10QSB 1 f10qsb-06302004.txt JUNE 30, 2004 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------ FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 Commission File Number: 1-11140 OPHTHALMIC IMAGING SYSTEMS (Exact name of registrant as specified in its charter) CALIFORNIA 94-3035367 (State of Incorporation) (IRS Employer Identification No.) 221 LATHROP WAY, SUITE I, SACRAMENTO, CA 95815 (Address of principal executive offices) (916) 646-2020 (Issuer's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes XX No ------------- ------------- As of August 5, 2004, 14,962,157 shares of common stock, no par value, were outstanding. Transitional Small Business Disclosure Format: Yes No XX ------------- ------------- OPHTHALMIC IMAGING SYSTEMS FORM 10-QSB FOR THE QUARTER ENDED June 30, 2004 PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements (unaudited) Condensed Balance Sheet as of June 30, 2004 2 Condensed Statements of Operations for the Three Months and Six Months ended June 30, 2004 and June 30, 2003 3 Condensed Statements of Cash Flows for the Six Months ended June 30, 2004 and June 30, 2003 4 Notes to Condensed Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Controls and Procedures 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities and Use of Proceeds 14 Item 3. Defaults upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 15 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 1 Ophthalmic Imaging Systems Condensed Balance Sheet June 30, 2004 (Unaudited)
ASSETS ------ Current assets: Cash and equivalents $ 1,848,280 Accounts receivable, net 1,493,144 Inventories, net 758,667 Prepaid expenses and other current assets 238,823 Deferred tax asset 500,000 --------------------- Total current assets 4,838,914 Furniture and equipment, net of accumulated depreciation and amortization of $1,139,101 170,228 Restricted cash 150,000 Receivable from related party 114,644 Other assets 197,797 --------------------- Total assets $ 5,471,583 ===================== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 535,737 Accrued liabilities 1,246,859 Deferred extended warranty revenue 564,647 Customer deposits 159,460 Income taxes payable 32,600 Notes payable- current portion 748,973 --------------------- Total current liabilities 3,288,276 --------------------- Noncurrent Liabilities: Line of credit 150,000 Notes payable, less current portion 1,135,873 --------------------- Total noncurrent liabilities 1,285,873 --------------------- Stockholders' equity: Common stock, no par value, 35,000,000 shares authorized; 14,772,157 issued and outstanding 14,222,593 Accumulated deficit (13,325,159) --------------------- Total stockholders' equity 897,434 --------------------- Total liabilities and stockholders' equity $ 5,471,583 ===================== The accompanying notes are an integral part of these unaudited condensed financial statements.
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Ophthalmic Imaging Systems Condensed Statements of Operations (Unaudited) Three months ended June 30, Six months ended June 30, 2004 2003 2004 2003 ------------------ -------------------- ------------------ ------------------ Net revenues $ 2,403,040 $ 2,400,724 $ 4,800,109 $ 4,786,437 Cost of sales 914,399 977,424 1,871,945 1,937,083 ------------------ -------------------- ------------------ ------------------ Gross profit 1,488,641 1,423,300 2,928,164 2,849,354 Operating expenses: Sales and marketing 696,325 697,699 1,356,007 1,330,555 General and administrative 258,340 164,757 505,805 541,331 Research and development 229,950 180,322 477,186 261,230 ------------------ -------------------- ------------------ ------------------ Total operating expenses 1,184,615 1,042,778 2,338,998 2,133,116 ------------------ -------------------- ------------------ ------------------ Income from operations 304,026 380,522 589,166 716,238 Interest and other expense, net (59,342) (75,424) (104,667) (118,470) ------------------ -------------------- ------------------ ------------------ Net income before income taxes 244,684 305,098 484,499 597,768 Income taxes (3,000) (3,000) ------------------ -------------------- ------------------ ------------------ Net income $ 244,684 $ 302,098 $ 484,499 $ 594,768 ================== ==================== ================== ================== Shares used in the calculation of basic net income per share 14,639,300 8,206,615 14,537,924 8,172,460 Basic net income per share $ 0.02 $ 0.04 $ 0.03 $ 0.07 ================== ==================== ================== ================== Shares used in the calculation of diluted net income per share 15,700,475 8,651,215 15,583,163 8,400,620 Diluted net income per share $ 0.02 $ 0.03 $ 0.03 $ 0.07 ================== ==================== ================== ================== The accompanying notes are an integral part of these unaudited condensed financial statements.
