-----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, LqbP+WMYFXF7jeSkrF/p0aBwKfYaUfxpFb4pE+MpgKTssQC+5UMhOONqgFIG3Joz KMuLS8wnuX19UaQkn3RaMA== 0000910680-02-000363.txt : 20020415 0000910680-02-000363.hdr.sgml : 20020415 ACCESSION NUMBER: 0000910680-02-000363 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020326 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: 1934 Act SEC FILE NUMBER: 001-11140 FILM NUMBER: 02585867 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 d790410_1.txt FORM 10-KSB - 12/31/2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _____________ Commission File No. 1-11140 OPHTHALMIC IMAGING SYSTEMS (Exact name of Registrant as specified in its charter) California 94-3035367 - -------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization 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 its most recent fiscal year were $6,512,176. The aggregate market value of the voting and non-voting common stock of the issuer held by non-affiliates as of February 28, 2002, was approximately $65,200 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, 2002, 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. These WinStation products are targeted primarily at retinal specialists and general ophthalmologists in the diagnosis and treatment of retinal diseases and other ocular pathologies. The Company believes, however, that as the U.S. healthcare system moves toward managed care, the needs of managed care providers are changing the nature of demand for medical imaging equipment and services. New opportunities in telemedicine (i.e., the electronic delivery and provision of health care and consultative services to patients through integrated health information systems and telecommunications technologies), combined with lower cost imaging devices and systems, are emerging to allow physicians and managed care organizations to deliver a high quality of patient care while reducing costs. OIS is applying its technology in the ophthalmic imaging field to the development of new ocular imaging devices and exploring telemedicine/managed care applications targeted at the mass markets of general ophthalmology and optometry. The Company's objective is to become a leading provider of a diverse range of complimentary ophthalmic products and services for the ocular health care industry. In this regard, the Company refocused its business strategy during 1998 to the marketing and sales of its angiography products as well as the allocation of significant resources to the development of two ocular imaging devices, the Digital Fundus Imager ("DFI") and the Digital Slit Lamp Imager ("DSLI"). When these two products were introduced during the first quarter of fiscal 1999, they represented 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 is currently focusing its development efforts on related products for the ocular healthcare market, as well as features and enhancements to its existing products. MediVision and Premier Transactions In February 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. 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. In October 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 in October 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. 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. In July 2000, the Company, Premier and MediVision Medical Imaging Ltd., an Israeli company ("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 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 -2- unknown between them, including the $500,000 Termination Fee claimed by the Company against Premier. In July 2001, MediVision increased the amount of its loan commitment by $1,000,000 to $2,500,000. As a result of the foregoing transactions, MediVision currently owns approximately 73% of the Company's outstanding common stock. (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. -3- 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. 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 1,200 units per year at an average per unit selling price of approximately $24,000. Of total cameras worldwide, including new and previously-owned, a significant number are suitable to be interfaced with Company digital imaging systems. 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. -4- Sales, Marketing and Distribution The Company utilizes a direct sales force in marketing its products throughout the United States and Canada. At December 31, 2001, the Company's sales and marketing organization consisted of a marketing manager located at the Company's headquarters as well as 6 territory sales representatives and 3 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. MediVision currently serves as the principal distributor of the Company's products in Europe and certain other international markets. 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. 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 10,200 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 -5- 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. 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 ensure 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 -6- 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. 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 years ended December 31, 2001 and 2000 were approximately $549,000 and $323,000, respectively. 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 was undertaken commencing in the last quarter of fiscal 2000. PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY On June 15, 1993, the Company was issued United States Letters Patent No. 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. -7- In the event that any of the Company's products, including the Glaucoma-Scope(R), infringe patents, trademarks or proprietary rights of others, the Company may be required to modify the design of such products, change the names under which the products or services are provided or obtain licenses. There can be no assurance that the Company will be able to do so in a timely manner, upon acceptable terms and conditions, or at all. The failure to do any of the foregoing could have a material adverse effect on the Company. There can be no assurance that the Company's patents or trademarks, if granted, would be upheld if challenged or that competitors might not develop similar or superior processes or products outside the protection of any patents issued to the Company. In addition, there can be no assurance that the Company will have the financial or other resources necessary to enforce or defend a patent or trademark infringement or proprietary rights violation action. Moreover, if the Company's products infringe patents, trademarks or proprietary rights of others, the Company could, under certain circumstances, become liable for damages, which also could have a material adverse effect on the Company. The Company also relies on trade secrets, know-how, continuing technological innovation and other unpatented proprietary technology to maintain its competitive position. Certain of the image processing and optical interfaces of the Company's digital imaging systems are largely proprietary and constitute trade secrets, but the basic computer hardware, software and video components are purchased from third parties. No patent applications have been filed with respect thereto. The Company anticipates aggressively defending its unpatented proprietary technology, although there is no assurance that others will not independently develop substantially equivalent proprietary information or techniques, or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its rights to its unpatented trade secrets and other proprietary technology. The Company seeks to protect its unpatented proprietary technology, in part, through proprietary confidentiality and nondisclosure agreements with employees, consultants and other parties. The Company's confidentiality agreements with its employees and consultants generally contain industry standard provisions requiring such individuals to assign to 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 -8- practices, labeling and prohibition against misbranding and adulteration. Further, because the Company is engaged in international sales, the Company's products must satisfy certain manufacturing requirements and may subject the Company to various filing and other regulatory requirements imposed by foreign governments as a condition to the sale of such products. The Company has registered its manufacturing facility with both the FDA and certain California authorities as a medical device manufacturer and operates such facility under FDA and California requirements concerning Quality System Requirements ("QSR"). As a medical device manufacturer, the Company is required to continuously maintain its QSR compliance status and to demonstrate such compliance during periodic FDA and California inspections. If the facilities do not meet applicable QSR regulatory requirements, the Company may be required to implement changes necessary to comply with such regulations. 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, 2001, 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, 2001, the Company had 32 employees, of which 29 were full-time. The Company also engages the services of consultants from time to time to assist the Company on specific projects in the areas of research and development, software development, regulatory affairs and product services, as well as general corporate administration. Certain of 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. -9- ITEM 2. DESCRIPTION OF PROPERTY. The Company leases under a noncancelable triple net lease expiring in May 2004, approximately 10,200 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 minimum monthly lease payments, with respect to these properties, in the aggregate of approximately $7,000. Management believes its existing leased facilities are adequately covered by insurance. The Company has no current plans to significantly renovate, improve or develop any of its leased facilities. The Company does not have, and does not foresee acquiring, any real estate or investments in real estate, and is not engaged in any real estate activities. ITEM 3. LEGAL PROCEEDINGS. In 1999, the Company received correspondence from two European distributors indicating that the termination of their services, as proposed, would be in violation of European law. The Company is not aware of any formal action being brought by either distributor, but it will respond and defend itself, if necessary, to minimize any adverse impact on operations. Except as indicated above, to management's knowledge, there are no material legal proceedings presently pending or threatened to which the Company (or any of its directors or officers in their capacity as such) is, or may be, a party or to which property of the Company is, or may be, subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of the Company's security holders during the fourth quarter of the year ended December 31, 2001 covered by this Annual Report on Form 10-KSB. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The shares of common stock of the Company have been listed and principally quoted on the Nasdaq OTC Bulletin Board under the trading symbol "OISI" since May 28, 1998 and prior thereto on the Nasdaq Small-Cap Market. In May 1998, the NASD notified the Company that the Company no longer satisfied Nasdaq Small-Cap Market listing requirements and, in accordance with the terms of the Nasdaq Listing Qualifications Panel decision, the Company's common stock was delisted therefrom on May 27, 1998. Further, due to the Company's inability to comply with the Boston Stock Exchange listing requirements, the Company's common stock was delisted therefrom on March 3, 1998. The following table sets forth the high and low prices for the Company's common stock as reported 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. -10-
Year Ended December 31, 2001 Year Ended December 31, 2000 -------------------------------------- -------------------------------------- High Low High Low Ask Bid Dividend Ask Bid Dividend ------------ ------------ ------------ ------------ ------------ ------------ First Quarter 0.250 0.110 -- 1.250 0.375 -- Second Quarter 0.200 0.100 -- 0.620 0.200 -- Third Quarter 0.150 0.060 -- 0.800 0.406 -- Fourth Quarter 0.130 0.060 -- 0.437 0.160 --
On February 28, 2002, the closing price for the Company's common stock, as reported by the Nasdaq OTC Bulletin Board, was $0.03 per share and there were approximately 140 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. 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. 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 -11- 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 and related products has traditionally been retinal specialists. The Company introduced a new line of digital angiography systems 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. Initial commercial deliveries of these products commenced in the first half of 2001. The Company's latest digital angiography system was introduced at the 2001 Annual Meeting of the American Academy of Ophthalmology held in New Orleans, Louisiana and was similarly positively received. Initial commercial delivery of this product commenced during the fourth quarter of 2001. Revenues from the sale of these products, including upgrades, accounted for approximately 75% of the Company's reported revenues for 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 DFI and 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 with Premier whereby Premier began assembling and manufacturing the Company's products, including the DFI and DSLI (the "Manufacturing Agreement"). 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 and consummation of the transactions contemplated thereby. -12- As a consequence of the termination of the Merger Agreement and subsequent filing by Premier of a voluntary petition for protection and reorganization under Chapter 11 of the U.S. Bankruptcy Code, the Company rendered as non-effective the Manufacturing Agreement and the co-marketing and selling arrangements then in effect between the companies. 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, which amount was increased by $1,000,000 to $2,500,000 in July 2001. The Company's results for 2001 reflect the positive impact of redirecting its resources and efforts to the core disciplines of marketing, selling and operations. 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. Prior to 2001, the Company had experienced operating losses for each fiscal year since its initial public offering in 1992. At December 31, 2001, the Company had an accumulated deficit in excess of $15,000,000 and its current liabilities exceeded its current assets by approximately $1,600,000. 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. Results of Operations In December 2000, the Company's Board of Directors approved the change of its year end from a fiscal year ending on August 31st to a calendar year ending on December 31st. This change in the Company's fiscal year end gave rise to a four-month transition period ended December 31, 2000. The financial statements for the four-month period ended December 31, 2000 were audited by the Company's independent auditors and are included in the Company's report on Form 10-KSB/A for the four-month transition period ended December 31, 2000, filed on May 18, 2001. Where indicated below, certain of the selected financial data has not been audited but is included for comparative presentation. -13- Selected Financial Data
FOUR MONTHS ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, YEARS ENDED AUGUST 31, -------------------------- --------------------------- -------------------------- 2001 2000 2000 1999 2000 1999 -------------------------- --------------------------- -------------------------- (unaudited) (unaudited) STATEMENT OF OPERATIONS DATA: - ----------------------------- Net revenues $ 6,512,176 $ 4,069,441 $ 1,180,642 $ 1,660,300 $ 4,571,182 $ 6,243,305 Cost of sales 2,619,758 2,742,240 1,324,118 1,215,698 2,633,600 3,892,243 ---------------------------- ---------------------------- --------------------------- Gross profit (loss) 3,892,418 1,327,201 (143,476) 444,602 1,937,582 2,351,062 ---------------------------- ---------------------------- --------------------------- Operating expenses: Sales, marketing, general and administrative 3,185,923 2,792,794 1,115,403 962,913 2,662,607 2,868,089 Research and development 549,419 322,927 155,874 156,400 323,454 895,605 ---------------------------- ---------------------------- --------------------------- Total operating expense 3,735,342 3,115,721 1,271,277 1,119,313 2,986,061 3,763,694 ---------------------------- ---------------------------- --------------------------- Income (loss) from operations 157,076 (1,788,520) (1,414,753) (674,711) (1,048,479) (1,412,632) Other expense, net (273,384) (185,963) (51,003) (50,961) (185,920) (180,208) ---------------------------- ---------------------------- --------------------------- Net loss before extraordinary item (116,308) (1,974,483) (1,465,756) (725,672) (1,234,399) (1,592,840) Extraordinary item 188,762 62,836 - - 62,836 350,000 ---------------------------- ---------------------------- --------------------------- Net income (loss) $ 72,454 $(1,911,647) $(1,465,756) $ (725,672) $(1,171,563) $(1,242,840) =========================== =========================== ========================== Basic earnings (loss) per share $ .01 $ (.40) $ (.18) $ (.17) $ (.26) $ (.30) =========================== =========================== ========================== Shares used in the calculation of net earnings (loss) per share 8,138,305 4,763,707 8,138,305 4,272,461 4,430,413 4,155,428 =========================== =========================== ========================== STATEMENT OF CASH FLOWS DATA: - ----------------------------- Net cash used in operating $ (349,371) $(1,163,554) $(1,026,156) $ (39,222) $(1,491,246) $ (215,532) activities Net cash used in investing (97,017) (31,378) (57,359) (7,293) (13,944) (27,974) activities Net cash provided by (used in) financing activities 481,740 1,018,920 864,129 81,094 1,583,143 (92,673) ---------------------------- ---------------------------- --------------------------- Net increase (decrease) in cash and cash equivalents $ 35,352 $ (176,012) $ (219,386) $ 34,579 $ 77,953 $ (336,179) =========================== =========================== ==========================
Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000 Revenues The Company's revenues for the year ended December 31, 2001 were $6,512,176 representing an increase of approximately 60% from revenues of $4,069,441 for the year ended December 31, 2000. The increased revenue levels for 2001 include revenues from initial deliveries of the Company's newest digital angiography systems, including the WinStation 1400 and WinStation 5000. Sales of these products, including upgrades, accounted for approximately -14- 75% of the Company's total revenues for the 2001. The reduced revenue levels during the 2000 period reflect the adverse impact of a number of factors discussed in further detail below. Revenues from sales of systems incorporating the Company's DFI and DSLI products continue to be below initial management expectations and accounted for approximately 6% and 16% of revenues during 2001 and 2000, respectively. Gross Margins Gross margins were approximately 60% during fiscal 2001 versus approximately 33% for fiscal 2000. The fiscal 2001 gross margin percentage reflects the impact of sales of higher margin products as well as economies of scale associated with fixed and semi-variable overhead cost absorption over increased revenue levels. 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. 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, marketing, general and administrative expenses accounted for approximately 49% of total revenues during fiscal 2001 as compared with approximately 69% during fiscal 2000. Expense levels increased to $3,185,923 during fiscal 2001, representing an increase of approximately 14% compared to expenses of $2,792,794 in 2000. The fiscal 2001 third quarter amount is net of a non-recurring adjustment to reverse a previously accrued liability, absent of which adjustment actual expense levels for the period would have increased by approximately 8% over expense levels for the third quarter of fiscal 2000. 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 as well as increased commissions and other expenses associated with significantly increased revenue levels during 2001 versus 2000. These costs more than offset the impact of a non-recurring adjustment to reverse a previously accrued liability during the third quarter of 2001. Subsequent to the Closing of the transactions with MediVision, the Company 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 70% to $549,419 during 2001 from $322,927 during 2000. Such expenses accounted for approximately 8% of revenues during both years. 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. -15- Other Income (Expense) Other expense was $273,384 during 2001 compared to $185,963 during 2000. These amounts were comprised principally of interest expense associated with net borrowings from MediVision and Premier during fiscal 2001 and 2000, respectively, interest expense associated with financing arrangements provided to certain of the Company's customers in connection with sales of its products and interest expense 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. Net Income (Loss) The Company reported net income of $72,454, or $0.01 per share, during 2001, compared to a net loss of $1,911,647, or $0.40 per share, during 2000. 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 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 discussed in further detail in Note 12 of the Notes to Financial Statements included in Item 7 of this Form 10-KSB. The 2000 amounts include an extraordinary gain recorded during the third quarter of $62,836, or $0.01 per share, comprised principally of the write-off of the recorded amount of 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 in connection with the Closing in August 2000 of the transaction by and among the Company, Premier and MediVision, and, to a lesser extent, the impact of an insurance claim settlement during fiscal 2000 (see Note 12 of the Notes to Financial Statements included in Item 7 of this Form 10-KSB). The results of operations for 2001 reflect the positive impact of redirecting the Company's attention and resources to core marketing, selling and corporate operations issues, and it marks the Company's first year of profitability since its initial public offering. Initial sales of the Company's newest digital angiography products contributed significantly to these results 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 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 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 $2,000,000. Management believes that the probability of such an -16- 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 12% and 18% of the Company's net sales for 2001 and 2000, 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. Comparison of Four-Month Period Ended December 31, 2000 to Four-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, 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. 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). 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 -17- 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 certain delays inherent in the launch of new technology-based products. 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 -18- appreciation right granted to the Company's bank. Interest income in both periods was insignificant. 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. 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 redirected its attention and resources to core marketing, selling and corporate operations issues. As a direct result of these efforts, the Company introduced at the 2000 AAO Meeting its WinStation 1400 and WinStation 3000 digital imaging systems, both of which offered significantly higher resolution than the Company's then-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 was estimated on the basis of numerous factors and assumptions that might, in the least favorable combination, reach $1,700,000 at December 31, 2000. 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. 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, 000 and 1999, respectively. -19- 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. Comparison of Year Ended August 30, 2000 to Year Ended August 30, 1999 Revenues The Company's fiscal 2000 revenues were $4,571,182, representing a decrease of approximately 27% from revenues of $6,243,305 in fiscal 1999. A number of factors contributed to the significantly reduced revenue levels during fiscal 2000, including: (i) delays in delivery of the Company's products associated with the outsourcing of the manufacture and assembly of the Company's products during the first six months of the year under the Manufacturing Agreement with Premier as well as the disruptive impact on production efforts during the third quarter resulting from the termination of the Manufacturing Agreement; (ii) management's efforts being directed to the negotiation of the failed Merger Agreement with Premier as well as subsequent acquisition matters during the period and less time devoted to the generation of sales; and (iii) a reduction in the Company's new order bookings following the termination of the Merger Agreement and Premier's subsequent filing for bankruptcy protection. In addition, certain of the Company's sales, marketing and executive management personnel resigned their positions during 2000. While certain of the executive management personnel continued to work with, and provide consulting services for, the Company as independent contractors, these resignations resulted in reduced selling resources during the year. Reference is made to the Company's Form 8-K filed on March 17, 2000 summarizing the executive management resignations. Lastly, the fiscal 2000 revenue levels were negatively affected by the allocation of the Company's reduced selling resources away from its core WinStation products. Some selling resources were allocated during the period to EyeSys products in support of terminated co-marketing and co-selling arrangements with Premier. Higher concentrations of available selling resources were also allocated to the Company's DFI and DSLI products during the year. Revenues from sales of these low-cost digital imaging products accounted for approximately 14% of the Company's fiscal 2000 revenues versus approximately 3% of the Company's 1999 revenues. Unit sales of these products to date, and 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. Gross Margins Gross margins were approximately 42% in fiscal 2000 as compared to approximately 38% in fiscal 1999. The 1999 gross margin percentage reflects the impact of a one time adjustment during the last quarter of the year to reduce the carrying value of certain potential excess and obsolete inventory, which more than offset the impact on the fiscal 2000 gross margin percentage of fixed costs absorption over substantially lower revenue levels during fiscal 2000 -20- versus 1999. The Company also expended considerable resources during both fiscal 2000 and 1999 in connection with the outsourcing arrangements under the terminated Manufacturing Agreement, including efforts to resume manufacture and assembly of its products in its facilities in Sacramento, California commencing at the end of the second quarter of 2000. Costs associated with these efforts, together with delays in the timely delivery of certain of its products under and subsequent to termination of the Manufacturing Agreement also have adversely impacted gross margins during both periods. Sales, Marketing, General and Administrative Expenses Sales and marketing and general and administrative expenses accounted for approximately 58% of revenues for the fiscal year ended August 31, 2000 as compared to approximately 46% for the previous fiscal year. Expenses were $2,662,607 in fiscal 2000 as compared to $2,868,089 in fiscal 1999, representing a decrease of approximately 7%. The principal contributing factors to the decreased expenses in fiscal 2000 were lower costs associated with significantly reduced revenue levels and the impact of resignations during the year of certain sales, marketing and executive management personnel discussed previously. Subsequent to the Closing of the transactions with MediVision, the Company has hired a Director of Operations and had undertaken recruitment efforts for management and other personnel in this and other areas. Research and Development Expenses Research and development expenses decreased by approximately 64% to $323,454, or approximately 7% of revenues in fiscal 2000 from $895,605, or approximately 14% of revenues in fiscal 1999. While the Company has focused its recent research and development efforts on new digital image capture products and reducing cost configurations for its current products, the extent and focus of future research and development efforts would depend, in large measure, on direction from MediVision, including potential collaborative projects between MediVision and the Company. Interest Income Interest income was $143,833 during fiscal 2000 versus $1,659 during fiscal 1999. The substantial increase in the fiscal year 2000 amount resulted from interest income recorded in connection with products sold to Premier as well as expenditures made by the Company for or on behalf of Premier for, among other things, purchase of inventory components and certain selling and marketing expenses. Interest expense accounted for $329,753 and $181,867 in fiscal years 2000 and 1999, respectively. During both years, interest on inventory purchased and borrowings from and other advances by Premier was the major component of interest expense. Net Loss The Company incurred a net loss of $1,171,563, or $0.26 per share, during fiscal 2000 compared to a net loss of $1,242,840, or $.30 per share, during fiscal 1999. The 2000 figures include an extraordinary gain of $62,836, or $0.01 per share, resulting principally from the write-off of the recorded amount of the Premier debt in excess of the amount calculated in connection with the conversion of said debt into shares of the Company's common stock previously discussed. The 1999 figures include an extraordinary gain of $350,000, or $.08 per share, resulting from the -21- negotiated reduction of certain professional fees and expenses previously recorded in connection with the terminated Stock Purchase Agreement with Premier. The per share figures are basic amounts in accordance with Financial Accounting Standards No. 128. Some negative impact on fiscal year 2000 earnings was attributable to continuing diversion of the Company's resources and management's attention to acquisition matters during the year. The results of operations for fiscal 2000 reflect the adverse impact on revenues and corporate operations resulting from delays in delivery of the Company's products associated with the outsourcing of the manufacture and assembly of the Company's products under the Manufacturing Agreement with Premier during the first two quarters, as well as the disruption resulting from termination of the Manufacturing Agreement and return of production to the Company's facilities in Sacramento, California. In addition, the Company incurred higher than normal costs and professional fees and expenses in connection with the failed Merger Agreement and subsequent related activities, including the transactions with Premier and MediVision, while diverting a significant amount of the Company's resources and management's attention and selling efforts away from the Company's core operations during this period. Further, the significantly decreased sales levels during fiscal 2000, the preponderance of which decrease resulted during the latter half of the year, and corresponding results of operations reflect concern about the Company's financial stability evidenced by a reduction in its new order bookings following the termination of the Merger Agreement and Premier's subsequent filing for bankruptcy protection. At the 2000 AAO Meeting, however, the Company received a number of purchase commitments for its products, including its WinStation 1400 and WinStation 3000, both introduced at the meeting. 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 was estimated on the basis of numerous factors and assumptions that might, in the least favorable combination, reach $1,500,000 at August 31, 2000. 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. Export Sales Revenues from sales to customers located outside of the United States accounted for approximately 10% and 14% of the Company's net sales for the years ended August 31, 2000 and 1999, respectively. Seasonality The Company's most effective marketing tool is the demonstration and display of its products at the annual meeting of the American Academy of Ophthalmology held during the fall of each year, with a significant amount of the Company's sales orders generated during or shortly after this meeting. Accordingly, the Company expends a considerable amount of time and resources during the first quarter of its fiscal year preparing for this event. As a consequence, the Company's revenues and profitability typically decrease during the periods prior to and following the annual meeting. -22- Liquidity and Capital Resources The Company's operating activities used cash of $1,491,246 in the year ended August 31, 2000 as compared to $215,532 in the year ended August 31, 1999. The cash used in operations during fiscal 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 fiscal 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. 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 the 2000 4-month period 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 Company's operating activities used cash of $349,371 during 2001 as compared to $1,163,554 during 2000. The cash used in operations during 2001 was partially to fund the loss before extraordinary item. In addition, the Company recognized significant sales during the latter portion of the fourth quarter, resulting in increased accounts receivable balances as well as reduced customer deposit levels at the end of the year. The impact of these factors was only partially offset by a net increase in the aggregate of accounts payable and accrued liabilities during the period. The cash used in operations during 2000 was principally to fund the loss before extraordinary item, the impact of which was partially offset by the net effect of a number of factors, including increased payable amounts associated with the procurement of inventory, including inventory purchased from Premier by MediVision on behalf of the Company, 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. Net cash used in investing activities was $13,994 during the year ended August 31, 2000 as compared to $27,974 during the year ended August 31, 1999. Net cash used in investing activities was $57,359 during the 4-month period ended December 31, 2000 as compared to $7,293 during the comparable period of 1999. Net cash used in investing activities was $97,017 during 2001 versus $31,378 during 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 increasing its pool of demonstration equipment, as well as its ongoing efforts to -23- upgrade its existing management information and corporate communication systems. The Company anticipates that related expenditures, if any, will be financed from cash flow from operations, borrowings under existing arrangements with MediVision, if available, or other financing arrangements, if any, available to the Company. The Company generated cash of $1,583,193 in financing activities during fiscal 2000 as compared to using cash of $92,673 during 1999. The principal sources of cash from financing activities during 2000 were borrowings under the Short-Term Note and the Working Capital Note, discussed in further detail below, and increased advances from Premier in connection with inventory purchases under the Manufacturing Agreement. To a lesser extent, the Company also generated cash from the exercise of stock options by the Exercising Directors during the period as well as the purchase by Premier of shares of the Company's Series B Preferred Stock. The principal use of cash in financing activities during 1999 was the net repayment of borrowings under a credit agreement then in effect with the Company's bank, which credit agreement was subsequently terminated during the year ended August 31, 2000 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 the Company's bank discussed above. 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. The Company generated cash of $481,740 in financing activities during 2001 as compared to $1,018,920 during 2000. The cash provided by financing activities during both years was principally from increased borrowings under existing arrangements with MediVision, which amounts in 2000 were partially offset by certain repayments of debt owed to Premier and, to a lesser extent, net repayment of borrowings under a credit facility. Principal payments on notes payable other than to significant shareholders in both years was minimal. As discussed further above and in and Note 6 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") and the Company has borrowed the maximum principal amount of $260,000 available under the Short-Term Note. At December 31, 2001, the Company had recorded approximately $295,000 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. 