10KSB 1 f10ksb123103.txt ANNUAL REPORT 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, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _____________ Commission File No. 1-11140 OPHTHALMIC IMAGING SYSTEMS (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. Yes / / No /X/. The issuer's revenues for its most recent fiscal year were $9,944,827. The aggregate market value of the voting and non-voting common stock of the issuer held by non-affiliates as of February 23, 2004, was approximately $2,391,871 based upon the average bid and ask price of the common stock as quoted by Nasdaq OTC Bulletin Board on such date. As of February 23, 2004, there were 14,458,823 issued and outstanding shares of issuer's common stock. Traditional Small Business Disclosure Format (check one): Yes /X/ No / / 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 Winstation 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. 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. The Company has also entered into the Electronic Medical Records ("EMR") and the Enterprise Practice Management ("EPM") markets. To that end, it signed an agreement on June 30, 2003 with NextGen Healthcare Information Systems, Inc., a leading provider of such software platforms to the practitioners market and sale of their products to the ophthalmic market. This strategic business alliance diversifies the product portfolio of the Company, enabling it to offer a wider variety of products and comprehensive solutions to its customer base of ophthalmology departments and practices. The NextGen(R) EMR system creates and maintains complete medical records with minimal effort while it streamlines workflow, controls utilization, and manages critical data related to patient care outcomes. The NextGen(R) EPM system is a complete physician management system that provides a common registration system, enterprise-wide appointment scheduling, referral tracking, clinical support, a custom report writer, and patient financial management based on a managed care model. MediVision Transactions During the period of August 2000 through July 1, 2001, the Company executed several promissory notes in favor of MediVision Medical Imaging LTD. ("MediVision"), an Israeli corporation and majority shareholder in the Company. The Short Term Promissory Note (the "Short-Term Note") had a maximum principal balance of $260,000 available, while the Working Capital Funding Agreement (the "Working Capital Note") and Amendment No.1 to this agreement (the "Amendment") provided an additional funding of $2,500,000. Both Notes and the Amendment bear interest at the rate of 9.3% per annum and are secured by all of the Company's assets. The principal amount outstanding, together with any and all accrued interest on the Working Capital Note and Amendment, was payable by August 31, 2003, except that MediVision may, at its option, at any time convert any amount of principal and interest then outstanding into shares of the Company's common stock at a conversion price of $.80 per share on the Working Capital Note and $0.185 per share on the Amendment No.1 to the Working Capital Note. In May 2003, the Company and MediVision entered into Amendment No. 2 to the Working Capital Funding Agreement and the Short Term Note whereby the repayment terms on the debt were extended on all principal and interest due until January 1, 2005. In June 2003, MediVision exercised its option, as stipulated in the Working Capital Funding Agreement, Amendment No. 1, to convert $1,150,000 of principal and interest at a conversion price of $0.185 per share into 6,216,216 common shares of stock. As a result of the foregoing transactions, MediVision currently owns approximately 85% of the Company's outstanding common stock. At December 31, 2003, after the conversion, the Company had recorded approximately $201,000 in aggregate debt owed to MediVision. In August 2002, the Company's Board of Directors, at MediVision's request, authorized the Company to guarantee and/or provide security interests in its assets for certain of MediVision's loans with financial institutions, on the maximum aggregate amount of approximately $1,900,000. In August 2002, MediVision subordinated to the financial institutions its security position in the Company's assets, which had been granted in consideration of loans to the Company from MediVision. In December 2002, the Company's Board of Directors approved that the Company enter into and issue a debenture in favor of the bank to act as security for the debt of MediVision, such debenture shall be secured by a first lien on all of the Company's assets. Such debenture and lien were signed in December 2002. -2- (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 or DVD-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. 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 -3- segment (back of the eye). Within these groups there are several sub-specialties including medical retina, retina and vitreous, glaucoma, neurology, plastics, pediatric, cataract, cornea and refractive surgery. There are approximately 29,000 practicing optometrists (OD) 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 five manufacturers of fundus cameras. These manufacturers produce a total of 22 models, 9 current and 13 legacy models for which the Company has designed optical and electronic interfaces for each of them. The primary target market for digital angiography systems are retinal specialists who number approximately 2,000 in the United States. The Company's digital imaging system sales have been driven in this segment by both fluorescein and ICG angiography. The Company expects the demand for digital angiography to continue, as it is becoming a standard of care. The primary target markets for the DFI and DSLI products are optometrists, the majority of whom are among the approximately 29,000 practicing in the United States, which number includes those employed by or affiliated with retail optometry organizations; retinal specialists and general ophthalmologists who, combined, number approximately 16,000 in the United States; 5,000 retail optometry chain outlets in the United States; and teaching institutions and military hospitals. The DFI is a significantly lower cost alternative to currently available fundus cameras for use in posterior segment color fundus imaging and fluorescein angiography. In addition, both the DFI and DSLI provide the features, capabilities and benefits of digital imaging. Sales, Marketing and Distribution The Company utilizes a direct sales force in marketing its products throughout the United States and Canada. At December 31, 2003, the Company's sales and marketing organization consisted of a national sales manager as well as 7 territory sales representatives and 6 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 contractors 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 that sell the Company's products in various foreign countries. Each country has trained sales and technical service staff for their respective territories. MediVision Medical Imaging Systems Ltd. ("MediVision"), the Company's parent, 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. -4- 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. 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. The Company has been audited by the Food and Drug Administration (the "FDA") and was deemed to conform to Good Manufacturing Practices ("GMP"). The Company has 510(k)'s on file for 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. 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. Three 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 and Nidek. 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 -5- DFI. The Company is aware of two companies that currently have prototype units that could be similar in function to the DFI, one of these companies (Zeiss) has started to sell such a product recently. 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. 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 net research and development expenditures in the years ended December 31, 2003 and 2002 were approximately $702,000 and $559,000, respectively. The Company has focused its recent research and development efforts on new digital image capture products. The Company expects its research and development expenditures to grow as a result of paying for research and development conducted by MediVision on its behalf. In addition, the Company anticipates an increase in reported expenses that were previously reimbursed to it in connection with the "Computer Guided Laser Therapy" project by the Israel-U.S. Binational Industrial Research and Development Foundation that has since been completed. 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. Further, although the Company believes that its products do not and will not infringe on patents or violate proprietary rights of others, it is possible that its existing rights may not be valid or that infringement of existing or future patents, trademarks or proprietary rights may occur or be claimed to occur by third parties. In the event that any of the Company's products, 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. -6- 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 proprietary software, optical interfaces and synchronization modules 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 DFI and DSLI. The FDA has approved the Company's pre-marketing notification submittals, thereby granting the Company permission to market its products, subject to the general controls and provisions of the FDCA. The classification of the Company's products require, among other things, annual registration, listing of devices, good manufacturing practices, labeling and prohibition against misbranding and adulteration. Further, because the 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 -7- 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, 2003, 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, 2003, the Company had 43 employees of which 41 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. ITEM 2. DESCRIPTION OF PROPERTY. The Company leases under a noncancelable triple net lease expiring in May 2005, 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 $9,000. 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. To the Company'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) are, or may be, a party or to which the Company's property is, or may be, subject. -8- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the Company's 2003 Annual Meeting of Shareholders held on December 9, 2003, the following matters were voted upon and adopted by the votes indicated:
For Withheld Against Abstain To elect five individuals to serve as the Board of Directors of the Company until the next annual 13,501,946 27,040 -- -- meeting of shareholders and until their successors are elected and qualified.1 Approval and adoption of an amendment to the Company's Articles of Incorporation to increase the 13,454,945 68,527 5,514 number of authorized shares of common stock from -- 20,000,000 to 35,000,000 shares. Approval of the Company's 2003 Stock Option Plan authorizing 750,000 shares for grant. 11,112,490 2,352,323 54,512 9,661 To ratify the selection by the Board of Directors of Perry-Smith & Co. to be the independent accountants 13,512,414 -- 8,748 7,824 with respect to the audit of the Company's financial statements for the fiscal year ended December 31, 2003.
