-----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, Tgx6vQECbLcSBJRDgpj63x4RivHv5CDIRIFQcxlgG+SN7011NG/a6ZMf8J7vQveX nbAWcgUwFN+4VVAJgtzjrA== 0000910680-05-000351.txt : 20050511 0000910680-05-000351.hdr.sgml : 20050511 20050511131429 ACCESSION NUMBER: 0000910680-05-000351 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050511 DATE AS OF CHANGE: 20050511 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11140 FILM NUMBER: 05819781 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 10-Q 1 f10q-03312005.txt MARCH 31, 2005 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 March 31, 2005 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 May 11, 2005, 15,063,585 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 March 31, 2005 PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements (unaudited) Condensed Balance Sheet as of March 31, 2005 2 Condensed Statements of Operations for the Three Months ended March 31, 2005 and March 31, 2004 3 Condensed Statements of Cash Flows for the Three Months ended March 31, 2005 and March 31, 2004 4 Notes to Condensed Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 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 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 16 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Ophthalmic Imaging Systems Condensed Balance Sheet March 31, 2005 (Unaudited)
ASSETS - ------ Current assets: Cash and equivalents $ 2,091,446 Accounts receivable, net 1,634,702 Receivable from related party 214,862 Note receivable from related party 1,252,927 Inventories, net 464,082 Prepaid expenses and other current assets 227,000 Deferred tax asset 1,029,000 --------------------- Total current assets 6,914,019 Furniture and equipment, net of accumulated depreciation and amortization of $270,708 140,004 Restricted cash 150,000 Other assets 122,121 --------------------- Total assets $ 7,326,144 ===================== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 536,944 Accrued liabilities 1,375,885 Deferred extended warranty revenue 825,080 Customer deposits 274,843 Income taxes payable 7,649 Notes payable- current portion 774,012 --------------------- Total current liabilities 3,794,413 --------------------- Notes payable, less current portion 768,214 --------------------- Total liabilities 4,562,627 --------------------- Stockholders' equity: Common stock, no par value, 35,000,000 shares authorized; 15,063,585 issued and outstanding 14,534,420 Accumulated deficit (11,770,903) --------------------- Total stockholders' equity 2,763,517 --------------------- Total liabilities and stockholders' equity $ 7,326,144 =====================
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 March 31, 2005 2004 ------------------- -------------------- Net revenues $ 2,840,025 $ 2,397,069 Cost of sales 1,165,867 957,546 ------------------- -------------------- Gross profit 1,674,158 1,439,523 Operating expenses: Sales and marketing 728,004 659,682 General and administrative 312,996 247,465 Research and development 242,408 247,236 ------------------- -------------------- Total operating expenses 1,283,408 1,154,383 ------------------- -------------------- Income from operations 390,750 285,140 Interest and other expense, net (52,590) (45,325) ------------------- -------------------- Net income before income taxes 338,160 239,815 Income taxes (4,000) ------------------- -------------------- Net income $ 334,160 $ 239,815 =================== ==================== Shares used in the calculation of basic net income per share 15,041,141 14,436,547 Basic net income per share $ 0.02 $ 0.02 =================== ==================== Shares used in the calculation of diluted net income per share 16,318,728 15,465,852 Diluted net income per share $ 0.02 $ 0.02 =================== ====================
The accompanying notes are an integral part of these unaudited condensed financial statements. 3 Ophthalmic Imaging Systems Condensed Statements of Cash Flows (Unaudited)
Three months ended March 31, 2005 2004 -------------- ------------- OPERATING ACTIVITIES: Net income $ 334,160 $ 239,815 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 33,092 24,005 Non-cash payment of interest 2,818 17,024 Net decrease (increase) in current assets other than cash and equivalents 19,146 (368,328) Net (decrease) increase in current liabilities other than short-term borrowings (40,673) 142,749 -------------- ------------- Net cash provided by operating activities 348,543 55,265 INVESTING ACTIVITIES: Acquisition of furniture and equipment (6,800) (1,293) -------------- ------------- (6,800) (1,293) FINANCING ACTIVITIES: Principal payments on notes payable (43,192) Proceeds from sale of stock 13,468 Advances to related parties (197,415) (156,997) Repayments of borrowings under notes payable to related party, net (200,979) -------------- ------------- Net cash used in financing activities (240,607) (344,508) -------------- ------------- Net increase (decrease) in cash and equivalents 101,136 (290,536) Cash and equivalents at beginning of period 1,990,310 1,272,034 -------------- ------------- Cash and equivalents at beginning of period $ 2,091,446 $ 981,498 ============== ============= SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Repayment of notes payable with common stock $ 29,282 $ 105,913 Payment of interest with common stock $ 2,818 $ 17,024 Additions to (Reductions) in aggregate receivables from significant shareholders in exchange for inventory and other noncash transactions, net $ 114,113 $ (7,989) ============== ============= SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Cash paid for taxes $ 10,000 $ 70,050 Cash paid for interest $ 20,988 $ 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 Month Periods ended March 31, 2005 and 2004 (Unaudited) Note 1. Basis of Presentation The accompanying unaudited condensed balance sheet as of March 31, 2005, condensed statements of operations for the three month periods ended March 31, 2005 and 2004 and the condensed statements of cash flows for the three month periods ended March 31, 2005 and 2004 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. It