudited interim financial statements and the notes thereto which are set forth elsewhere in this Report on Form 10-QSB. In the opinion of management, the unaudited interim period financial statements include all adjustments, all of which are of a normal recurring nature, that are necessary for a fair presentation of the results of the periods. Results of Operations - --------------------- Revenues The Company's revenues for the second quarter ended June 30, 2001 were $1,331,803 representing an increase of approximately 43% from revenues of $928,476 for the second quarter ended June 30, 2000. Revenues for the first six months of fiscal 2001 were $3,040,604 representing an increase of approximately 21% from revenues of $2,519,096 for the comparable period of fiscal 2000. The increased revenue levels during fiscal 2001 include revenues from initial deliveries of the Company's newest digital angiography systems, the WinStation 1400 and WinStation 3000. Sales of these products accounted for approximately 67% and 64% of the Company's total revenues for the 2001 second quarter and six-month period, respectively. Revenues from sales of systems incorporating the Company's DFI and DSLI products continue to be below initial management expectations and accounted for approximately 12% and 10% of second quarter revenues during 2001 and 2000, respectively, and 11% and 9% of revenues for the first six months of 2001 and 2000, respectively. Gross Margins Gross margins were approximately 54% during the second quarter ended June 30, 2001 versus approximately 45% for the comparable quarter of 2000. For the six-month period ended June 30, 2001, gross margins were approximately 53% as compared to approximately 49% during the comparable period of 2000. Pursuant to the Closing of the transactions with MediVision, the Company has, with support from MediVision, undertaken certain gross margin enhancement efforts and continues to monitor its expenses in this area in contemplation of current and anticipated business conditions. Sales, Marketing, General and Administrative Expenses Sales and marketing and general and administrative expenses accounted for approximately 52% of total revenues during the second quarter of fiscal 2001 as compared with approximately 63% during the second quarter of fiscal 2000. Actual expense levels increased to $695,558 during the second quarter of 2001 versus $589,460 during the second quarter of 2000. For the first six months of fiscal 2001 and fiscal 2000 such expenses accounted for approximately 49% and 52% of total revenues for the respective six-month periods. Actual expenses increased to $1,501,541 from $1,318,676 during the six-month periods of fiscal 2001 and 2000, respectively. Primary contributing factors to the increased expenses were professional, administrative and other costs in connection with or as a consequence of the transactions with MediVision. Subsequent to 12 the Closing of the transactions with MediVision, the Company has hired, among others, a Director of Operations and certain sales and related support managers and has undertaken recruitment efforts for management and other personnel in this and other areas. Research and Development Expenses Research and development expenses increased by approximately 51% to $94,339 in the second quarter of fiscal 2001 from $62,542 in fiscal 2000. Such expenses accounted for approximately 7% of revenues during the second quarter of both periods. For the first six months of fiscal 2001, such expenses accounted for approximately 6% of total revenues as compared to approximately 5% during the comparable period of 2000. 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 undertaken commencing in the last quarter of fiscal 2000. Other Expense Other expense was $54,381 during the second quarter of fiscal 2001 versus $52,795 during the same period of 2000. For the six-month periods, other expense was $108,341 and $75,532 in fiscal 2001 and fiscal 2000, respectively. These amounts were comprised principally of interest expense associated with net borrowings from MediVision and Premier during fiscal 2001 and 2000, 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. The fiscal 2000 expenses were partially offset by an insurance claim settlement during the first quarter. Net Income The Company recorded a net loss of $130,226, or $0.02 per share, for the second quarter ended June 30, 2001 as compared to a net loss of $287,926, or $0.07 per share, for the second quarter ended June 30, 2000. For the six-month periods, the Company recorded net income of $7,691, or breakeven per share as compared to a net loss of $285,848, or $0.07 per share during fiscal 2001 and fiscal 2000, respectively. The 2001 amounts include an extraordinary gain recorded during the first quarter of $188,762, or $0.02 per share, resulting from the negotiated reduction of certain principal and interest charges previously recorded in connection with a stock appreciation right granted to the Company's bank (the "Bank") discussed in further detail in Note 5 of the Notes to Condensed Financial Statements included in Item 1 of this Form 10-QSB. 