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 -24- favor of MediVision (the "Working Capital Note"). The maximum principal amount available under the Working Capital Note, prior to the Amendment as discussed in further detail below, was $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 $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. In July 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 million to $2.5 million. In connection with the Amendment, the Company executed in favor of MediVision a promissory note in the aggregate amount of $1 million (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. At December 31, 2001, the Company had recorded, in aggregate, approximately $2,298,000 in principal and interest outstanding under the Working Capital Note and Amendment Note. At December 31, 2001, the Company had recorded approximately $2,248,000 in aggregate debt owed to MediVision, which amount is net of approximately $345,000 in accounts receivable recorded in connection with sales of the Company's products to MediVision. On December 31, 2001, the Company's cash and cash equivalents were $71,926. Management anticipates that additional sources of capital beyond those currently available to the Company will may 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. The foregoing notwithstanding, Company's relationship with MediVision, will, in Management's opinion, significantly improve the Company's financial condition and enhance Management's ability to achieve sustained profitable operations, particularly in light of the agreement between MediVision and Agfa-Gevaert N.V. entered into during the fourth quarter of 2001. Pursuant to the agreement, Agfa acquired a minority interest in MediVision and is to invest in MediVision up to Euro 3.9 million, Euro 1.1 million of which was provided in connection with the closing in October 2001. Under the terms of the Agreement, among other -25- things, Agfa and MediVision will jointly develop, promote and market a combined, Integrated Digital Ophthalmology Picture Archive & Communication System, the first such system to be introduced in the ophthalmic imaging field. The Company anticipates actively supporting MediVision in these efforts. The Company's relationship with MediVision provides OIS access to resources in addition to working capital. As a direct consequence of the MediVision transactions, the Company has implemented certain gross margin enhancement efforts, including improved production cost control and sustaining engineering programs. In addition, the Company and MediVision are continuing 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. Irrespective of the foregoing, 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 year ended December 31, 2001 are attached hereto. 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. -26- 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, 2001: Name Age Position - -------------------------------------------------------------------------------- Noam Allon 42 Director Gil Allon 40 Director, Chief Executive Officer Ariel Shenhar 36 Director Jonathan Adereth 54 Director, Chairman of the Board Alon Harris, Ph.D. 42 Director Noam Allon has served as a member of the Company's Board of Directors since the Closing of the transactions with MediVision in August 2000. Mr. Allon has also 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 a member of the Company's Board of Directors since the Closing of the transactions with MediVision in August 2000 and has served as the Company's Chief Executive Officer since January 2002. Prior to joining the Company as an employee in January 2002, Mr. Allon acted in the capacity of the Company's Chief Executive Officer since August 2000. Mr. Allon is also a member of the Compensation and Nomination Committees of the Company's Board of Directors. Mr. Allon has also served as the Vice President, Chief Operating Officer and a member of the Board of Directors of MediVision since MediVision's inception in June 1993. Mr. Allon also currently serves as the Vice President, Chief Operating Officer and a member of the Board of Directors of MediVision's subsidiaries: Camvision and Laservision. From 1990 to 1993, Mr. Allon served as General Manager of Guy Systems, an Israeli corporation engaged in the analysis and development of information systems and general software. Mr. Allon received his B.A. and M.Sc. in Computer Science, both with distinction, from the Technion Israel Institute of Technology in Haifa, Israel in May 1987 and December 1989, respectively, and his M.B.A. with distinction in Business Management from the University of Haifa in September 1999. Ariel Shenhar has served as a member of the Company's Board of Directors since the Closing of the transactions with MediVision in August 2000. Mr. Shenhar is also a member of -27- the Audit Committee of the Company's Board of Directors. Mr. Shenhar has also 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 Chairman of the Company's Board of Directors since the Closing of the transactions with MediVision in August 2000. Mr. Adereth is also Chairman of each of the Audit, Compensation and Nomination Committees of the Company's Board of Directors. Mr. Adereth has also served as a member of the Board of Directors of MediVision since July 1, 1999. Mr. Adereth currently serves also as Chairman 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 Magna Lab Inc., a U.S. corporation engaged in medical imaging. 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 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. Alon Harris has served as a member of the Company's Board of Directors since November 2001. Professor Harris has been Director of the Glaucoma Research and Diagnostic Center (the "Center") in the Department of Ophthalmology at the Indiana University School of Medicine ("Indiana") since 1993. The Center, founded by Professor Harris, specializes in investigation of ocular blood flow and its relationship to eye diseases such as glaucoma, age-related macular degeneration and diabetic retinopathy. He has been the Letzter Professor of Ophthalmology at Indiana since 2000 and has been a Professor of Ophthalmology and Physiology and Biophysics at Indiana since 1999. Professor Harris is the 1995 recipient of the Research to Prevent Blindness International Scholar Award and holds the Letzter Endowed Chair of Ophthalmology. There are no family relationships among any of the persons listed above except that Noam Allon and Gil Allon are brothers. -28- (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 year ended December 31, 2001, its acting officers, directors and holders of more than 10% of its outstanding common stock complied with all Section 16(a) filing requirements, except that directors Noam Allon, Gil Allon, Ariel Shenhar Jonathan Adereth and Alon Harris were late in filing reports concerning the grant to them of options to purchase 150,000, 250,000, 150,000, 150,000 and 20,000 shares of the Company's common stock, respectively. ITEM 10. EXECUTIVE COMPENSATION. (a) Summary Executive Compensation Table None. During the year ended December 31, 2001, no executive officers were employed by the Company. (b) Summary Option Grants None. During the year ended December 31, 2001, no executive officers were employed by the Company. (c) Aggregated Option Exercises and Fiscal Year End Values None. During the year ended December 31, 2001, no executive officers were employed by the Company. (d) Compensation of Directors Throughout the fiscal year ended December 31 2001, Gil Allon provided executive management services to the Company, including acting in the capacity of its Chief Executive Officer. These services were performed pursuant to arrangement between the Company and MediVision, of which Mr. Allon was an executive officer. In January 2002, Mr. Allon terminated his employment with MediVision and became an employee of the Company, currently serving as its Chief Executive Officer. In consideration for the executive management services rendered by Mr. Allon to the Company during the year ended December 31, 2001, the Company incurred charges in the amount of approximately $140,000. Payments to and on behalf of Mr. Allon for his services to the Company were generally made directly by MediVision and charged to the Company, substantially all of which charges have been included in the amount reported as outstanding at December 31, 2001 under the Working Capital Note and Amendment Note discussed in further detail in Management's Discussion and Analysis or Plan of Operation included in Item 6 of this Report on Form 10-KSB and Note 6 of the Notes to Financial Statements included in Item 7 of this Report on Form 10-KSB. -29- The terms of Mr. Allon's employment with the Company are the subject of current negotiations between the parties and have not yet been finalized. In addition, Jonathan Adereth provides certain consulting services to the Company. For services rendered during the year ended December 31, 2001, Mr. Adereth earned consulting fees of approximately $23,000, plus expenses, of which approximately $3,500 remained accrued but unpaid as of December 31, 2001. Furthermore, in September 2001, the directors were granted options to purchase an aggregate of 700,000 shares of the Company's common stock pursuant to the Company's 2000 Stock Option Plan at a per share exercise price of $0.41, which price was the closing price of the Company's common stock on the date that the 2000 Stock Option Plan was approved by the Company's Board of Directors and which price exceeded the closing price of the Company's stock on the date of grant. Pursuant to a letter agreement executed on October 24, 2001, between Alon Harris and the Company, the Company has agreed to the following in connection with his service as a director: (i) to grant to Dr. Harris options to purchase up to 20,000 shares of the Company's common stock, at a per share exercise price not less that fair market value on the date of the grant, (ii) to pay to Dr. Harris, in four equal quarterly installments, an annual retainer in the aggregate amount of $4,000, (iii) to pay to Dr. Harris a per meeting fee of $500 for attending non-telephonic meetings of the Board, (iv) to pay to Dr. Harris an hourly fee of $100 for attending telephonic meetings of the Board, and (v) to reimburse Dr. Harris for reasonable expenses incurred in connection with his services as a director. No payments were made pursuant to the foregoing during the year ended December 31, 2001 and the referenced options were granted in January 2002 at a per share exercise price of $0.10, which price exceeded the closing price of the Company's stock on the date of grant. No standard arrangement 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. 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, 2002, by (i) each person who "beneficially" owns more than 5% of all outstanding shares of common stock, (ii) each director and the executive officer identified above in Item 10, and (iii) all directors and the executive officer as a group. -30-
Name and Address of Beneficial Owner Amount and Nature of Beneficial Owner Percent of Class - ------------------------------------ ------------------------------------- ---------------- MediVision Medical Imaging Ltd. 5,964,635 (1) 73.3% P.O. Box 45, Industrial Park Yokneam Elit 20692 Israel Gil Allon 125,000 (2) 1.5% 221 Lathrop Way, Suite I Sacramento, CA 95815 Noam Allon 75,000 (3) 0.9% 221 Lathrop Way, Suite I Sacramento, CA 95815 Ariel Shenhar 75,000 (3) 0.9% 221 Lathrop Way, Suite I Sacramento, CA 95815 Jonathan Adereth 75,000 (3) 0.9% 221 Lathrop Way, Suite I Sacramento, CA 95815 Alon Harris, Ph.D. -- -- 221 Lathrop Way, Suite I Sacramento, CA 95815 Directors and Officers as a group 350,000 (4) 4.1% (total of 5 persons)
____________________________________ (1) As indicated in a Schedule 13D filed by MediVision on September 12, 2000. (2) Include 125,000 shares subject to stock options exercisable with 60 days from February 28, 2002. (3) Include 75,000 shares subject to stock options exercisable with 60 days from February 28, 2002. (4) Include 350,000 shares subject to stock options exercisable with 60 days from February 28, 2002. 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. -31- 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 between the (13) Company and Premier. 2.2 Agreement and Plan of Reorganization By and Among Premier, Ophthalmic (18) Acquisition Corporation and the Company, dated as of October 21, 1999. 2.3 Series B Preferred Stock Purchase Agreement dated as of October 21, 1999 by (19) and among the Company and Premier. 2.4 Agreement dated as of October 21, 1999 by and among the Company, Premier, (20) Walt Williams, Daniel S. Durrie and Randall C. Fowler. 2.5 Securities Purchase Agreement dated as of July 13, 2000, by and among the (24) Company, Premier and MediVision. 3.1 Articles of Incorporation of the Company, as amended. * 3.2 Amendment to Articles of Incorporation (Certificate of Determination of (11) Preferences of Series A Junior Participating Preferred Stock of the Company). 3.3 Amendment to Articles of Incorporation (Certificate of Determination of (21) Preferences of Series B Preferred Stock of the Company). 3.4 Amended Bylaws of the Company. * 3.5 Amendment to Amended Bylaws of the Company dated January 28, 1998. (16) 4.1 Specimen of Stock Certificate * 4.2 Rights Agreement, dated as of December 31, 1997, between the Company and (10) American Securities Transfer, Inc., including form of Rights Certificate attached thereto. 4.3 Amendment to Rights Agreement, dated as of February 25, 1998, between the (14) Company and American Securities Transfer, Inc. 4.4 Second Amendment to Rights Agreement, effective as of October 20, 1999, (22) between the Company and American Securities Transfer, Inc. 10.1 Lease Agreement, dated as of April 21, 2001, between the Company and (27) Jackson-Jahn, Inc. -32- 10.2 Confidentiality Agreement, dated March 27, 1992 between the Company and * Steven R. Verdooner. 10.3 Assignment dated October 23, 1990 of U.S. Patent Application for Apparatus * and Method for Topographical Analysis of the Retina to the Company 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). 10.4 Form of International Distribution Agreement used by the Company and sample * form of End User Software License Agreement. 10.5 Original Equipment Manufacturer Agreement, dated April 1, 1991, between the * Company and SONY Medical Electronics, a division of SONY Corporation of America. 10.6 Original Equipment Manufacturer/Value Added Reseller Agreement, dated May 7, * 1991, between the Company and Eastman Kodak Company. 10.7 The Company's 1992 Nonstatutory Stock Option Plan and sample form of *+ Nonstatutory Stock Option Agreement. 10.8 Cross-Indemnification Agreement, dated February 14, 1991, among Dennis Makes, * Steven Verdooner and Richard Wullaert. 10.9 Key Man Life Insurance Policies in the amount of $1,000,000 for each of * Dennis J. Makes and Steven R. Verdooner, with the Company as the named beneficiary. 10.10 Stock Option Plan (1)+ 10.11 Rental Agreement dated May 1, 1994 by and between the Company and Robert J. (2) Rossetti. 10.12 Security and Loan Agreement (with Credit Terms and Conditions) dated April (3) 12, 1995 by and between the Company and Imperial Bank. 10.13 General Security Agreement dated April 12, 1995 by and between the Company (3) and Imperial Bank. 10.14 Warrant dated November 1, 1995 issued by the Company to Imperial Bank to (4) purchase 67,500 shares of common stock. 10.15 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated (4) November 1, 1995. 10.16 Registration Rights Agreement dated November 1, 1995 between the Company and (4) Imperial Bank. 10.17 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated (6) April 4, 1996. -33- 10.18 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated (7) July 12, 1996. 10.19 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated (7) November 21, 1996. 10.20 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated (8) June 3, 1997. 10.21 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated (9) August 28, 1997. 10.22 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated (9) October 24, 1997. 10.23 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated (9) November 3, 1997. 10.24 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated (9) November 21, 1997. 10.25 Agreement of Purchase of Receivable (Full Recourse) dated November 18, 1997 (9) between the Company and Imperial Bank. 10.26 Agreement of Purchase of Receivable dated July 13, 1999 between the Company (23) and Imperial Bank. 10.27 The Company's 1995 Nonstatutory Stock Option Plan and sample form of (5)+ Nonstatutory Stock Option Agreement. 10.28 The Company's 1997 Nonstatutory Stock Option Plan and sample form of (12)+ Nonstatutory Stock Option Agreement. 10.29 Promissory Note dated April 30, 1998 from the Company to Premier Laser (15) Systems, Inc. in the maximum amount of $500,000 due in full upon the earlier of (i) written demand by Premier or (ii) April 30, 1999. 10.30 Security Agreement dated April 30, 1998 by and between the Company and (15) Premier Laser Systems, Inc. 10.31 Form of Indemnification Agreement between the Company and each of its (16) directors, officers and certain key employees. 10.32 Manufacturing Agreement dated March 7, 1999 between the Company and Premier. (17) 10.33 Working Capital Funding Agreement dated as of July 13, 2000 by and between (24) MediVision and the Company. 10.34 Amendment No. 1 to Working Capital Funding Agreement dated as of July 1, 2001 (26) by and between MediVision and the Company. 10.35 Loan and Security Agreement dated as of July 13, 2000 by and between (24) MediVision and the Company. -34- 10.36 Put and Call Agreement dated as of August 2000 by and between MediVision and (24) the Company. 10.37 Registration Rights Agreement dated as of August 2000 by and between (24) MediVision and the Company. 10.38 Secured Convertible Working Capital Note dated August 2000 from the Company (24) to MediVision in the principal amount of $260,000. 10.39 Secured Promissory Note dated July 21, 2000 from the Company to MediVision in (24) the principal amount of $1,500,000. 10.40 Secured Convertible Working Capital Promissory Note dated July 1, 2001 by and (26) between MediVision and the Company in the principal amount of $1,000,000 10.41 Cooperation and Project Funding Agreement dated January 21, 2001, among (25) Israel- United States Binational Industrial Research and Development Foundation, MediVision and the Company. 10.42 2000 Stock Option Plan. (27)+ 11.1 Computation of net loss per share. (27) 23.1 Consent of Perry-Smith & Company LLP, Independent Auditors. (27) * 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. -35- (7) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1996, filed on November 29, 1996. (8) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended May 31, 1997, filed on July 15, 1997. (9) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1997, filed on December 1, 1997. (10) Incorporated by reference to Exhibit 1 of the Company's Form 8-K, filed on January 2, 1998. (11) Incorporated by reference to Exhibit A of Exhibit 1 of the Company's Form 8-K, filed on January 2, 1998. (12) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended November 30, 1997, filed on January 14, 1998. (13) Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K, filed on March 9, 1998. (14) Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K, filed on March 9, 1998. (15) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended May 31, 1998, filed on July 15, 1998. (16) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1998, filed on December 15, 1998. (17) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended February 28, 1999, filed on April 14, 1999. (18) Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K, filed on November 24, 1999. (19) Incorporated by reference to Exhibit 4.2 of the Company's Form 8-K, filed on November 24, 1999. (20) Incorporated by reference to Exhibit 4.3 of the Company's Form 8-K, filed on November 24, 1999. (21) Incorporated by reference to Exhibit 3.1 of the Company's Form 8-K, filed on November 24, 1999. (22) Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K, filed on November 24, 1999. -36- (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) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the transition period from September 1, 2000 to December 31, 2000, filed on March 29, 2001. (26) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 2001, filed on November 14, 2001. (27) Filed herewith. + Management contract or compensatory plan or arrangement.