3 Ophthalmic Imaging Systems Condensed Statements of Cash Flows (Unaudited)
Six months ended June 30, 2004 2003 -------------------- ------------------- OPERATING ACTIVITIES: Net income $ 484,499 $ 594,768 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 50,918 24,914 Non-cash payment of interest 21,802 Loss of disposition of equipment 457 Net increase in current assets other than cash and equivalents (322,950) (350,270) Net increase in other assets (136,734) Net (decrease) increase in current liabilities other than short-term borrowings (233,388) 16,720 ----------------- ------------------- Net cash (used in) provided by operating activities (135,396) 286,132 INVESTING ACTIVITIES: Acquisition of furniture and equipment (8,565) (16,903) Proceeds from disposition of equipment 890 Increase in restricted cash (150,000) ----------------- ------------------- Net cash used in investing activities (7,675) (166,903) FINANCING ACTIVITIES: Principal payments on notes payable (14,528) (1,409) Proceeds from notes payable, other 1,000,000 Proceeds from borrowings under line of credit, net 150,000 Proceeds from sale of stock 49,468 Advances to related parties (114,644) Repayments of borrowings under notes payable to related party, net (200,979) (304,586) ----------------- ------------------- Net cash provided by (used in) financing activities 719,317 (155,995) ----------------- ------------------- Net increase (decrease) in cash and equivalents 576,246 (36,766) Cash and equivalents at beginning of period $ 1,272,034 $ 383,234 ----------------- ------------------- Cash and equivalents at beginning of period $ 1,848,280 $ 346,468 ================= =================== SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Repayment of notes payable with common stock 315,135 Payment of interest with common stock 21,802 Addition to capital lease obligation for equipment purchases 41,258 Addition to (reduction in) aggregate debt payable to significant shareholders in exchange for inventory and other noncash transactions, net $ 92,366 $ (104,586) ================= =================== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Conversion of related party notes payable to common stock $ 1,150,000 Cash paid for taxes $ 70,050 $ 45,000 The accompanying notes are an integral part of these unaudited condensed financial statements.
4 Ophthalmic Imaging Systems Notes to Condensed Financial Statements Three and Six Month Periods ended June 30, 2004 and 2003 (Unaudited) Note 1. Basis of Presentation The accompanying unaudited condensed balance sheet as of June 30, 2004, condensed statements of operations for the three and six month periods ended June 30, 2004 and 2003 and the condensed statements of cash flows for the six month periods ended June 30, 2004 and 2003 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. These condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in Ophthalmic Imaging Systems' (the "Company's") Annual Report for the year ended December 31, 2003 on Form 10-KSB. In the opinion of management, the accompanying condensed financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial position and results of operations for the periods presented. The results of operations for the period ended June 30, 2004 are not necessarily indicative of the operating results for the full year. Note 2. Net Income 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. 5
Unaudited Unaudited Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 --------------------------------------------------------------- Numerator for basic and diluted net income per share $ 244,684 $ 302,098 $ 484,499 $ 594,768 =============================================================== Denominator for basic net income per share: Weighted average shares 14,639,300 8,206,615 14,537,924 8,172,460 Effect of dilutive securities: Employee/director stock 1,061,175 444,600 1,045,239 228,160 options Warrants and other -- -- -- -- --------------------------------------------------------------- Dilutive potential common shares 1,061,175 444,600 1,045,239 228,160 --------------------------------------------------------------- Denominator for diluted net income per share 15,700,475 8,651,215 15,583,163 8,400,620 =============================================================== Basic net income per share $ 0.02 $ 0.04 $ 0.03 $ 0.07 =============================================================== Diluted net income per share $ 0.02 $ 0.03 $ 0.03 $ 0.07 ===============================================================
Options and warrants whose exercise price exceeds the average market price of the stock have been excluded from this computation. Note 3. Related Parties 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 Note" had a maximum principal balance of $260,000 available, while the "Working Capital Funding Agreement and Amendment No.1" to this agreement provide 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 such that all principal and interest shall become due on 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. 6 Pursuant to a Common Stock Purchase Agreement dated as of June 1, 2004 between MediVision and S2 Partners LP, MediVision agreed to sell 550,000 of the Company's common stock to S2 Partners LP at a price of $1.35 per share. On June 23, 2004, MediVison, through Nollenberger Capital Partners Inc. acting as its agent, sold an additional 500,000 shares of the Company's common stock at a price of $1.38 per share. As a result of the foregoing transactions, MediVision currently owns approximately 75% of the Company's outstanding common stock. At June 30, 2004 the Company had recorded a net amount due from MediVision of approximately $115,000. This amount comprises approximately $462,000 due from MediVision for products and services offset by approximately $347,000 owed to MediVision for interest on the loans. 