is suggested that these condensed financial statements be read in conjunction with the audited financial statements and notes thereto included in Ophthalmic Imaging Systems' (the "Company's") Annual Report for the year ended December 31, 2004 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 March 31, 2005 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 Three Months Ended March 31, 2005 2004 ------------------------------ Numerator for basic and diluted net income per share $ 334,160 $ 239,815 ============================== Denominator for basic net income per share: Weighted average shares 15,041,141 14,436,547 Effect of dilutive securities: Employee/director stock 1,277,587 1,029,305 options Warrants and other -- -- ------------------------------ Dilutive potential common shares 1,277,587 1,029,305 ------------------------------ Denominator for diluted net income per share 16,318,728 15,465,852 ============================== Basic net income per share $ 0.02 $ 0.02 ============================== Diluted net income per share $ 0.02 $ 0.02 ============================== As of March 31, 2005 and March 31, 2004 there were 714,500 and 401,500 options and warrants, respectively whose exercise price exceeded the average market price of the stock and 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 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. 6 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 banks 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. The amount owed to the financial institutions by MediVision and secured by the Company as of March 31, 2005 was approximately $179,000. In March 2004, the Company's Board of Directors approved a line of credit to MediVision of $1,000,000 at 9.3% interest for two years. In January 2005 the Company's Board of Directors approved an additional loan advance of $150,000 for a thirty day term. On February 28, 2005, the Company and MediVision entered into a Loan and Security Agreement and Promissory Note whereby the Company agreed to loan MediVision up to two million dollars ($2,000,000). The loan agreement incorporates the $1,150,000 previously approved by the Company's Board of Directors. Under the terms of the agreement, interest is 7.25% per annum and is payable on February 28, 2006 along with all outstanding principal due at that date. The note is secured by 2,409,000 of the 11,130,151 shares of the Company's common stock owned by MediVision. The number of shares is based on the average closing price of shares of stock of the Company during the period covering the last ten (10) business days of February, 2005, which average closing price was $1.11, discounted by 25%. In the event that MediVision sells any shares it owns in the Company during the period of the agreement, a minimum of 50% of the proceeds from such sales would be required to be paid to the Company to reduce the outstanding amount owed. At March 31, 2005 the Company had recorded a net amount due from MediVision of approximately $1,253,000 on the promissory note and approximately $215,000 net, due for products and services. Sales to MediVision during the three months ended March 31, 2005 and 2004 totaled approximately $267,000 and $183,000, respectively. Sales derived from product shipments to MediVision are made at transfer pricing which is based on similar volume discounts that are available to other resellers or distributors of the Company's products. During the three-month periods ended March 31, 2005 and 2004, the Company paid approximately $176,900 and $148,700 respectively, to MediVision for research and development performed by MediVision on behalf of the Company. 7 As of March 31, 2005, MediVision currently owns approximately 74% of the Company's outstanding common stock. Note 4. Stock Based Compensation At March 31, 2005, 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. Unaudited Three Months Ended March 31, ---------------------------- 2005 2004 -------------- ------------- Net Income, As Reported $ 334,160 $ 239,815 Deduct Total Stock-Based Employee Compensation Expenses Determined Under the Fair Value Based Method For all Awards, Net of Related Tax Effects (5,030) (1,087) -------------- ------------- Pro Forma Net Income $ 329,130 $ 238,728 ============== ============= Basic Earnings Per Share As Reported $ 0.02 $ 0.02 Pro Forma $ 0.02 $ 0.02 Diluted Earnings Per Share: As Reported $ 0.02 $ 0.02 Pro Forma $ 0.02 $ 0.02 8 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 the options granted during the periods indicated was estimated on the date of grant using an option-pricing model. There were 46,000 options granted for the three-month period ended March 31, 2005, of which 26,000 were qualified options and 20,000 were non-qualified. The estimated fair market value of the qualified and non-qualified options granted was $1.10 and $0.68, respectively. In December 2004 the FASB issued Statement Number 123 (revised 2004) (FAS 23 (R)), Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. The Company is required to apply FAS 23 (R) on a modified prospective method. Under this method, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In addition, the Company may elect to adopt FAS 123 (R) by restating previously issued financial statements, basing the expense on that previously reported in their pro forma disclosures required by FAS 123. FAS 123 (R) is effective for the first reporting period beginning after June 15, 2005. For companies filing under Regulation S-B, FAS 123 (R) is effective the beginning of the first interim or annual reporting period that begins after December 15, 2005, which for the Company will be the first quarter of the year ending December 31, 2006. The Company anticipates adopting SFAS No. 123(R) beginning in the quarter ending March 31, 2006. Management has not completed its evaluation of the effect that FAS 123 (R) will have, but believes that the effect will be consistent with its previous pro forma disclosures. 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. Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed historical amounts. 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. 