-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T3m2ND0g46iFBavYgu9uZiX3FUV3rFDnpYXTJsqYV6DgCEVNkFy9E5SjROT+c/6c Nx+ILSehQzf1XMsqEuzS0Q== 0000910680-04-001148.txt : 20041105 0000910680-04-001148.hdr.sgml : 20041105 20041105105038 ACCESSION NUMBER: 0000910680-04-001148 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041105 DATE AS OF CHANGE: 20041105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPHTHALMIC IMAGING SYSTEMS CENTRAL INDEX KEY: 0000885317 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 943035367 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11140 FILM NUMBER: 041121446 BUSINESS ADDRESS: STREET 1: 221 LATHROP WAY STREET 2: SUITE 1 CITY: SACRAMENTO STATE: CA ZIP: 95815 BUSINESS PHONE: 9166462020 MAIL ADDRESS: STREET 1: 221 LATHROP WAY STREET 2: SUITE 1 CITY: SACRAMENTO STATE: CA ZIP: 95815 FORMER COMPANY: FORMER CONFORMED NAME: OPHTHALMIC IMAGING SYSTEMS INC DATE OF NAME CHANGE: 19930328 10QSB 1 f10qsb-09302004.txt SEPTEMBER 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 September 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 November 05, 2004, 15,033,585 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 September 30, 2004 PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements (unaudited) Condensed Balance Sheet as of September 30, 2004 2 Condensed Statements of Operations for the Three Months and Nine Months ended September 30, 2004 and September 30, 2003 3 Condensed Statements of Cash Flows for the Nine Months ended September 30, 2004 and September 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 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Ophthalmic Imaging Systems Condensed Balance Sheet September 30, 2004 (Unaudited)
ASSETS - ------ Current assets: Cash and equivalents $ 1,904,023 Accounts receivable, net 1,738,457 Inventories, net 583,817 Prepaid expenses and other current assets 266,664 Deferred tax asset 500,000 --------------------- Total current assets 4,992,961 Furniture and equipment, net of accumulated depreciation and amortization of $768,625 160,494 Restricted cash 150,000 Receivable from related party 397,729 Other assets 195,639 --------------------- Total assets $ 5,896,823 ===================== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 517,838 Accrued liabilities 1,242,014 Deferred extended warranty revenue 758,205 Customer deposits 225,328 Income taxes payable 32,600 Notes payable- current portion 746,753 --------------------- Total current liabilities 3,522,738 --------------------- Noncurrent Liabilities: Notes payable, less current portion 870,211 --------------------- Total noncurrent liabilities 870,211 --------------------- Stockholders' equity: Common stock, no par value, 35,000,000 shares authorized; 15,033,585 issued and outstanding 14,502,320 Accumulated deficit (12,998,446) --------------------- Total stockholders' equity 1,503,874 --------------------- Total liabilities and stockholders' equity $ 5,896,823 =====================
The accompanying notes are an integral part of these unaudited condensed financial statements. 2 Ophthalmic Imaging Systems Condensed Statements of Operations (Unaudited)
Three months ended September 30, Nine months ended September 30, 2004 2003 2004 2003 ------------------ -------------------- ------------------ -------------------- Net revenues $ 2,614,798 $ 2,446,084 $ 7,414,907 $ 7,232,522 Cost of sales 1,053,576 986,422 2,925,522 2,923,506 ------------------ -------------------- ------------------ -------------------- Gross profit 1,561,222 1,459,662 4,489,385 4,309,016 Operating expenses: Sales and marketing 641,828 661,872 1,992,427 General and administrative 290,912 219,126 796,716 760,457 Research and development 242,847 215,003 720,033 476,234 ------------------ -------------------- ------------------ -------------------- Total operating expenses 1,175,587 1,096,001 3,514,583 3,229,118 ------------------ -------------------- ------------------ -------------------- Income from operations 385,635 363,661 974,802 1,079,898 Interest and other expense, net (58,922) (46,077) (163,590) (164,546) ------------------ -------------------- ------------------ -------------------- Net income before income taxes 326,713 317,584 811,212 915,352 Income taxes (7,500) (10,500) ------------------ -------------------- ------------------ -------------------- Net income $ 326,713 $ 310,084 $ 811,212 $ 904,852 ================== ==================== ================== ==================== Shares used in the calculation of basic net income per share 14,975,014 14,354,521 14,683,620 10,233,147 Basic net income per share $ 0.02 $ 0.02 $ 0.06 $ 0.09 ================== ==================== ================== ==================== Shares used in the calculation of diluted net income per share 15,981,937 15,251,916 15,716,087 10,684,385 Diluted net income per share $ 0.02 $ 0.02 $ 0.06 $ 0.09 ================== ==================== ================== ====================