B. Reports on Form 8-K. None. -37- SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OPHTHALMIC IMAGING SYSTEMS Company By: /s/ Gil Allon ---------------------------------- Gil Allon Chief Executive Officer, Chief Financial Officer (Principal Accounting Officer) 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, 2002 Noam Allon /s/ Gil Allon - ----------------------------- Director March 26, 2002 Gil Allon /s/ Ariel Shenhar - ----------------------------- Director March 26, 2002 Ariel Shenhar /s/ Jonathan Adereth - ----------------------------- Director March 26, 2002 Jonathan Adereth /s/ Alon Harris - ----------------------------- Director March 26, 2002 Alon Harris -38- OPHTHALMIC IMAGING SYSTEMS FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2001, 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 sheets of Ophthalmic Imaging Systems as of December 31, 2001 and 2000, and the related statements of operations, stockholders' deficit, and cash flows for the year ended December 31, 2001, 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of its operations and its cash flows for the year ended December 31, 2001, the four months ended December 31, 2000 and the year ended August 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 19, 2002 OPHTHALMIC IMAGING SYSTEMS BALANCE SHEET DECEMBER 31, 2001 AND 2000 2001 2000 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 71,926 $ 36,574 Accounts receivable, net of allowance for doubtful accounts of approximately $182,000 and $152,000 1,022,841 336,156 Inventories (Note 2) 335,493 391,510 Prepaid expenses and other current assets 45,033 82,176 ---------- ---------- Total current assets 1,475,293 846,416 ---------- ---------- Furniture and equipment, at cost, net (Note 3) 184,678 211,988 Other assets 12,890 10,295 ---------- ---------- Total assets $1,672,861 $1,068,699 ========== ========== F-2 OPHTHALMIC IMAGING SYSTEMS BALANCE SHEET (Continued) DECEMBER 31, 2001 AND 2000
2001 2000 LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 627,249 $ 604,918 Accrued liabilities (Note 4) 1,564,395 1,193,297 Accrued warrant appreciation right (Note 12) 228,581 Deferred extended warranty revenue 185,781 132,660 Customer deposits 217,844 388,894 Notes payable to related party (Note 6) 473,662 302,451 Capitalized lease obligation (Note 5) 8,939 8,939 ------------ ------------ Total current liabilities 3,077,870 2,859,740 ------------ ------------ Capitalized lease obligation, less current portion (Note 5) 3,169 10,434 Notes payable to related party, less current portion (Note 6) 1,773,894 1,456,100 ------------ ------------ Total noncurrent liabilities 1,777,063 1,466,534 ------------ ------------ Total liabilities 4,854,933 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 12,630,604 Deferred compensation (3,049) Accumulated deficit (15,812,676) (15,885,130) ------------ ------------ Total stockholders' deficit (3,182,072) (3,257,575) ------------ ------------ Total liabilities and stockholders' deficit $ 1,672,861 $ 1,068,699 ============ ============
The accompanying notes are an integral part of these financial statements. F-3 OPHTHALMIC IMAGING SYSTEMS STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001, THE FOUR-MONTH PERIOD ENDED DECEMBER 31, 2000 AND THE YEAR ENDED AUGUST 31, 2000
FOUR-MONTH YEAR ENDED PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, AUGUST 31, 2001 2000 2000 ------------ ------------ ---------- Revenues: Net sales $ 6,512,176 $ 1,180,642 $ 4,571,182 Cost of sales 2,619,758 1,324,118 2,633,600 ------------ ------------ ------------ Gross profit (loss) 3,892,418 (143,476) 1,937,582 ------------ ------------ ------------ Operating expenses: Sales and marketing 1,927,886 660,279 1,569,220 General and administrative 1,258,037 455,124 1,093,387 Research and development 549,419 155,874 323,454 ------------ ------------ ------------ Total operating expenses 3,735,342 1,271,277 2,986,061 ------------ ------------ ------------ Income (loss) from operations 157,076 (1,414,753) (1,048,479) Other income (expense): Interest income 513 234 143,833 Interest expense (273,897) (51,237) (329,753) ------------ ------------ ------------ Total other income (expense) (273,384) (51,003) (185,920) ------------ ------------ ------------ Net loss before extraordinary item (116,308) (1,465,756) (1,234,399) Extraordinary items (Note 12): Gain on forgiveness of debt 188,762 62,836 ------------ ------------ ------------ Net income (loss) before income taxes (benefit) 72,454 (1,465,756) (1,171,563) ------------ ------------ ------------ Income taxes (benefit) (Note 9) ------------ ------------ ------------ Net income (loss) $ 72,454 $(1,465,756) $(1,171,563) ============ ============ ============ Basic loss per share before extraordinary item $ (.01) $ (.18) $ (.28) Basic earnings per share from extraordinary item $ .02 $ $ .02 ------------ ------------ ------------ Basic earnings (loss) per share $ .01 $ (.18) $ (.26) ============ ============ ============ Shares used in the calculation of net earnings (loss) per share 8,138,305 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 YEAR ENDED DECEMBER 31, 2001, 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) Stock option compensation expense 3,049 3,049 Net income 72,454 72,454 --------- ------------ ------- --------- ---------- ------------ ----------- Balance, December 31, 2001 8,138,305 $ 12,603,604 -- $ -- $ -- $(15,812,676) $(3,182,072) ========= ============ ======= ========= ========== ============ ===========
The accompanying notes are an integral part of these financial statements. F-5 OPHTHALMIC IMAGING SYSTEMS STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2001, THE FOUR-MONTH PERIOD ENDED DECEMBER 31, 2000 AND THE YEAR ENDED AUGUST 31, 2000
FOUR-MONTH YEAR ENDED PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, AUGUST 31, 2001 2000 2000 ------------ ------------ ---------- Cash flows from operating activities: Net income (loss) $ 72,454 $(1,465,756) $(1,171,563) Adjustments to reconcile net income (loss) to net cash used in operating activities: Accrued warrant appreciation right (39,819) 6,841 (71,969) Depreciation and amortization 124,327 35,899 126,596 Stock option compensation expense 3,049 12,196 78,888 Extraordinary gain on extinguishment of debt (188,762) Net changes in operating assets and liabilities: Accounts receivable (686,685) (178,157) 221,176 Inventories 56,017 233,515 (263,933) Prepaid expenses and other current assets 37,143 20,242 (2,440) Other assets (2,595) (110) (2,800) Accounts payable 22,331 115,113 (105,609) Accrued liabilities 371,098 259,837 (367,984) Deferred extended warranty revenue 53,121 (5,230) 48,498 Customer deposits (171,050) (60,546) 19,894 ------------ ------------ ------------ Net cash used in operating activities (349,371) (1,026,156) (1,491,246) ------------ ------------ ------------ Cash flows used in investing activities: Acquisition of furniture and equipment (97,017) (57,359) (13,944) ------------ ------------ ------------ Cash flows from financing activities: Sale of common stock 60,000 Net proceeds from notes payable to related parties 489,005 866,338 1,529,311 Capitalized lease obligation (7,265) (2,209) (6,168) ------------ ------------ ------------ Net cash provided by financing activities 481,740 864,129 1,583,143 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 35,352 (219,386) 77,953 Cash and cash equivalents, beginning of the year 36,574 255,960 178,007 ------------ ------------ ------------ Cash and cash equivalents, end of the year $ 71,926 $ 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. In 2000, the Company changed its year-end for financial reporting purposes from August 31 to December 31. 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 year ended December 31, 2001, the four-month period ended December 31, 2000 and the year ended August 31, 2000 comprised 10% or more of net sales. Revenues from sales to customers located outside of the United States accounted for approximately 12%, 15% and 10% of net sales during the year ended December 31, 2001, 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. F-7 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 recognizes revenue from installation and training services when such services are performed. The Company generally provides a one-year warranty covering materials and workmanship and accruals are provided for anticipated warranty expenses. 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 $57,000, $89,000 and $80,000 for the year ended December 31, 2001, the four-month period ended December 31, 2000 and the year ended August 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. Earnings (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 or when the effect of dilutive securities is immaterial. F-8 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 $1,800, $1,000 and $11,000 during the year ended December 31, 2001, the four-month period ended December 31, 2000 and the year ended August 31, 2000, respectively. 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 four-month period ended December 31, 2000 and 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, 2001 and 2000: 2001 2000 ---- ---- Raw materials $ 250,903 $ 380,643 Work-in-process 28,341 10,867 Finished goods 56,249 ----------- ------------- $ 335,493 $ 391,510 =========== ============= F-9 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 3. FURNITURE AND EQUIPMENT Furniture and equipment consist of the following as of December 31, 2001 and 2000: 2001 2000 ---- ---- Research and manufacturing equipment $ 641,468 $ 602,386 Office furniture and equipment 616,706 556,469 Demonstration equipment 187,662 189,965 ------------- ----------- 1,445,836 1,348,820 Less accumulated depreciation and amortization (1,261,158) (1,136,832) ------------- ----------- $ 184,678 $ 211,988 ============= =========== The net book value of assets capitalized under capital leases (Note 5) is $6,900 and $13,400 at December 31, 2001 and December 31, 2000, respectively. 4. ACCRUED LIABILITIES Accrued liabilities consist of the following as of December 31, 2001 and 2000: 2001 2000 ---- ---- Accrued compensation $ 436,463 $ 285,395 Accrued warranty expenses 465,023 521,718 Other accrued liabilities 662,909 386,184 ------------- ----------- $ 1,564,395 $ 1,193,297 ============= =========== 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, ------------ 2002 $ 8,939 2003 4,389 ------------- 13,328 Less amount representing interest 1,220 ------------- $ 12,108 ============= F-10 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 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. 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. The Company had reported approximately $295,000 and $271,000 in principal and interest outstanding under the Short- Term Note at December 31, 2001 and 2000, respectively. 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. F-11 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 6. NOTES PAYABLE TO RELATED PARTIES (Continued) 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, prior to the Amendment as discussed in further detail below, was $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. In July 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 million to $2.5 million. In connection with the Amendment, the Company executed in favor of MediVision a promissory note in the aggregate amount of $1 million (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. At December 31, 2001, the Company had recorded, in aggregate approximately $2,298,000 in principal and interest under the Working Capital Note and Amendment Note. At December 31, 2001, the Company had recorded approximately $2,247,556 in aggregate debt owed to MediVision, which amount is net of approximately $345,436 in accounts receivable recorded in connection with sales of the Company's products to MediVision. Notes payable to related parties mature as follows: Year Ending December 31, ------------ 2002 $ 473,662 2003 1,773,894 ------------- $ 2,247,556 ============= F-12 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 7. COMMITMENTS Operating Leases ---------------- The Company leases its corporate headquarters and manufacturing facility under a noncancellable operating lease that expires in May 2004. The lease agreement provides for minimum lease payments of approximately $81,000, $85,000 and $35,000 for the years ended December 31, 2002, 2003 and 2004, respectively. The Company also leases a sales office under a month-to-month lease requiring a minimum lease payment of approximately $300 per month. Rental expense charged to operations for all operating leases was approximately $79,175, $19,000 and $83,000 during the year ended December 31, 2001, the four-month period ended December 31, 2000 and the year ended August 31, 2000, respectively. 8. STOCKHOLDERS' DEFICIT Common Stock ------------ Of the 11,861,695 shares of common stock authorized but unissued as of December 31, 2001, 3,704,097 shares are reserved for issuance under stock option plans. 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 6). At the Closing, 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. Other Warrants -------------- 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 statement of operations. F-13 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 8. STOCKHOLDERS' DEFICIT (Continued) Stock Option Plans ------------------ The Company has five 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 11,666 options remained available for granting as of December 31, 2001. As of December 31, 2001, stock options to purchase 55,000 shares at exercise prices ranging from $1.00 to $2.75 were granted and outstanding under the Plan. None of the options granted under the Plan were exercised during the year ended December 31, 2001. 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 40,115 remained available for granting of options as of December 31, 2001. As of December 31, 2001, stock options to purchase 96,485 shares at exercise prices ranging from $.48 to $4.25 were granted and outstanding under the Option Plan. None of the options granted under the Option Plan were exercised during the year ended December 31, 2001. F-14 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 8. STOCKHOLDERS' DEFICIT (Continued) Stock Option Plans (Continued) ------------------ 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 795,000 options remained available for granting as of December 31, 2001. As of December 31, 2001, stock options to purchase 240,000 shares at exercise prices ranging from $.48 to $4.50 were granted and outstanding under the Nonstatutory Plan and none of the granted options were exercised. In October 1997, the Company's Board of Directors approved a Nonstatutory Stock Option Plan (the "1997 Nonstatutory Plan") under which all officers, employees, directors and consultants may participate. The 1997 Nonstatutory Plan expires October 2002. Options granted under the 1997 Nonstatutory Plan are non-qualified stock options and will have a term of not longer than ten years from the date of grant. The exercise prices under the 1997 Nonstatutory Plan will be at 100% of the fair market value of the Company's common stock on the date of grant, unless otherwise specified in the option agreement. The maximum number of shares of the Company's common stock which may be optioned and sold under the Plan is 1,000,000, of which 723,000 options remained available for granting as of December 31, 2001. As of December 31, 2001, stock options to purchase 127,000 shares at exercise prices ranging from $.63 to $1.38 were granted and outstanding under the 1997 Nonstatutory Plan. None of the options granted under the 1997 Nonstatutory Plan were exercised during the year ended December 31, 2001. In September 2000, the Company's Board of Directors approved a Stock Option Plan (the "2000 Plan") under which all officers, employees, directors and consultants may participate. Subsequent to September 2000, the 2000 Plan was approved by consent of the Company's majority shareholder. The 2000 Plan expires in September 2010. Options granted under the 2000 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 2000 Plan will be not less than 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 2000 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 2000 Plan is 1,500,000, of which 166,667 remained available for granting of options as of December 31, 2001. As of December 31, 2001, stock options to purchase 1,333,333 shares at an exercise price of $0.41 were granted and outstanding under the 2000 Plan. None of the options granted under the 2000 Plan were exercised during the year ended December 31, 2001. F-15 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 8. STOCKHOLDERS' DEFICIT (Continued) Stock Option Plans (Continued) ------------------------------ A summary of the status of the Company's stock option plans and changes during the periods is presented below: Weighted Average Exercise Options Price ---------- -------- Balance, September 1, 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 ---------- Balance, December 31, 2000 1,578,345 $ 1.09 Options granted 1,050,000 $ .41 Options canceled (410,697) $ .58 Options lapsed (250,000) $ 2.66 ---------- Balance, December 31, 2001 1,967,648 $ .63 ========== The weighted average fair value of options granted during the year ended December 31, 2001, the four-month period ended December 31, 2000 and the year ended August 31, 2000 was $.33, $.38 and $.27, respectively. The following table summarizes information about the stock options outstanding at December 31, 2001:
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 1,844,648 8.0 years $ .47 796,092 $ .54 $ 1.38 - $ 3.00 78,500 1.6 years $ 2.25 78,115 $ 2.26 $ 3.01 - $ 4.50 44,500 1.4 years $ 4.47 44,500 $ 4.47 --------- ------- 1,967,648 918,707 ========= =======
F-16 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 8. STOCKHOLDERS' DEFICIT (Continued) Stock Option Plans (Continued) ------------------ Pro forma information regarding net loss and net los7 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 year ended December 31, 2001, the four-month 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 111% to 141% for the year ended December 31, 2001, the four-month period ended December 31, 2000 and the year ended August 31, 2000; risk-free interest rate of 5%, 6% and 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:
Four-Month Year Ended Period Ended Year Ended December 31, December 31, August 31, 2001 2000 2000 ------------ ------------ ---------- Pro forma net loss $ (1,635) $ (1,502,756) $(1,273,739) =========== ============= ============ Pro forma net loss per share $ -- $ (.18) $ (.29) =========== ============= ============