9 The following provides a reconciliation of changes in the Company's warranty reserve. Unaudited Three Months Ended March 31, ----------------------------- 2005 2004 Warranty balance at beginning of period $ 505,851 $ 438,449 Net provision (reduction) for current period 13,250 (5,771) Warranty costs incurred (125,119) (26,313) -------------- -------------- Warranty balance at end of period $ 393,982 $ 406,365 ============== ============== 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. The Company made a strategic decision to expand its product offering to include the ophthalmic informatics field. Over the last year the Company introduced its Ophthalmology Office line composed of Electronic Medical Records (EMR) and Enterprise Practice Management (EPM) software products by NextGen Healthcare Information Systems, Inc. and the Company's import modules. This decision enables the Company to offer a wider variety of products and comprehensive solutions to its customer base of ophthalmology departments and practices. 10 On December 28, 2004, the Company entered into an investment agreement with Dutchess Private Equities Fund II, LP ("Dutchess") providing for an equity line of credit. Pursuant to the investment agreement, Dutchess has agreed to provide the Company with up to $9,000,000 of funding during the thirty month period beginning on the date that the registration statement the Company agreed to file providing for the resale of the shares of common stock issuable under the investment agreement is declared effective by the Securities and Exchange Commission. During this thirty month period, the Company may request a drawdown under the investment agreement by selling shares of its common stock to Dutchess, and Dutchess will be obligated to purchase the shares. The Company is under no obligation to request any drawdowns under the investment agreement. The amount that the Company can request in any drawdown notice is, at the Company's election, the greater of (A) up to 200% of the average daily volume of the Company's common stock for the ten trading days prior to the date of the drawdown notice multiplied by the average of the three daily closing bid prices for the common stock immediately preceding the date of the drawdown notice or (B) $100,000; provided that the Company may not request more than $1,000,000 in any single drawdown. As of March 31, 2005, the Company's registration statement had not been deemed effective; accordingly no drawdowns have been made. At March 31, 2005, the Company had a stockholders' equity of approximately $2,763,500 and its current assets exceeded its current liabilities by approximately $3,119,600. The convertible loan agreements with Laurus Master Fund. Ltd. ("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. As of March 31, 2005, under the terms of the 2003 convertible loan agreement, Laurus has converted $682,013 of principal and interest into 637,396 shares of the Company's common stock at a conversion price of $1.07 per share. As of March 31, 2004, Laurus had converted $156,186 of principal and interest into 145,968 shares of the Company's common stock. 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's revenue recognition policies are in compliance with applicable accounting regulations, including Staff Accounting Bulletin No. 104 ("SAB 104"), Revenue Recognition in Financial Statements, American Institute of Certified Public accountants ("AICPA"), Statement of Position ("SOP") 97-2, Software Revenue Recognition, SOP 98-9, Modification of SOP 97-2, with Respect to Certain Transactions and Emerging Issues Task 11 Force Issue 00-21, Revenue Arrangements with Multiple Deliverables. 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. Revenue from installation and training services are recognized when such services are performed. Revenue generated from service contracts are recognized ratably over the term of the contracts. 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 first quarter ended March 31, 2005 were $2,840,025, representing an 18% increase from revenues of $2,397,069 for the first quarter ended March 31, 2004. The increase in revenues is due primarily to higher revenues generated from the informatics products and increased service revenues. Digital angiography systems, Informatics and peripherals accounted for approximately 84% and 89% of the Company's revenue for the first quarters of 2005 and 2004, respectively. Service revenues accounted for approximately 15% and 11% of the Company's revenue for the first quarters of 2005 and 2004, respectively. Revenues from sales of the Company's products to MediVision were approximately $267,000 during the three-month period ended March 31, 2005 and $183,000 for the comparable three-month period ending March 31, 2004. Gross Margins Gross margins were approximately 59% during the first quarter ended March 31, 2005 as compared to 60% for the first quarter ended March 31, 2004. The decrease in margins is a result of an increase in sales of the NextGen Healthcare Information Systems, Inc. software products, which have lower gross margins than the majority of the Company's other products. It is anticipated that the Company's gross margins will decrease as its sales of the NextGen software products become more significant. Sales and Marketing Expenses Sales and marketing expenses accounted for approximately 26% of total revenues during the first quarter of fiscal 2005 as compared to approximately 28% during the first quarter of fiscal 2004. Actual expense levels increased to $728,004 during the first quarter of 2005 versus $659,682 during the first quarter of 2004. Primary contributing factors to the increased expenses were new hires to the sales organization and higher commissions associated with higher revenue levels. General and Administrative Expenses General and administrative expenses were $312,996 in the first quarter of fiscal 2005 and $247,465 in the first quarter of fiscal 2004. Such expenses accounted for approximately 11% and 10% of revenues during the first quarter of 2005 and 2004, respectively. The increased expenses 12 were the result of increases in sales returns reserve requirements and increased investor related expenses. Research and Development Expenses Research and development expenses were $242,408 in the first quarter of fiscal 2005 and $247,236 in the first quarter of fiscal 2004. Such expenses accounted for approximately 9% and 10% of revenues during the first quarter of 2005 and 2004, 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 its projects for research and development conducted by MediVision and other outsourced consulting on the Company's behalf. Interest and Other Expense, net Interest and other expense was $52,590 during the first quarter of fiscal 2005 versus $45,325 during the first quarter of fiscal 2004. 