/1/ Reflects votes cast for, and withheld for all directors, except for Gil Allon who received 13,501,880 votes for and 27,106 votes withheld and Noam Allon who received 13,501,814 votes for and 27,172 votes withheld. There were 825,535 non-votes with respect to the matters listed above. ---------- -9- 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. Year Ended Year Ended December 31, 2003 December 31, 2002 ----------------- ----------------- Low High Low High Bid Ask Bid Ask ----------------- ----------------- First Quarter 0.20 0.33 0.03 0.22 Second Quarter 0.30 0.91 0.12 0.20 Third Quarter 0.61 1.25 0.11 0.24 Fourth Quarter 0.92 1.50 0.11 0.45 On February 23, 2004, the closing price for the Company's common stock, as reported by the Nasdaq OTC Bulletin Board, was $1.05 per share and there were approximately 143 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. Equity Compensation Plans The following table sets forth certain information, as at December 31, 2003, with respect to the Company's equity compensation plans: -10-
NUMBER OF SECURITIES NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE REMAINING AVAILABLE FOR ISSUED UPON EXERCISE OF EXERCISE PRICE OF FUTURE ISSUANCE OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY COMPENSATION PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS PLANS Equity compensation plans approved by security holders... 92,319(a) $.91 750,000(b) --------- ---- --------- Equity compensation plans not approved by security holders ....................... 1,678,633(c) $.44 1,008,333(d) ------------ ---- ------------ Total ....................... 1,770,952 $.46 1,758,333 ============ ==== =========
(a) Represents options granted under the Company's 1992 Stock Option Plan under which no further options may be granted. (b) Represents shares available for grant under the 2003 Stock Option Plan to employees and directors of, consultants to, and to non-employee directors of, the Company. Upon the expiration, cancellation or termination of unexercised options, shares subject to options under the plan will again be available for the grant of options under the applicable plan. (c) Includes 60,000 shares subject to options granted under the Company's 1997 Stock Option Plan under which no further options may be granted. Also includes 115,000 and 1,398,333 shares subject to options granted under the 1995 Stock Option Plan (the "1995 Plan") and the 2000 Stock Option Plan (the "2000 Plan"), respectively. Also includes 105,300 options granted under individual stock option plans. (d) Includes 920,000 and 88,333 shares available for future grant under the 1995 Plan and the 2000 Plan respectively, to employees and directors of, consultants to, and to non-employee directors of, the Company. Upon the expiration, cancellation or termination of unexercised options, shares subject to options under the 1995 Plan and the 2000 Plan will again be available for the grant of options under the applicable plan. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. General This report contains forward-looking statements within the meaning of the federal securities laws. The Company intends such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended, and in Section 21E of the Exchange Act of 1934, as amended. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. -11- 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. In October 2001, MediVision, the Company's parent, signed an agreement for the acquisition of a minority interest by Agfa Gevaert N.V. creating an alliance for joint development and marketing of an integrated, digital Ophthalmology PACS solution. The marketing efforts under this agreement are anticipated to be implemented beginning in the US market, and are to include efforts by the Company. 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. In June 2003, the Company signed a licensing agreement with NextGen Healthcare Information Systems, Inc., a subsidiary of Quality Systems, Inc. Under the terms of the agreement, OIS will become a value added reseller of two computer-based practice management and medical records products: NextGen(R) Electronic Medical Records (EMR) and NextGen(R) Enterprise Practice Management (EPM). This strategic business alliance diversifies the product portfolio of the Company, enabling it to offer a wider variety of products and comprehensive solutions to its customer base of ophthalmology departments and practices. The NextGen(R) EMR system creates and maintains complete medical records with minimal effort while it streamlines workflow, controls utilization, and manages critical data related to patient care outcomes. The NextGen(R) EPM system is a complete physician management system that provides a common registration system, enterprise-wide appointment scheduling, referral tracking, clinical support, a custom report writer, and patient financial management based on a managed care model. In May 2003, the Company entered into a $150,000 line of credit agreement with its bank. The line is secured by a pledged investment with the bank equal to the amount of the line of credit. The interest charged on the line of credit is at prime rate and is due monthly. Advances on the line of credit mature on September 10, 2008. In September 2003, the Company entered into a $1,200,000 debt agreement with Laurus Master Fund, Ltd ("Laurus") in the form of a three-year convertible note with a fixed coupon price of 6.5% per annum. The convertible note may be converted by Laurus into the Company's Common Stock at a fixed conversion price of $1.07. The Company also issued seven-year warrants to Laurus to purchase 375,000 shares of the Company's Common Stock at exercise prices ranging between $1.23 and $1.61 per share. At December 31, 2003, the Company had a stockholders' equity of approximately $27,000 and its current assets exceeded its current liabilities by approximately $556,000. The convertible loan agreement -12- with Laurus that was entered into during 2003 has had a favorable impact on the Company's current ratio. There can be no assurance that the Company will be able to achieve or sustain significant positive cash flows, revenues or profitability in the future. MediVision Transactions During the period of August 2000 through July 1, 2001, the Company executed several promissory notes in favor of MediVision Medical Imaging LTD. ("MediVision"), an Israeli corporation and majority shareholder in the Company. The ShortTerm Note had a maximum principal balance of $260,000 available, while the Working Capital Funding Agreement and Amendment No.1 to this agreement provided an additional funding of $2,500,000. Both Notes and the Amendment bear interest at the rate of 9.3% per annum and are secured by all of the Company's assets. The principal amount outstanding, together with any and all accrued interest on the Working Capital Note and Amendment, was payable by August 31, 2003, except that MediVision may, at its option, at any time convert any amount of principal and interest then outstanding into shares of the Company's common stock at a conversion price of $.80 per share on the Working Capital Note and $0.185 per share on the Amendment No.1 to the Working Capital Note. In May 2003, the Company and MediVision entered in Amendment No. 2 to the Working Capital Funding Agreement and the Short Term Note whereby the repayment terms on the debt were extended on all principal and interest due until January 1, 2005. In June 2003, MediVision exercised its option, as stipulated in the Working Capital Funding Agreement, Amendment No. 1, to convert $1,150,000 of principal and interest at a conversion price of $0.185 per share into 6,216,216 common shares of stock. As a result of the foregoing transactions, MediVision currently owns approximately 85% of the Company's outstanding common stock. Critical Accounting Policies Financial Accounting Pronouncement FAS 148 In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123 ("SFAS No. 148"). This Statement amends SFAS No.123, Accounting for Stock-Based Compensation ("SFAS No. 123"), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reporting containing financial statements for interim periods beginning after December 15, 2002. Because the Company accounts for the compensation cost associated with its stock option plans under the intrinsic value method, the alternative methods of transition will not apply to the Company. The additional disclosure requirements of the statement are included in these financial statements. Management does not believe that the adoption of this Statement had a material impact on the Company's consolidated financial position or results of operations. -13- New Accounting Pronouncement FAS 149 On April 30, 2003, the Financial Accounting Standards Board issued Statement No. 149, Amendment of Statement on Derivative Instruments and Hedging Activities. This Statement amends and clarifies the accounting for derivative instruments by providing guidance related to circumstances under which a contract with a net investment meets the characteristics of a derivative as discussed in Statement 133. The Statement also clarifies when a derivative contains a financing component. The Statement is intended to result in more consistent reporting for derivative contracts and must be applied prospectively for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003. In management's opinion, adoption of this statement is not expected to have a material effect on the Company's financial position or results of operations. New Accounting Pronouncement FAS 150 In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Some of the provisions of this Statement are consistent with the current definition of liabilities in FASB Concepts Statement No. 6, Elements of Financial Statements. The remaining provisions of this Statement incorporate the FASB's intention to revise the definition to encompass certain obligations that a reporting entity can or must settle by issuing its own equity shares, depending on the nature of the relationship established between the holder and the issuer. This Statement concludes the first phase of the FASB's redeliberations of the Exposure Draft, Accounting for Financial Instruments with Characteristics of Liabilities, Equity, or Both. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. In management's opinion, adoption of this statement did not have a material effect on the Company's consolidated financial position or results of operations. Disposal Obligations In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires liabilities for costs related to exit or disposal activities to be recognized when the liability is incurred. SFAS No. 146 supersedes EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity, and is effective for the Company in fiscal 2003. The Company adopted SFAS No. 146 as of the first day of fiscal 2003 and does not expect that the adoption of this statement will have a significant impact on the Company's financial position or results of operations. Guarantor Accounting In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 changes current practice in accounting for, and disclosure of, guarantees. FIN 45 will require certain guarantees to be recorded at fair value on the Company's balance sheet, a change from current practice, which is generally to record a liability only when a loss is probable and reasonably estimable, as those terms are defined in SFAS No. 5, Accounting for Contingencies. FIN 45 also requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote, which is another change from current practice. The disclosure requirements of FIN 45 are effective immediately and are included in Note 8, "Litigation and Contingencies." The initial recognition -14- and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 28, 2002. The Company expects that the new recognition and measurement provisions will not have a significant impact on the Company's future financial position or results of operations. Consolidation of Variable Interest Entities In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). This standard clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and addresses consolidation by business enterprises of variable interest entities. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risk among the parties involved. FIN 46 also enhances the disclosure requirements related to variable interest entities. This statement is effective for variable interest entities created or in which an enterprise obtains an interest after January 31, 2003. FIN 46 will be effective for the Company beginning September 7, 2003 for all interests in variable interest entities acquired before February 1, 2003. The adoption of FIN 46 is not expected to have a material impact on the Company's financial position or results of operations Results of Operations Selected Financial Data YEARS ENDED DECEMBER 31, ------------------------------------------- 2003 2002 2001 ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Net revenues $ 9,944,827 $ 8,465,707 $ 6,958,119 Cost of sales 3,955,680 3,535,316 3,128,355 ----------- ----------- ----------- Gross profit 5,989,147 4,930,391 3,829,764 ----------- ----------- ----------- Operating expenses: Sales, marketing, general and administrative 3,984,482 3,426,616 3,123,269 Research and development 702,020 558,999 549,419 ----------- ----------- ----------- Total operating expenses 4,686,502 3,985,615 3,672,688 ----------- ----------- ----------- Income from operations 1,302,645 944,776 157,076 Other expense, net (269,451) (360,953) (273,384) ----------- ----------- ----------- Net income (loss) before extraordinary item 1,033,194 583,823 (116,308) Extraordinary item 188,762 ----------- ----------- ----------- Net Income before taxes 1,033,194 583,823 72,454 Income Tax benefit (expense) 405,000 (19,000) ----------- ----------- ----------- Net income $ 1,438,194 $ 564,823 $ 72,454 =========== =========== =========== Basic earnings per share $ .13 $ .07 $ .01 =========== =========== =========== Shares used in the calculation of basic earnings per share 11,267,493 8,138,305 8,138,305 =========== =========== =========== Diluted earnings per share $ .12 $ .07 $ .01 =========== =========== =========== -15- YEARS ENDED DECEMBER 31, ---------------------------------------------- 2003 2002 2001 ------------ ------------ ------------ Shares used in the calculation of diluted earnings per share 11,877,205 8,138,305 8,138,305 ============ ============ ============ STATEMENT OF CASH FLOWS DATA: Net cash provided by (used in) operating activities $ 367,129 $ 725,846 $ (349,371) Net cash used in investing activities (175,360) (72,331) (97,017) Net cash provided by (used in) financing activities 697,031 (342,207) 481,740 ------------ ------------ ------------ Net increase in cash and cash equivalents $ 888,800 $ 311,308 $ 35,352 ============ ============ ============ COMPARISON OF YEAR ENDED DECEMBER 31, 2003 TO YEAR ENDED DECEMBER 31, 2002 Revenues The Company's revenues for the year ended December 31, 2003 were $9,944,827 representing an increase of approximately 17% from revenues of $8,465,707 for the year ended December 31, 2002. The increased revenue levels for 2003 include revenues from initial deliveries of the Company's newest digital angiography system, the WinStation 4000. Digital angiography systems and peripherals, including upgrades, accounted for approximately 92% and 93% of the Company's total revenues during 2003 and 2002, respectively. Service revenue for the years ended 2003 and 2002 accounted for approximately 8% and 7% of the Company's total revenue, respectively. The increased revenue levels during the 2003 period reflect the impact of a number of factors discussed in further detail below. Gross Margins Gross margins were approximately 60% during fiscal 2003 versus approximately 58% for fiscal 2002. The fiscal 2003 gross margin percentage reflects the continued impact of sales of higher margin products as well as economies of scale associated with the fixed and semi-variable overhead cost absorption over increased revenue levels. It is anticipated that our gross margins will decrease as our sales of the NextGen software products become more significant, since the gross margins associated with such sales are below the majority of the products that we currently market. Sales, Marketing, General and Administrative Expenses Sales, marketing, general and administrative expenses accounted for approximately 40% of total revenues during both fiscal 2003 and fiscal 2002. Expense levels increased to $3,984,482 during fiscal 2003, representing an increase of approximately 16% compared to expenses of $3,426,616 in 2002. Primary contributing factors to the increased expenses were salaries and support costs related to direct sales and other support personnel added during and subsequent to the third quarter of 2002, as well as other costs in connection with the increased sales levels in 2003. -16- Research and Development Expenses Research and development expenses increased by approximately 26% to $702,020 during 2003 from $558,999 during 2002. Such expenses accounted for approximately 7% of total revenues during fiscal 2003 and fiscal 2002. The Company has focused its recent research and development efforts on new digital image capture products. The Company expects its research and development expenditures to grow as a result of its paying for research and development conducted by MediVision on the Company's behalf. In addition, the Company anticipates an increase in reported expenses that were previously reimbursed to the Company, in connection with the "Computer Guided Laser Therapy" project, by the Israel-U.S. Binational Industrial Research and Development Foundation, that has since been completed. Interest and Other Expense, net Interest and other expense were $269,451 during 2003 compared to $360,953 during 2002. These amounts were comprised principally of interest expense associated with net borrowings from MediVision during fiscal 2003 and 2002, respectively and interest expense associated with financing arrangements provided to certain of the Company's customers in connection with sales of its products. Interest income in both periods was insignificant. Income Taxes At December 31, 2003 and 2002, management reviewed recent operating results and projected future operating results. At the end of each of these years, management determined that it was more likely than not that a portion of the deferred tax assets attributable to net operating losses would likely be realized. Due to the Company's limited history of profitable operations, management has recorded a valuation allowance of $4,734,000 and $5,053,000 at December 31, 2003 and 2002, respectively. The amount of the valuation allowance will be adjusted in the future when management determines that it is more likely than not the deferred assets will be realized. The Company has at December 31, 2003, a net operating loss carryover of approximately $5,410,500 for federal income tax purposes which expires between 2007 and 2020, and a net operating loss carryforward of approximately $2,088,800 for California state income tax purposes which expires through 2010. The State of California has suspended the application of net operating losses for the 2002 and 2003 fiscal years and extended the carry forward period two years. Federal tax credit carryforwards of approximately $174,900 will begin to expire in 2007. 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 these limitations, a portion of these loss and credit carryovers will expire without being utilized. Net Income The Company reported net income of $1,438,194, or $0.13 per share basic and $0.12 per share diluted, during 2003, compared to a net income of $564,823, or $0.07 per share basic and diluted, during 2002. 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 results of operations for 2003 reflect the positive impact of the Company's ongoing attention and resources to core marketing, selling and corporate operations issues. Growing sales of the Company's digital angiography products reflect the market acceptance of these products and the ongoing product quality improvements made to meet customers' requirements. There can be no assurance, -17- however, that there will be continued market acceptance of the Company's products or that any continued market acceptance will result in significant future unit sales or revenue contribution. The results of operations do not include any amounts with respect to a potential contingent liability in connection with the collection of taxes from the Company's customers, which amount has been estimated on the basis of numerous factors and assumptions that might, in the least favorable combination, reach $570,000. Management believes that the probability of such an assessment is remote and accordingly, has not recorded a liability in its financial statements. However, there can be no assurance that the amount that might ultimately be assessed for prior periods would not materially affect the Company's results of operations or cash flows in any given reporting period (see Note 11 of Notes to Financial Statements included in Item 7 of this Form 10-KSB). Export Sales Revenues from sales to customers located outside of the United States accounted for approximately 9% and 11% of the Company's net sales for 2003 and 2002, respectively. Sales to MediVision, included in these totals, accounted for approximately $482,000 and $514,000 for 2003 and 2002, 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 fourth quarter of its fiscal year preparing for this event. COMPARISON OF YEAR ENDED DECEMBER 31, 2002 TO YEAR ENDED DECEMBER 31, 2001 Revenues The Company's revenues for the year ended December 31, 2002 were $8,465,707 representing an increase of approximately 22% from revenues of $6,958,119 for the year ended December 31, 2001. The increased revenue levels for 2002 include revenues from initial deliveries of the Company's newest digital angiography systems, including the WinStation 1400 and WinStation 5000. Sales of Digital angiography systems and peripherals, including upgrades, accounted for approximately 93% of the Company's total revenues for 2002. The increased revenue levels during the 2002 period reflect the impact of a number of factors discussed in further detail below. Gross Margins Gross margins were approximately 58% during fiscal 2002 versus approximately 55% for fiscal 2001. The fiscal 2002 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 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. Pursuant to the Closing of the transactions with MediVision, the Company has, with support from MediVision, undertaken certain gross margin enhancement efforts and continue to monitor its expenses in this area in contemplation of current and anticipated business conditions. Sales, Marketing, General and Administrative Expenses -18- Sales, marketing, general and administrative expenses accounted for approximately 40% of total revenues during fiscal 2002 as compared with approximately 45% during fiscal 2001. Expense levels increased to $3,426,616 during fiscal 2002, representing