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 is secured by a first lien on all of the Company's assets. The debenture and lien were signed in December 2002. The amount owed to the financial institutions by MediVision as of June 30, 2004 was approximately $984,000. Note 4. Stock Based Compensation At June 30, 2004, the Company had five stock-based compensation plans (the "Plans"). The Company accounts for the Plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based compensation cost is reflected in net income, as all options granted under the Plans had an exercise price equal to or above the market value of the underlying common stock on the date of grant. For purposes of pro forma disclosures, the estimated fair value of stock-based compensation plans and other options are amortized to expense primarily over the vesting period. The following tables illustrate the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based compensation. 7
Unaudited Unaudited Three Months Ended Six Months Ended June 30, June 30, ---------------------------------------------------------- 2004 2003 2004 2003 ---------------------------------------------------------- Net Income, As Reported $ 244,684 $ 302,098 $ 484,499 $ 594,768 Deduct Total Stock-Based Employee Compensation Expenses Determined Under the Fair Value Based Method For all Awards, Net of Related Tax Effects (1,078) (15,234) (2,165) (28,662) ---------------------------------------------------------- Pro Forma Net Income $ 243,606 $ 286,864 $ 482,334 $ 566,106 ========================================================== Basic Earnings Per Share As Reported $ 0.02 $ 0.04 $ 0.03 $ 0.07 Pro Forma $ 0.02 $ 0.04 $ 0.03 $ 0.07 Diluted Earnings Per Share: As Reported $ 0.02 $ 0.03 $ 0.03 $ 0.07 Pro Forma $ 0.02 $ 0.03 $ 0.03 $ 0.07
As required, the pro forma disclosures above include options granted since January 1, 1995. Consequently, the effects of applying FASB Statement No. 123 for providing pro forma disclosures may not be representative of the effects on reported net income for future years until all options outstanding are included in the pro forma disclosures. The fair value of each option granted during the periods indicated was estimated on the date of grant using an option-pricing model. No options were granted for the three-month period ended June 30, 2004. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements within the meaning of the federal securities laws. The Company intends such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended, and in Section 21E of the Exchange Act of 1934, as amended. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on its operations and future prospects include, but are not limited to, changes in: economic conditions generally and the medical instruments market specifically, legislative or regulatory changes affecting 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 8 Securities and Exchange Commission should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. Indeed, it is likely that some of the Company's assumptions will prove to be incorrect. The Company's actual results and financial position will vary from those projected or implied in the forward-looking statements, and the variances may be material. Overview -------- To date, the Company has designed, developed, manufactured and marketed ophthalmic digital imaging systems and has derived substantially all of its revenues from the sale of such products. The primary target market for the Company's digital angiography systems and related products has traditionally been retinal specialists. In April 2004, the Company entered into a $1,000,000 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 $1.22. The Company also issued five-year detachable warrants to Laurus to purchase 313,000 shares of the Company's Common Stock at exercise prices ranging between $1.40 and $1.83 per share. At June 30, 2004, the Company had stockholders' equity of approximately $897,000 and its current assets exceeded its current liabilities by approximately $1,551,000. The convertible loan agreements with Laurus that were entered into during the third quarter of 2003 and the second quarter of 2004 have 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. The following discussion should be read in conjunction with the unaudited interim financial statements and the notes thereto which are set forth elsewhere in this Report on Form 10-QSB. In the opinion of management, the unaudited interim period financial statements include all adjustments, all of which are of a normal recurring nature, that are necessary for a fair presentation of the results of the periods. Critical Accounting Policies ---------------------------- 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. Management is also required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the 9 Company's transactions would be the same, the timing of events that would impact transactions could change. Results of Operations --------------------- Revenues The Company's revenues for the second quarter ended June 30, 2004 were $2,403,040, representing no change from revenues of $2,400,724 for the second quarter ended June 30, 2003. Revenues for the first six months