-----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, PT4mIb2j0uEwz83fbGfstJi3kPWTk71p8nDTcLdkhUxSHO84ABVtWRgRK/84qjOr rG30cZjykt3yjIAOVS6OaQ== 0001001277-97-000106.txt : 19971203 0001001277-97-000106.hdr.sgml : 19971203 ACCESSION NUMBER: 0001001277-97-000106 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971201 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPHTHALMIC IMAGING SYSTEMS INC CENTRAL INDEX KEY: 0000885317 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 943035367 STATE OF INCORPORATION: CA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-11140 FILM NUMBER: 97730919 BUSINESS ADDRESS: STREET 1: 221 LATHROP WAY STE 1 CITY: SACRAMENTO STATE: CA ZIP: 95815 BUSINESS PHONE: 9166462020 10KSB 1 FORM 10-KSB FOR OPHTHALMIC IMAGING SYSTEMS U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the fiscal year ended August 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File Number 1-11140 OPHTHALMIC IMAGING SYSTEMS (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) CALIFORNIA 94-3035367 (I.R.S. Employer (State or Other Jurisdiction of Incorporation Identification No.) or Organization) 221 LATHROP WAY, SUITE I 95815 SACRAMENTO, CALIFORNIA (Zip Code) (Address of Principal Executive Offices) (916) 646-2020 (Issuer's Telephone Number, Including Area Code) SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: Name of Each Exchange TITLE OF EACH CLASS ON WHICH REGISTERED Common Stock, No Par Value Boston Stock Exchange NASDAQ SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: NONE (TITLE OF CLASS) Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes XX No CHECK IF NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM 405 OF REGULATION S-B IS CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB OR ANY AMENDMENT TO THIS FORM 10-KSB. [ ] The issuer's revenues for its most recent fiscal year was $6,625,616. The aggregate market value of the Common Stock of the issuer held by non- affiliates as of October 31, 1997, was approximately $3,507,989 by reference to the average bid and ask price of the Common Stock as quoted by NASDAQ Small Cap Market on such date. As of October 31, 1997, there were 3,905,428 issued and outstanding shares of issuer's Common Stock. Traditional Small Business Disclosure Format (check one): Yes No XX 1 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL Ophthalmic Imaging Systems (the "Company" or "OIS") was incorporated under the laws of the State of California on July 14, 1986. The Company is engaged in the business of designing, developing, manufacturing, and marketing digital imaging systems and image enhancement and analysis software for use by practitioners in the ocular health field. Since its inception, the Company's products have addressed primarily the needs of the ophthalmic fluorescein angiography market, and more recently the indocyanine green market. The current flagship products in the Company's angiography line are its digital imaging systems, the WinStation 1024 and WinStation 640. These WinStation products are targeted primarily at retinal specialists and general ophthalmologists. The Company believes, however, that as the U.S. healthcare system moves toward managed care the needs of the managed care providers are changing the nature of demand for medical imaging equipment and services. New opportunities in telemedicine are emerging that allow managed care organizations to reduce costs while maintaining their quality of patient care. OIS is currently a market leader in the ophthalmic imaging field and plans to expand this role by applying its technology to telemedicine/managed care applications. The Company's objective is to become a leading provider of ophthalmic diagnostic products and services in the ocular health care industry, while maintaining its position as a market leader in digital imaging and telemedicine. In this regard, over the past two years, the Company has expended significant resources in developing a Reading and Documentation Center through which it originally intended to provide documentation services of electronically transmitted digital images acquired at remote locations. The Company has recently redefined the scope of the Reading and Documentation Center, however, to support research and development efforts surrounding its existing products. The Reading and Documentation Center is presently being utilized in the validation of diabetic retinopathy screening through electronically transmitted digital images acquired at remote locations. The Company is currently conducting a pilot program with a major managed care provider to evaluate remote image interpretation for diabetic retinopathy screening and intends to utilize this validation study to help expand the use of the Company's digital imaging products for such screening. The Company also recently has refocused its resources on the marketing and sales of its WinStation digital imaging systems. The Company's products are currently being utilized in a variety of ophthalmic settings for the telemedicine application of remote consultation. The Company is currently focusing its product development efforts on features and enhancements to its existing products targeting various other telemedicine applications. Additionally, in the near-term, the Company intends to utilize its Reading and Documentation Center to develop and assess viable opportunities for the Company's digital imaging products in screening, remote consultation, distance learning and other telemedicine applications. 2 The Company continues to assess market opportunities for its Glaucoma- Scope, but currently does not actively market for the sale of this product. The Company has experienced operating losses for each fiscal year since its initial public offering in 1992. The Company expects to continue to incur operating losses for the foreseeable future and there can be no assurance that the Company will be able to achieve or sustain significant revenues or profitability in the future. In an effort to achieve profitability, the Company intends to strengthen its existing product lines and expand into new product lines. In this regard, the Company's plans to expand its technology to telemedicine/managed care applications which may result in significant expenses over the next several years. The Company, headquartered in Sacramento, California, enjoys a fine reputation within the ophthalmic community for producing high quality, reliable, easy to use equipment. Its products are compatible with standard diagnostic procedures used in all types of eye care practices. THE INDUSTRY There are approximately 18,000 ophthalmologists in the United States and 28,000 ophthalmologists practicing medicine in countries outside the United States. This group has been traditionally divided into two major groups: anterior segment (front of the eye) and posterior segment (back of the eye). Within these groups there are several sub-specialties including medical retina, retina and vitreous, glaucoma, neuro, plastics, pediatric, cataract, cornea and refractive surgery. The Company's WinStation products are targeted primarily at the retina specialist and general ophthalmologist. PRODUCTS The Company currently offers two products to the ophthalmic market: WinStation 640 and the WinStation 1024. WINSTATION SYSTEMS (640 & 1024) The Company's WinStation systems (640 and 1024 resolution) are primarily used by ophthalmologists to perform a diagnostic test procedure known as fluorescein angiography. This procedure is used to diagnose and monitor pathology and provide important information in making treatment decisions. Fluorescein angiography is performed by injecting a fluorescent dye in the bloodstream. As the dye circulates through the blood vessels of the eye, the WinStation system connected to a fundus camera takes detailed images of the patient's retina. Quite often these images provide a "road map" for laser treatment. Over the past 35 years fluorescein angiography has been performed using photographic film which requires special processing and printing. The Company's WinStation systems allow for immediate diagnosis and treatment of the patient. Images are automatically data based and are permanently stored on optical laser disk or CD-ROM. OIS offers a variety of networking and printer options to best fit the practice needs. The Company's WinStation systems are also used by ophthalmologists to perform indocyanine green ("ICG") angiography. ICG angiography is a new diagnostic test procedure which is yielding new clinically significant 3 information that is helpful in the treatment of patients with macular degeneration (a leading cause of blindness afflicting over 13 million people in the U.S.). ICG angiography, used for approximately 10-20% of patient angiography, is a dye procedure that can only be performed using a digital imaging system. OTHER The Company also developed the Glaucoma-Scope, designed for use by ocular health providers that manage patients with glaucoma by providing a means for comparing optic nerve head topography over a number of patient visits. While the Company has sold Glaucoma-Scope units in the past, it no longer actively markets this product for sale. MARKETS The WinStation market consists of current fundus camera owners and anticipated fundus cameras purchasers of cameras suitable for interfacing with the Company's digital imaging system products. Presently there are over 8,500 mydriatic fundus cameras in clinical use in the United States with an equal number in the international market. New fundus camera sales fluctuate between 500 and 1,000 units per year. Of the total number of fundus cameras worldwide, approximately 12,000 are suitable to be interfaced with OIS digital imaging systems. Currently there are six manufacturers of fundus cameras producing a total of 17 models. OIS has successfully designed optical and electronic interfaces to each of these cameras. The primary target market for digital angiography systems is retinal specialists who number approximately 3,000 in the U.S. For the past two years OIS digital imaging system sales have been driven in this segment to a large extent by indocyanine green ("ICG") angiography. ICG angiography is a new diagnostic test procedure which is yielding new clinically significant information that is helpful in the treatment of patients with macular degeneration (a leading cause of blindness afflicting over 13 million people in the U.S.). ICG angiography is a dye procedure that can only be performed using a digital imaging system. While only used for 10-20% of patient angiography, it has been the catalyst to digital imaging system purchases. Competition is intense in the retinal community and those practices without ICG capability are losing referral business from general ophthalmologists. The Company expects the demand for digital angiography to continue as it is becoming a standard of care. Although the Company no longer actively manufactures or markets the Glaucoma-Scope for sale, it continue to asses potential market opportunities for this product. SALES, MARKETING AND DISTRIBUTION The Company utilizes a direct sales force in marketing its products throughout the United States and Canada. The direct sales force consists of territory representatives and product specialists strategically located throughout the contiguous U.S. as well as a marketing manager located at the Company's headquarters. These regional representatives and product specialists provide marketing, sales, service, installation and training. Additionally, the Company subcontracts service in several cities in the U.S. and Canada for routine component replacement. Internationally, the Company has retained specialized ophthalmic distributors which sell the Company's products in various foreign countries. Each country has trained sales and technical service staff for their respective territories. 4 For its marketing activities, the Company prepares brochures, data sheets, application notes on its products, and participates in industry trade shows and workshops. Advertising and promotion is achieved through advertisements in trade journals, press releases, a Company newsletter, direct mail solicitations, journal articles, and scientific papers and presentations. MANUFACTURING AND PRODUCTION The Company is primarily a systems integrator with proprietary software, optical interfaces, and electronic fundus camera interfaces. Certain components are subcontracted to outside vendors and assembled at OIS. The Company inventories and assembles components in a 10,500 square foot facility located in Sacramento, California. For production of certain components of its products, the Company's manufacturing strategy is to use subcontractors to minimize time and reduce capital requirements. The Company's product line is manufactured by assembling components purchased from established outside quality vendors as well as certain components manufactured by OIS. Proprietary components manufactured by the Company include interface circuit boards for 17 fundus camera models, video optical interfaces including ICG and live viewing options. The Glaucoma- Scope optical head is also manufactured by the Company. The Company has been routinely audited by the Food and Drug Administration and was deemed to conform to Good Manufacturing Practices ("GMP"). The Company has 510(k)'s on file for both the Glaucoma-Scope and its digital angiography products. See "Government Regulation". COMPONENTS, RAW MATERIALS AND SUPPLIERS As a systems integrator, a significant number of the major hardware components in the Company's products are procured from sole source vendors. Whenever possible, however, the Company seeks multiple vendor sources from which to procure its components. As with any manufacturing concern dependent on subcontractors and component suppliers, significant delays in receiving products or unexpected vendor price increases could adversely affect the Company. The Company works closely with its principal component suppliers and the rest of its vendors to maintain dependable working relationships and to continually integrate the most current proven pertinent technologies into the manufacturing of its products. WARRANTIES The Company generally provides a 12-month limited warranty for parts, labor and shipping charges in connection with the initial sale of its products. The Company also provides its standard limited warranty beyond the 12-month period in consideration for increased deposits from customers. Peripheral products such as monitors, printers and optical laser disk drives also carry the original manufacturer's warranty. To insure quality control and the proper functioning of a product in the doctor's office, the Company installs the system and trains the doctor and his staff. The Company makes every effort to provide the customer with a properly functioning system and a well-trained staff. 