an increase of approximately 10% compared to expenses of $3,123,269 in 2001. Primary contributing factors to the increased expenses were professional, administrative and other costs as well as increased commissions and other expenses associated with significantly increased revenue levels during 2002 versus 2001. Research and Development Expenses Research and development expenses increased by approximately 2% to $558,999 during 2002 from $549,419 during 2001. Such expenses accounted for approximately 7% and 8% of revenues for fiscal years 2002 and 2001, 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. Interest and Other Expense, net Interest and other expense were $360,953 during 2002 compared to $273,384 during 2001. These amounts were comprised principally of interest expense associated with net borrowings from MediVision during fiscal 2002 and 2001, 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 The Company reported net income of $564,823, or $0.07 per share, during 2002, compared to a net income of $72,454, or $0.01 per share, during 2001. The per share figures are basic amounts in accordance with Financial Accounting Standards No. 128. The 2001 amounts include an extraordinary gain recorded during the first quarter of $188,762, or $0.02 per share, resulting from the negotiated reduction of certain principal and interest charges previously recorded in connection with a stock appreciation right granted to the Company's bank. The results of operations for 2002 reflect the positive impact of the Company's ongoing attention and resources to core marketing, selling and corporate operations issues. Growing sales of its digital angiography products reflect the market acceptance of these products and the ongoing product quality improvements made to meet customers' requirements. 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 first year of profitability since the Company's initial public offering. Initial sales of the 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 continued market acceptance of these products or that any continued market acceptance will result in significant future unit sales or revenue contribution. The results of operations do not include any amounts with respect to a potential contingent liability in connection with the collection of taxes from the Company's customers, which amount has been estimated on the basis of numerous factors and assumptions that might, in the least favorable combination, reach $665,000. Management believes that the probability of such an assessment is remote and accordingly, has not recorded a liability in its financial statements. However, there can be no -19- 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 11% and 12% of the Company's net sales for 2002 and 2001, respectively. Sales to MediVision, included in these totals, accounted for approximately $514,000 and $342,000 for 2002 and 2001, 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 fourth quarter of its fiscal year preparing for this event. Liquidity and Capital Resources The Company's operating activities provided cash of $367,129 during 2003 as compared to generating cash of $725,846 during 2002. The cash provided by operations during 2003 was substantially due to the Company's increased profitability which amounts were partially offset by increased receivables. Net cash used in investing activities was $175,360 during 2003 versus $72,331 during 2002. The Company's primary investing activities consisted of an investment in a Certificate of Deposit in order to secure a line of credit with its bank and 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 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, or other financing arrangements available to Company, if any. The Company generated cash of $697,031 in financing activities during 2003 as compared to using $342,207 during 2002. The cash generated in financing activities during 2003 was principally from proceeds received from the signing of the $1,200,000 convertible debt instrument offset by repayments of borrowings under existing arrangements with MediVision, while cash used during 2002 was principally from repayment of principal on notes payable under existing arrangements with MediVision. Principal payments on notes payable other than to MediVision in both years were minimal. In June 2003, MediVision exercised its option, as stipulated in the Amendment No.1, to convert $1,150,000 of principal and interest at a conversion price of $0.185 per share into 6,216,216 common shares of stock. As a result of the foregoing transactions, MediVision currently owns approximately 85% of the Company's outstanding common stock On December 31, 2003, the Company's cash and cash equivalents were $1,272,034. Management anticipates that additional sources of capital beyond those currently available to it may be required to continue funding of research and development for new products and selling and marketing related expenses for existing products. 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 -20- 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. Trends The Company is unaware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on the Company's financial condition or results from operations. 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. Off Balance Sheet Arrangements None. ITEM 7. FINANCIAL STATEMENTS. The Company's financial statements for the year ended December 31, 2003 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 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. ITEM 8A. Controls and Procedures The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The financial information contained within its statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company recognizes revenue when products are shipped. Estimates are used relative to the expected useful lives of depreciable assets. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company's transactions would be the same, the timing of events that would impact transactions could change. The Company's Chief Executive Officer and Chief Financial Officer, based on their evaluation within 90 days prior to the date of this report of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a--14(c)), have concluded that the Company's disclosure controls and procedures are adequate and effective for purposes of Rule 13a--14(c) in timely alerting them to material information relating to the Company required to be included in the Company's filings with the SEC under the Securities Exchange Act of 1934. There were no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation. -21- 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:
Name Age Position ------------------------------------- ----------------- ------------------------------------------------------- Gil Allon 42 Chief Executive Officer and Director Ariel Shenhar 38 Chief Financial Officer, Vice President, Secretary, and Director Jonathan Adereth 56 Director, Chairman of the Board Noam Allon 44 Director Alon Harris, Ph.D. 44 Director
Gil Allon has served as a member of the Company's Board of Directors since August 2000 and has served as the Company's Chief Executive Officer since January 2002. Mr. Allon has 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 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 August 2000, has served as the Company's Vice President and Chief Financial Officer since July 2002 and has served as the Company's Secretary since August 2002. 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 public 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. Mr. Shenhar received his B.A. in Economics and Accounting in June 1992 and his M.B.A. in Finance, with distinction, in June 1999 both from the Hebrew University in Jerusalem, Israel, and has been a Certified Public Accountant since January 1997. Jonathan Adereth has served as Chairman of the Company's Board of Directors since 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 Barnev Ltd., an Israeli corporation engaged in the business of labor monitoring systems. In addition, Mr. Adereth is a director of UCGT Ltd., an Israeli corporation and of Magnalab Inc., a US based corporation. Both companies are engaged in medical imaging technology. 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 -22- 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. Noam Allon has served as a member of the Company's Board of Directors since 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 received his B.Sc. in Computer Science with distinction from the Technion Israel Institute of Technology in Haifa, Israel in May 1986. 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 Laboratories (the "Laboratory") in the Department of Ophthalmology at the Indiana University School of Medicine ("Indiana") since 1993. The Laboratory, 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 Chair 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. (b) Audit Committee Financial Expert The Company's Board of Directors has determined that Jonathan Adereth, the Chairman of the Audit Committee, qualifies as an independent financial expert serving on its audit committee. This qualification is based upon his experience, more fully described above in his biography, in particular, in his capacity as President and Chief Executive Officer and board member of Elscint Ltd. (c) 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, 2003, 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 Noam Allon, Gil Allon, Ariel Shenhar and Jonathan Adereth were late in filing reports concerning the grant to them of options to purchase 30,000, 70,000, 50,000 and 30,000 shares of the Company's common stock, respectively and MediVision was late in filing reports concerning its conversion of its line of credit with the Company into 6,216,216 shares of the Company's common stock. -23- (d) Code of Ethics The Company has adopted a Code of Ethics that applies to its principal executive officer and principal financial officer. The Company's Code of Ethics is attached to this Form 10-KSB as Exhibit 14. The Company will provide to any person upon request, without charge, a copy of the Code of Ethics. Such request is to be submitted in writing to the Company at: Ophthalmic Imaging Systems, Attention: Ariel Shenhar, 221 Lathrop Way, Suite I, Sacramento, Ca. 95815 EXECUTIVE COMPENSATION. (a) Summary Executive Compensation Table SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL FISCAL OTHER ANNUAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) ----------------------------------- ----- ---------- --------- --------- Gil Allon 2003 $132,000(1) $55,440(2) $34,860(3) Chief Executive Officer 2002 122,769 39,892(4) 36,126(5) 2001 120,000 42,269(6) 40,639(7) Ariel Shenhar 2003 $115,500 $38,000 $ 8,737(8) Vice-President, Chief Financial 2002 48,231(9) 38,000(10) 5,528(11) Officer