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. For the year ended December 31, 2001, the four-month period ended December 31, 2000 and the year ended August 31, 2000, the amortized deferred compensation expense was approximately $3,000, $12,000 and $78,000, respectively. F-17 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 9. INCOME TAXES There was no provision (benefit) for income taxes during the year ended December 31, 2001, 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, ------------ 2001 2000 ---- ---- Deferred tax assets: Net operating loss carryforwards $ 3,586,000 $ 3,122,000 Inventory reserves 965,000 1,011,000 Accrued warrant appreciation right 98,000 Payroll related accruals 81,000 96,000 Warranty accrual 199,000 224,000 Sales and accounts receivable reserves 216,000 102,000 Uniform capitalization 72,000 71,000 Deferred revenue 80,000 57,000 Depreciation 15,000 21,000 ------------ ------------ Total deferred tax assets (5,214,000) (4,802,000) Valuation allowance 5,214,000 4,802,000 ------------ ------------ Net deferred taxes $ -- $ -- ============ ============ For the year ended December 31, 2001, the valuation allowance increased by $412,000 to $5,214,000. The Company has at December 31, 2001, a net operating loss carryover of approximately $10,169,000 for Federal income tax purposes which expires between 2007 and 2015, and a net operating loss carryforward of approximately $2,393,000 for California state income tax purposes which expires between 2002 and 2005. Federal and state tax credit carryforwards of approximately $70,000 and $40,000 will begin to expire in 2002 and 2017, respectively. Due to changes in ownership which occurred in prior years, Section 382 of the Internal Revenue Code provides for significant limitations on the utilization of net operating loss carryforwards and tax credits. As a result of limitations discussed above, a substantial portion of these loss and credit carryovers will expire without being utilized. F-18 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 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. For the year ended December 31, 2001, the Company accrued for matching contributions of $42,474, which will be paid in the following year, and made minimum top heavy required contributions in the amount of $18,085, pursuant to IRS Code Section 416(c). The Company did not make any matching contributions during the four-month period ended December 31, 2000. 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). 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 $2,000,000. 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. F-19 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 12. EXTRAORDINARY ITEMS 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 statement of operations. In connection with the Closing in August 2000 of the transactions contemplated by and among the Company, MediVision and Premier, the Company's entire debt 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 the amount of excess of the recorded debt owed to Premier over the fair value of the Company's common stock (see Notes 6 and 8). F-20 EX-10 3 d787399_2.txt EXHIBIT 10.1 -- LEASE EXHIBIT 10.1 ------------ STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE -NET AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. BASIC PROVISIONS ("BASIC PROVISIONS"). 1.1 Parties: This Lease ("Lease"), dated for reference purposes only APRIL 21, 2001 , is made by and between JACKSON-JAHN, INC. _____ _______________________________________________ ("LESSOR") and OPTHALMIC IMAGING SYSTEMS, INC., A CALIFORNIA CORPORATION ______________ ("LESSEE"), (collectively the "PARTIES" or individually a "PARTY"). 1.2 (a) PREMISES: That certain portion of the Project (as defined below), including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 221 Lathrop Way, Suites J, K, L, N located in the City of SACRAMENTO, County of SACRAMENTO, State of CALIFORNIA, with zip code as outlined in Exhibit A attached hereto ("PREMISES") and generally described as (describe briefly the nature of the Premises): APPROXIMATELY 10,237 SQUARE FEET OF GROSS FLOOR AREA, INCLUDING APPROXIMATELY 6,888 SQUARE FEET OF OFFICE AREA. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusivity rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the building containing the Premises ("Building") or to any other buildings in the Project. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "PROJECT." (See also Paragraph 2) (b) PARKING: A PRORATIO SHARE OF unreserved vehicle parking spaces ("Unreserved Parking Spaces"); and N/A reserved vehicle parking spaces ("Reserved Parking Spaces"). (See also Paragraph 2.6) 1.3 TERM: Three (3) years and 0 months ("ORIGINAL TERM") commencing JUNE 1, 2001 ("COMMENCEMENT DATE") and ending May 31, 2004 ("EXPIRATION DATE"). (See also Paragraph 3) 1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). (See also Paragraphs 3.2 and 3.3). 1.5 BASE RENT: $6,735.00 per month ("BASE RENT"), payable on the FIRST day of each month commencing JUNE 1 2001. (See also Paragraph 4) |X| If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: 9.13 percent (__%) ("LESSEE'S SHARE"). 1.7 BASE RENT AND OTHER MONIES PAID UPON EXECUTION: (a) BASE RENT: $6,735.00 for the period JUNE 1, 2001 THROUGH JUNE 30, 2001. (b) COMMON AREA OPERATING EXERCISES: set forth period JUNE 1, 200l THRU JUNE 30, 2001. (c) SECURITY DEPOSIT: $6,735.00 ("SECURITY DEPOSIT"). (See also Paragraph 5). (d) OTHER: $________________________ for ___________________________________________ (e) TOTAL DUE UPON EXECUTION OF THIS LEASE: $14,654 42. 1.8 AGREED USE: THE OPERATION OF A DIGITAL IMAGING SYSTEMS COMPANY AND RELATED USES NOT INJURIOUS TO THE PREMISES. __________________________________________________________ _____________________________________________________________________________ (See also Paragraph 6). 1.9 INSURING PARTY. Lessor is the "INSURING PARTY". (See also Paragraph 8). 1.10 REAL ESTATE BROKERS: (See also Paragraph 15). (a) REPRESENTATION: The following real estate brokers (the "BROKERS") and brokerage relationships exist in this transaction (check applicable boxes): |_| ____________________________________________ represents Lessor exclusively ("LESSOR'S BROKER"); |_| _________________N/A________________________ represents Lessee exclusively ("LESSEE'S BROKER"); or |_| ____________________________________________ represents both Lessor and Lessee ("DUAL AGENCY"). (b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Brokers the brokerage fee agreed to In a separate written agreement (or if there is no such agreement, the sum of N/A or ___% of the total Base Rent for the brokerage services rendered by the Brokers). 1.11 GUARANTOR: The obligations of the Lessee under this Lease are to be guaranteed by ("GUARANTOR"). (See also Paragraph 37). 1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda consisting of Paragraphs 50 through 55 and Exhibits A through C , all which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less. 2.2 CONDITION. Lessor shall deliver that portion of the Premises contained within the Building ("UNIT") to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs ("START DATE"), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee and in effect within thirty days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, if any, and all other such elements in the Unit, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof, bearing walls and foundation of the Unit shall be free of material defects II. If a non-compliance with such warranty exists as of the Start Date, or if one of such systems or elements should malfunction or fail within the appropriate warranty period, Lessor shall, as Lessor's sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, malfunction or failure, rectify same at Lessor's expense. The warranty periods shall be as follows: (i) 6 months as to the HVAC systems, and (ii) 30 days as to the remaining systems and other elements of the Unit. If Lessee does not give Lessor the required notice within the appropriate warranty period, correction of any such non-compliance, malfunction or failure shall be the obligation of Lessee at Lessee's sole cost and expense (except for the repairs to the fire sprinkler systems, roof, foundations, and/or bearing walls - see Paragraph 7). Page 1 2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises and the Common Areas comply with the building codes that were in effect at the time that each such improvement, or portion thereof, was constructed, and also with all applicable laws, covenants or restrictions of record, regulations, and ordinances in effect on the Start Date ("APPLICABLE REQUIREMENTS"). Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: LESSEE IS RESPONSIBLE FOR DETERMINING WHETHER OR NOT THE APPLICABLE REQUIREMENTS, AND ESPECIALLY THE ZONING, ARE APPROPRIATE FOR LESSEE'S INTENDED USE, AND ACKNOWLEDGES THAT PAST USES OF THE PREMISES MAY NO LONGER BE ALLOWED. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within 6 months following the start date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Unit, Premises and/or Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Unit, Premises and/or Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the Cost of such work as follows: (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof provided, however that if such Capital Expenditure is required during the last 2 years of this Lease and the cost thereof exceeds a months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee in writing, within 10 days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to a months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least 90 days thereafter. Such termination date shall however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for the portion of such costs reasonably attributable to the Premises pursuant to the formula set out in Paragraph 7.1(d); provided, however, that if such Capital Expenditure is required during the last 2 years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon 90 days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within 10 days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to lender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable finance Lessor's share or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessor on an offset basis Lessee shall have the right to terminate this Lease upon 30 days written notice to Lessor. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result or curl actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event. Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security environmental aspects, and compliance with Applicable Requirements and the Americans with Disabilities Act), and their suitability for Lessee's intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, Lessor's agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (i) Brokers have made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises, and (ii) it is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work. 2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full-size passenger automobiles or pick-up trucks, herein called "PERMITTED SIZE VEHICLES." Lessor may regulate the loading unloading of vehicles by adopting Rules and Regulations as provided in Paragraph 2.9. No vehicles other than Permitted Size Vehicles may be parked in the Common Area without the prior written permission of Lessor. (a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. (b) Lessee shall not service or store any vehicles in the Common Areas. (c) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.7 COMMON AREAS - DEFINITION. The term "COMMON AREAS" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Project and interior utility raceways and installations within the Unit that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and other tenants of the Project and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, walkways, driveways and landscaped areas. Page 2 2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Project. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable rules and regulations ("RULES AND REGULATIONS") for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Project and their invitees. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said Rules and Regulations by other tenants of the Project. 2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways: (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Project to be a part of the Common Areas: (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Project as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Lessee's Share of Common Area Operating Expenses, Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until it receives possession of the Premises. If possession is not delivered within 60 days after the Commencement Date, Lessee may, at its option, by notice in writing within 10 days after the end of such 60 day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said 10 day period, Lessee's right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Lessee by the Start Dale and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have, enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession of the Premises is not delivered within 4 months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing. 3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. RENT. 4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("RENT"). 4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share (as specified in Paragraph 1.6) of all Common Area Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: (a) "COMMON AREA OPERATING EXPENSES" are defined, for purposes of this Lease, as all costs incurred by Lessor relating to the ownership and operation of the Project, including, but not limited to, the following: (i) The operation, repair and maintenance, in neat, clean, good order and condition of the following: (aa) The Common Areas and Common Area improvements, including parking areas, loading and unloading areas, trash areas, roadways, parkways, walkways, driveways, landscaped areas, bumpers, irrigation systems, Common Area lighting facilities, fences and gates, elevators, roofs, and roof drainage systems. (bb) Exterior signs and any tenant directories. (cc) Any fire detection and/or sprinkler systems. Page 3 (ii) The cost of water, gas, electricity and telephone to service the Common Areas and any utilities not separately metered. (iii) Trash disposal, pest control services, property management, security services, and the costs of any environmental inspections. (iv) Reserves set aside for maintenance and repair of Common Areas. (v) Real Property Taxes (as defined in Paragraph 10). (vi) The cost of the premiums for the insurance maintained by Lessor pursuant to Paragraph 8. (vii) Any deductible portion of an insured loss concerning the Building or the Common Areas. (viii) The cost of any Capital Expenditure to the Building or the Project not covered under the provisions of Paragraph 2.3 provided; however, that Lessor shall allocate the cost of any such Capital Expenditure over a 12 year period and Lessee shall not be required to pay more than Lessee's Share of 1/44th of the cost of such Capital Expenditure In any given month. (ix) Any other services to be provided by Lessor that are stated elsewhere in this Lease to be a Common Area Operating Expense. (b) Any Common Area Operating Expenses and Real Property Taxes that are specifically attributable to the Unit, the Building or to any other building in the Project or to the operation, repair and maintenance thereof, shall be allocated entirely to such Unit, Building, or other building. However, any Common Area Operating Expenses and Real Property Taxes that are not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shall be equitably allocated by Lessor to all buildings in the Project. (c) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Project already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them. (d) Lessee's Share of Common Area Operating Expenses shall be payable by Lessee within 10 days after a reasonably detailed statement of actual expenses is presented to Lessee. At Lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's Share of Annual Common Area Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each 12 month period of the Lease term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to Lessee within 60 days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Common Area Operating Expenses incurred during the preceding year. If Lessee's payments under this Paragraph 4.2(d) during the preceding year exceed Lessee's Share as indicated on such statement, Lessor shall be credited the amount of such overpayment against Lessee's Share of Common Area Operating Expenses next becoming due. If Lessee's payments under this Paragraph 4.2(d) during the preceding year were less than Lessee's Share as indicated on such statement, Lessee shall pay to Lessor the amount of the deficiency within 10 days after delivery by Lessor to Lessee of the statement. 4.3 PAYMENT. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. Rent for any period during the term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in Writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights 10 the balance of such Rent, regardless of Lessor's endorsement of any check so stating. In the event that any check, draft, or other instrument of payment given by Lessee to Lessor is dishonored for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any late charges which may be due. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful Performance of obligations under this Lease, its if Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee. Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any, increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced. Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 14 days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, al id otherwise within 30 days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, and/or is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within 7 days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in the Agreed Use. Page 4 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plait is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it ha; concerning the presence of such Hazardous Substance. (c) LESSEE REMEDIATION. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, it any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from areas outside of the Project). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor, and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. (e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation which existed as a result of Hazardous Substances on the Premises prior to the Start Date or which are caused by the gross negligent or willful misconduct of Lessor, its agents or employees, Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive me expiration or termination of this Lease. (f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the responsibility and pay for any investigations C) I remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date, unless such remediation measure is required as a result of Lessee's use (including "Alterations") as defined in paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. (g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition (see Paragraph 9.1 (e) ) occurs during the term at this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds 12 times the then monthly Base Rent or $100,000 whichever is greater, give written notice to Lessee, within 30 days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date 60 days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give written notice to lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to 12 times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds satisfactory or assurance thereof within 30 days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. Page 5 6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements at any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within 10 days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined in Paragraph 30) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long as such inspection is reasonably related to the violation or contamination. 7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) IN GENERAL. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises, Utility Installations (intended for Lessee's exclusive use, no matter where located), and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, art! reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing. HVAC equipment, electrical, lighting facilities, boilers, pressure vessels, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1 (b) below, Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler and pressure vessels, (iii) clarifiers, and (iv) any other equipment, if reasonably required by Lessor. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain any or all of such service contracts, and if Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof. (c) FAILURE TO PERFORM. If Lessee fails to perform Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the Premises after 10 days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf, and put the Premises in good order, condition and repair, and Lessee Shall promptly reimburse Lessor for the cost thereof. (d) REPLACEMENT. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if an item described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such item, then such item shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is 144 (i.e. 1/144th of the cost per month). Lessee shall pay interest on the unamortized balance at a rate that is commercially reasonable in the judgment of Lessor's accountants. Lessee may, however, prepay its obligation at any time. 7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler system, Common Area fire alarm and/or smoke detection systems, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. Lessee expressly waives the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS. The term "UTILITY INSTALLATIONS" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). (b) CONSENT. Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice of Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing Walls, and the cumulative cost thereof during Page 6 this Lease as extended does not exceed a sum equal to 3 month's Base Rent in the aggregate or a sum equal to one month's Base Rent in any one year. Notwithstanding the foregoing, Lessee shall not make or permit any roof penetrations and/or install anything on the roof without the prior written approval of Lessor. Lessor may, as a precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed Plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance With all conditions Of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon Competition furnish Lessor with as-built plans and specifications. For work which costs an amount in excess of one month's Base Rent, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to 150% of the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialman's lien against the Premises or any interest therein. Lessee shall give Lessor not less than 10 days notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to 150% of the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at anytime, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise: instructed per paragraph 7.4(b)hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) REMOVAL. By delivery to Lessee of written notice from Lessor not earlier than 90 and not later than 30 days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. (c) SURRENDER; RESTORATION. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Notwithstanding the foregoing, if this Lease is for 12 months or less, then Lessee shall surrender the Premises in the same condition as delivered to Lessee on the Start Date with NO allowance for ordinary wear and tear Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee. Lessee shall also completely remove from the Premises any and all Hazardous Substances brought onto the Premises by or for Lessee, or any other party (except Hazardous Substances which were deposited via underground migration from areas outside of the Project)even if such removal would require Lessee to perform or pay for work that exceeds statutory requirements. Trade Fixtures shall remain the properly of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. 