5 The Company also offers service plans for sale to its customers as a supplement to the original manufacturer's warranties carried on certain of the Company's component parts used in its products. COMPETITION The healthcare industry is characterized by extensive research and development efforts and rapid technological change. Competition for products that can diagnose and evaluate eye disease is intense and is expected to increase. The Company is aware of two primary competitors in the U.S. which produce and are delivering digital fundus imaging systems, Topcon and Tomey. Four other companies are known to have systems in the international market each with small market penetration. Topcon is the Company's main competitor in the angiography market. Topcon angiography products predominantly interface with Topcon fundus cameras while the Company's systems interface with 17 different models or fundus cameras from a wide variety of manufacturers. Although the Company will continue to work to develop new and improved products, many companies are engaged in research and development of new devices and alternative methods to diagnose and evaluate eye disease. Introduction of such devices and alternative methods could hinder the Company's ability to compete effectively and could have a material adverse effect on its business, financial condition and results of operations. Many of the Company's competitors and potential competitors have substantially greater financial, manufacturing, marketing, distribution and technical resources than the Company. RESEARCH AND DEVELOPMENT The Company intends to devote significant resources to the development of telemedicine/managed care applications, the improvement of optics, new fundus camera interfaces for ICG, software development (including the continued enhancement of WinStation), hardware optimization, and the patient/doctor interface. The Company's research and development expenditures in the periods ended August 31, 1997 and 1996, were $1,070,192 and $846,034, respectively. PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY On June 15, 1993 the Company was issued United States Letters Patent 5,220,360 for "Apparatus and Method for Topographical Analysis of the Retina." This patent relates to the Glaucoma-Scope apparatus, and methods used by the apparatus for topographically mapping the retina and comparing the mapping to previous mappings. In addition, the Company relies upon trade secrets, know-how, and continuing technological innovation to develop and maintain its competitive position. The Company anticipates aggressively defending its patents and proprietary technology, although there can be no assurance that any patent will not be circumvented or invalidated. Further, although the Company believes that the Glaucoma- Scope and the Company's other products do not and will not infringe patents or violate proprietary rights of others, it is possible that its existing rights may not be valid or that infringement of existing or future patents, trademarks or proprietary rights may occur. In the event that any of the Company's products, including the Glaucoma-Scope, infringe 6 patents, trademarks or proprietary rights of others, the Company may be required to modify the design of such products, change the names under which the products or services are provided, or obtain licenses. There can be no assurance that the Company will be able to do so in a timely manner, upon acceptable terms and conditions, or at all. The failure to do any of the foregoing could have a material adverse effect on the Company. There can be no assurance that the Company's patents or trademarks, if granted, would be upheld if challenged, or that competitors might not develop similar or superior processes or products outside the protection of any patents issued to the Company. In addition, there can be no assurance that the Company will have the financial or other resources necessary to enforce or defend a patent or trademark infringement or proprietary rights violation action. Moreover, if the Company's products infringe patents, trademarks or proprietary rights of others, the Company could, under certain circumstances, become liable for damages, which also could have a material adverse effect on the Company. The Company also relies on unpatented proprietary technology. Certain of the image processing and optical interfaces of the Company's digital imaging systems are largely proprietary and constitute trade secrets, but the basic computer hardware, software, and video components are purchased from third parties. No patent applications have been filed with respect thereto. There is no assurance that others will not independently develop substantially equivalent proprietary information or techniques, or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its rights to its unpatented trade secrets. The Company seeks to protect its unpatented proprietary technology, in part, through proprietary confidentiality and nondisclosure agreements with employees, consultants and other parties. The Company's confidentiality agreements with its employees and consultants generally contain industry standard provisions requiring such individuals to assign to the Company without additional consideration any inventions conceived or reduced to practice by them while employed or retained by the Company, subject to customary exceptions. There can be no assurance that proprietary information agreements with employees, consultants and others will not be breached, that the Company would have adequate remedies for any breach or that the Company's trade secrets will not otherwise become known to or independently developed by competitors. GOVERNMENT REGULATION The marketing and sale of the Company's products are subject to certain domestic and foreign governmental regulations and approvals. Pursuant to the Federal Food, Drug, and Cosmetic Act ("FDCA"), the Company is required under Section 510(k) to file, and has submitted, a Pre-Marketing Notification with the Federal Drug Administration (the "FDA") which provides certain safety and effectiveness information concerning the Company's diagnostic imaging systems and the Glaucoma-Scope. The FDA has approved the Company's pre-marketing notification submittals thereby granting the Company permission to market its product, subject to the general controls and provisions of the FDCA. The Company's products are classified as Class II devices (special controls) which require, among other things, annual registration, listing of devices, good manufacturing practices and labeling, and prohibition against misbranding and adulteration. The Company has registered its manufacturing facility with both the FDA and the California authorities as a medical device manufacturer and operates such facility under FDA and California requirements concerning Quality System Requirements ("QSR"), and formerly GMP. As a medical device manufacturer, the Company is required to continuously maintain its QSR compliance status and to demonstrate such compliance during periodic FDA or California inspections. If the facilities do not meet applicable QSR regulatory requirements, the Company may be required to implement changes necessary to comply with such regulations. 7 Although the FDA has made findings which permit the Company to proceed with its products to the marketplace, such findings do not constitute FDA approval of these devices. Further, since the Company is engaged in international sales, the Company's products must satisfy certain manufacturing requirements and may subject the Company to various filing and other regulatory requirements imposed by foreign governments as a condition to the sale of such products. The Company cannot predict the effect that future legislation or regulatory developments may have on its operations. Additional regulations, reconsideration of approvals granted under current regulations, or a change in the manner in which existing statutes and regulations are interpreted or applied may have a material adverse impact on the Company's business, financial condition and results of operations. Moreover, new products and services developed by the Company, if any, also may be subject to the same or other various federal and state regulation, including that of the FDCA. INSURANCE The Company maintains general commercial casualty and property insurance coverage for its business operations, as well as product liability insurance. As of August 31, 1997, the Company has not received any product liability claims and is unaware of any threatened or pending claims. To the extent that product liability claims are made against the Company in the future, such claims may have a material adverse impact on the Company. EMPLOYEES As of August 31, 1997, the Company had 33 employees, of which 28 were full time. The Company also engages the services of consultants from time to time to assist the Company on specific projects in the area of research and development, software development, regulatory affairs, and product services. These consultants periodically engage contract engineers as independent consultants for specific projects. The Company has no collective bargaining agreements covering any of its employees, has never experienced any material labor disruption, and is unaware of any current efforts or plans to organize its employees. The Company considers its relationship with its employees to be good. ITEM 2. DESCRIPTION OF PROPERTY FACILITIES The Company leases, under a triple net lease, approximately 13,875 square feet of office, manufacturing, and warehouse space in Sacramento, California under a lease which terminates June 30, 1998. The Company also leases an approximately 200 square foot sales office in Simsbury, Connecticut on a month- to-month basis. Management believes that its existing facilities are suitable and adequate to meet its current needs. The Company pays monthly lease payments, with respect to these properties, in the aggregate of approximately $10,200. 8 The Company does not have, and does not foresee acquiring, any real estate or investments in real estate, and is not engaged in any real estate activities. ITEM 3. LEGAL PROCEEDINGS On September 6, 1996, an action was filed in Superior Court in the County of Sacramento, California against the Company by a former employee alleging that such employee was wrongfully terminated by the Company in retaliation for filing a grievance against a co-employee for harassment and creation of a hostile work environment. The suit, which is still pending, seeks, among other things, lost wages, $150,000 in compensatory damages, and punitive damages. The Company believes that this action is without merit and intends to defend this action vigorously. There is no other material litigation or other legal proceedings presently pending or threatened (to the knowledge of management of the Company) to which the Company (or any of its directors or officers in their capacity as such) is, or may be a party, or to which property of the Company is, or may be, subject. On or about August 17, 1997, the Company was advised that JB Oxford & Company ("JBO"), one of several market makers in the Company's common shares which trade over the counter on the NASDAQ Small-Cap Market, was being investigated by the Securities and Exchange Commission ("SEC"). In connection with this investigation, the Company, and Mr. Verdooner, in his capacity as Chief Executive Officer of the Company, were served by the SEC with a subpoena on or about August 18, 1997. These subpoenas require the submission to the SEC of various documents, predominantly relating to JBO. The Company has cooperated with the SEC investigation and is making every effort to produce the documents requested. The Company does not believe, nor has it any reason to believe, it is a subject of the SEC inquiries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the Company's securities holders during the fourth quarter of its fiscal year ended August 31, 1997 covered by this Annual Report on Form 10-KSB. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock of the Company, no par value, is traded over-the-counter on the NASDAQ Small-Cap Market under the symbol "OISI" and on the Boston Stock Exchange under the symbol "OIS." The table below sets forth the high ask and low bid prices for the Company's Common Stock for each quarter of fiscal year 1996 and 1997, respectively. The source of the following information was NASDAQ. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-downs or commissions and may not necessarily represent actual transactions. 9
FISCAL YEAR 1996 FISCAL YEAR 1997 C> HIGH LOW HIGH LOW ASK BID DIVIDEND ASK BID DIVIDEND QUARTER 1 3-3/4 1-1/2 -- 5-3/4 3-1/4 -- QUARTER 2 4 1-9/16 -- 5-3/16 3 -- QUARTER 3 7-3/8 3 -- 3-7/8 1-7/8 -- QUARTER 4 5-3/4 3-1/8 -- 2-1/4 1/2 --