(1) Payments to and on behalf of Mr. Allon for his services to the Company in 2003 and 2002 were generally made directly by the Company to Mr. Allon. Payments to and on behalf of Mr. Allon for his services to the Company in 2001 were generally made directly by MediVision and charged to the Company (2) $44,921 of the estimated bonus was paid by the Company to Mr. Allon in 2003. The balance was accrued in the financial statements. As of February 23, 2004, the Company had not paid the balance. (3) Represents $26,123 in housing expenses paid by MediVision and charged to the Company and approximately $8,737 in automobile expenses for Mr. Allon paid by the Company. (4) $10,000 of this amount was paid by the Company to Mr. Allon in 2002 and the balance was paid in 2003. (5) Represents $25,800 in housing expenses paid by MediVision and charged to the Company and approximately $10,326 in automobile expenses for Mr. Allon paid by the Company. (6) Paid by the Company to Mr. Allon in June 2002 (7) Represents $21,925 in housing expenses and $5,514 in medical insurance premiums paid by MediVision and charged to the Company and approximately $13,200 in automobile expenses for Mr. Allon paid by the Company. (8) Represents approximately $8,737 in automobile expenses for Mr. Shenhar paid by the Company. (9) Represents salary from July 22, 2002 through December 31, 2002 (10) Represents bonus accrued in the financial statements and paid in 2003. (11) Represents approximately $5,528 in automobile expenses for Mr. Shenhar paid by the Company. -24- (b) Summary Option Grants During the year ended December 31, 2003, the following options were granted to named executive officers:
% of total Number of Options/ Securities SARs Granted Underlying to Employees Options/SARs in Fiscal Exercise or Base Name Granted (#) Year Price ($/Share) Expiration Date -------------------------------- ------------- -------------- ----------------------- ---------------------- Gil Allon 70,000 28% $.41 April 9, 2013 Chief Executive Officer Ariel Shenhar Vice President, Chief 50,000 20% $.41 April 9, 2013 Financial Officer
(c) Aggregated Option Exercises and Fiscal Year End Values
Number of Securities Underlying Value of Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at Shares Value FY-End (#) FY-End ($) Acquired on Realized Exercisable/ Exercisable/ Name Exercise (#) ($) Unexercisable (1) Unexercisable -------------------------------- ------------- -------------- ----------------------- ---------------------- Gil Allon -- -- 286,667/73,333(2) $228,014/58,226 Chief Executive Officer Ariel Shenhar Vice President, Chief -- -- 166,667/33,333 $132,334/26,466 Financial Officer
(1) All options had a market value of $1.20 per share at December 31, 2003. The exercise price on all shares was $.406 per share. (2) Includes 13,334 shares exercisable and 26,666 shares unexercisable by indirect ownership through spouse. -25- (d) Compensation of Directors The Company has entered into an employment agreement with Mr. Allon, dated December 1, 2001, for his services as Chief Executive Officer, for a term of approximately one year, which agreement may be renewed for successive one year intervals upon mutual agreement of the parties. Under the terms of the agreement, revised in October 2002, Mr. Allon is to receive an annual salary of $132,000 and a bonus to be determined annually by the Board of Directors based on the Company meeting certain performance goals. Mr. Allon will also be eligible to participate in the Company's health and welfare insurance plans and is provided an automobile for business use. The agreement between the parties was renewed on December 15, 2002, but was revised to provide for an indefinite term. The Company also entered into an employment agreement with Mr. Shenhar for his services as Chief Financial Officer, for a term of approximately one year, commencing on July 22, 2002, and expiring on June 30, 2003. Under the terms of the agreement, revised in December 2003 to provide for an indefinite term, Mr. Shenhar's salary was increased from $114,000 to $120,000 annually effective October 1, 2003, and he is to receive a bonus to be determined annually by the Board of Directors based on the Company meeting certain performance goals. Mr. Shenhar will also be eligible to participate in the Company's health and welfare insurance plans and is provided an automobile for business use. In addition, Jonathan Adereth received $36,000 for his services as Chairman of the Board and an additional $2,000 for meetings attended in 2003. Pursuant to a letter agreement executed on October 24, 2001, between Dr. Harris and the Company, and as subsequently modified by the parties, the Company 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. Dr. Harris's agreement was revised in September 2002 to provide for a quarterly payment of $1,500 for his services as a director, eliminating the payments to him for his individual attendance at telephonic and non-telephonic meetings of the Board. For his services as a director during the year, Dr. Harris earned approximately $6,000, of which approximately $1,500 remained accrued but unpaid as of December 31, 2003. As of February 23, 2004 this amount was not paid. The above referenced options were granted in January 2002 at a per share exercise price of $.10, which price exceeded the closing price of the Company's common 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 23, 2004, 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. -26-
Name and Address of Amount and Nature of Beneficial Owner Beneficial Owner Percent of Class ------------------------------- -------------------- ---------------- MediVision Medical Imaging Ltd. 12,180,151 (1) 84.2% P.O. Box 45, Industrial Park Yokneam Elit 20692 Israel Gil Allon 305,000(2)(3) 2.1% 221 Lathrop Way, Suite I Sacramento, CA 95815 Ariel Shenhar 175,000 (2) 1.2% 221 Lathrop Way, Suite I Sacramento, CA 95815 Jonathan Adereth 165,000 (2) 1.1% 221 Lathrop Way, Suite I Sacramento, CA 95815 Noam Allon 165,000 (2) 1.1% 221 Lathrop Way, Suite I Sacramento, CA 95815 Alon Harris, Ph.D. 13,333(2) * 221 Lathrop Way, Suite I Sacramento, CA 95815 Directors and Officers as a group 823,333(2) 5.4% (total of 5 persons) --------------------------------------------------------------------------------
* Represents less than 1%. (1) As indicated in a Schedule 13D filed by MediVision on August 22, 2003. (2) Represents shares subject to stock options exercisable within 60 days from February 23, 2004. (3) Includes indirect beneficial ownership by spouse of stock options to purchase 20,000 shares. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) Transactions with Executive Officers and Directors In January 2004, the Company entered into a service agreement, effective January 1, 2003 with MediStrategy Ltd. ("MS"), an Israeli company owned by Noam Allon, a director of the Company. Under the terms of the agreement, MS will provide services to the Company primarily in the business development field in ophthalmology including business cooperation, mergers and acquisitions allocating new lines of business and analyzing of such, defining new product lines or business opportunities to be developed. All services provided by MS shall be performed solely by Noam Allon. In consideration for the services to be provided, the Company agrees to pay MS a monthly sum of $3,300 paid quarterly. In addition, MS is to be paid a yearly performance bonus of up to $20,000 upon achievement of goals under the terms of the agreement determined by MS, Noam Allon and the Company's Chairman of the Board. As of December 31, 2003, MS has earned fees in the amount of $39,600 and a bonus, which has not been finalized. These amounts remain accrued but unpaid as of December 31, 2003. -27- (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 and MediVision entered into a series of transactions which resulted in MediVision owning approximately 85% of the Company's outstanding common stock at fiscal year end 2003. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits
Exhibit Footnote Number Description of Exhibit Reference ------- ---------------------- ---------- 2.1 Securities Purchase Agreement dated as of July 13, 2000, by and among the (8) 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 (4) Preferences of Series A Junior Participating Preferred Stock of the Company). 3.3 Amendment to Articles of Incorporation (Certificate of Determination of (7) 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. (6) 4.1 Specimen of Stock Certificate. * 4.2 Securities Purchase Agreement dated September 25, 2003 by and between the (13) Company and Laurus. 4.3 Secured Convertible Term Note dated September 25, 2003 issued to Laurus. (14) 4.4 Common Stock Purchase Warrant dated September 25, 2003 by and between the (15) Company and Laurus. 4.5 Registration Rights Agreement dated September 25, 2003 by and between the (16) Company and Laurus. 4.6 Security Agreement dated September 25, 2003 by and between the Company and (17) Laurus. 10.1 Lease Agreement, dated as of April 21, 2001, between the Company and (11) Jackson-Jahn, Inc. 10.2 Confidentiality Agreement dated March 27, 1992 between the Company and Steven * R. Verdooner.
-28- 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 Stock Option Plan. (1)+ 10.6 Rental Agreement dated May 1, 1994 by and between the Company and Robert J. (2) Rossetti. 10.7 The Company's 1995 Nonstatutory Stock Option Plan and sample form of (3)+ Nonstatutory Stock Option Agreement. 10.8 The Company's 1997 Nonstatutory Stock Option Plan and sample form of (5)+ Nonstatutory Stock Option Agreement. 10.9 Form of Indemnification Agreement between the Company and each of its (6) directors, officers and certain key employees. 10.10 Working Capital Funding Agreement dated as of July 13, 2000 by and between (8) MediVision and the Company. 10.11 Amendment No. 1 to Working Capital Funding Agreement dated as of July 1, 2001 (10) by and between MediVision and the Company. 10.12 Loan and Security Agreement dated as of July 13, 2000 by and between (8) MediVision and the Company. 10.13 Registration Rights Agreement dated as of August 2000 by and between (8) MediVision and the Company. 10.14 Secured Convertible Working Capital Note dated August 2000 from the Company (8) to MediVision in the principal amount of $260,000. 10.15 Secured Promissory Note dated July 21, 2000 from the Company to MediVision in (8) the principal amount of $1,500,000. 10.16 Secured Convertible Working Capital Promissory Note dated July 1, 2001 by and (10) between MediVision and the Company in the principal amount of $1,000,000. 10.17 Cooperation and Project Funding Agreement dated January 21, 2001, among (9) Israel- United States Binational Industrial Research and Development Foundation, MediVision and the Company. 10.18 2000 Stock Option Plan. (11)+ 10.19 Secured Debenture Agreement by and between United Mizrahi Bank LTD and the (12) Company dated December 9, 2002. 10.20 Amendment No. 2 to Working Capital Funding Agreement dated as of May 21, 2003 (18) by and between MediVision and the Company. 10.21 2003 Stock Option Plan. (19) 11.1 Computation of net earnings per share. (19)
-29- 14 Code of Ethics. (19) 23.1 Consent of Perry-Smith LLP, Independent Auditors. (19) 31.1 Rule 13a 14a/15d 14(a) Certification. (19) 31.2 Rule 13a 14a/15d 14(a) Certification. (19) 32 Certification of principal executive officer and principal financial officer (19) pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * 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 Registration Statement on Form S-8, filed on May 28, 1996, number 333-0461. (4) Incorporated by reference to Exhibit A of Exhibit 1 of the Company's Form 8-K, filed on January 2, 1998. (5) 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. (6) 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. (7) Incorporated by reference to Exhibit 3.1 of the Company's Form 8-K, filed on November 24, 1999. (8) 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. (9) 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. (10) 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. (11) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001, filed on March 26, 2002. (12) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002, filed on March 27, 2003.