of fiscal 2004 were $4,800,109 representing no change from revenues of $4,786,437 for the comparable six months of fiscal 2003. Digital angiography systems and peripherals accounted for approximately 89% of the Company's revenue for the second quarter and six-month period of 2004. Sales of these products accounted for approximately 93% of the Company's total revenues for the second quarter and six-month period of 2003. Service revenues accounted for approximately 11% of the Company's revenue for the second quarter and six-month period of 2004 and approximately 7% of the Company's revenue for the second quarter and six-month period of 2003. Revenues from sales of the Company's products to MediVision were approximately $97,000 and $280,000 during the three-month and six-month periods ended June 30, 2004 and $237,000 and $290,000 for the comparable three-month and six-month periods ending June 30, 2003, respectively. Gross Margins Gross margins were approximately 62% during the second quarter ended June 30, 2004 versus approximately 59% for the comparable quarter of 2003. For the six-month period ended June 30, 2004, gross margins were approximately 61% as compared to 60% for the comparable six-month period of 2003. The Company continues to monitor its expenses in this area in contemplation of current and anticipated business conditions. It is anticipated that the Company's gross margins will decrease as its sales of the NextGen Healthcare Information Systems, Inc. software products become more significant, since the gross margins associated with such sales are less than the majority of the products that the Company currently markets. Sales and Marketing Expenses Sales and marketing expenses accounted for approximately 29% of total revenues during the second quarter of fiscal 2004 as compared with approximately 28% during the second quarter of fiscal 2003. Actual expense levels showed a minor decrease to $696,325 during the second quarter of 2004 versus $697,699 during the second quarter of 2003. For the first six months of fiscal 2004 and fiscal 2003 such expenses accounted for approximately 28% of total revenues for the respective six-month periods. Actual expenses increased to $1,356,007 from $1,330,555 during the six-month periods of fiscal 2004 and 2003, respectively. 10 General and Administrative Expenses General and administrative expenses were $258,340 in the second quarter of fiscal 2004 and $164,757 in the second quarter of fiscal 2003. Such expenses accounted for approximately 11% and 7% of revenues during the second quarter of 2004 and 2003, respectively. For the first six months of fiscal 2004 and 2003 such expenses accounted for approximately 11% of total revenues for the respective six-month periods. Actual expenses decreased to $505,805 from $541,331 during the six-month periods of fiscal 2004 and 2003, respectively. Research and Development Expenses Research and development expenses were $229,950 in the second quarter of fiscal 2004 and $180,322 in the second quarter of fiscal 2003. Such expenses accounted for approximately 10% and 8% of revenues during the second quarter of 2004 and 2003, respectively. For the first six months of fiscal 2004, such expenses accounted for approximately 10% of total revenues as compared to approximately 6% during the comparable six-month period of 2003. 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 and other outsourced consulting on the Company's behalf. Research and development expenses incurred by MediVision on behalf of the Company for the second quarter and the first six months of 2004 amounted to approximately $181,000 and $330,000, respectively. Such expenses for the second quarter and first six months of 2003 were approximately $66,000. Interest and Other Expense, net Interest and other expense was $59,342 during the second quarter of fiscal 2004 versus $75,424 during the same quarter of 2003. For the six-month periods, interest and other expense was $104,667 and $118,470 in fiscal 2004 and fiscal 2003, respectively. These amounts were comprised principally of interest expense, mainly associated with the convertible loans from Laurus and with financing arrangements provided to certain of the Company's customers in connection with sales of its products. Net Income The Company recorded net income of $244,684, or $0.02 per share basic and diluted earnings for the second quarter ended June 30, 2004 as compared to net income of $302,098 or $0.04 per share basic earnings and $0.03 per share diluted earnings for the second quarter ended June 30, 2003. For the six-month periods, the Company recorded net income of $484,499 or $0.03 per share basic and diluted earnings as compared to $594.768, or $0.07 per share basic and diluted earnings during fiscal 2004 and fiscal 2003, respectively. The decrease in earnings per share is mainly attributable to a substantial increase in the weighted number of shares of common stock outstanding between the comparable quarters and six-month periods. 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 $569,000. 