On October 31, 1997 the closing price for the Company's Common Stock as reported by Nasdaq was $1.00 per share and there were approximately 168 shareholders of record. Under the NASDAQ rules, one prerequisite to continued listing on NASDAQ, is maintenance by a company of a minimum closing bid price of $1.00 per share. If a company's closing bid price per share is below $1.00 per share for ten (10) consecutive trading days, the company may be subject to having its shares delisted from NASDAQ. In September 1997, the Company's closing bid price per share fell below $1.00 per share for ten (10) consecutive trading days. Accordingly, the Company received a letter from NASDAQ which indicated that although the Company's closing bid price per share did not meet the minimum $1.00 requirement, NASDAQ was not going to commence any delisting action at that time. Instead, NASDAQ stated that the Company would be in compliance with its minimum listing price rules, if at any time during the next 90 calendar days from September 23, 1997, the closing bid price per share of the Company's common stock is at least $1.00 for ten consecutive trading days ("Minimum Closing Price Requirement"). Although the bid price of the Company's shares has closed at or above $1.00 per share since September 23, 1997, as of the date hereof the Company has not met the Minimum Closing Price Requirement and there can be no assurance that the Company will meet said requirement or that the Company may not become subject to delisting from the NASDAQ Small-Cap Market in the future. DIVIDEND POLICY The Company has not paid any cash dividends since its inception and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The Company expects to retain its earnings, if any, to provide funds for the expansion of its business. Pursuant to a Credit Agreement (defined below), the Company is restricted from paying dividends prior to retirement of the debt thereunder. Future dividend policy will be determined periodically by the Board of Directors based upon conditions then existing, including the Company's earnings and financial condition, capital requirements, and other relevant factors. 10 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION THE STATEMENTS BELOW INCLUDE STATEMENTS THAT ARE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 21A OF THE SECURITIES ACT OF 1933, AS AMENDED, IN SECTION 21E OF THE SECURITIES ACT OF 1934, AS AMENDED, AND IS SUBJECT TO THE SAFE HARBOR CREATED THEREBY. FUTURE OPERATING RESULTS MAY BE ADVERSELY EFFECTED AS A RESULT OF A NUMBER OF FACTORS ENUMERATED IN THE COMPANY'S PUBLIC REPORTS. 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 Company has a reputation within the ophthalmic community for producing high quality, reliable, easy to use equipment and believes itself to be an acknowledged industry leader in the technology and sales of digital ophthalmic imaging systems. The Company believes, however, that as the U.S. healthcare system moves toward managed care the needs of the managed care providers are changing the nature and demand for medical imaging equipment and services. New opportunities in telemedicine are emerging that may allow managed care organizations to reduce costs while maintaining their quality of patient care. OIS plans to leverage its digital imaging technology and established customer base to develop product features and services targeting telemedicine/managed care applications for the ocular health care industry. Since its inception, the Company's products have addressed primarily the needs of the ophthalmic fluorescein angiography market, and more recently the indocyanine green ("ICG") market. While the Company believes that the overall angiography market has modest growth potential, sustaining growth in its traditional angiography equipment business may become increasingly difficult due to increased competition. In recognition of this, the Company is expanding its product capabilities to address the emerging telemedicine market. The Company will continue to support and expand its entire line of digital angiography products, and will focus its future efforts on developing product enhancements and pursuing viable opportunities in this market, particularly as they relate to telemedicine applications. The Company's objective is to become a leading provider of ophthalmic diagnostic products and services in the ocular health care industry, while maintaining its position as a market leader in its existing digital imaging products and telemedicine. In this regard, over the past two years, the Company has expended significant resources in developing a Reading and Documentation Center through which it originally intended to provide documentation services of electronically transmitted digital images acquired at remote locations. The Company has recently redefined the scope of the Reading and Documentation Center, however, to support research and development efforts surrounding its existing products. The Reading and Documentation Center is presently being utilized in the validation of diabetic retinopathy screening through electronically transmitted digital images acquired at remote locations. The Company is currently conducting a pilot program with a major managed care provider to evaluate remote image interpretation for diabetic retinopathy screening and intends to utilize this validation study to help expand the use of the Company's digital imaging products for such screening. 11 The Company also recently has refocused its resources on the marketing and sales of its WinStation digital imaging systems. The Company's products are currently being utilized in a variety of ophthalmic settings for the telemedicine application of remote consultation. The Company is currently focusing its product development efforts on features and enhancements to its existing products targeting various other telemedicine applications. Additionally, in the near-term, the Company intends to utilize its Reading and Documentation Center to develop and assess viable opportunities for the Company's digital imaging products in screening, remote consultation, distance learning and other telemedicine applications. Although the Company no longer actively markets for the sale of its Glaucoma-Scope, it continues to assess market opportunities for this product. The Company's results of operations have historically fluctuated from quarter to quarter and from year to year and management anticipates that such fluctuations will continue in the future. There can be no assurance that revenue growth or profitability can be achieved or sustained in the future. RESULTS OF OPERATIONS The Company's revenues decreased to $6,625,616 in 1997 from $6,873,651 in 1996. The primary factor contributing to the reduced 1997 revenue level was a reallocation of the Company's resources to address emerging opportunities in the telemedicine/managed care market; and pursuit of sales for its Reading and Documentation Center Services, which it has since ceased. During the 1996 fall meeting of the American Academy of Ophthalmology ("AAO"), the Company introduced lower-priced digital imaging systems incorporating telemedicine features providing for remote consultation and distance learning, as well as other applications. The Company has targeted these products to the general ophthalmology and retinal specialty practice markets and made initial deliveries of these systems during the latter half of 1997. During the recently completed 1997 AAO meeting, the Company introduced new models of its digital angiography products incorporating enhanced telemedicine features, with the Company receiving significantly more purchase commitments for its products as compared to previous AAO meetings. As such, the Company will continue to allocate resources to address these markets, and direct the majority of its resources to both support the demand for its digital imaging products in these and related markets and, more recently, to pursue opportunities in the telemedicine/managed care market. Contribution to revenues from sales of Glaucoma-Scope units have been negligible and management does not anticipate near-term sales improvement from the Glaucoma-Scope. Gross margins were approximately 26% in 1997 as compared to approximately 30% in 1996. This decrease in gross margin percentage was attributable primarily to the adverse impact of a non-recurring adjustment to reduce the carrying value of certain inventory, including field spares, due to, among other things, potential obsolescence and reduced cost recovery estimates. The Company continues to evaluate its expenses in this area consistent with current and anticipated business conditions and management believes that near-term gross margin improvement, if any, would result principally from reduced material costs associated with currently deliverable system configurations, outsourcing additional manufacturing and assembly operations and related fixed cost reduction measures implemented during the latter half of 1997, including personnel cutbacks, economics of scale from increased unit production and other manufacturing efficiencies. 12 Sales and marketing and general and administrative expenses accounted for approximately 41% of revenues for the fiscal year ended August 31, 1997 as compared to approximately 35% for the previous fiscal year. Expenses were $2,714,140 in 1997 as compared to $2,375,427 in 1996, representing an increase of approximately 14%. The primary factors contributing to this increase were costs associated with hiring additional support personnel, the impact of increased reserves for potential credit losses and the costs associated with developing the telemedicine/managed care applications and the start-up marketing efforts. The Company anticipates expenses in this area will continue to run above historical levels for the foreseeable future, in particular in conjunction with the hiring of additional senior management level personnel during the fourth quarter of fiscal 1997. Research and development expenses increased by approximately 26% to $1,070,192, or approximately 16% of revenues in 1997 from $846,034, or approximately 12% of revenues in 1996. The Company intends to focus its research and development efforts on current product enhancements and reducing cost configurations for its current products. The Company anticipates that research and development expense will be maintained at current levels in the near term. Interest income was $13,912 during 1997 versus $20,618 during 1996. Interest expense accounted for $80,746 and $288,667 in 1997 and 1996, respectively. Interest expense decreased in 1997 from 1996 due to significant charges incurred in 1996 in connection with a stock appreciation right previously granted to the Company's bank. In May 1996, the bank exercised an alternative stock appreciation right available under the warrant. During 1996, the Company recognized as interest expense approximately $218,000 in connection with the alternative stock appreciation right. Principal and interest amounts due under the alternative stock appreciation right, which were payable on November 30, 1997, have recently been extended to April 1, 1998. EXPORT SALES Revenues from sales to customers located outside of the United States (primarily Europe) accounted for approximately 30% and 29% of the net sales for the years ended August 31, 1997 and 1996, respectively. SEASONALITY The Company's most effective marketing tool is the demonstration and display of its products at the annual meeting of the American Academy of Ophthalmology held during the fall of each year, with a significant amount of the Company's sales orders generated during or shortly after this meeting. Accordingly, the Company expends a considerable amount of time and resources during the first quarter of its fiscal year preparing for this event. As a consequence, the Company's revenues and profitability typically decrease during the periods prior to and following the annual meeting. LIQUIDITY AND CAPITAL RESOURCES The Company's operating activities used cash of $1,411,425 in 1997 as compared to $1,460,460 in 1996. The cash used in operations in 1997 was partially offset by the significant reduction to inventories. Cash used in operating activities in 1996 was comprised principally of the net loss for the year and, to a lesser extent, increased inventory levels. 13 Net cash used in investing activities decreased to $161,735 during 1997 from $215,884 during 1996. The Company's primary investing activities consist of equipment and other capital asset acquisitions. The higher levels during 1996 included capital expenditures associated with establishing the Company's Reading and Documentation Center as well as the purchase and installation of software to upgrade its management information systems, which expenditures were not required during 1997. The Company does not currently have commitments for capital expenditures, however, the Company plans to upgrade its existing management information and corporate communication systems, which may result in increased near term expenditures. In addition, the Company anticipates certain capital expenditures to support efforts to expand its technology to telemedicine/managed care applications. The Company anticipates that related expenditures, if any, will be financed from one or more of the following sources: (i) working capital; (ii) borrowings under an existing credit agreement, if available; or (iii) debt, equity or other financing arrangements, if any, available to the Company. Net cash provided by financing activities in 1997 was $664,135 as compared to $2,410,464 during 1996. The sources of cash from financing activities during the 1997 period were principally the net proceeds of approximately $757,000 from the exercise of certain Series A and B Warrants issued pursuant to a private placement of the Company's Common Stock discussed in the succeeding sentence, and, to a lesser extent, proceeds from the exercise of stock options. The sources of cash from financing activities during the 1996 period were principally the net proceeds of approximately $1,075,000 from a private placement of 1,368,421 shares of the Company's Common Stock and warrants in November 1995, the net proceeds of approximately $1,180,000 from the exercise in May 1996 of certain Series A Warrants issued pursuant to said private placement and, to a lesser extent, borrowings under the Credit Agreement which is more fully described immediately below. See Footnote 7 of the Company's financial statements for a more detailed description of the private placement. Cash generated from financing activities during 1997 was partially offset by the net repayment of borrowings under the Credit Agreement, and during both 1997 and 1996 was offset slightly by principal repayments on notes payable. The Company is party to a revolving line of credit agreement (the "Credit Agreement") with a bank which matured on November 7, 1997. The maximum amount available under the Credit Agreement is $750,000, based upon eligible outstanding accounts receivable balances. Borrowings under the Credit Agreement bear interest at the rate of the bank's prime plus 3% per annum and are secured by substantially all of the Company's assets. The Credit Agreement contains certain restrictive covenants which provide for, among other things, certain working capital and net worth balances and ratios. The Company was not in compliance with the restrictive covenants at August 31, 1997 and borrowings in the amount of approximately $311,000 were outstanding related to the Credit Agreement at that date. On November 18, 1997, the Credit Agreement was converted to a full recourse accounts receivable credit agreement (the "Agreement"), and all amounts outstanding under the Credit Agreement were considered to be the initial advance under the Agreement. The Agreement allows for up to an 80% advance rate on eligible accounts receivable balances, and the maximum borrowing base under the Agreement is $1.2 million. The Bank has full recourse against the Company under the Agreement and the Agreement expires in November 1998. Borrowings under the Agreement bear interest at the Bank's prime lending rate plus 4%. In addition, the Bank will charge monthly an administrative fee equal to the greater of 1/2% of the average daily balance for the month or $1,200. Under the terms of the Agreement, borrowings are secured by substantially all of the Company's assets. 