-30- (13) Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K, filed on October 1, 2003. (14) Incorporated by reference to Exhibit 4.2 of the Company's Form 8-K, filed on October 1, 2003. (15) Incorporated by reference to Exhibit 4.3 of the Company's Form 8-K, filed on October 1, 2003. (16) Incorporated by reference to Exhibit 4.4 of the Company's Form 8-K, filed on October 1, 2003. (17) Incorporated by reference to Exhibit 4.5 of the Company's Form 8-K, filed on October 1, 2003. (18) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 2003, filed on August 14, 2003. (19) Filed herewith. + Management contract or compensatory plan or arrangement.
B. Reports on Form 8-K. On October 1, 2003 the Company filed a Form 8-K disclosing that the Company entered into a securities purchase agreement with Laurus Master Fund, Ltd. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES For the fiscal years ended December 31, 2003 and December 31, 2002, Perry-Smith LLP has billed the Company the following fees for services rendered in connection with the audit and other services in respect to these years: AUDIT FEES For the fiscal years ended December 31, 2003 and December 31, 2002, Perry-Smith LLP billed the Company $ 52,318 and $ 41,555, respectively, for services rendered for the audit of the Company's annual financial statements included in its report on Form 10-KSB and the reviews of the financial statements included in its reports on Form 10-QSB filed with the SEC. AUDIT RELATED FEES There were no audit related fees paid to Perry-Smith LLP during the fiscal years ended December 31, 2003 and December 31, 2002. TAX FEES For the fiscal years ended December 31, 2003 and December 31, 2002, Perry-Smith LLP billed the Company $ 13,615 and $ 16,250, respectively, in connection with the preparation of tax returns and the provision of tax advice. ALL OTHER FEES For the fiscal years ended December 31, 2003 and December 31, 2002, Perry-Smith LLP billed -31- the Company $ 320 and $ 0, respectively, for services related to exercising of options under the Company's Stock Option Plans. All of the fees described above were approved by the Company's Audit Committee. The Audit Committee does not currently have any pre-approval policies. -32- 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 By: /s/ Gil Allon ------------------------------------- Gil Allon Chief Executive Officer By: /s/ Ariel Shenhar ------------------------------------- Ariel Shenhar Chief Financial 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/ Gil Allon Director March 24, 2004 ----------------------------------- Gil Allon /s/ Ariel Shenhar Director March 24, 2004 Ariel Shenhar /s/ Jonathan Adereth Director March 24, 2004 ------------------------------------ Jonathan Adereth /s/ Noam Allon Director March 24, 2004 ------------------------------------ Noam Allon /s/ Alon Harris Director March 24, 2004 ------------------------------------ Alon Harris OPHTHALMIC IMAGING SYSTEMS FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003, FOR THE YEAR ENDED DECEMBER 31, 2002, 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, 2003 and 2002, and the related statements of income, stockholders' equity (deficit), and cash flows for the years then ended. 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, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. February 20, 2004 OPHTHALMIC IMAGING SYSTEMS BALANCE SHEET December 31, 2003 and 2002 2003 2002 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $1,272,034 $ 383,234 Accounts receivable, net of allowance for doubtful accounts of approximately $361,175 and $192,979 1,536,610 902,678 Inventories (Note 2) 416,420 463,971 Prepaid expenses and other current assets 214,653 51,474 Deferred tax asset (Note 9) 500,000 51,000 ---------- ---------- Total current assets 3,939,717 1,852,357 ---------- ---------- Restricted cash (Note 7) 150,000 Furniture and equipment, at cost, net (Note 3) 150,912 178,552 Other assets 82,821 12,890 ---------- ---------- Total assets $4,323,450 $2,043,799 ========== ========== (Continued) 2 OPHTHALMIC IMAGING SYSTEMS BALANCE SHEET (Continued) December 31, 2003 and 2002
2003 2002 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 523,539 $ 590,974 Accrued liabilities (Note 4) 1,387,563 1,471,077 Deferred extended warranty revenue (Note 4) 557,143 267,888 Customer deposits 201,797 343,652 Income taxes payable (Note 9) 102,650 70,000 Notes payable - short term portion (Note 5) 409,613 Notes payable to related party (Note 6) 200,979 1,913,290 Capitalized lease obligation 4,167 ------------ ------------ Total current liabilities 3,383,284 4,661,048 ------------ ------------ Line of credit (Note 7) 150,000 Notes payable, less current portion (Note 5) 763,637 ------------ ------------ Total noncurrent liabilities 913,637 ------------ ------------ Total liabilities 4,296,921 4,661,048 ------------ ------------ Commitments and contingencies (Note 10) Stockholders' equity (deficit): Common stock, no par value, 35,000,000 shares authorized; 14,403,929 and 8,138,305 shares issued and outstanding, respectively 13,836,188 12,630,604 Accumulated deficit (13,809,659) (15,247,853) ------------ ------------ Total stockholders' equity (deficit) 26,529 (2,617,249) ------------ ------------ Total liabilities and stockholders' equity (deficit) $ 4,323,450 $ 2,043,799 ============ ============
The accompanying notes are an integral part of these financial statements. 3 OPHTHALMIC IMAGING SYSTEMS STATEMENT OF INCOME For the Years Ended December 31, 2003 and 2002
2003 2002 ------------ ------------ Revenues: Net sales $ 9,944,827 $ 8,465,707 Cost of sales 3,955,680 3,535,316 ------------ ------------ Gross profit 5,989,147 4,930,391 ------------ ------------ Operating expenses: Sales and marketing 2,915,848 2,235,969 General and administrative 1,068,634 1,190,647 Research and development (Note 6) 702,020 558,999 ------------ ------------ Total operating expenses 4,686,502 3,985,615 ------------ ------------ Income from operations 1,302,645 944,776 Other income (expense): Interest expense (295,353) (361,932) Other income (expense) 20,722 (2,479) Interest income 5,180 3,458 ------------ ------------ Total other income (expense) (269,451) (360,953) ------------ ------------ Net income before income taxes 1,033,194 583,823 ------------ ------------ Income tax benefit (expense) (Note 9) 405,000 (19,000) ------------ ------------ Net income $ 1,438,194 $ 564,823 ============ ============ Basic earnings per share $ 0.13 $ 0.07 ============ ============ Diluted earnings per share $ 0.12 $ 0.07 ============ ============ Shares used in the calculation of basic earnings per share 11,267,493 8,138,305 ============ ============ Shares used in the calculation of diluted earnings per share 11,887,205 8,138,305 ============ ============
The accompanying notes are an integral part of these financial statements. 4 OPHTHALMIC IMAGING SYSTEMS STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) For the Years Ended December 31, 2003 and 2002
Total Common Stock Stockholders' ------------------------- Accumulated Equity Shares Amount Deficit (Deficit) ---------- ------------ ------------ ------------ Balance, January 1, 2002 8,138,305 $ 12,630,604 $(15,812,676) $ (3,182,072) Net income 564,823 564,823 ---------- ------------ ------------ ------------ Balance, December 31, 2002 8,138,305 $ 12,630,604 (15,247,853) (2,617,249) Issuance of common stock (Note 6) 6,216,216 1,150,000 1,150,000 Conversion of principal and interest to common stock 31,074 33,250 33,250 Exercise of non-qualified stock options 18,334 22,334 22,334 Net income 1,438,194 1,438,194 ---------- ------------ ------------ ------------ Balance, December 31, 2003 14,403,929 $ 13,836,188 $(13,809,659) $ 26,529 ========== ============ ============ ============
The accompanying notes are an integral part of these financial statements. 5 OPHTHALMIC IMAGING SYSTEMS STATEMENT OF CASH FLOWS For the Years Ended December 31, 2003 and 2002
2003 2002 ----------- ----------- Cash flows from operating activities: Net income $ 1,438,194 $ 564,823 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 53,000 78,457 Non-cash payment of interest 6,500 Net changes in operating assets and liabilities: Accounts receivable (633,932) 120,163 Inventories 47,551 (128,478) Prepaid expenses and other current assets (123,615) (6,441) Deferred tax asset (449,000) (51,000) Net increase in other assets (670) Accounts payable (67,435) (36,455) Accrued liabilities (83,514) (93,138) Deferred extended warranty revenue 289,255 82,107 Customer deposits (141,855) 125,808 Income taxes payable 32,650 70,000 ----------- ----------- Net cash provided by operating activities 367,129 725,846 ----------- ----------- Cash flows used in investing activities: Acquisition of furniture and equipment (25,360) (74,527) Increase in restricted cash (150,000) 2,196 ----------- ----------- Net cash used in investing activities (175,360) (72,331) ----------- ----------- Cash flows used in financing activities: Repayment of notes payable to related parties, net (562,311) (334,266) Principal payments on notes payable (4,167) (7,941) Increase in prepaid financing expenses (108,825) Proceeds from borrowings under line of credit, net 150,000 Proceeds from notes payable, other 1,200,000 Proceeds from sale of stock 22,334 ----------- ----------- Net cash provided by (used in) financing activities 697,031 (342,207) ----------- ----------- Net increase in cash and cash equivalents 888,800 311,308 Cash and cash equivalents, beginning of the year 383,234 71,926 ----------- ----------- Cash and cash equivalents, end of the year $ 1,272,034 $ 383,234 =========== ===========
(Continued) 6 OPHTHALMIC IMAGING SYSTEMS STATEMENT OF CASH FLOWS (Continued) For the Years Ended December 31, 2003 and 2002
2003 2002 ---------- ---------- Supplemental schedule of non cash financing activities: Conversion of related party notes payable to common stock $1,150,000 Repayment of notes payable with common stock $ 26,750 Payment of interest with common stock $ 6,500 Addition to aggregate debt payable to significant shareholders in exchange for inventory and other noncash transactions, net $ 6,689 Supplemental schedule of cash flow information: Cash paid for taxes $ 10,500 Cash paid for interest $ 9,545 $ 950