The accompanying notes are an integral part of these unaudited condensed financial statements. 3 Ophthalmic Imaging Systems Condensed Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2004 2003 -------------------- ------------------- OPERATING ACTIVITIES: Net income $ 811,212 $ 904,852 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 83,732 38,645 Non-cash payment of interest 35,869 Loss of disposition of equipment 1,499 Net increase in current assets other than cash and equivalents (421,255) (358,905) Net increase in other assets (150,385) (44,908) Net increase in current liabilities other than short-term borrowings 3,293 20,450 ------------------- -------------------- Net cash provided by operating activities 363,965 560,134 INVESTING ACTIVITIES: Acquisition of furniture and equipment (16,875) (10,903) Proceeds from disposition of equipment 890 Increase in restricted cash (150,000) ------------------- -------------------- Net cash used in investing activities (15,985) (160,903) FINANCING ACTIVITIES: Principal payments on notes payable (16,751) (4,167) Proceeds from notes payable, other 1,000,000 1,200,000 Repayment of line of credit, net (150,000) Proceeds from sale of stock 49,468 Advances to related parties (397,729) Repayments of borrowings under notes payable to related party, net (200,979) (333,300) ------------------- -------------------- Net cash provided by financing activities 284,009 862,533 ------------------- -------------------- Net increase in cash and equivalents 631,989 1,261,764 Cash and equivalents at beginning of period 1,272,034 383,234 ------------------- -------------------- Cash and equivalents at beginning of period $ 1,904,023 $ 1,644,998 =================== ==================== SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Repayment of notes payable with common stock $ 580,796 Payment of interest with common stock $ 35,869 Addition to capital lease obligation for equipment purchases $ 41,261 Reductions in aggregate debt payable to significant shareholders in exchange for inventory and other noncash transactions, net $ (28,215) $ (133,300) =================== ==================== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Conversion of related party notes payable to common stock $ 1,150,000 Cash paid for taxes $ 70,050 $ 52,500
The accompanying notes are an integral part of these unaudited condensed financial statements. 4 Ophthalmic Imaging Systems Notes to Condensed Financial Statements Three and Nine Month Periods ended September 30, 2004 and 2003 (Unaudited) Note 1. Basis of Presentation The accompanying unaudited condensed balance sheet as of September 30, 2004, condensed statements of operations for the three and nine month periods ended September 30, 2004 and 2003 and the condensed statements of cash flows for the nine month periods ended September 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 September 30, 2004 are not necessarily indicative of the operating results for the full year. Certain amounts in the fiscal 2003 financial statements have been reclassified to conform to the presentation in the fiscal 2004 financial statements. 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 Nine Months Ended September 30, September 30, 2004 2003 2004 2003 --------------- --------------- -------------- ---------------- Numerator for basic and diluted net income per share $ 326,713 $ 310,084 $ 811,212 $ 904,852 =============== =============== ============== ================ Denominator for basic net income per share: Weighted average shares 14,975,014 14,354,521 14,683,620 10,233,147 Effect of dilutive securities: Employee/director stock options 1,006,923 897,395 1,032,467 451,238 Warrants and other -- -- -- -- --------------- --------------- -------------- ---------------- Dilutive potential common shares 1,006,923 897,395 1,032,467 451,238 --------------- --------------- -------------- ---------------- Denominator for diluted net income per share 15,981,937 15,251,916 15,716,087 10,684,385 =============== =============== ============== ================ Basic net income per share $ 0.02 $ 0.02 $ 0.06 $ 0.09 =============== =============== =============== =============== Diluted net income per share $ 0.02 $ 0.02 $ 0.05 $ 0.08 =============== =============== =============== ===============
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, MediVision, 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 74% of the Company's outstanding common stock. At September 30, 2004 the Company had recorded a net amount due from MediVision of approximately $398,000. This amount comprises approximately $745,000 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 September 30, 2004 was approximately $784,000. Note 4. Stock Based Compensation At September 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 Nine Months Ended September 30, September 30, ----------------------------- --------------------------- 2004 2003 2004 2003 -------------- -------------- ------------- -------------- Net Income, As Reported $ 326,713 $ 310,084 $ 811,212 $ 904,852 Deduct Total Stock-Based Employee Compensation Expenses Determined Under the Fair Value Based Method For all Awards, Net of Related Tax Effects (1,078) (15,633) (3,244) (46,898) -------------- -------------- ------------- -------------- Pro Forma Net Income $ 325,635 $ 294,451 $ 807,968 $ 857,954 ============== ============== ============= ============== Basic Earnings Per Share As Reported $ 0.02 $ 0.02 $ 0.06 $ 0.09 Pro Forma $ 0.02 $ 0.02 $ 0.06 $ 0.09 Diluted Earnings Per Share: As Reported $ 0.02 $ 0.02 $ 0.05 $ 0.08 Pro Forma $ 0.02 $ 0.02 $ 0.05 $ 0.08
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 September 30, 2004. For the nine-month period ended September 30, 2004 there were 25,000 options granted. Note 5. Warranty Obligations 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. The amount of warranty liability accrued reflects the Company's best estimate of the expected future cost of honoring its obligations under the warranty plans. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the balance as necessary. The following provides a reconciliation of changes in the Company's warranty reserve. 8
Unaudited Unaudited Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- --------------------------- 2004 2003 2004 2003 Warranty balance at beginning of period $ 346,244 $ 409,688 $ 438,450 $ 370,680 Net provision for current period 33,516 73,900 3,060 197,138 Warranty costs incurred (44,375) (59,588) (106,125) (138,198) -------------- -------------- ------------- ------------- Warranty balance at end of period $ 335,385 $ 423,900 $ 335,385 $ 423.900 ============== ============== ============= =============