14 At August 31, 1997, the Company's cash and cash equivalents were $142,300. As indicated above, the Company typically expends considerable time and resources during the first quarter of its fiscal year preparing for the annual meeting of the American Academy of Ophthalmology and as a consequence, the Company's revenues and profitability typically decrease during the period surrounding the meeting which could adversely impact the Company's cash position in the immediate term. The Company believes, however, that its existing cash balances together with ongoing collections of its accounts receivable and recently increased available borrowing capacity under the Agreement will be adequate to meet its liquidity and capital requirements over the next twelve months. The Company does not expect to experience collection difficulties with respect to its accounts receivable that would have a material adverse effect on its liquidity. In addition, principal and interest amounts due under the alternative stock appreciation right with the Bank, which amounts were approximately $251,000 as of August 31, 1997, and were originally payable on November 30, 1997, have recently been extended to April 1, 1998. The Company will, however, continue to evaluate alternative sources of capital to meet its cash requirements, including other debt financing, issuing equity securities and entering into other financing arrangements and/or strategic alliances. There can be no assurance, however, that additional financing will be available and, if available, can be obtained on terms favorable to the Company. Additional capital could also be made available to the Company pursuant to the exercise of Series C Warrants issued to JBO in connection with a November 1995 private placement of the Company's common stock, as well as from other outstanding stock options; however, there can be no assurance any such warrants or options will be exercised in the near-term, if at all. In this regard, there can be no assurance that the SEC investigation of JBO may not adversely affect JBO's ability to exercise the Series C Warrants. In addition, the Company faces the possibility of its common stock being delisted from NASDAQ unless it meets the Minimum Closing Price Requirement as stipulated therein. See "Item 5 - Market for Common Equity and Related Stockholder Matters". If the Company's common stock is delisted, it may be difficult for the Company to raise capital through the sale of its common stock. INFLATION The Company believes that inflation has not had a material or significant impact on the Company's revenue or on its results from operations. INCOME TAXES Deferred income taxes are accounted for pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and result from differences in the timing of recognition of certain revenues and expenses for financial statement and income tax reporting purposes. General business credits are accounted for as a reduction of federal income taxes payable under the flow-through method. ACCOUNTING- EARNINGS PER SHARE COMPUTATION AND CAPITAL STRUCTURE DISCLOSURE In February 1997, the Financial Accounting Standards Board issued Statement NO. 128, "Earnings per Share," which is required for both interim and annual periods ending after December 15, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and 15 to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact of Statement No. 128 on the calculation of primary and fully diluted earnings per share is not expected to be material. In February 1997, the Financial Accounting Standards Boards issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure". Statement 129 consolidates existing guidance in APB Opinion No. 10, Omnibus Opinion, Opinion 15, Earnings per Share, and FASB Statement No. 47, Disclosure of Long-Lived Obligations, relating to disclosure about the Company's capital structure. The Financial Accounting Standards Board believes that placing capital structure disclosures in a single standard will simplify compliance with the requirements. Statement 129 effective for financial statements for periods ending after December 15, 1997. The impact of Statement No. 129 on the disclosures relating to the Company's capital structure is not expected to be significant. ITEM 7. FINANCIAL STATEMENTS The financial statements of the Company are attached hereto. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT DIRECTORS AND EXECUTIVE OFFICERS The age of each director or executive officer, his positions and offices with the Company, his term of office as a director, his business experience during the past five years or more, and additional biographical data are set forth below. Information with respect to the officer or director is as of November 1, 1997, except as otherwise stated. DIRECTOR
DIRECTOR NAME AGE POSITION WITH COMPANY SINCE Steven R. Verdooner 36 Chairman of the Board, Chief Executive Officer, 1986 Chief Financial Officer, and Secretary William L. Mince 46 President and Chief Operating Officer 1997 Mark S. Blumenkranz, MD 47 Director 1995 Robert W. Medearis 65 Director 1997 Robert I. Schnuer 64 Director 1996 Lawrence A. Yannuzzi, MD 60 Director 1996
16 All directors of the Company hold office until the earlier of the next annual meeting of shareholders and until their successors have been duly elected and qualified, or their death, resignation or removal. Officers are elected annually by the Board of Directors to hold office until the earlier of their death, resignation, or removal. Set forth below is a description of their business experience during the past five years or more, and other biographical information, for the Company's executive officers an directors: STEVEN R. VERDOONER is Chief Executive Officer, Chief Financial Officer and Secretary for the Company. Mr. Verdooner served as acting President from May of 1993 until his election by the Board of Directors to the position of Chief Executive Officer in July 1997. Mr. Verdooner first served as Secretary of the Company from 1987 to 1988 and has been serving in this capacity since May 1993. Since the Company's inception, Mr. Verdooner has served as a director and is currently the Chairman of the Board of Directors. From 1986 to May 1993, Mr. Verdooner served as Vice President of the Company. From 1986 to 1987, and since 1988, Mr. Verdooner has served as the Company's Chief Financial Officer. From 1983 to 1986, Mr. Verdooner directed the activities of Ocular Graphics, a privately owned company engaged in the business of fluorescein angiography. In 1983 Mr. Verdooner was a member of a research team at the University of California, Davis, School of Medicine, Department of Human Anatomy. WILLIAM L. MINCE joined the Company in July 1997 as President and Chief Operating Officer. From 1994 to July 1997, Mr. Mince held the position of Vice President of Operations for PICS Retail Networks, a company pioneering point- of-sale interactive multimedia advertising. From 1988 to 1994, Mr. Mince served in various operational management capacities for Nellcor/Puritan Bennett, a manufacturer of medical devices and related disposable products. From 1984 to 1988, Mr. Mince was Director of Operations for Topaz, Inc./Square D, a manufacturer of power conditioners, noise suppressers and uninterruptible power supplies. Prior to joining Topaz, Inc./Square D, Mr. Mince served in various manufacturing and operations management positions during a 12-year tenure with Armorlite, Inc., a subsidiary of 3M Company. 17 MARK S. BLUMENKRANZ, M.D. has been a director of the Company since 1995. He also serves on the Company's Scientific Advisory Board. Since 1992 he has been Clinical Professor of Ophthalmology and Co-Director of Retinal Service at Stanford University, and a partner in California Vitreoretinal Associates, a professional medical corporation specializing in diseases and surgery of the retina and vitreous. From 1985 to 1992, he was a partner in Associated Retinal Consultants, a professional medical corporation. Dr. Blumenkranz is currently a director of Midlabs, Inc., a manufacturer of ophthalmic surgical instruments. Dr. Blumenkranz is an associate examiner for the American Board of Ophthalmology and a member of the Retina, Macula and Vitreous Societies. ROBERT W. MEDEARIS has been a director of the Company since August 1997. He has been the President, Chief Executive Officer and co-owner of Chalice Investments Inc., a company engaged in joint ventures and related entrepreneurial and international management consulting activities in the former USSR, primarily the Republic of Georgia, since its formation in 1992. Since 1980, Mr. Medearis has served as director for a number of companies, both private and public, engaged principally in engineering, real estate and banking. ROBERT I. SCHNUER has been a director of the Company since March 1996. He has been the President and Chief Executive Officer of RIS Consulting Services, his own consulting firm which concentrates in the health care and employee benefits industry, since its formation in 1995. From 1954 to 1995, Mr. Schnuer was employed by CIGNA Corporation in the sales and account management aspects of its health care and employee benefits operations, ultimately serving as a Vice President. LAWRENCE A. YANNUZZI, M.D. has been a director of the Company since March 1996. He also serves on the Company's Scientific Advisory Board. Dr. Yannuzzi is the founder and President of Vitreous-Retina-Macula Consultants of New York, P.C., a professional medical corporation specializing in diseases and surgery of the retina and vitreous, for which he has been an officer, director, and practicing ophthalmologist for over 15 years. Dr. Yannuzzi also is Director of Retinal Services and Vice Chairman of the Department of Ophthalmology at the Manhattan Eye, Ear, and Throat Hospital and he is a professor of Clinical Ophthalmology at the College of Physicians and Surgeons of Columbia University Medical School. There is no family relationship between any of the Company's directors or officers. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under Section 16(a) of the Exchange Act of 1934, as amended ("Exchange Act"), all executive officers, directors, and persons who are the beneficial owner of more than 10% of the common stock of a company which files reports pursuant to Section 12 of the Exchange Act are required to report the ownership of such common stock, options, and stock appreciation rights (other than certain cash-only rights) and any changes in that ownership with the Securities and Exchange Commission (the "SEC"). Specific due dates for these reports have been established, and the Company is required to report in this Form 10-KSB any failure to comply therewith during the fiscal year ended August 31, 1997. The Company believes that all of these filing requirements were satisfied by its executive officers, directors, and by the beneficial owners of more than 10% of the Common Stock, except for Messrs. Mince and Medearis' inadvertent failure to file a Form 3 upon becoming a Company officer and director, respectively, and a 18 Form 4 upon the Company's grant of stock options, Mr. Verdooner and Dr. Yannuzzi's inadvertent failure to timely file a Form 4 in connection with stock options granted in April 1997, and Dr. Blumenkranz's inadvertent failure to timely file a Form 4 upon exercise of warrants in February 1997. In making this statement, the Company has relied on copies of the reporting forms received by it or on the written representations from certain reporting persons that no Form 5 (Annual Statement of Changes in Beneficial Ownership) were required to be filed under applicable rules of the SEC. ITEM 10. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following summary compensation table sets forth the cash and non-cash compensation paid to or accrued for the Company's Chief Executive Officer and President during the last three fiscal years. The table also includes information for other Company employees earning total compensation in excess of $100,000 for fiscal year 1997.