The accompanying notes are an integral part of these financial statements. 7 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Ophthalmic Imaging Systems (the "Company"), was incorporated in California in July 1986. The Company is primarily engaged in the business of designing, developing, manufacturing, and marketing digital imaging systems, image enhancements and analysis software, and related products and services for use by practitioners in the ocular healthcare field. Use of Estimates The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. Cash and Cash Equivalents 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 and cash equivalents as of December 31, 2003 includes $200,000 insured and $1,235,353 which is not federally insured. 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 comprised 10% or more of net sales, during the year ended December 31, 2003 or 2002. Revenues from sales to customers located outside of the United States accounted for approximately 9% and 11% of net sales during the years ended December 31, 2003 and 2002, 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. 8 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Furniture and Equipment Furniture and equipment are stated at cost and depreciated or amortized on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives generally range from three to seven years. Revenue Recognition and Warranties The Company generally recognizes revenue from the sale of its products when the goods are shipped to its customers. The Company generally 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 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 totaled approximately $50,864 and $56,900, for the years ended December 31, 2003 and 2002, respectively . Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets relate primarily to estimated warranty claims, and deferred tax liabilities relate primarily to property and equipment. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. General business credits are accounted for as a reduction of federal income taxes payable under the flow-through method. 9 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments: o The carrying amount approximates fair value because of the short maturity of those instruments. o The carrying amount approximates fair value because of the short maturity of the instrument. o The carrying amount of the long-term debt approximates fair value because the debt was recently issued at an interest rate consistent with prevailing interest rates with other lending institutions. Earnings Per Share Basic earnings per share (EPS), which excludes dilution, is computed by dividing income 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. For the year ended December 31, 2002, basic and diluted earnings per share are equal due to the fact that there were no stock options with a dilutive effect which would share in the earnings of the Company. 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 (the intrinsic value method). 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 additional disclosures regarding the Company's stock option plans. 10 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Stock Based Compensation (Continued) Pro forma disclosures of stock-based employee compensation expense disclosures are as follows:
Year ended December 31, -------------------------------------- 2003 2002 ------------------ ------------------ Net income as reported $ 1,438,194 $ 564,823 Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect (40,445) (31,689) ------------------ ------------------ Pro forma net income $ 1,397,749 $ 533,134 ------------------ ================== Basic earnings per share - as reported $ 0.13 $ 0.07 ================== ================== Basic earnings per share - pro forma $ 0.12 $ 0.07 ================== ================== Diluted earnings per share - as reported $ 0.12 $ 0.07 ================== ================== Diluted earnings per share - pro forma $ 0.12 $ 0.06 ================== ================== Reclassifications Certain accounts have been reclassified to conform to the current year's presentation. 2. INVENTORIES Inventories consist of the following as of December 31, 2003 and 2002: 2003 2002 ------------------ ------------------ Raw materials $ 230,880 $ 228,653 Work-in-process 59,145 54,624 Finished goods 126,395 180,694 ------------------ ------------------ $ 416,420 $ 463,971 ================== ==================
11 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 3. FURNITURE AND EQUIPMENT Furniture and equipment consist of the following as of December 31, 2003 and 2002: 2003 2002 ----------- ----------- Research and manufacturing equipment $ 679,506 $ 677,419 Office furniture and equipment 657,847 635,576 Demonstration equipment 197,104 196,101 ----------- ----------- 1,534,457 1,509,096 Less accumulated depreciation and amortization (1,383,545) (1,330,544) ----------- ----------- $ 150,912 $ 178,552 =========== =========== 4. ACCRUED LIABILITIES AND PRODUCT WARRANTY Accrued liabilities consist of the following as of December 31, 2003 and 2002: 2003 2002 ---------- ---------- Accrued compensation $ 555,817 $ 491,784 Accrued warranty expenses 438,450 370,680 Other accrued liabilities 393,296 608,613 ---------- ---------- $1,387,563 $1,471,077 ========== ========== Product Warranty and Deferred Warranty Revenue The Company generally offers a one year warranty to its customers. The Company's warranty requires it to repair or replace defective products during the warranty period. At the time product revenue is recognized, the Company records a liability for estimated costs that may be incurred under its warranties. The costs are estimated based on historical experience and any specific warranty issues that have been identified. (Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed historical amounts.) The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the balance as necessary. In addition to the Company's one-year warranty, the Company offers an extended warranty for an additional charge to the customer. The company records the sale of the extended warranty as deferred revenue and amortizes the revenue over the term of the agreement, generally one to two years. At December 31, 2003 and 2002, deferred extended warranty revenue was $557,143 and $267,888, respectively. 12 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 5. NOTES PAYABLE On September 25, 2003, the Company entered into a securities purchase agreement with Laurus Master Fund, Ltd. ("Laurus"). Pursuant to this agreement, the Company sold to Laurus, a secured convertible term note in the principal amount of $1,200,000 bearing interest at the rate of six and one-half percent (6.5%) per annum, due September 25, 2006, convertible into shares of its common stock at a conversion price of $1.07 per share, at the Company's option. Loan costs of $118,718 have been capitalized and are being amortized over the three-year life of the note. The effective annual interest rate on the note is 8.32%. Interest is payable at the Company's option in cash or shares of common stock. The Company granted to Laurus a subordinated second priority security interest in its assets to secure the obligations under the note pursuant to a security agreement dated September 25, 2003 between it and Laurus. Additionally, the Company issued a warrant to Laurus to purchase 375,000 shares of its common stock at exercise prices ranging between $1.23 and $1.61 per share (Note 8). On December 2, 2003, the Company opted to pay $26,750 of principal and $6,500 of interest in 31,074 shares of common stock at a conversion price of $1.07 per share. 6. NOTES PAYABLE TO RELATED PARTY During the period of August 2000 through July 1, 2001, the Company executed several promissory notes in favor of MediVision Medical Imaging LTD. ("MediVision"), an Israeli corporation and majority shareholder in the Company. The "Short-Term Note" had a maximum principal balance of $260,000 available, while the "Working Capital Funding Agreement and Amendment No.1" to this agreement provided an additional funding of $2,500,000. Both Notes and the Amendment bear interest at the rate of 9.3% per annum and are secured by all of the Company's assets. The principal amount outstanding, together with any and all accrued interest on the Working Capital Note and Amendment, was payable by August 31, 2003, except that MediVision may, at its option, at any time convert any amount of principal and interest then outstanding into shares of the Company's common stock at a conversion price of $.80 per share on the Working Capital Note and $0.185 per share on the Amendment No.1 to the Working Capital Note. In May 2003, the Company and MediVision entered in Amendment No. 2 to the Working Capital Funding Agreement and the Short Term Note whereby the repayment terms on the debt were extended on all principal and interest due until January 1, 2005. In June 2003, MediVision exercised its option, as stipulated in the Working Capital Funding Agreement, Amendment No. 1, to convert $1,150,000 of principal and interest at a conversion price of $0.185 per share into 6,216,216 common shares of stock. As a result of the foregoing transactions, MediVision currently owns approximately 85% of the Company's outstanding common stock. 13 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 6. NOTES PAYABLE TO RELATED PARTY (Continued) In August 2002, the Company's Board of Directors, at MediVision's request, authorized the Company to guarantee and/or provide security interests in its assets for certain of MediVision's loans with financial institutions, on the maximum aggregate amount of approximately $1,900,000. In August 2002, MediVision subordinated to the financial institutions its security position in the Company's assets, which had been granted in consideration of loans to the Company from MediVision. In December 2002, the Company's Board of Directors approved that the Company enter into and issue a debenture in favor of the bank to act as security for the debt of MediVision, such debenture shall be secured by a first lien on all of the Company's assets. Such debenture and lien were signed in December 2002. At December 31, 2003 and 2002, the Company had recorded approximately $200,979 and $1,913,290, respectively, in aggregate debt and accrued interest owed to MediVision. This amount includes the net effect of other intercompany revenue and expense transactions. During the year ended December 31, 2003, the Company paid $263,200 to MediVision for research and development performed on behalf of the Company. 7. LINE OF CREDIT In May 2003, the Company entered into a $150,000 line of credit agreement with its bank. The line is secured by a pledged investment with the bank equal to the amount of the line of credit. Advances on the line bear interest at prime (4% at December 31, 2003) with interest due monthly. The line matures on September 10, 2008. 