8. INSURANCE: INDEMNITY. 8.1 PAYMENT OF PREMIUMS. The cost of the premiums for the insurance policies required to be carried by Lessor, pursuant to Paragraphs 8.2(b), 8.3(a)and 8.3(b), shall be a Common Area Operating Expense. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Start Date or Expiration Date. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an annual aggregate of not less than $2,000,000, an "Additional Insured-Managers or Lessors of Premises Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement" for damage caused by heat, smoke or fumes from a hostile fire. The policy Shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an 'insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), ii) addition to and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in force a policy or policies of insurance in the name of Lessor, with loss payable to Lessor, any ground-lessor, and to any Lender insuring loss or damage to the Page 7 Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lender, but in no event more than the commercially reasonable and available insurable value thereof. Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U. S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause. the deductible amount shall not exceed $1,000 per occurrence. (b) RENTAL VALUE. Lessor shall also obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one year with an extended period of indemnity for an additional 180 days ("Rental Value Insurance"). Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next 12 month period. (c) ADJACENT PREMISES. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Project if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 LESSEE'S PROPERTY; BUSINESS INTERRUPTION INSURANCE. (a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property. Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property. Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5 INSURANCE POLICIES. Insurance required herein shall be by companies duly licensed or admitted to transact business in the State where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most Current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall. prior to the Start Date, deliver to lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after 30 days prior written notice to Lessor. Lessee shall at least 30 days: prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to procure and maintain the same. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage Insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the cast: may be so long as the insurance is not invalidated thereby. 8.7 INDEMNITY. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. II any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage. leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor nor from the failure of Lessor to enforce the provisions of any other lease in the Project. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. Page 8 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in 3 months or less from the date of the damage or destruction, and the cost thereof does not exceed a sum equal to 6 month's Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in 3 months or less from the date of the damage or destruction and/or the cost thereof exceeds a sum equal to 6 month's Base Rent. Lessor shall notify Lessee In writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by it operation of Applicable Requirements, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE -INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election. make the repair of any damage or destruction the total cost to repair of which is $5,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the insuring Party shall promptly contribute the shortage in proceeds as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof within 10 days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said 10 day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or (ii) have this Lease terminate 30 days thereafter Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some Insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect. or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice. In the event Lessor elects to terminate this Lease. Lessee shall have the right within 10 days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate 60 days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last 6 months of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective 60 days following the date of occurrence of such damage by giving a written termination notice to Lessee within 30 days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a)exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date within is 10 days of Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect, if Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) ABATEMENT. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required Page 9 for the repair redemption or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, redemption, repair or restoration except as provided herein. (b) REMEDIES. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within 90 days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than 60 days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within 30 days thereafter, this Lease shall terminate as of the date specified in such notice. If the repair or restoration Is commenced within such 30 days, this Lease shall continue in full force and effect. "Commence shall mean either the unconditional authorization of the preparation of the required plans, ,or the beginning of the actual work on the Premises, whichever first occurs. 9.7 TERMINATION; ADVANCE PAYMENTS. Upon termination of this Lease pursuant to Paragraph 6.2(g)or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be used by Lessor. 9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future stature to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 DEFINITION. As used herein, the term "Real Property Taxes" shall include any form of assessment; real estate, general special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Project, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds art: generated with reference to the Project address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Project is located. The term "Real Property Taxes" shall also include any tax, fee, levy. assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Project or any portion thereof or a change in the improvements thereon. in calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. 10.2 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes applicable to the Project, and except as otherwise provided in Paragraph 10.3, any such amounts shall be included in the calculation of Common Area Operating Expenses in accordance with the provisions of Paragraph 4.2. 10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Project by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.2 hereof, Lessee shall however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable. determination thereof, in good faith, shall be conclusive. 10.5 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises. When possible, Lessee shall cause its Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's Said property shall be assessed with Lessor's real property, Lessee shall pay lessor the taxes attributable to Lessee's property within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. Notwithstanding the provisions of Paragraph 4.2, if at any time in Lessor's sole judgment, Lessor determines that Lessee is using a disproportionate amount of water, electricity or other commonly metered utilities, or that Lessee is generating such a large volume of trash as to require an Increase in the size of the dumpster and/or an increase in the number of times per month that the dumpster is emptied, then Lessor may increase Lessee's Base Rent by an amount equal to such increased costs. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively "assign or assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent. (b) A change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of 25% or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The Involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions Page 10 constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. "Net Worth of Lessee" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles. (d) An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days written notice. increase the monthly Base Rent to 110% of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to 110% of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to 110% of the scheduled adjusted rent. (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and or injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, no assignment or subletting shall: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (b) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or Sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $1,000 or 10% of the current monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or Sublessee, whichever is greater, as consideration for Lessor's considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing. (g) Lessor's consent to any assignment or subletting shall not transfer to the assignee or sublessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor in writing. (See Paragraph 39.2). 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. (b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants. conditions or Rules and Regulations under this Lease. A "BREACH" is defined as the occurrence of one or more of the following Defaults and the failure of Lessee to cure such Default within any applicable grace period: (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. Page 11 (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of 3 business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) an Estoppel Certificate, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 41 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of 10 days following written notice to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 2.9 hereof, other than those described in subparagraphs 13.1(a), (b)or (c), above, where such Default continues for a period of 30 days after written notice; provided, however, that if the nature of Lessee's Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "DEBTOR" as defined in 11 U. S. C. ss.101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within 30 days: or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within 60 days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. Page 12 13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS", shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within 5 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to 6% of each such overdue amount or $100, whichever is greater. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 INTEREST. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within 30 days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the 31st day after it was due as to non-scheduled payments. The interest ("INTEREST") charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus 4%, but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. 13.6 BREACH BY LESSOR. (a) NOTICE OF BREACH. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than 30 days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than 30 days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such 30 day period and thereafter diligently pursued to completion. (b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that neither Lessor nor Lender cures said breach within 30 days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor Lessee shall document the cost of said cure and supply said documentation to Lessor. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "CONDEMNATION"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the floor area of the Unit, or more than 25% of Lessee's Reserved Parking Spaces, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within 10 days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within 10 days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. 15. ESTOPPEL CERTIFICATES. (a) Each Party (as "RESPONDING PARTY") shall within 10 days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "ESTOPPEL CERTIFICATE" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. (b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance. and (iii) if Lessor is the Requesting Party, not more than one month's rent has been paid in advance. Prospective purchasers and encumbrances may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past 3 years. All such financial statements shall Page 13 be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 16. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit)any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6.2 above. 17. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction. shall in no way affect the validity of any other provision hereof. 18. DAYS. Unless otherwise specifically indicated to the contrary, the word "DAYS" as used in this Lease shall mean and refer to calendar days. 19. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors. officers or shareholders, or any of their personal assets for such satisfaction. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. NOTICES. 21.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease or applicable law shall be in writing and may be delivered in person (by hand or by courier)or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 21.2 DATE OF NOTICE. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given 48 hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given 24 hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt (confirmation report from fax machine is sufficient), provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. 22. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 23. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to 150% of the Base Rent applicable immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 24. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 25. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it. 26. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 27. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 27.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "LENDER") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Page 14 ease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 27.2 ATTORNMENT. In the event that Lessor transfers title to the Premises, or the Premises are acquired by another upon the foreclosure or termination of a Security Device to which this Lease is subordinated (i) Lessee shall, subject to the non-disturbance provisions of Paragraph 30.3, attorn to such new owner, and upon request, enter into a new lease, containing all of the terms and provisions of this Lease, with such new owner for the remainder of the term hereof, or, at the election of such new owner, this Lease shall automatically become a new Lease between Lessee and such new owner, upon all of the terms and conditions hereof, for the remainder of the term hereof, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall assume all of Lessor's obligations hereunder, except that such new owner shall not: (a) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) be subject to any offsets or defenses which Lessee might have against any prior lessor, (c) be bound by prepayment of more than one month's rent, or (d) be liable for the return of any security deposit paid to any prior lessor. 27.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within 60 days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee's option, directly contact Lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. 27.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein. 28. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith. whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($3,200 is a reasonable minimum per occurrence for such services and consultation). 29. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "FOR SALE" signs and Lessor may during the last 6 months of the term hereof place on the Premises any ordinary "FOR LEASE" signs. Lessee may at any time place on the Premises any ordinary "FOR SUBLEASE" sign. 30. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction 31. SIGNS. Except for ordinary "For Sublease" signs which may be placed only on the Premises, Lessee shall not place any sign upon the Project without Lessor's prior written consent. All signs must comply with all Applicable Requirements. 32. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 33. CONSENTS. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within 10 business days following such request. Page 15 34. GUARANTOR. 34.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease. 34.2 DEFAULT. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect. 35. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof. 36. OPTIONS. If Lessee is granted an option, as defined below, then the following provisions, shall apply. 36.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c)the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor. 36.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Any Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting. 36.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 36.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given 3 or more notices of separate Default, whether or not the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 36.4(a). (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee 3 or more notices of separate Default during any 12 month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 37. SECURITY MEASURES. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 38. RESERVATIONS. Lessor reserves the right: (i) to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, (ii) to cause the recordation of parcel maps and restrictions, and (iii) to create and/or install new utility raceways, so long as such easements, rights, dedications, maps, restrictions, and utility raceways do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate such rights. 39. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. 40. AUTHORITY. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each party shall, within 30 days after request, deliver to the other party satisfactory evidence of such authority. 41. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 42. OFFER. Preparation of this Lease by either party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 43. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 44. MULTIPLE PARTIES. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 45. WAIVER OF JURY TRIAL. The Parties hereby waive their respective rights to trial by jury in any action or proceeding involving the Property or arising out of this Agreement. 46. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease |_| is |_| is not attached to this Lease. Page 16 LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES ARE LOCATED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: ________________________ Executed at: __________________________ on:__________________________________ on:____________________________________ By LESSOR:___________________________ By LESSOR:_____________________________ _____________________________________ _______________________________________ _____________________________________ _______________________________________ By:__________________________________ By:____________________________________ Name Printed:________________________ Name Printed:__________________________ Title:_______________________________ Title:_________________________________ By:__________________________________ By:____________________________________ Name Printed:________________________ Name Printed:__________________________ Title:_______________________________ Title:_________________________________ Address:_____________________________ Address:_______________________________ Telephone:___________________________ Telephone:_____________________________ Facsimile:___________________________ Facsimile:_____________________________ Federal ID No._______________________ Federal ID No._________________________ THESE FORMS ARE OFTEN MODIFIED TO MEET CHANGING REQUIREMENTS OF LAW AND NEEDS OF THE INDUSTRY. ALWAYS WRITE OR CALL TO MAKE SURE YOU ARE UTILIZING THE MOST CURRENT FORM: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 SOUTH FLOWER STREET, SUITE 600, LOS ANGELES, CA 90017. (213) 687-6777. (C)COPYRIGHT 1999-BY AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION. ALL RIGHTS RESERVED. NO PART OF THESE WORKS MAY BE REPRODUCED IN ANY FORM WITHOUT PERMISSION IN WRITING. Page 17 Page 1 of 18 ADDENDUM TO LEASE AGREEMENT DATED: April 24,200l By and Between JACKSON JAHN, LLC -LESSOR OPTHALMIC IMAGING SYSTEMS, INC. -LESSEE 50. Signage - Lessee shall have the right to erect or install exterior or interior signs as permitted by Lessor's sign criteria. In all cases, any exterior sign shall be approved in writing by Lessor prior to erection. (See Exhibit "C" attached). If a sign is erected without Lessor's approval, it shall be at Lessor's option to remove or alter said sign at Lessee's expense to comply with Lessor's sign criteria. It shall be the responsibility of Lessee to determine that any such signs or advertising media comply with all applicable regulations and restrictions. It shall be the responsibility of Lessee to maintain all such signs and advertising media in a good state of cleanliness and repair and no such signs shall impair the structural integrity of the building. Upon removal of any signs, Lessee shall, at Lessee's sole cost and expense, repair any damage to the surface from which the sign was removed if said damage is caused by such removal. 