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS NAME AND SECURITIES UNDERLYING PRINCIPAL OCCUPATION YEAR SALARY BONUS OPTIONS ALL OTHER COMPENSATION ($) ($) ($) (#) ($) Steven R. Verdooner, Chief Executive 1997 $ 123,750 0 0 $ 768(1) Officer, Chief 1996 $ 120,000 0 0 $ 3,768(1) Financial Officer 1995 $ 96,308 0 0 $ 4,018(1) and Secretary William L. Mince, President and Chief 1997 $ 17,500(2) 5,250(3) 0 0 Operating Officer 1996 $ 0 0 0 0 1995 $ 0 0 0 0 Glenn W. Erickson Regional Sales Manager and 1997 $ 75,000 0 0 $49,827(4) Product Specialist 1996 $ 75,000 0 0 $64,048(4) 1995 $ 75,000 0 0 $59,652(4)
(1) Includes disability insurance premiums in the amount of $518 paid by the Company on behalf of Mr. Verdooner for each of the fiscal years ended in 1997, 1996, and 1995, and royalty payments to Mr. Verdooner in the amount of $250, $3,250, and $3,500 for each of the fiscal years ended 1997, 1996, and 1995, respectively. (2) Mr. Mince was appointed as President for the Company in July 1997. This figure reflects the portion of Mr. Mince's $140,000 annual salary that accrued during fiscal year 1997. (3) This amount represents the portion of Mr. Mince's annual bonus that accrued for fiscal year 1997. (4) This figure reflects sales commission paid to Mr. Erickson during the year. 19 STOCK OPTIONS GRANTED As of August 31, 1997, the Company did not have any long term incentive plans nor had it awarded any restricted stock. The table set forth below contains information with respect to the award of stock options during the fiscal year ended August 31, 1997 to the executive officers covered by the Summary Compensation Table.
NUMBER OF SECURITIES PERCENT OF TOTAL UNDERLYING OPTIONS GRANTED TO EXERCISE OR MARKET PRICE EXPIRATION NAME OPTIONS GRANTED(#) EMPLOYEES IN 1997 BASE PRICE ON DATE OF GRANT DATE Steven R. Verdooner 50,000 (1) 27% (2) $2.75 $2.75 04/11/2002 William L. Mince 100,000 (3) 54% (2) $1.19 $1.19 08/11/2002 Glenn W. Erickson -- -- -- -- --
(1) These options were granted to Mr. Verdooner on April 11, 1997, pursuant to the Company's 1992 Nonstatutory Stock Option Plan and 50,000 options under this same plan previously granted to Mr. Verdooner on March 27, 1992 expired in March 1997. (2) Employees of the Company were granted options from the Company's 1992 Stock Option Plan, with an aggregate of 36,500 shares of common stock underlying such options. (3) These options were granted to Mr. Mince on August 11, 1997 as required by Mr. Mince's employment contract with the Company, executed in July 1997. AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES No stock options or SARs were exercised in 1997 by the executive officers covered by the Summary Compensation Table. The following table sets forth, for each of the executive officer named in the Summary Compensation Table above, the number of the stock options held at August 31, 1997, and the realizable gain of the stock options that are "in-the-money". The in-the-money stock options and SARs are those with exercise prices that are below the year-end stock price because the stock value grew since the date of the grant.
FISCAL YEAR-END OPTIONS VALUES Number of Securities Underlying Value of Unexercised Shares Unexercised Options In-the-Money Options Acquired on Value AT FISCAL YEAR END AT FISCAL YEAR END NAME EXERCISED(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE (#) (#) ($) ($) Steven R. Verdooner -- -- 108,333 75,000 $ 2,000 -- William L. Mince -- -- -- 100,000 -- -- Glenn W. Erickson -- -- 32,167 30,833 $ 130 $50
___________ (1) Based upon the closing price of the Common Stock as quoted by Nasdaq Small Cap Market on August 29, 1997 of $1.00 per share. 20 EMPLOYMENT AGREEMENTS Mr. Verdooner's employment agreement, as amended in 1995, provides for an annual salary of $120,000, incentive stock options covering 33,333 shares of the Company's Common Stock pursuant to the Company's 1992 Stock Option Plan and a termination date of November 1998. In July 1997, the Company restructured its executive management and Mr. Verdooner was appointed, from his former position of President, to serve as Chief Executive Officer. As a result of his new office, the Company has increased Mr. Verdooner's annual salary from $120,000 to $150,000, and extended the term of his employment agreement to July 1999, effective July 1997. A formal amendment to Mr. Verdooner's employment agreement with the Company reflecting these changes is expected to be executed in the near future. In July 1997, the Company hired Mr. Mince to serve as the Company's President and Chief Operating Officer. Pursuant to the terms of the employment agreement, which has a two (2) year term, the Company has granted a stock option to Mr. Mince to purchase 100,000 shares of the Company's common stock. Further, the employment agreement provides, among other things, for an annual base salary of $140,000 and the opportunity for Mr. Mince to receive an annual performance bonus, not to exceed $42,000. In addition, if Mr. Mince's employment is terminated before the expiration of its two -year term, other than as provided in the employment agreement, Mr. Mince may be eligible to receive severance payments ranging from $70,000 to $140,000. DIRECTORS FEES During 1997, the Company implemented a directors fees policy. Under the Company's policy, directors receive $1,000 for each meeting attended in person and reimbursement of costs associated with such attendance. Each director who attends a directors' meeting by telephone receives $500, which covers all telephonic meetings for that particular quarter. In addition, under the new policy, each director receives, on the subsequent anniversary date for each year of service to the Company as a director, an option to purchase 5,000 shares of the Company's common stock. SCIENTIFIC ADVISORY BOARD The Company has assembled fourteen ophthalmologists from around the country with expertise complimentary to the Company's proprietary technology who have agreed to serve on a Scientific Advisory Board (the "SAB"). The principal purpose of the SAB is to assist in advancing the Company's technology by reviewing its status and recommending alternative approaches. The SAB plans to hold meetings in conjunction with national conferences such as the annual meeting of the American Academy of Ophthalmology held during the fall of each year. The members of the SAB are not expected to devote substantial amounts of their time as a result of serving on the SAB. The composition of the SAB may vary from time to time depending on the Company's evolving technological needs. SAB members do not receive compensation for their services as advisors. They are, however, reimbursed for reasonable out-of-pocket expenses incurred in connection with their services and the Company has granted options under its 1995 Nonstatutory Stock Option Plan to each member of the SAB to purchase shares of Common Stock. In addition to Drs. Mark S. Blumenkranz and Lawrence A. Yannuzzi, both directors of the Company, the SAB includes: 21 DAVID BOYER, M.D. Senior Partner, Retina Vitreous Associates North Hollywood, California STANLEY CHANG, M.D. Chairman Department of Ophthalmology Columbia University DONALD D'AMICO, M.D. Associate Chief of Ophthalmology for Clinical Affairs Professor of Ophthalmology Massachusetts Eye and Ear Infirmary JAY FEDERMAN, M.D. Professor of Ophthalmology Medical College of Pennsylvania Co-Director of Retina Services of Wills Eye Hospital Co-Director of Associated Retinal Consultants HARRY FLYNN, JR., M.D. Professor of Ophthalmology Bascom Palmer Eye Institute KURT A. GITTER, M.D. Clinical Professor of Ophthalmology Louisiana State University Director, Foundation for Retinal Research LEE JAMPOL, M.D. Professor and Chairman of Department of Ophthalmology, Northwestern University of Medical School JONATHAN JAVITT, M.D., M.P.H. Chairman and Chief Medical Officer Certitude HENRY J. KAPLAN, M.D. Professor and Chairman Department of Ophthalmology & Visual Sciences Washington University School of Medicine HILEL LEWIS, M.D. Chairman, Division of Ophthalmology, Cleveland Clinic Director, Eye Clinic, Cleveland Clinic LAWRENCE SINGERMAN, M.D. Clinical Professor of Ophthalmology Case Western Reserve University Director, The Retina Institute and Retina Service Mt. Sinai Medical Center President, Retina Associates of Cleveland, Inc. Founder, The Macula Society 22 GEORGE WILLIAMS, M.D. Chief of Vitreo-Retina Surgery William Beaumon Hospital, Royal Oak, MI Associate Clinical Professor Oakland University, Rochester Hills, MI President Michigan Ophthalmology Society Vice President Vitreous Society ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's outstanding Common Stock as of October 31, 1997, by: (i) each executive officer of the Company named in the Summary Compensation Table, (ii) all directors and executive officers of the Company as a group, and (iii) each person known to the Company to own beneficially more than 5% of its outstanding Common Stock. Except as otherwise indicated, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock owned by them.