8. STOCKHOLDERS' EQUITY (DEFICIT) Common Stock Of the shares of common stock authorized but unissued as of December 31, 2003, 1,758,333 shares are reserved for issuance under stock option plans. Stock Option Plans 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. 14 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 8. STOCKHOLDERS' EQUITY (DEFICIT) (Continued) Stock Option Plans (Continued) In 1992 and 1993, the Board of Directors and Shareholders, respectively, approved a Stock Option Plan (the "Option Plan") under which all officers, employees, directors and consultants may participate. The Plan expired December 2002. Options granted under the Option Plan may be either incentive stock options or non-qualified stock options and generally had 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 were 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 was 150,000. No shares remained available for granting of options as of December 31, 2003. As of December 31, 2003, stock options to purchase 92,319 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, 2003. In 1995, the 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 920,000 options remained available for granting as of December 31, 2003. As of December 31, 2003, stock options to purchase 115,000 shares at exercise prices ranging from $.48 to $.50 were granted and outstanding under the Nonstatutory Plan and none of the granted options were exercised during the year ended December 31, 2003. In 1997, the 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 expired October 2002. Options granted under the 1997 Nonstatutory Plan are non-qualified stock options and had a term of not longer than ten years from the date of grant. The exercise prices under the 1997 Nonstatutory Plan was 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 was 1,000,000. There were no options available for granting as of December 31, 2003. As of December 31, 2003, stock options to purchase 60,000 shares at exercise prices ranging from $.63 to $1.38 were granted and outstanding under the 1997 Nonstatutory Plan. During the year ended December 31, 2003, options to purchase 5,000 shares were exercised. 15 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 8. STOCKHOLDERS' EQUITY (DEFICIT) (Continued) Stock Option Plans (Continued) In 2000, the Board of Directors approved a Stock Option Plan (the "2000 Plan") under which all officers, employees, directors and consultants may participate. The 2000 Plan expires in September 2010. Options granted under the 2000 Plan are 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 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 88,333 remained available for granting of options as of December 31, 2003. As of December 31, 2003, stock options to purchase 1,398,333 shares at an exercise price of $0.41 were granted and outstanding under the 2000 Plan. During the year ended December 31, 2003, 13,334 options were exercised. In 2003, the Board of Directors and stockholders approved a Stock Option Plan (the "2003 Plan") under which all officers, employees, directors and consultants may participate. The 2003 Plan expires in October 2013. Options granted under the 2003 Plan are 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 non-qualified stock options granted under the 2003 Plan cannot be less than 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 2003 Plan is 750,000, all of which remained available for granting of options as of December 31, 2003. 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, January 1, 2002 1,967,648 $ 0.63 --------- Options granted 180,000 $ 0.37 Options canceled (336,696) $ 0.57 Options lapsed (95,000) $ 3.40 --------- Balance, December 31, 2002 1,715,952 $ 0.46 --------- Options granted 650,000 $ 0.41 Options canceled (576,666) $ 0.41 Options exercised (18,334) $ 0.47 --------- Balance December 31, 2003 1,770,952 $ 0.46 ========= The weighted average fair value of options granted during the years ended December 31, 2003 and 2002 were $.41 and $.40, respectively. 16 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 8. STOCKHOLDERS' EQUITY (DEFICIT) (Continued) Stock Option Plans (Continued) The following table summarizes information about the stock options outstanding at December 31, 2003:
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 1,744,452 4.7 years $ 0.46 1,491,123 $ 0.46 $ 1.38 - $ 3.00 25,000 3.6 years $ 1.37 25,000 1.37 $ 3.01 - $ 4.50 1,500 2.9 years $ 4.25 1,500 $ 4.25 ------------- ------------- 1,770,952 1,517,623 ============= =============
Pro forma information regarding net income and net income per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to August 31, 1995 under the fair value method of that Statement. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted- average assumptions for the years ended December 31, 2003 and 2002, respectively; dividend yield of zero; volatility factors of the expected market price of the Company's common stock ranged from 95% to 211% for the years ended December 31, 2003 and 2002, risk-free interest rate of 3.98% and 2.76%; and a weighted-average expected life of 10 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:
2003 2002 ------------------ ------------------ Pro forma net income $ 1,397,749 $ 533,134 ================== ================== Pro forma net income per share $ 0.12 $ 0.07 ================== ==================
17 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 8. STOCKHOLDERS' EQUITY (DEFICIT) (Continued) Warrants The Company issued a warrant in September 2003 pursuant to the issuance of a note payable (Note 5). The warrant permits the holder to purchase up to 375,000 shares of common stock at a price of $1.23 per share for the first 100,000 shares; $1.39 per share for the next 125,000 shares and $1.61 per share for the remaining 150,000 shares. The warrant is exercisable through September 25, 2010. 9. INCOME TAXES The income tax benefit (expense) for the years ended December 31, 2003 and 2002 consisted of the following:
Federal State Total ------------------ ------------------ ------------------ 2003 ---- Current $ 22,000 $ 22,000 $ 44,000 Deferred (109,000) (21,000) (130,000) Change in valuation allowance (219,000) (100,000) (319,000) ------------------ ------------------ ------------------ Total income tax (benefit) $ (306,000) $ (99,000) $ (405,000) ================== ================== ================== 2002 ---- Current $ 260,000 $ 70,000 $ 330,000 Deferred (150,000) (150,000) Change in valuation allowance (161,000) (161,000) ------------------ ------------------ ------------------ Total income tax (benefit) $ (51,000) $ 70,000 $ 19,000 ================== ================== ==================
The Company's effective tax rate for the years ended December 31, 2003 and 2002 was (39)% and 3%. The reconciliation of the statutory rate to the effective rate is as follows:
2003 2002 ------------- ------------- Statutory rate 34 % 34 % State income taxes, net of Federal benefit 9 8 Other (32) Utilization of net operating losses (19) (34) Change in valuation allowance (31) (5) ------------- -------------- Total (39)% 3 % ============= =============
18 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 9. INCOME TAXES (Continued) The significant components of the Company's deferred tax assets and liabilities are as follows:
December 31, -------------------------- 2003 2002 ----------- ----------- Deferred tax assets: Net operating loss carryforwards $ 3,087,000 $ 3,293,000 Inventory reserves 1,119,000 1,096,000 Payroll related accruals 171,000 83,000 Warranty accrual 188,000 159,000 Sales and accounts receivable reserves 186,000 260,000 Uniform capitalization 77,000 77,000 Deferred revenue 239,000 115,000 R&D credit carryover 175,000 Depreciation 21,000 ----------- ----------- Total deferred tax assets 5,242,000 5,104,000 Valuation allowance (4,734,000) (5,053,000) ----------- ----------- Net deferred tax assets 508,000 51,000 Deferred tax liabilities: Depreciation (8,000) ----------- ----------- Net deferred tax assets $ 500,000 $ 51,000 =========== ===========
At December 31, 2003 and 2002, management reviewed recent operating results and projected future operating results. At the end of each of these years, management determined that it was more likely than not that a portion of the deferred tax assets attributable to net operating losses would likely be realized. Due to the Company's limited history of profitable operations, management has recorded a valuation allowance of $4,734,000 and $5,053,000 at December 31, 2003 and 2002, respectively. The amount of the valuation allowance will be adjusted in the future when management determines that it is more likely than not the deferred assets will be realized. The Company has at December 31, 2003, a net operating loss carryover of approximately $5,410,500 for Federal income tax purposes which expires between 2007 and 2020, and a net operating loss carryforward of approximately $2,088,800 for California state income tax purposes which expires through 2010. The State of California has suspended the application of net operating losses for the 2002 and 2003 fiscal years and extended the carry forward period two years. Federal tax credit carryforwards of approximately $174,900 will begin to expire in 2007. 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 these limitations, a portion of these loss and credit carryovers will expire without being utilized. 19 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 10. COMMITMENTS AND CONTINGENCIES Security Interest In December 2002, the Company granted a security interest in substantially all assets of the Company to the United Mizrahi Bank Ltd. (bank), as security for amounts borrowed by MediVision from the bank and advanced to the Company under the note agreements (Note 6). Operating Leases The Company leases its corporate headquarters and manufacturing facility under a noncancellable operating lease that expires in May 2005. The lease agreement provides for minimum lease payments of approximately $102,768 and $42,820 for the years ended December 31, 2004 and 2005, 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 $104,000 and $87,000, respectively during the years ended December 31, 2003 and 2002. 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 approximately $570,000. 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. 20