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 $334,160, or $0.02 per share basic and diluted earnings, for the first quarter ended March 31, 2005 as compared to net income of $239,815 or $0.02 per share basic and diluted earnings for the first quarter ended March 31, 2004. Liquidity and Capital Resources - ------------------------------- The Company's operating activities generated cash of $348,543 during the three months ended March 31, 2005 as compared to generating cash of $55,265 in the three months ended March 31, 2004. The cash generated from operations during the first three months of 2005 was principally from net income for the period. The cash generated from operations during the first three months of 2004 was principally from net income for the period which amounts were principally offset by increased receivables and inventory. Cash used in investing activities was $6,800 during the first three months of 2005 as compared to $1,293 during the first three months of 2004. The Company's investing activities consisted of minor purchases of equipment. 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 used cash in financing activities of $240,607 during the first three months of fiscal 2005 as compared to using cash of $344,508 during the first three months of fiscal 2004. The cash used in financing activities during the first three months of 2005 was principally from advances on the note receivable from MediVision and repayments of the debt to Laurus. Cash used in financing 13 activities during the first three months of 2004 was principally from repayments of borrowings under existing arrangements with MediVision and advances to MediVision. At March 31, 2005 the Company had recorded a net amount due from MediVision of approximately $1,253,000 on the promissory note and approximately $215,000 net amount due for products and services On March 31, 2005 the Company's cash and cash equivalents were $2,091,446. 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. 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. ITEM 3. CONTROLS AND PROCEDURES As of the end of the period covered by this Report, management of the Company, with the participation of the Company's Chief Executive Officer (principal executive officer) and the Company's Chief Financial Officer (principal financial officer), evaluated the effectiveness of the Company's "disclosure controls and procedures," as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, these officers concluded that, as of March 31, 2005, the Company's disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company's periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to the Company's management, including those officers, to allow timely decisions regarding required disclosure. During the quarter ended March 31, 2005, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 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 as well as injunctive relief against the defendants. On August 20, 2004, the United States District Court for the Eastern District of California granted in part the Company's application for a preliminary injunction against certain of the defendants. In December 2004 the Court dismissed Johnny Justice, Jr. as an individual and Justice Ophthalmics, Inc. from the case. Trial in the matter currently is scheduled for April 2006. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. 15 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) On February 28, 2005 the Company filed a Form 8-K disclosing that the Company issued a press release announcing its results of operations for the Company's fiscal year ended December 31, 2004. 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: May 11, 2005 17 EX-31 2 ex31-1for10q.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 small business issuer as of, and for, the periods presented in this report; 4. The small business issuer'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)) for the small business issuer 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 small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the small business issuer'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 c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer'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 small business issuer'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 small business issuer's internal control over financial reporting. Date: May 11, 2005 /s/ Gil Alon ------------------------------- Gil Alon Chief Executive Officer EX-31 3 ex31-2for10q.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 small business issuer as of, and for, the periods presented in this report; 4. The small business issuer'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)) for the small business issuer 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 small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the small business issuer'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 c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer'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 small business issuer'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 small business issuer's internal control over financial reporting. Date: May 11, 2005 /s/ Ariel Shenhar ---------------------------- Ariel Shenhar Chief Financial Officer EX-32 4 ex32for10q.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 March 31, 2005 (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-----