Current Beneficial Ownership Number Percent NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES (1) OF CLASS(2) DIRECTORS AND CERTAIN EXECUTIVE OFFICERS Steven R. Verdooner (3) 182,372 4.5% 221 Lathrop Way, Suite I Sacramento, CA 95815 William L. Mince 30,450 * 221 Lathrop Way, Suite I Sacramento, Ca 95815 Mark S. Blumenkranz, M.D. (4) 694,911 16.6% 1225 Crane Street Menlo Park, CA 94025 Glenn W. Erickson (5) 39,583 1.0% 221 Lathrop Way, Suite I Sacramento, CA 95815 Robert W. Medearis (6) 5,000 * 195 Bryant Street, Suite A Palo Alto, CA 94301 Robert I. Schnuer (7) 39,450 1.0% 111 Roxen Road Rockville Centre, NY 11570 Lawrence A. Yannuzzi, M.D. (8) 40,000 1.0% 519 East 72nd Street, Suite 203 New York, NY 10021 All directors and executive officers as a group (7 persons) 1,031,767 23.3% OTHER BENEFICIAL HOLDERS JB Oxford & Company (9) 250,000 6.0% 9665 Wilshire Boulevard Beverly Hills, CA 90212
23 ______________ * Less than 1% (1) In accordance with Rule 13d-3 promulgated pursuant to the Securities Exchange Act of 1934, a person is deemed to be the beneficial owner of a security for purposes of the rule if he or she has or shares voting power or dispositive power with respect to such security or has the right to acquire such ownership within sixty days. As used herein, "voting power" is the power to vote or direct the voting of shares, and "dispositive power" is the power to dispose or direct the disposition of shares, irrespective of any economic interest therein. (2) In calculating the percentage ownership for a given individual or group, the number of shares of Common Stock outstanding includes unissued shares subject to options, warrants, rights or conversion privileges exercisable within sixty days held by such individual or group, but are not deemed outstanding by any other person or group. (3) Includes 121,666 shares subject to currently exercisable options and 16,666 shares subject to currently exercisable warrants. (4) Includes 63,333 shares subject to currently exercisable stock options, and 210,526 shares subject to Series B Warrants (which expired November 21, 1997). (5) Includes 37,583 shares subject to currently exercisable stock options. (6) Includes 5,000 shares subject to currently exercisable stock options. (7) Includes 31,250 shares subject to currently exercisable stock options. (8) Includes 40,000 shares subject to currently exercisable stock options. (9) Includes 250,000 shares subject to currently exercisable Series C Warrants, which warrants were issued in connection with the Company's November 1995 private placement offering of Common Stock. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The U.S. patent application relating to the Glaucoma-Scope was originally filed on June 24, 1991 in the name of Dennis J. Makes, a former officer and director of the Company, Mr. Verdooner and Ms. Patricia C. Meade. Each of these individuals assigned all their U.S. and foreign rights in the invention to the Company pursuant to an assignment dated October 23, 1990 recorded with the U.S. Patent and Trademark Office. Mr. Makes and Mr. Verdooner each have been granted a royalty of $250 for each Glaucoma-Scope sold by the Company. During the 1997 fiscal year, Mr. Verdooner received royalty payments of $250. Ms. Meade assigned her patent rights to the Company pursuant to her condition of employment by the Company and no additional compensation was paid to her as a result of such assignment. In addition, the Company also entered into a consulting agreement with G. Peter Halberg, M.D., a former Company director, on January 23, 1992, pursuant to which Dr. Halberg is entitled to receive a partial payment for services rendered under such agreement, deferred compensation in the form of a royalty payment of $200 for each of the first 100 Glaucoma-Scope units sold at full price (for a maximum royalty payment of $20,000). Other than as described above, the Company has no other agreements, contracts, understandings or arrangements, directly or indirectly, to pay any additional royalties on the sale of its products. Mr. Verdooner and Mr. Mince each have an employment agreement with the Company. See "Employment Agreements" above. All current and future transactions between the Company and its officers and directors and principal shareholders or any affiliates thereof will be on terms no less favorable than could be obtained from unaffiliated third parties. 24 Except as described herein, none of the directors or officers of the Company, and no shareholders holding over 5% of the Company's Common Stock and no corporations or firms with which such persons or entities are associated, currently maintains or has maintained since the beginning of the last fiscal year, any significant business or personal relationship with the Company, other than such as arises by virtue of such position or ownership interest in the Company. 25 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits
Exhibit FOOTNOTE NUMBER Description of Exhibit Reference 3.1 Articles of Incorporation of the Registrant, as amended. * 3.2 Amended Bylaws of the Registrant. * 4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of * Incorporation, as amended, and the amended Bylaws of the Registrant defining the rights of holders of Common Stock of the Registrant. 10.1 Lease Agreement, dated as of July 10, 1987, between the Registrant * (as tenant) and Transamerica/Emkay Income Properties I, as amended on July 23, 1990 and June 11, 1991. 10.1(a) Seventh Amendment to lease effective as of July 18, 1996. (7) 10.2 Employment Agreement, dated March 27, 1992, between the Registrant * and Dennis J. Makes. 10.2(a) Amendment dated June 30, 1993 to the Employment Agreement between (1) the Registrant and Dennis J. Makes dated March 27, 1992. 10.3 Confidentiality Agreement, dated March 27, 1992 between the * Registrant and Dennis J. Makes. 10.4 Confidentiality Agreement, dated March 27, 1992 between the * Registrant and Steven R. Verdooner. 10.5 Confidentiality Agreement, dated March 27, 1992 between the * Registrant and Richard Wullaert. 10.6 Consulting Agreement, dated January 23, 1992, between the * Registrant and G. Peter Halberg, M.D. 10.7 Assignment dated October 23, 1990 of U.S. Patent Application for * Apparatus and Method for Topographical Analysis of the Retina to the Registrant by Steven R. Verdooner, Patricia C. Meade, and Dennis J. Makes (as recorded on Reel 5490, Frame 423 in the Assignment Branch of the U.S. Patent and Trademark Office). 10.8 Form of International Distribution Agreement used by the * Registrant and sample form of End User Software License Agreement. 10.9 Original Equipment Manufacturer Agreement, dated April 1, 1991, * between the Registrant and SONY Medical Electronics, a division of SONY Corporation of America. 10.10 Original Equipment Manufacturer/Value Added Reseller Agreement, * dated May 7, 1991, between the Registrant and Eastman Kodak Company. 10.11 The Registrant's 1992 Nonstatutory Stock Option Plan and sample * form of Nonstatutory Stock Option Agreement. 10.12 Common Stock and Warrant Purchase Agreement ("Stock Purchase * Agreement"), dated as of February 8, 1992, among the Registrant, Johnnie R. Williams, Kathleen M. O'Donnell, as Trustee of Irre- vocable Trust No. 6, FBO F.E. O'Donnell, Jr., M.D., Steven R. Verdooner and Dennis J. Makes. 26 10.12(a) Amendment No. 1 to Stock Purchase Agreement, dated March 25, 1992, * among the Registrant, Johnnie R. Williams, individually, Johnnie R. Williams, as Trustee of Irrevocable Trust No. 1, Rambert Summons, and Kathleen M. O'Donnell, as Trustee of Irrevocable Trust No. 6, FBO F.E. O'Donnell, Jr., M.D. 10.13 Cross-Indemnification Agreement, dated February 14, 1991, among * Dennis Makes, Steven Verdooner, and Richard Wullaert. 10.14 Key Man Life Insurance Policies in the amount of $1,000,000 for * each of Dennis J. Makes and Steven R. Verdooner, with the Registrant as the named beneficiary. 10.15 Warrant dated February 12, 1993 issued by the Registrant to (1) Steven R. Verdooner to purchase 50,000 shares of Common Stock. 10.16 Stock Option Plan. (1) 10.17 Promissory Note dated January 4, 1993 from the Registrant to (1) Western Financial Savings Bank in the amount of $25,209.83 due in full by January 4, 1998. 10.18 Rental Agreement dated May 1, 1994 by and between the Registrant (2) and Robert J. Rossetti. 10.19 Security and Loan Agreement (with Credit Terms and Conditions) (3) dated April 12, 1995 by and between the Registrant and Imperial Bank. 10.19(a) General Security Agreement dated April 12, 1995 by and between the (3) Registrant and Imperial Bank. 10.19(b) Warrant dated November 1, 1995 issued by the Registrant to (4) Imperial Bank to purchase 67,500 shares of Common Stock. 10.19(c) Amended Loan and Security Agreement (with Credit Terms and (4) Conditions) dated November 1, 1995. 10.19(d) Registration Rights Agreement dated November 1, 1995 between the (4) Registrant and Imperial Bank. 10.19(e) Amended Loan and Security Agreement (with Credit Terms and (6) Conditions) dated April 4, 1996. 10.19(f) Amended Loan and Security Agreement (with Credit Terms and (7) Conditions) dated July 12, 1996. 10.19(g) Amended Loan and Security Agreement (with Credit Terms and (7) Conditions) dated November 21, 1996. 10.19(h) Amended Loan and Security Agreement (with Credit Terms and (8) Conditions) dated June 3, 1997. 10.19(i) Amended Loan and Security Agreement (with Credit Terms and (9) Conditions) dated August 28, 1997. 10.19(j) Amended Loan and Security Agreement (with Credit Terms and (9) Conditions) dated October 24, 1997. 10.19(k) Amended Loan and Security Agreement (with Credit Terms and (9) Conditions) dated November 3, 1997. 10.19(l) Amended Loan and Security Agreement (with Credit Terms and (9) Conditions) dated November 21, 1997. 10.19(m) Agreement for Purchase of Receivable (Full Recourse) dated (9) November 18, 1997 between the Registrant and Imperial Bank. 10.20 Purchase Agreements dated November 21, 1995 between the (4) Registrant, JB Oxford & Company and certain Investors. 10.20(a) Warrant Agreement dated November 21, 1995 between the Registrant, (4) JB Oxford & Company and certain Investors. 27 10.20(b) First Amendment Warrant Agreement dated November 21, 1996 between (7) the Registrant, JB Oxford & Company and certain Holders. 10.20(c) Registration Rights Agreement dated November 21, 1995 between the (4) Registrant, JB Oxford & Company and certain Investors. 10.21 Employment Agreement dated November 20, 1995 between the (4) Registrant and Steven R. Verdooner. 10.22 Employment Agreement dated November 20, 1995 between the (4) Registrant and R. Michael Clark. 10.23 Employment Agreement dated July 14, 1997 between the Registrant (9) and William L. Mince. 10.25 The Registrant's 1995 Nonstatutory Stock Option Plan and sample (5) form of Nonstatutory Stock Option Agreement. 11.1 Computation of net loss per share. (9) 23.1 Consent of Ernst & Young LLP, Independent Auditors. (9) 27 Financial Data Schedule (for SEC use only). (9)
* Incorporated by reference to the like-numbered exhibits previously filed with Registrant's Registration Statement on Form S-18, number 33-46864-LA. (1) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1993 filed on November 26, 1993. (2) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1994 filed on November 29, 1994. (3) Incorporated by reference to the Registrant's Quarterly Report on Form 10- QSB for the quarterly period ended May 31, 1995 filed on July 14, 1995. (4) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1995 filed on November 29, 1995. (5) Incorporated by reference to the Registrant's Registration Statement on Form S-8 filed on May 28, 1996, number 333-0461. (6) Incorporated by reference to the Registrant's Quarterly Report on Form 10- QSB for the quarterly period ended May 31, 1996 filed on July 15, 1996. (7) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1996 filed on November 29, 1996. (8) Incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended May 31, 1997 filed on July 15, 1997. (9) Exhibit filed herewith. B. Reports on Form 8-K None. 28 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OPHTHALMIC IMAGING SYSTEMS Date: November 28, 1997 By STEVEN R. VERDOONER Steven R. Verdooner, Chief Executive Officer, Chief Financial Officer and Secretary In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
STEVEN R. VERDOONER Chief Executive Officer, Chief November 28, 1997 Steven R. Verdooner Financial Officer, Secretary and Director (Principal Executive Officer and Principal Financial Officer) WILLIAM L. MINCE President and Chief Operating November 25, 1997 William L. Mince Officer STEVEN C. LAGORIO Director of Finance November 28, 1997 Steven C. Lagorio (Principal Accounting Officer) MARK S. BLUMENKRANZ, M.D. Director November 28, 1997 Mark S. Blumenkranz, M.D. ROBERT W. MEDEARIS Director November 28, 1997 Robert W. Medearis ROBERT I. SCHNUER Director November 25, 1997 Robert I. Schnuer LAWRENCE A. YANNUZZI Director November 25, 1997 Lawrence A. Yannuzzi, M.D.