50. Alarm System - Lessee may install, at Lessee's sole cost and expense, an alarm system to service the subject premises, provided that Lessee obtains Lessor's written approval prior to installation. In order to maintain the appearance and operation of the building, no portion of the alarm system shall be installed where it is visible from the exterior of the building. Alarm systems installed without Lessor's prior written approval and/or installed in a manner or location objectionable to Lessor will be removed at Lessee's expense. Said expense will include the cost of restoring the exterior wall surface to its original condition. Lessor shall not be liable for damages to Lessee as a result of said removal. 52. Rent Escalation Schedule - Lessee shall pay, as monthly rent as specified in Paragraph 4, herein, shall be adjusted as follows: June 1, 2001 to November 30, 2002 $6,735.00/mo. plus NNN December 1, 2002 to May 31, 2004 $7,072.00/mo. plus NNN Per Paragraph 5 of this agreement, the security deposit shall at all times be equal to one month's rent. 53. Tenant Improvements - Upon mutual execution hereof, Lessor will provide the Tenant Improvements as shown on Exhibit "B" to the premises, at a cost not to exceed $28,996.00. Any costs in excess of $28,996.00 shall be the sole responsibility of Lessee. 54. Availability of Premises - a portion of the premises (Suite M, approximately 838 square feet), is currently occupied by a third party. Lessor will endeavor to gain possession of the premises prior to the commencement of improvements and occupancy by Lessee herein. In the event Lessee's occupancy of the expansion suite is delayed hereunder due to its availability, Lessor shall abate a portion of Lessee's rent in the amount of $377.00 per month, triple net, until said premises are available to Lessee. 55. Special Provision For Common Area Dumpster - Lessor may, at Lessor's sole discretion, elect to provide waste disposal services for the tenants of the Woodlake Business Park, subject to the provisions of Paragraph 4.2 herein. Said waste disposal services shall be for office waste only. In the event Lessee overburdens the common area dumpster, Lessor reserves the right to require that Lessee procure a separate dumpster, at Lessee's expense. In the event Lessee acquires a dumpster for his exclusive use, said dumpster shall be stored within the premises at all times. __________________________ __________________________ Lessor's Initials Lessee's Initials Date: ____________________ Date: ___________________ PAGE 1 EX-10 4 d706139_3.txt EX-10.42 - 2000 STOCK OPTION PLAN EXHIBIT 10.42 OPHTHALMIC IMAGING SYSTEMS 2000 STOCK OPTION PLAN 1. Purposes of the Plan. -------------------- (a) This stock option plan (the "Plan") is intended to provide an incentive to employees (including directors and officers who are employees) and non-employee directors of, and consultants and advisors, to Ophthalmic Imaging Systems, a California corporation (the "Company") or any of its Subsidiaries, and to offer an additional inducement in obtaining the services of such individuals. (b) The Plan provides for the grant of "incentive stock options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), stock options which do not qualify as ISOs ("NQSOs"), warrants, and shares of stock of the Company that may be subject to contingencies or restrictions (collectively, with an ISO, a NQSO or a warrant, each an "Award"). The Company makes no representation or warranty, express or implied, as to the qualification of any option as an "incentive stock option" or any other treatment of an Award under the Code. (c) Capitalized terms used but not defined elsewhere herein have the meanings assigned to them in Section 18 below. 2. Stock Subject to the Plan. Subject to the provisions of Section 11, the aggregate number of shares of the Company's common stock, without par value ("Common Stock"), for which Awards may be granted under the Plan shall not exceed One Million Five Hundred Thousand (1,500,000) shares. Such shares of Common Stock may, in the discretion of the Board of Directors of the Company (the "Board of Directors"), consist either in whole or in part of authorized but unissued shares of Common Stock or shares of Common Stock held in the treasury of the Company. Subject to the provisions of Section 12, any shares of Common Stock subject to an Award which for any reason expires or is forfeited, canceled, or terminated unexercised or which ceases for any reason to be exercisable, shall again become available for the granting of Awards under the Plan. The Company shall at all times during the term of the Plan reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of the Plan. 3. Administration of the Plan. --------------------------- (a) The Plan will be administered by the Board of Directors, or by a committee (the "Committee") consisting of two or more directors appointed by the Board of Directors. Those administering the Plan shall be referred to herein as the "Administrators." Notwithstanding the foregoing, if the Company is or becomes a corporation issuing any class of common equity securities required to be registered under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to the extent necessary to preserve any deduction under Section 162(m) of the Code or to comply with Rule 16b-3 promulgated under the Exchange Act, or any successor rule ("Rule 16b-3"), any Committee appointed by the Board of Directors to administer the Plan shall be comprised of two or more directors each of whom shall be a "non-employee director," within the meaning of Rule 16b-3, and an "outside director," within the meaning of Treasury Regulation Section 1.162-27(e)(3), and the delegation of powers to the Committee shall be consistent with applicable laws and regulations (including, without limitation, applicable state law and Rule 16b-3). Unless otherwise provided in the By-Laws of the Company, by resolution of the Board of Directors or applicable law, a majority of the members of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, and any acts approved in writing by all members without a meeting, shall be the acts of the Committee. (b) Subject to the express provisions of the Plan, the Administrators shall have the authority, in their sole discretion, to determine each person who shall be granted an Award; the type of Award to be granted, the times when an Award shall be granted; whether an option granted to a Designee (as defined in Section 4 below) shall be an ISO or a NQSO; the number of shares of Common Stock to be subject to each Award; the number of shares of Common Stock into which each Award consisting of warrants shall be exercisable, and the terms of such warrant exercise; the term of each Award; the date each Award shall vest and/or become exercisable; whether an Award shall vest and/or be exercisable in whole or in installments, and, if in installments, the number of shares of Common Stock to be subject to each installment; whether the installments shall be cumulative; the date each installment shall become exercisable and the term of each installment; whether to accelerate the date of grant of any Award or exercise of any option or warrant granted under the Plan or installment of either of them; whether shares of Common Stock may be issued upon the exercise of an option or warrant granted under the Plan as partly paid, and, if so, the dates when future installments of the exercise price shall become due and the amounts of such installments; the exercise price or other amount to be paid in connection with the exercise of an option or warrant granted under the Plan; the form of payment of the exercise price; the fair market value of a share of Common Stock; the restrictions and/or contingencies, if any, imposed with respect to an Award and whether and under what conditions to waive any such restrictions and/or contingencies; whether and under what conditions to restrict the sale or other disposition of the shares of Common Stock acquired upon the grant of an Award or exercise of an option or warrant granted under the Plan and, if so, whether and under what conditions to waive any such restriction and/or contingencies; whether and under what conditions to subject the grant of all or any portion of an Award, the exercise of all or any portion of an option or warrant granted under the Plan, the vesting of an Award, or the shares acquired pursuant to the exercise of an option or warrant granted under the Plan to the fulfillment of certain restrictions and/or contingencies as specified in the contract or other document evidencing the Award (the "Agreement"), including, without limitation, restrictions and/or contingencies relating to (i) entering into a covenant not to compete with the Company, its Parent (if any) and any of its Subsidiaries, (ii) financial objectives for the Company, any of its Subsidiaries, a division, a product line or other category and/or (iii) the period of continued employment with the Company or any of its Subsidiaries, and to determine whether such restrictions or contingencies have been met; whether to accelerate the date on which an Award may vest or an option or warrant may be exercised or to waive any restriction or limitation with respect to an Award; the amount, if any, necessary to satisfy the obligation of the Company, any of its Subsidiaries or any Parent to withhold taxes or other amounts; whether a Designee has a Disability; with the consent of the Designee, to cancel or modify an Award; provided, however, that the modified provision is permitted to be included in an Award granted under the Plan on the date of the modification; provided, further, however, that in the case of a modification (within 2 the meaning of Section 424(h) of the Code) of an ISO, such option or warrant as modified would be permitted to be granted on the date of such modification under the terms of the Plan; to construe the respective Agreements and the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; to approve any provision of the Plan or any Award granted under the Plan or any amendment to either which, under Rule 16b-3 or Section 162(m) of the Code, requires the approval of the Board of Directors, a committee of non-employee directors or the stockholders, in order to be exempt under Section 16(b) of the Exchange Act (unless otherwise specifically provided herein) or to preserve any deduction under Section 162(m) of the Code; and to make all other determinations necessary or advisable for administering the Plan. Any controversy or claim arising out of or relating to the Plan, any Award granted under the Plan or any Agreement shall be determined unilaterally by the Administrators in their sole discretion. The determinations of the Administrators on matters referred to in this Section 3 shall be conclusive and binding on all parties. No Administrator or former Administrator shall be liable for any action or determination made in good faith with respect to the Plan or any Award granted hereunder. 4. Eligibility. The Administrators may from time to time, consistent with the purposes of the Plan, grant Awards to (a) employees (including officers and directors who are employees) of the Company or of any of its Subsidiaries or a Parent, (b) consultants to the Company or to any of its Subsidiaries or to a Parent, (c) advisors to the Company or to any of its Subsidiaries or to a Parent, and (d) such directors of the Company who, at the time of grant, are not common law employees of the Company, as the Administrators may determine in their sole discretion (each, a "Designee"). Such Awards granted shall cover the number of shares of Common Stock that the Administrators may determine in their sole discretion; provided, however, that the aggregate market value (determined at the time the option or warrant is granted) of the shares of Common Stock for which any eligible employee may be granted ISOs under the Plan or any other plan of the Company, or of a Parent or a Subsidiary of the Company, which are exercisable for the first time by such Designee during any calendar year shall not exceed One Hundred Thousand Dollars ($100,000). The One Hundred Thousand Dollar ($100,000) ISO limitation amount shall be applied by taking ISOs into account in the order in which they were granted. Any option or warrant (or portion thereof) granted in excess of such ISO limitation amount shall be treated as a NQSO to the extent of such excess. 5. Options and Warrants. --------------------- (a) The Administrators may from time to time, in their sole discretion, consistent with the purposes of the Plan, grant options or warrants to one or more Designees. (b) The exercise price of the shares of Common Stock under each option or warrant shall be determined by the Administrators in their sole discretion; provided, however, that the exercise price of an ISO shall not be less than the fair market value of the Common Stock subject to such option on the date of grant; and provided, further, however, that if, at the time an ISO is granted, the Designee owns (or is deemed to own under Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, of any of its Subsidiaries or of a Parent, the exercise price of such ISO shall not be less than one hundred and ten percent (110%) of the fair market value of the Common Stock subject to such ISO on the date of grant. 3 (c) Each option or warrant granted pursuant to the Plan shall be for such term as is established by the Administrators, in their sole discretion, at or before the time such option or warrant is granted; provided, however, that the term of each option or warrant granted pursuant to the Plan shall be for a period not exceeding ten (10) years from the date of grant thereof, and provided further, that if, at the time an ISO is granted, the Designee owns (or is deemed to own under Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, of any of its Subsidiaries or of a Parent, the term of the ISO shall be for a period not exceeding five (5) years from the date of grant. Options and warrants shall be subject to earlier termination as hereinafter provided. 6. Restricted Stock. The Administrators, in their sole discretion, may from time to time, consistent with the purposes of the Plan, grant shares of Common Stock to one or more Designees on such terms and conditions as the Administrators may determine in the applicable Agreement. The grant may require the Designee to pay such price per share therefor, if any, as the Administrators may determine in their sole discretion. The Administrators may subject such shares to such contingencies and restrictions as the Administrators may in their sole discretion determine, including, but not limited to, requirements to forfeit all or a portion of such shares back to the Company for no consideration, voting agreements and the withholding of dividends and other payments with respect to the shares. Until such time as all of the restrictions and contingencies lapse, the Administrators may require that such shares be held by the Company, together with a stock power duly endorsed in blank by the Designee. 7. Rules of Operation. ------------------- (a) The fair market value of a share of Common Stock on any day shall be (i) if the principal market for the Common Stock is a national securities exchange, the average of the highest and lowest sales prices per share of the Common Stock on such day as reported by such exchange or on a consolidated tape reflecting transactions on such exchange, (ii) if the principal market for the Common Stock is not a national securities exchange and the Common Stock is quoted on the Nasdaq Stock Market ("Nasdaq"), and (A) if actual sales price information is available with respect to the Common Stock, the average of the highest and lowest sales prices per share of the Common Stock on such day on Nasdaq, or (B) if such information is not available, the average of the highest bid and the lowest asked prices per share for the Common Stock on such day on Nasdaq, or (iii) if the principal market for the Common Stock is not a national securities exchange and the Common Stock is not quoted on Nasdaq, the average of the highest bid and lowest asked prices per share for the Common Stock on such day as reported on the OTC Bulletin Board Service or by National Quotation Bureau, Incorporated or a comparable service; provided, however, that if clauses (i), (ii) and (iii) of this Section 7(a) are all inapplicable because the Company's Common Stock is not publicly traded, or if no trades have been made or no quotes are available for such day, the fair market value of a share of Common Stock shall be determined by the Administrators by any method consistent with any applicable regulations adopted by the Treasury Department relating to stock options. (b) An option or warrant granted under the Plan (or any installment thereof), to the extent then vested and exercisable, shall be exercised by giving written notice to the Company at its principal office stating which option or warrant is being exercised, specifying the number of shares of Common Stock as to which such option or warrant is being exercised and 4 accompanied by payment in full of the aggregate exercise price therefor (or the amount due on exercise if the applicable Agreement permits installment payments) (i) in cash and/or by certified check, (ii) with the authorization of the Administrators, with previously acquired shares of Common Stock having an aggregate fair market value, on the date of exercise, equal to the aggregate exercise price of all Awards being exercised, or (iii) some combination thereof; provided, however, that in no case may shares be tendered if such tender would require the Company to incur a charge against its earnings for financial accounting purposes. The Company shall not be required to issue any shares of Common Stock pursuant to the exercise of any option or warrant until all required payments with respect thereto, including payments for any required withholding amounts, have been made. (c) The Administrators may, in their sole discretion, permit payment of the exercise price of an option or warrant granted under the Plan by delivery by the Designee of a properly executed notice, together with a copy of the Designee's irrevocable instructions to a broker acceptable to the Administrators to deliver promptly to the Company the amount of sale or loan proceeds sufficient to pay such exercise price. In connection therewith, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. (d) In no case may a fraction of a share of Common Stock be purchased or issued under the Plan. (e) A Designee shall not have the rights of a stockholder with respect to such shares of Common Stock to be received upon the exercise or grant of an Award until the date of issuance of a stock certificate to the Designee for such shares or, in the case of uncertificated shares, until the date an entry is made on the books of the Company's transfer agent representing such shares; provided, however, that until such stock certificate is issued or until such book entry is made, any Designee using previously acquired shares of Common Stock in payment of an option or warrant exercise price shall continue to have the rights of a stockholder with respect to such previously acquired shares. 