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 $1.9 million. Management believes that the probability of such an assessment is remote and 13 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. Liquidity and Capital Resources - ------------------------------- The Company's operating activities used cash of $108,026 during the six months ended June 30, 2001 as compared to generating cash of $218,688 in the six months ended June 30, 2000. The cash used in operations during the first six months of 2001 was principally to fund the loss before extraordinary item, the impact of which was partially offset by an increase in accrued liabilities during the period, as well as increases in customer deposits resulting in large measure from orders generated in connection with the 2000 AAO Meeting. The cash provided by operations during the first six months of fiscal 2000 resulted principally from increased payable amounts associated with the procurement of inventory, including inventory purchased from Premier under the Manufacturing Agreement, as well as collection of accounts receivable during the period, which amounts were only partially offset by reduced levels of accrued liabilities and customer deposits. Cash used in investing activities was $56,529 during the first six months of 2001 as compared to cash provided by investing activities of $2,474 during the same period for 2000. The Company's primary investing activities consist of equipment and other capital asset acquisitions. The Company anticipates continued certain near-term capital expenditures in connection with its ongoing efforts 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 from financing activities of $170,870 during the first six months of fiscal 2001 as compared to using cash of $337,780 during the comparable period of fiscal 2000. The cash provided by financing activities during the first quarter of fiscal 2001 was principally from increased borrowings under existing arrangements with MediVision. The cash used in financing activities during the first quarter of fiscal 2000 were principally payments under then-existing arrangements with Premier and, to a lesser extent, payments under a then-available credit facility with the Bank. Principal payments on notes payable other than to significant shareholders in both years was minimal. As discussed further above and in Note 3, Note 4 and Note 6 of the Notes to Condensed Financial Statements included in Item 1 of this Form 10-QSB, on July 21, 2000, the Company executed a promissory note in favor of MediVision (the "Short-Term Note") and the Company has borrowed the maximum principal amount of $260,000 available under the Short-Term Note. At June 30, 2001, the Company had recorded approximately $283,000 in principal and interest outstanding 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. 14 In addition, 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 Company has borrowed the maximum principal amount available under the Working Capital Note of $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. At June 30, 2001, the Company had recorded approximately $1,812,000 in principal and interest outstanding under the Working Capital Note. At June 30, 2001, the Company had recorded approximately $1,804,000 in aggregate debt owed to MediVision, which amount is net of approximately $291,000 in accounts receivable recorded in connection with sales of the Company's products to MediVision for further sale to customers in international markets. Subsequent to June 30, 2001, the Company and MediVision entered into Amendment No. 1 to the Working Capital Funding Agreement ("Amendment") whereby, among other things, the maximum principal amount of allowable borrowings pursuant to the Working Capital Funding Agreement entered into in connection with the Closing in August 2000 was increased by $1,000,000 to $2,500,000 from $1,500,000, which earlier amount was supported by the Working Capital Note discussed in further detail above. In connection with the Amendment, the Company executed in favor of MediVision a promissory note in the aggregate amount of $1,000,000 (the "Amendment Note"). Under the terms of the Amendment Note, all principal amounts 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 $0.185 per share. Under the terms of the Amendment Note, borrowings bear interest at the rate of 9.3% per annum and are secured by all of the Company's assets. On June 30, 2001, the Company's cash and cash equivalents were $42,889. 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 cash flow from sales of such products as well as potential increased costs. Additionally, such delays could prompt customers to request return deposits which would further adversely impact the Company's cash position. 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 sustained profitable operations. 15 Its relationship with MediVision provides 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, the Company and MediVision have begun collaborative efforts with respect to design and implementation of certain product development programs. Furthermore, 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 have recently executed an agreement to increase available working capital beyond the $1,500,000 under the Working Capital Note by $1,000,000 to $2,500,000. Irrespective of this increase, 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. 16 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) None. (b) None. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the undersigned has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OPHTHALMIC IMAGING SYSTEMS (Registrant) By: /s/ GIL ALLON ---------------------------------- Gil Allon, Chief Executive Officer Dated: August 14, 2001 18 -----END PRIVACY-ENHANCED MESSAGE-----