EXHIBIT INDEX
Exhibit NUMBER Description of Exhibit Page Number 3.1 Articles of Incorporation of the Registrant, as amended. * 3.2 Amended Bylaws of the Registrant. * 4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation, * as amended, and the amended Bylaws of the Registrant defining the rights of holders of Common Stock of the Registrant. 10.1 Lease Agreement, dated as of July 10, 1987, between the Registrant (as * tenant) and Transamerica/Emkay Income Properties I, as amended on July 23, 1990 and June 11, 1991. 10.1(a) Seventh Amendment to lease effective as of July 18, 1996. (7) 10.2 Employment Agreement, dated March 27, 1992, between the Registrant and * Dennis J. Makes. 10.2(a) Amendment dated June 30, 1993 to the Employment Agreement between the (1) Registrant and Dennis J. Makes dated March 27, 1992. 10.3 Confidentiality Agreement, dated March 27, 1992 between the Registrant and * Dennis J. Makes. 10.4 Confidentiality Agreement, dated March 27, 1992 between the Registrant and * Steven R. Verdooner. 10.5 Confidentiality Agreement, dated March 27, 1992 between the Registrant and * Richard Wullaert. 10.6 Consulting Agreement, dated January 23, 1992, between the Registrant and * G. Peter Halberg, M.D. 10.7 Assignment dated October 23, 1990 of U.S. Patent Application for Apparatus * and Method for Topographical Analysis of the Retina to the Registrant by Steven R. Verdooner, Patricia C. Meade, and Dennis J. Makes (as recorded on Reel 5490, Frame 423 in the Assignment Branch of the U.S. Patent and Trademark Office). 10.8 Form of International Distribution Agreement used by the Registrant and * sample form of End User Software License Agreement. 10.9 Original Equipment Manufacturer Agreement, dated April 1, 1991, between the * Registrant and SONY Medical Electronics, a division of SONY Corporation of America. 10.10 Original Equipment Manufacturer/Value Added Reseller Agreement, * dated May 7, 1991, between the Registrant and Eastman Kodak Company. 10.11 The Registrant's 1992 Nonstatutory Stock Option Plan and sample form * of Nonstatutory Stock Option Agreement. 10.12 Common Stock and Warrant Purchase Agreement ("Stock Purchase * Agreement"), dated as of February 8, 1992, among the Registrant, Johnnie R. Williams, Kathleen M. O'Donnell, as Trustee of Irre- vocable Trust No. 6, FBO F.E. O'Donnell, Jr., M.D., Steven R. Verdooner and Dennis J. Makes. 10.12(a) Amendment No. 1 to Stock Purchase Agreement, dated March 25, 1992, * among the Registrant, Johnnie R. Williams, individually, Johnnie R. Williams, as Trustee of Irrevocable Trust No. 1, Rambert Summons, and Kathleen M. O'Donnell, as Trustee of Irrevocable Trust No. 6, FBO F.E. O'Donnell, Jr., M.D. 10.13 Cross-Indemnification Agreement, dated February 14, 1991, among * Dennis Makes, Steven Verdooner, and Richard Wullaert. 10.14 Key Man Life Insurance Policies in the amount of $1,000,000 for each * of Dennis J. Makes and Steven R. Verdooner, with the Registrant as the named beneficiary. 10.15 Warrant dated February 12, 1993 issued by the Registrant to (1) Steven R. Verdooner to purchase 50,000 shares of Common Stock. 10.16 Stock Option Plan. (1) 10.17 Promissory Note dated January 4, 1993 from the Registrant to Western (1) Financial Savings Bank in the amount of $25,209.83 due in full by January 4, 1998. 10.18 Rental Agreement dated May 1, 1994 by and between the Registrant and (2) Robert J. Rossetti. 10.19 Security and Loan Agreement (with Credit Terms and Conditions) dated (3) April 12, 1995 by and between the Registrant and Imperial Bank. 10.19(a) General Security Agreement dated April 12, 1995 by and between the (3) Registrant and Imperial Bank. 10.19(b) Warrant dated November 1, 1995 issued by the Registrant to Imperial (4) Bank to purchase 67,500 shares of Common Stock. 10.19(c) Amended Loan and Security Agreement (with Credit Terms and (4) Conditions) dated November 1, 1995. 10.19(d) Registration Rights Agreement dated November 1, 1995 between the (4) Registrant and Imperial Bank. 10.19(e) Amended Loan and Security Agreement (with Credit Terms and (6) Conditions) dated April 4, 1996. 10.19(f) Amended Loan and Security Agreement (with Credit Terms and (7) Conditions) dated July 12, 1996. 10.19(g) Amended Loan and Security Agreement (with Credit Terms and (7) Conditions) dated November 21, 1996. 10.19(h) Amended Loan and Security Agreement (with Credit Terms and (8) Conditions) dated June 3, 1997. 10.19(i) Amended Loan and Security Agreement (with Credit Terms and (9) Conditions) dated August 28, 1997. 10.19(j) Amended Loan and Security Agreement (with Credit Terms and (9) Conditions) dated October 24, 1997. 10.19(k) Amended Loan and Security Agreement (with Credit Terms and (9) Conditions) dated November 3, 1997. 10.19(l) Amended Loan and Security Agreement (with Credit Terms and (9) Conditions) dated November 21, 1997. 10.19(m) Agreement for Purchase of Receivable (Full Recourse) dated November (9) 18, 1997 between the Registrant and Imperial Bank. 10.20 Purchase Agreements dated November 21, 1995 between the Registrant, (4) JB Oxford & Company and certain Investors. 10.20(a) Warrant Agreement dated November 21, 1995 between the Registrant, (4) JB Oxford & Company and certain Investors. 10.20(b) First Amendment Warrant Agreement dated November 21, 1996 between (7) the Registrant, JB Oxford & Company and certain Holders. 10.20(c) Registration Rights Agreement dated November 21, 1995 between the (4) Registrant, JB Oxford & Company and certain Investors. 10.21 Employment Agreement dated November 20, 1995 between the Registrant (4) and Steven R. Verdooner. 10.22 Employment Agreement dated November 20, 1995 between the Registrant (4) and R. Michael Clark. 10.23 Employment Agreement dated July 14, 1997 between the Registrant and (9) William L. Mince. 10.25 The Registrant's 1995 Nonstatutory Stock Option Plan and sample form (5) of Nonstatutory Stock Option Agreement. 11.1 Computation of net loss per share. (9) 23.1 Consent of Ernst & Young LLP, Independent Auditors. (9) 27 Financial Data Schedule (for SEC use only). (9)
*Incorporated by reference to the like-numbered exhibits previously filed with Registrant's Registration Statement on Form S-18, number 33-46864-LA. (1) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1993 filed on November 26, 1993. (2) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1994 filed on November 29, 1994. (3) Incorporated by reference to the Registrant's Quarterly Report on Form 10- QSB for the quarterly period ended May 31, 1995 filed on July 14, 1995. (4) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1995 filed on November 29, 1995. (5) Incorporated by reference to the Registrant's Registration Statement on Form S-8 filed on May 28, 1996, number 333-0461. (6) Incorporated by reference to the Registrant's Quarterly Report on Form 10- QSB for the quarterly period ended May 31, 1996 filed on July 15, 1996. (7) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1996 filed on November 29, 1996. (8) Incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended May 31, 1997 filed on July 15, 1997. (9) Exhibit filed herewith. INDEX TO FINANCIAL STATEMENTS Ophthalmic Imaging Systems PAGE Report of Ernst & Young LLP, Independent Auditors .......................F-1 Balance Sheet as of August 31, 1997 ....................................F-2 Statements of Operations for the Years Ended August 31, 1997 and 1996... F-3 Statements of Stockholders' Equity for the Years Ended August 31, 1997 and 1996..............................................................F-4 Statements of Cash Flows for the Years Ended August 31, 1997 and 1996....F-5 Notes to Financial Statements ...........................................F-6 F-1 Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Stockholders Ophthalmic Imaging Systems We have audited the accompanying balance sheet of Ophthalmic Imaging Systems as of August 31, 1997, and the related statements of operations, stockholders' equity, and cash flows for the years ended August 31, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ophthalmic Imaging Systems at August 31, 1997, and the results of its operations and its cash flows for the years ended August 31, 1997 and 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Sacramento, California October 21, 1997, except for Note 10 as to which the date is November 18, 1997 F-2 Ophthalmic Imaging Systems Balance Sheet August 31, 1997 ASSETS Current assets: Cash and equivalents $ 142,300 Accounts receivable, net of allowance for doubtful accounts of approximately $100,000 1,644,541 Inventories 794,052 Prepaid expenses and other current assets 93,408 ---------- Total current assets 2,674,301 Furniture and equipment, net 380,782 Other assets 7,385 ---------- $3,062,468 ========== Liabilities and Stockholders' Equity Current liabilities: Short-term borrowings $ 311,002 Accounts payable 816,509 Accrued liabilities 794,305 Accrued warrant appreciation right 251,497 Deferred extended warranty revenue 93,614 Customer deposits 125,538 Notes payable 2,234 ---------- Total current liabilities 2,394,699 Commitments Stockholders' equity: Preferred stock, no par value, 20,000,000 shares authorized; none issued or outstanding - Common stock, no par value, 20,000,000 shares authorized; 3,905,428 shares issued and outstanding 10,244,615 Deferred compensation (306,894) Accumulated deficit (9,269,952) ---------- Total stockholders' equity 667,769 ---------- $ 3,062,468 =========== SEE ACCOMPANYING NOTES. F-3 Ophthalmic Imaging Systems Statements of Operations YEARS ENDED AUGUST 31, 1997 1996 ------------------------------ Revenues: Net sales $6,480,055 $ 6,672,667 Other revenue 145,561 200,984 ------------------------------ 6,625,616 6,873,651 Cost of sales 4,885,004 4,797,324 ------------------------------ Gross profit 1,740,612 2,076,327 OPERATING EXPENSES: Sales and marketing 1,624,470 1,652,965 General and administrative 1,089,670 722,462 Research and development 1,070,192 846,034 ------------------------------ Total operating expenses 3,784,332 3,221,461 ------------------------------ Loss from operations (2,043,720) (1,145,134) OTHER INCOME (EXPENSE): Interest income 13,912 20,618 Interest expense (80,746) (288,667) ------------------------------- Net loss $(2,110,554) $ (1,413,183) =============================== Net loss per share $ (.59) $ (.64) =============================== Shares used in the calculation of net loss per share 3,597,879 2,204,506 ============================== SEE ACCOMPANYING NOTES. F-4 Ophthalmic Imaging Systems Statements of Stockholders' Equity Years ended August 31, 1997 and 1996
COMMON STOCK Total -------------------- Deferred Accumulated Stockholders' SHARES Amount Compensation Deficit Equity ----------------------------------------------------------------------- Balances at August 31, 1995 875,112 $ 6,674,639 $ - $ (5,746,215) $ 928,424 Sale of common stock through private placement 1,368,421 1,074,841 - - 1,074,841 Options exercised 11,000 10,230 - - 10,230 Issuance of common stock upon exercise of warrants 1,052,631 1,180,486 - - 1,180,486 Net loss - - - (1,413,183) (1,413,183) ----------------------------------------------------------------------- Balances at August 31, 1996 3,307,164 8,940,196 - (7,159,398) 1,780,798 Options exercised 52,400 152,286 - - 152,286 Issuance of common stock upon exercise of warrants 545,864 757,097 - - 757,097 Deferred compensation related to stock options granted to non-employees - 395,036 (395,036) - - Stock option compensation expense - - 88,142 - 88,142 Net loss - - - (2,110,554) (2,110,554) ------------------------------------------------------------------------- Balances at August 31, 1997 3,905,428 $ 10,244,615 $(306,894) $ (9,269,952) $ 667,769 =========================================================================