8. Termination of Relationship. ---------------------------- (a) Except as may otherwise be expressly provided in the applicable Agreement, any Designee whose employment, consulting or advisory relationship with the Company, its Parent and any of its Subsidiaries has terminated for any reason other than the death or Disability of the Designee may exercise any option or warrant granted to the Designee as an employee, consultant or advisor, to the extent exercisable on the date of such termination, at any time within three (3) months after the date of termination, but not thereafter and in no event after the date the option or warrant would otherwise have expired; provided, however, that if the Designee's employment is terminated for Cause, such option or warrant shall terminate immediately. (b) For the purposes of the Plan, an employment relationship shall be deemed to exist between an individual and a corporation if, at the time of the determination, the individual was an employee of such corporation for purposes of Section 422(a) of the Code. As a result, an individual on military leave, sick leave or other bona fide leave of absence shall continue to be considered an employee for purposes of the Plan during such leave if the period of the leave does not exceed ninety (90) days, or, if longer, so long as the individual's right to re-employment with 5 the Company, any of its Subsidiaries or a Parent is guaranteed either by statute or by contract. If the period of leave exceeds ninety (90) days and the individual's right to re-employment is not guaranteed by statute or by contract, the employment relationship shall be deemed to have terminated on the ninety-first (91st) day of such leave. (c) Except as may otherwise be expressly provided in the applicable Agreement, a Designee whose directorship with the Company has terminated for any reason other than the Designee's death or Disability may exercise the options or warrants granted to the Designee as a director who was not an employee of or consultant to the Company or any of its Subsidiaries to the extent exercisable on the date of such termination, at any time within three (3) months after the date of termination, but not thereafter and in no event after the date the option or warrant would otherwise have expired; provided, however, that if the Designee's directorship is terminated for Cause, such option or warrant shall terminate immediately. (d) Except as may otherwise be expressly provided in the applicable Agreement, options and warrants granted under this Plan to a director, officer, employee, consultant or advisor shall not be affected by any change in the status of the Designee so long as such Designee continues to be a director of the Company, or an officer or employee of, or a consultant or advisor to, the Company or any of its Subsidiaries or a Parent (regardless of having changed from one to the other or having been transferred from one entity to another). (e) Nothing in the Plan or in any option or warrant granted under the Plan shall confer on any person any right to continue in the employ or as a consultant of the Company, its Parent or any of its Subsidiaries, or as a director of the Company, or interfere in any way with any right of the Company, its Parent or any of its Subsidiaries to terminate such relationship at any time for any reason whatsoever without liability to the Company, its Parent or any of its Subsidiaries. (f) Except as may otherwise be expressly provided in the applicable Agreement, if a Designee dies (i) while the Designee is employed by, or a consultant or advisor to, the Company, its Parent or any of its Subsidiaries (ii) within three (3) months after the termination of the Designee's employment, consulting or advisory relationship with the Company, its Parent or any of its Subsidiaries (unless such termination was for Cause or without the consent of the Company) or (iii) within one (1) year following the termination of such employment, consulting or advisory relationship by reason of the Designee's Disability, the options or warrants granted to the Designee as an employee of, or consultant to, the Company or any of its Subsidiaries, may be exercised, to the extent exercisable on the date of the Designee's death, by the Designee's Legal Representative, at any time within one (1) year after death, but not thereafter and in no event after the date the option or warrant would otherwise have expired. Except as may otherwise be expressly provided in the applicable Agreement, any Designee whose employment, consulting or advisory relationship with the Company, its Parent or any of its Subsidiaries has terminated by reason of the Designee's Disability may exercise such options or warrants, to the extent exercisable upon the effective date of such termination, at any time within one year after such date, but not thereafter and in no event after the date the option or warrant would otherwise have expired. 6 (g) Except as may otherwise be expressly provided in the applicable Agreement, if a Designee dies (i) while the Designee is a director of the Company, (ii) within three (3) months after the termination of the Designee's directorship with the Company (unless such termination was for Cause) or (iii) within one (1) year after the termination of the Designee's directorship by reason of the Designee's Disability, the options or warrants granted to the Designee as a director who was not an employee of, or consultant or advisor to, the Company or any of its Subsidiaries, may be exercised, to the extent exercisable on the date of the Designee's death, by the Designee's Legal Representative at any time within one (1) year after death, but not thereafter and in no event after the date the option or warrant would otherwise have expired. Except as may otherwise be expressly provided in the applicable Agreement, a Designee whose directorship with the Company has terminated by reason of Disability may exercise such options or warrants, to the extent exercisable on the effective date of such termination, at any time within one year after such date, but not thereafter and in no event after the date the option or warrant would otherwise have expired. 9. Compliance with Securities Laws. -------------------------------- (a) It is a condition to the receipt or exercise of any Award that either (i) a Registration Statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the shares of Common Stock to be issued upon such grant or exercise shall be effective and current at the time of such grant or exercise, or (ii) there is an exemption from registration under the Securities Act for the issuance of the shares of Common Stock upon such grant or exercise. Nothing herein shall be construed as requiring the Company to register shares subject to any Award under the Securities Act or to keep any Registration Statement effective or current. (b) The Administrators may require, in their sole discretion, as a condition to the grant of an Award or the exercise of an option or warrant granted under the Plan, that the Designee execute and deliver to the Company the Designee's representations and warranties, in form, substance and scope satisfactory to the Administrators, which the Administrators determine is necessary or convenient to facilitate the perfection of an exemption from the registration requirements of the Securities Act, applicable state securities laws or other legal requirements, including without limitation, that (i) the shares of Common Stock to be issued upon the receipt of an Award or the exercise of an option or warrant granted under the Plan are being acquired by the Designee for the Designee's own account, for investment only and not with a view to the resale or distribution thereof, and (ii) any subsequent resale or distribution of shares of Common Stock by such Designee will be made only pursuant to (A) a Registration Statement under the Securities Act which is effective and current with respect to the shares of Common Stock being sold, or (B) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption, the Designee, prior to any offer of sale or sale of such shares of Common Stock, shall provide the Company with a favorable written opinion of counsel satisfactory to the Company, in form, substance and scope satisfactory to the Company, as to the applicability of such exemption to the proposed sale or distribution. (c) In addition, if at any time the Administrators shall determine that the listing or qualification of the shares of Common Stock subject to any Award on any securities exchange, Nasdaq or under any applicable law, or that the consent or approval of any governmental agency or regulatory body, is necessary or desirable as a condition to, or in connection with, the granting 7 of an Award or the issuance of shares of Common Stock upon exercise of an Award, such Award may not be granted or exercised in whole or in part, as the case may be, unless such listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Administrators. 10. Award Agreements. Each Award shall be evidenced by an appropriate Agreement, which shall be duly executed by the Company and the Designee. Such Agreement shall contain such terms, provisions and conditions not inconsistent herewith as may be determined by the Administrators in their sole discretion. The terms of each Award and Agreement need not be identical. 11. Adjustments upon Changes in Common Stock. ----------------------------------------- (a) Notwithstanding any other provision of the Plan, in the event of any change in the outstanding Common Stock by reason of a stock dividend, recapitalization, merger in which the Company is the surviving corporation, spin-off, split-up, combination or exchange of shares or the like which results in a change in the number or kind of shares of Common Stock which are outstanding immediately prior to such event, the aggregate number and kind of shares subject to the Plan, the aggregate number and kind of shares subject to each outstanding Award, and the exercise price of each Award, and the maximum number of shares subject to each Award that may be granted to any employee in any calendar year, shall be appropriately adjusted by the Board of Directors, whose determination shall be conclusive and binding on all parties. Such adjustment may provide for the elimination of fractional shares that might otherwise be subject to options or warrants without payment therefor. Notwithstanding the foregoing, no adjustment shall be made pursuant to this Section 11 if such adjustment (i) would cause the Plan to fail to comply with Section 422 of the Code or with Rule 16b-3 of the Exchange Act (if applicable to such Award), or (ii) would be considered as the adoption of a new plan requiring stockholder approval. (b) Except as may otherwise be expressly provided in an applicable Agreement, in the event of (i) a liquidation or dissolution of the Company, or (ii) any transaction (or series of related transactions) that is approved by a majority of the members of the Company's Board of Directors who were elected by stockholders prior to the first such transaction (including, without limitation, a merger, consolidation, sale of stock by the Company or its stockholders, tender offer or sale of assets) and in which either (A) the voting power (in the election of directors generally) of the Company's voting securities outstanding immediately prior to such transaction(s) ceases to represent more than fifty percent (50%) of the combined voting power (in the election of directors generally) of the Company or such surviving entity outstanding immediately after such transaction(s), or (B) all or substantially all of the Company's assets are sold to an unaffiliated third party, the Board of Directors of the Company, or the board of directors of any corporation or other legal entity assuming the obligations of the Company, shall, as to outstanding options, either (x) make appropriate provision for the protection of any such outstanding options by the substitution on an equitable basis of appropriate stock of the Company, or of the merged, consolidated or otherwise reorganized entity which will be issuable in respect of the shares of Common Stock of the Company, provided that no additional benefits shall be conferred upon optionees as a result of such substitution, and the excess of the aggregate fair market value of the shares subject to the options immediately after such substitution over the purchase price thereof 8 is not more than the excess of the aggregate fair market value of the shares subject to the options immediately before such substitution over the purchase price thereof, or (y) upon written notice to the optionees, provide that all unexercised options must be exercised within a specified number of days of the date of such notice or they will be terminated. In any such case, the Board of Directors may, in its discretion, accelerate the exercise dates of outstanding options. 12. Amendments and Termination of the Plan. The Plan was adopted by the Board of Directors on September 8, 2000. No Award may be granted under the Plan after September 7, 2010. The Board of Directors, without further approval of the Company's stockholders, may at any time suspend or terminate the Plan, in whole or in part, or amend it from time to time in such respects as it may deem advisable, including without limitation, in order that ISOs granted hereunder meet the requirements for "incentive stock options" under the Code, or to comply with the provisions of Rule 16b-3 or Section 162(m) of the Code or any change in applicable laws or regulations, ruling or interpretation of any governmental agency or regulatory body; provided, however, that no amendment shall be effective, without the requisite prior or subsequent stockholder approval, which would (a) except as contemplated in Section 10, increase the maximum number of shares of Common Stock for which any Awards may be granted under the Plan, (b) change the eligibility requirements for individuals entitled to receive Awards hereunder, or (c) make any change for which applicable law or any governmental agency or regulatory body requires stockholder approval. No termination, suspension or amendment of the Plan shall adversely affect the rights of a Designee under any Award granted under the Plan without such Designee's consent. The power of the Administrators to construe and administer any Award granted under the Plan prior to the termination or suspension of the Plan shall continue after such termination or during such suspension. 13. Non-Transferability. Except as may otherwise be expressly provided in the applicable Agreement, no Award granted under the Plan shall be transferable other than by will or the laws of descent and distribution, and options or warrants may be exercised, during the lifetime of the Designee, only by the Designee or the Designee's Legal Representatives. Except as may otherwise be expressly provided in the applicable Agreement, an Award, to the extent not vested, shall not be transferable otherwise than by will or the laws or descent and distribution. Except to the extent provided above, Awards may not be assigned, transferred, pledged, hypothecated or disposed of in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process, and any such attempted assignment, transfer, pledge, hypothecation or disposition shall be null and void ab initio and of no force or effect. 14. Withholding Taxes. The Company, or its Subsidiary or Parent, as applicable, may withhold (a) cash or (b) with the consent of the Administrators (in the Agreement or otherwise), shares of Common Stock to be issued under an Award or a combination of cash and shares, having an aggregate fair market equal to the amount which the Administrators determine is necessary to satisfy the obligation of the Company, a Subsidiary or Parent to withhold federal, state and local income taxes or other amounts incurred by reason of the grant, vesting, exercise or disposition of an option or warrant, or the disposition of the underlying shares of Common Stock. Alternatively, the Company may require the Designee to pay to the Company such amount, in cash, promptly upon demand. 9 15. Legends; Payment of Expenses. ----------------------------- (a) The Company may endorse such legend or legends upon the certificates for shares of Common Stock issued upon the grant or exercise of an Award and may issue such "stop transfer" instructions to its transfer agent in respect of such shares as it determines, in its sole discretion, to be necessary or appropriate to (i) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act, applicable state securities laws or other legal requirements, (ii) implement the provisions of the Plan or any agreement between the Company and the Designee with respect to such shares of Common Stock, or (iii) permit the Company to determine the occurrence of a "disqualifying disposition," as described in Section 421(b) of the Code, of the shares of Common Stock transferred upon the exercise of an ISO granted under the Plan. (b) The Company shall pay all issuance taxes with respect to the issuance of shares of Common Stock upon grant of an Award or exercise of an option or warrant granted under the Plan, as well as all fees and expenses incurred by the Company in connection with such issuance. 16. Use of Proceeds. The cash proceeds to be received upon the grant of an Award or the exercise of an option or warrant granted under the plan shall be added to the general funds of the Company and used for such corporate purposes as the Board of Directors may determine, in its sole discretion. 17. Substitutions and Assumptions of Awards of Certain Constituent Corporations. Anything in this Plan to the contrary notwithstanding, the Board of Directors may, without further approval by the stockholders, substitute new Awards for prior Awards of a Constituent Corporation or assume the prior options, warrants or restricted stock of such Constituent Corporation. 18. Definitions. ------------ (a) "Cause," in connection with the termination of a Designee, shall mean (i) "cause," as such term (or any similar term, such as "with cause") is defined in any employment, consulting or other applicable agreement for services between the Company and such Designee, or (ii) in the absence of such an agreement, "cause" as such term is defined in the Agreement executed by the Company and such Designee, or (iii) in the absence of both of the foregoing, (A) indictment of such Designee for any illegal conduct, (B) failure of such Designee to adequately perform any of the Designee's duties and responsibilities in any capacity held with the Company, any of its Subsidiaries or any Parent (other than any such failure resulting solely from such Designee's physical or mental incapacity), (C) the commission of any act or failure to act by such Designee that involves moral turpitude, dishonesty, theft, destruction of property, fraud, embezzlement or unethical business conduct, or that is otherwise injurious to the Company, any of its Subsidiaries or any Parent or any other affiliate of the Company (or its or their respective employees), whether financially or otherwise, (D) any violation by such Designee of any Company rule or policy, or (E) any violation by such Designee of the requirements of such Agreement, any other contract or agreement between the Company and 10 such Designee or this Plan (as in effect from time to time); in each case, with respect to subsections (A) through (E), as determined by the Board of Directors. (b) "Constituent Corporation" shall mean any corporation which engages with the Company, its Parent or any Subsidiary in a transaction to which Section 424(a) of the Code applies (or would apply if the option or warrant assumed or substituted were an ISO), or any Parent or any Subsidiary of such corporation. (c) "Disability" shall mean a permanent and total disability within the meaning of Section 22(e)(3) of the Code. (d) "Legal Representative" shall mean the executor, administrator or other person who at the time is entitled by law to exercise the rights of a deceased or incapacitated Designee with respect to an Award granted under the Plan. (e) "Parent" shall mean a "parent corporation" within the meaning of Section 424(e) of the Code. (f) "Subsidiary" shall mean a "subsidiary corporation" within the meaning of Section 424(f) of the Code. 19. Governing Law. -------------- (a) The Plan, any Awards granted hereunder, the Agreements and all related matters shall be governed by, and construed in accordance with, the laws of the State of California, without regard to conflict or choice of law provisions that would defer to the substantive laws of another jurisdiction. (b) Neither the Plan nor any Agreement shall be construed or interpreted with any presumption against the Company by reason of the Company causing the Plan or Agreement to be drafted. Whenever from the context it appears appropriate, any term stated in either the singular or plural shall include the singular and plural, and any term stated in the masculine, feminine or neuter gender shall include the masculine, feminine and neuter. 20. Partial Invalidity. The invalidity, illegality or unenforceability of any provision in the Plan, any Award or Agreement shall not affect the validity, legality or enforceability of any other provision, all of which shall be valid, legal and enforceable to the fullest extent permitted by applicable law. 21. Stockholder Approval. The Plan shall be subject to approval of the Company's stockholders. No options or warrants granted hereunder may be exercised prior to such approval, provided, however, that the date of grant of any option or warrant shall be determined as if the Plan had not been subject to such approval. 11 EX-11 5 d788459_1.txt CALCULATION OF NET EARNINGS EXHIBIT 11.1 OPHTHALMIC IMAGING SYSTEMS CALCULATION OF NET EARNINGS (LOSS) PER SHARE The following table sets forth the calculation of basic and diluted earnings (loss) per share:
Four-Month Year Ended Period Ended Year Ended December 31, December 31, August 31, 2001 2000 2000 ----------------- ----------------- ---------------- Numerator for basic and diluted net earnings (loss) per share $ 72,454 $ (1,465,756) $ (1,171,563) ================= ================= ================ Denominator for basic net loss per share: Weighted average shares 8,138,305 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 8,138,305 4,430,413 ================= ================= ================ Basic net earnings (loss) per share $ 0.01 $ (0.18) $ (0.26) ================= ================= ================ Diluted net earnings (loss) per share $ 0.01 $ (0.18) $ (0.26) ================= ================= ================ (1) No amounts are included, as amounts are anti-dilutive.
EX-23 6 d788457_1.txt CONSENT OF PERRY-SMITH LLP EXHIBIT 23.1 CONSENT OF PERRY-SMITH LLP INDEPENDENT AUDITOR'S CONSENT We consent to incorporation of our report dated February 19, 2002 in this Form 10-KSB, relating to the balance sheets of Ophthalmic Imaging Systems as of December 31, 2001 and 2000, and related statements of operations, shareholders' deficit and cash flows for the year ended December 31, 2001, the four months ended December 31, 2000 and the year ended August 31, 2000. /s/ Perry-Smith LLP Sacramento, California March 22, 2002 -----END PRIVACY-ENHANCED MESSAGE-----