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 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. 9 At September 30, 2004, the Company had stockholders' equity of approximately $1,504,000 and its current assets exceeded its current liabilities by approximately $1,470,000. 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. At September 30, 2004, under the terms of the 2003 convertible loan agreement, Laurus has converted $649,913 of principal and interest into 607,396 shares of the Company's common stock at a conversion price of $1.07 per share. 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 records revenue in accordance with SAB 101 and 104, Revenue Recognition in Financial Statements. As such, revenue is recorded when there is evidence of an arrangement, delivery has occurred, the price is fixed and determinable and collectability is reasonably assured. 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 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 third quarter ended September 30, 2004 were $2,614,798, representing a 7% increase from revenues of $2,446,084 for the third quarter ended September 30, 2003. Revenues for the first nine months of fiscal 2004 were $7,414,907 representing a 3% change from revenues of $7,232,522 for the comparable nine months of fiscal 2003. Digital angiography systems and peripherals accounted for approximately 88% of the Company's revenue for the third quarter and nine-month period of 2004. Sales of these products accounted for approximately 92% and 93% of the Company's total revenues for the third quarter and nine-month period of 2003, respectively. Service revenues accounted for approximately 12% of the Company's revenue for the third quarter and nine-month period of 2004 and approximately 8% and 7% of the Company's revenue for the third quarter and nine-month period of 2003, respectively. Revenues from sales of the Company's products to MediVision were 10 approximately $266,000 and $545,000 during the three-month and nine-month periods ended September 30, 2004 and $102,000 and $392,000 for the comparable three-month and nine-month periods ending September 30, 2003, respectively. Gross Margins Gross margins were approximately 60% during the third quarter ended September 30, 2004 and for the comparable quarter of 2003. For the nine-month period ended September 30, 2004, gross margins were approximately 61% as compared to 60% for the comparable nine-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 25% of total revenues during the third quarter of fiscal 2004 as compared with approximately 27% during the third quarter of fiscal 2003. Actual expense levels showed a minor decrease to $641,828 during the third quarter of 2004 versus $661,872 during the third quarter of 2003. For the first nine months of fiscal 2004 and fiscal 2003 such expenses accounted for approximately 27% and 28% of total revenues for the respective nine-month periods. Actual expenses remained relatively constant increasing to $1,997,834 from $1,992,427 during the nine-month periods of fiscal 2004 and 2003, respectively. General and Administrative Expenses General and administrative expenses were $290,912 in the third quarter of fiscal 2004 and $219,126 in the third quarter of fiscal 2003. Such expenses accounted for approximately 11% and 9% of revenues during the third quarter of 2004 and 2003, respectively. For the first nine months of fiscal 2004 and 2003 such expenses accounted for approximately 11% of total revenues for the respective nine-month periods. Actual expenses increased to $796,716 from $760,457 during the nine-month periods of fiscal 2004 and 2003, respectively. Research and Development Expenses Research and development expenses were $242,847 in the third quarter of fiscal 2004 and $215,003 in the third quarter of fiscal 2003. Such expenses accounted for approximately 9% of revenues during the third quarter of 2004 and 2003, respectively. For the first nine months of fiscal 2004, such expenses accounted for approximately 10% of total revenues as compared to approximately 7% during the comparable nine-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 third quarter and the first nine months of 2004 amounted to approximately $142,000 and $471,000, respectively. Such expenses for the third quarter and first nine months of 2003 were approximately $99,000 and 165,000 , respectively. 11 Interest and Other Expense, net Interest and other expense was $58,922 during the third quarter of fiscal 2004 versus $46,077 during the third quarter of fiscal 2003. For the nine-month periods, interest and other expense was $163,590 and $164,546 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. Income Taxes The Company has not provided for any income tax expense for the three-month and nine-month periods ending September 30, 2004. At December 31, 2003, the Company had a net operating loss carryforward 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. 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. The Company believes however, that based on these carryforwards and on its results of operations through September 30, 2004, no income tax provision is required at this time. Net Income The Company recorded net income of $326,713, or $0.02 per share basic and diluted earnings for the third quarter ended September 30, 2004 as compared to net income of $310,084 or $0.02 per share basic and diluted earnings for the third quarter ended September 30, 2003. For the nine-month periods, the Company recorded net income of $811,212 or $0.06 per share basic and $.05 per share diluted earnings as compared to $904,852, or $0.09 per share basic and $0.08 per share 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 nine-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 $526,000. 