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 11 periods would not materially affect the Company's results of operations or cash flows in any given reporting period. Liquidity and Capital Resources ------------------------------- The Company's operating activities used cash of $135,396 during the six months ended June 30, 2004 as compared to generating cash of $286,132 in the six months ended June 30, 2003. The cash used by operations during the first six months of 2004 was principally from increased inventory and a reduction of current liabilities offset partially by net income for the period. The cash generated from operations during the first six months of 2003 was principally from net income for the period which amounts were partially offset by increased receivables. Cash used in investing activities was $7,675 during the first six months of 2004 as compared to $166,903 during the same period for 2003. The Company's investing activities in 2004 consisted of minor purchases of equipment. The primary investing activities in 2003 consisted of an investment to secure the line of credit with its bank. 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 the Company, if any. The Company generated cash in financing activities of $719,317 during the first six months of fiscal 2004 as compared to using cash of $155,995 during the comparable six-month period of fiscal 2003. The cash generated in financing activities during the first six months of 2004 was principally from proceeds received from the signing of the $1,000,000 convertible debt instrument with Laurus and the addition of a capital lease offset by repayments of borrowings and advances under existing arrangements with MediVision. The cash used during the same six-month period in 2003 was principally from repayments of borrowings to MediVision offset by borrowings under the Company's line of credit. 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. At June 30, 2004 the Company had recorded a net amount due from MediVision of approximately $115,000. This amount comprises approximately $462,000 due from MediVision for products and services offset by approximately $347,000 owed to MediVision for interest on the loans. On June 30, 2004 the Company's cash and cash equivalents were $1,848,280. Management anticipates that additional sources of capital beyond those currently available to the Company 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 growth requirements, including other asset or debt financing, issuing equity securities and entering into other financing arrangements and is hopeful that it will be successful in this regard. There can be no assurance, however, that any of the contemplated financing arrangements described herein will be available and, if available, can be obtained on terms favorable to the Company. 12 ITEM 3. CONTROLS AND PROCEDURES 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. 13 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On March 9, 2004, the Company filed a civil action in the United States District Court for the Eastern District of California against several of its former employees, led by former vice-president Mark Fukuhara, who have been doing business for the last two years as Imaging Service Group (ISG) and Zeta Development Laboratories in El Dorado Hills, California, and several affiliated persons and companies, including Dale Brodsky, Eyepictures, Inc., Johnny Justice Jr., and two of his ophthalmic equipment businesses, Zeta Development Labs, Inc. (doing business as Justice Diagnostic Imaging) and Justice Ophthalmic, Inc. The complaint alleges claims for misappropriation of trade secrets, violations of the federal computer fraud and abuse act, copyright infringement, breach of contract, interference with contract, and false advertising. The complaint seeks monetary damages and injunctive relief against the defendants. ITEM 2. CHANGES IN SECURITIES On April 27, 2004, the Company entered into a private placement transaction with Laurus Master Fund, Ltd. which was exempt from registration under Section 4 (2) of the Securities Act of 1933 and Regulation D and Rule 506 promulgated there under. Pursuant to the securities purchase agreement, the Company sold to Laurus a secured convertible term note in the principal amount of $1,000,000 bearing interest at the rate of six and one-half percent (6.5%) per annum, due April 27, 2007, convertible into shares of the Company's common stock at a conversion price of $1.22 per share. Interest is payable at the Company's option in cash or shares of common stock. Additionally, the Company issued a warrant to Laurus to purchase 313,000 shares of its common stock at exercise prices ranging between $1.40 and $1.83 per share. Laurus may exercise the warrant through April 27, 2009. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) 4.1 - Securities Purchase Agreement dated April 27, 2004 by and between the Company and Laurus. * 4.2 - Secured Convertible Term Note dated April 27, 2004 April 27, 2004 issued to Laurus. * 4.3 - Common Stock Purchase Warrant Agreement dated April 27, 2004 issued to Laurus. * 4.4 - Registration Rights Agreement dated April 27, 2004 by and between the Company and Laurus. * 4.5 - Security Agreement dated April 27, 2004 by and between the Company and Laurus. * 31.1 - Certification Required Under Section 302 of Sarbanes- Oxley Act of 2002 31.2 - Certification Required Under Section 302 of Sarbanes- Oxley Act of 2002 32 - Certification Required Under Section 906 of Sarbanes- Oxley Act of 2002 -------------------------------------------------------------- *Incorporated herein by reference to the Company's Form 8-K filed on April 29, 2004. (b) None. 15 SIGNATURES Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OPHTHALMIC IMAGING SYSTEMS (Company) By: /s/ Gil Allon ----------------------------------------- Gil Allon, Chief Executive Officer /s/ Ariel Shenhar ----------------------------------------- Ariel Shenhar, Chief Financial Officer Dated: August 5, 2004 16