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. Liquidity and Capital Resources - ------------------------------- The Company's operating activities generated cash of $363,965 during the nine months ended September 30, 2004 as compared to generating cash of $560,134 during the nine months ended September 30, 2003. The cash generated by operations during the first nine months of 2004 was principally from income for the period which amounts were partially offset by increased inventory and receivables. The cash generated from operations during the first nine 12 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 $15,985 during the first nine months of 2004 as compared to $160,903 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 $284,009 during the first nine months of fiscal 2004 as compared to generating cash of $862,533 during the comparable nine-month period of fiscal 2003. The cash generated in financing activities during the first nine 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 generated during the same nine-month period in 2003 was principally from the signing of the $1,200,000 convertible debt instrument with Laurus offset by repayments of borrowings to MediVision. 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 September 30, 2004 the Company had recorded a net amount due from MediVision of approximately $398,000. This amount comprises approximately $745,000 due from MediVision for products and services offset by approximately $347,000 owed to MediVision for interest on the loans. On September 30, 2004 the Company's cash and cash equivalents were $1,904,023. 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 asset or debt financing, issuing equity securities and entering into other financing arrangements. There can be no assurance, however, that any of the contemplated financing arrangements described herein will be available and, if available, can be obtained on terms favorable to the Company. 13 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. 14 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 Ophthalmics, 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. On August 20, 2004, the United States District Court for the Eastern District of California granted the Company's application for a preliminary injunction against certain of the defendants. The motion for an injunction was denied with respect to defendants Dale Brodsky and Eyepictures, Inc. and was granted with respect to defendants Mark Fukhara, Douglas Burland, Michael Gerkovich, Steven Leach, Edmund Peterson, Dan Salomon, Joe Silva, Justice Ophthalmics, Inc., Zeta Development Labs, Inc. and Johnny Justice Jr. (collectively the "Fukhara Defendants"). Pursuant to the order, the Fukhara Defendants are enjoined from making any copies of any computer software created or licensed by the Company; selling, distributing or transferring any copies of any version of the Company's WinStation computer software; and transferring or disclosing to any third party any documents containing a copy of the Company's customer database. The Fukhara Defendants shall resell any of the Company's imaging systems or devices already in their possession "as is" and shall not modify those systems or devices in any way before resale, even at the request of the customer, except that the Fukuhara Defendants may do so if they advise the customer in writing that the systems or devices have been modified and are not the Company's original systems or devices. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) 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 (b) None. 16 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: November 05, 2004 17 EX-31 2 ex31-1.txt 31.1 EXHIBIT 31.1 ------------ SECTION 302 CERTIFICATION CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-QSB ------------------------------------------------- I, Gil Allon, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Ophthalmic Imaging Systems; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f) for the Registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; c) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting; Date: November 05, 2004 /s/ Gil Allon ---------------------------------- Gil Allon Chief Executive Officer EX-31 3 ex31-2.txt 31.2 EXHIBIT 31.2 ------------ SECTION 302 CERTIFICATION CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-QSB ------------------------------------------------- I, Ariel Shenhar, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Ophthalmic Imaging Systems; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f) for the Registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; c) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting; Date: November 05, 2004 /s/ Ariel Shenhar ----------------------------------- Ariel Shenhar Chief Financial Officer EX-32 4 ex32.txt 32 EXHIBIT 32 ---------- CERTIFICATION REQUIRED UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the financial statements of Ophthalmic Imaging Systems ("Registrant") for the quarter ended September 30, 2004 (the "Report"), each of the undersigned hereby certifies, to such officer's knowledge, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant. /s/ Gil Allon ------------------------- Gil Allon Chief Executive Officer /s/ Ariel Shenhar ------------------------ Ariel Shenhar Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----