SEE ACCOMPANYING NOTES. F-5 Ophthalmic Imaging Systems Statements of Cash Flows Increase (Decrease) in Cash and Equivalents YEARS ENDED AUGUST 31, 1997 1996 ------------------------------ Operating activities: Net loss $(2,110,554) $ (1,413,183) Adjustments to reconcile net loss to net cash used in operating activities: Accrued warrant appreciation right 27,215 211,782 Depreciation and amortization 142,148 102,156 Provision for doubtful accounts (6,116) (5,338) Stock option compensation expense 88,142 - Net changes in operating assets and liabilities: Accounts receivable (566,421) 239,943 Inventories 786,483 (405,040) Prepaid expenses and other current assets (28,460) (475) Other assets 79,250 (79,797) Accounts payable (120,950) (164,714) Accrued liabilities 196,664 75,716 Deferred extended warranty revenue 12,417 6,100 Customer deposits 88,757 (27,610) --------------------------- Net cash used in operating activities (1,411,425) (1,460,460) INVESTING ACTIVITY: Capital expenditures for furniture and equipment (161,735) (215,884) FINANCING ACTIVITIES: Proceeds from short-term borrowings 308,000 150,000 Repayment of short-term borrowings (546,998) - Principal payments on notes payable (6,250) (5,093) Issuance of common stock 909,383 2,265,557 ----------------------------- Net cash provided by financing activities 664,135 2,410,464 ----------------------------- Net (decrease) increase in cash and equivalents (909,025) 734,120 Cash and equivalents, beginning of year 1,051,325 317,205 ----------------------------- Cash and equivalents, end of year $142,300 $ 1,051,325 ============================= SEE ACCOMPANYING NOTES. F-6 Ophthalmic Imaging Systems Notes to Financial Statements August 31, 1997 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Ophthalmic Imaging Systems (the Company), was incorporated in California in July 1986. The Company is primarily engaged in the business of designing, developing, manufacturing, and marketing digital imaging systems, image enhancements and analysis software, and related products and services for use by practitioners in the ocular healthcare field. USE OF ESTIMATES The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which require the Company's management to make estimates and assumptions that affect the amounts reported therein. Actual results could vary from such estimates. CONCENTRATIONS OF CREDIT RISK AND EXPORT SALES Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit quality financial institutions. Concentrations of credit risk with respect to trade receivables are limited due to the Company's policy of requiring deposits from customers, the number of customers and their geographic dispersion. The Company maintains reserves for potential credit losses and such losses have historically been within management's expectations. No single customer during fiscal 1997 or 1996 comprised 10% or more of net sales. Revenues from sales to customers located outside of the United States (primarily Europe) accounted for approximately 30% and 29% of net sales during the years ended August 31, 1997 and 1996, respectively. INVENTORIES Inventories, which consist primarily of purchased system parts, subassemblies and assembled systems are stated at the lower of cost (determined using the first-in, first-out method) or market. F-7 Ophthalmic Imaging Systems Notes to Financial Statements (continued) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FURNITURE AND EQUIPMENT Furniture and equipment are stated at cost and depreciated or amortized on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives generally range from three to seven years. REVENUE RECOGNITION AND WARRANTIES The Company recognizes revenue from the sale of its products when the goods are shipped to its customers. The Company generally provides a one- year warranty covering materials and workmanship and accruals are provided for anticipated warranty expenses. Customers may purchase extended warranty coverage for additional one or two year periods. Revenues from the sale of these extended warranties are deferred and recognized as other revenue on a straight-line basis over the term of the extended warranty contract. INCOME TAXES Deferred income taxes are accounted for pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," as a result of differences in the timing of recognition of certain revenues and expenses for financial statement and income tax reporting purposes. General business credits are accounted for as a reduction of federal income taxes payable under the flow-through method. NET LOSS PER SHARE Net loss per share is computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options and warrants are excluded from the computation because their effect is antidilutive. F-8 Ophthalmic Imaging Systems Notes to Financial Statements (continued) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET LOSS PER SHARE (CONTINUED) In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which is required for both interim and annual periods ending after December 15, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact of Statement No. 128 on the calculation of primary and fully diluted earnings per share is not expected to be material. STATEMENT OF CASH FLOWS For purposes of the statement of cash flows, the Company considers highly liquid investments with original maturities of three months or less as cash equivalents. Cash paid for interest amounted to approximately $64,000 and $67,000 during the years ended August 31, 1997 and 1996, respectively. Cash paid for income taxes amounted to approximately $800 for each of the years ended August 31, 1997 and 1996. STOCK BASED COMPENSATION In accordance with the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") which the Company adopted in 1996, the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its stock option plans. Under APB 25, if the exercise price of the Company's employee stock options equals or exceeds the fair value of the underlying stock on the date of grant as determined by the Company's Board of Directors, no compensation expense is recognized. See Note 7 for pro forma disclosures required by SFAS 123. F-9 Ophthalmic Imaging Systems Notes to Financial Statements (continued) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LONG-LIVED ASSETS The Company has adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the estimated undiscounted cash flows to be generated by those assets are less than their carrying amounts. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. The adoption of SFAS No. 121 had no effect on the Company's financial position or results of operations for the year ended August 31, 1997. 2. INVENTORIES Inventories consist of the following as of August 31, 1997: Raw materials $ 526,090 Work-in-process 139,182 Finished goods 128,780 --------- $ 794,052 ========= 3. FURNITURE AND EQUIPMENT Furniture and equipment consists of the following as of August 31, 1997: Research and manufacturing equipment $ 554,147 Office furniture and equipment 358,537 Demonstration equipment 183,938 Vehicles 58,991 --------- 1,155,613 Less accumulated depreciation and amortization (774,831) --------- $ 380,782 ========= F-10 Ophthalmic Imaging Systems Notes to Financial Statements (continued) 4. SHORT-TERM BORROWINGS The Company entered into a revolving line of credit agreement (the "Credit Agreement") with a bank (the "Bank") which expired on November 7, 1997. The maximum amount available under the terms of the Credit Agreement is $750,000 and is based upon eligible outstanding accounts receivable balances. Borrowings under the Credit Agreement bear interest at the Bank's prime lending rate plus three percent (11% as of August 31, 1997) and are secured by substantially all assets of the Company. The Credit Agreement contains certain restrictive covenants which provide for, among other things, certain working capital and net worth balances and ratios. The Company was not in compliance with the various restrictive covenants as of August 31, 1997. In addition, the Credit Agreement restricts the Company's ability to 1) enter into any merger or acquisition, 2) pay dividends or repurchase stock, 3) mortgage existing assets or 4) loan money or guarantee the loans of others without the Bank's prior approval. As of August 31, 1997, borrowings in the amount of $311,000 were outstanding related to the Credit Agreement. Subsequent to year-end the Credit Agreement was converted to a full recourse accounts receivable credit agreement (Note 10). 5. ACCRUED LIABILITIES Accrued liabilities consist of the following as of August 31, 1997: Accrued compensation $ 402,389 Accrued warranty expenses 170,200 Other accrued liabilities 221,716 --------- $ 794,305 ========= 6. COMMITMENTS LEASES The Company leases its facility under a noncancelable operating lease which expires in June 1998. The lease agreement provides for minimum lease payments of approximately $84,000 for the year ended August 31, 1998. Rental expense charged to operations for all operating leases was approximately $126,000 and $88,000 during the years ended August 31, 1997 and 1996, respectively. F-11 Ophthalmic Imaging Systems Notes to Financial Statements (continued) 6. COMMITMENTS (CONTINUED) EMPLOYMENT AGREEMENTS The Company has employment agreements with two of its executive officers. The agreement with the chief executive officer calls for an annual salary of $150,000 and a performance based bonus plan, which has yet to be determined by the Company's compensation committee. The agreement with the president/chief operating officer calls for an annual salary of $140,000 and an annual bonus not to exceed $42,000. In addition, the Company's board of directors granted the president/chief operating officer incentive stock options covering 100,000 shares of common stock. Both agreements have a 24 month term expiring in July 1999. 7. STOCKHOLDERS' EQUITY COMMON STOCK Of the 16,094,572 shares of common stock authorized but unissued as of August 31, 1997, the following shares are reserved for issuance: Common stock warrants 1,299,750 Stock option plans 1,338,267 ----------- 2,638,017 =========== PRIVATE PLACEMENT In November 1995, the Company completed a private placement of 1,368,421 shares of its common stock with detachable warrants. The net proceeds from this offering was approximately $1,075,000. Along with each share of common stock issued the purchasers were given an "A Warrant" and a "B Warrant" to purchase shares of the Company's common stock. The A and B Warrants per share exercise prices are $1.25 and $1.75, respectively. The number of shares exercisable as well as the per share exercise prices of the A and B Warrants are subject to adjustment upon the occurrence of certain events. The A and B Warrants expired on February 19, 1997 as amended and November 21, 1997, respectively. In May 1996, 1,052,631 A Warrants were exercised resulting in net proceeds to the Company of approximately $1,180,000. During the year ended August 31, 1997, 210,526 and 335,338 A and B warrants, respectively, were exercised resulting in aggregate net proceeds to the Company of approximately $757,000. F-12 Ophthalmic Imaging Systems Notes to Financial Statements (continued) 7. STOCKHOLDERS' EQUITY (CONTINUED) PRIVATE PLACEMENT (CONTINUED) The private placement underwriter was issued a warrant to purchase 250,000 shares of the Company's common stock at $.95 per share. The number of shares exercisable as well as the per share exercise price are subject to adjustment upon the occurrence of certain events. This warrant expires on November 21, 1999. In addition, the underwriter will receive as a commission, 10% of the proceeds received by the Company upon exercise of the A and B Warrants described above. OTHER WARRANTS In February 1993, the Company issued a warrant to the Bank that provided a line-of-credit (Note 4). The warrant was amended several times in connection with amendments to the line-of-credit as well as the current Credit Agreement. The warrant is currently exercisable for 50,000 shares of common stock at an exercise price of $1.73 per share and it expires in November 2000. This warrant includes a provision wherein the Bank can require the Company to pay in cash the difference between the fair market value (as defined) of the underlying common stock of the warrant and the exercise price (the "Appreciation Right"). The Bank informed the Company of its intent to exercise the Appreciation Right on May 23, 1996. The Company has accrued the entire amount of the Appreciation Right and it is reflected as a current liability on the accompanying balance sheet. For purposes of the statement of operations, the amount has been recorded as additional interest expense for the year ended August 31, 1996. The Appreciation Right is due on April 1, 1998. During February 1993, in consideration for providing bridge loans, each of the two officers, then employed by the Company, was issued a warrant to purchase 16,667 shares of the Company's common stock at an exercise price of $18.00 per share. These warrants expire in February 1998. During fiscal 1995, one of the warrants to purchase 16,667 shares was canceled. STOCK OPTION PLANS At August 31, 1997, the Company has three stock-based compensation plans, which are described below. The Company applies APB 25 and related Interpretations in accounting for its stock options because, as discussed below, the alternative fair value accounting F-13 Ophthalmic Imaging Systems Notes to Financial Statements (continued) 7. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLANS (CONTINUED) provided for under SFAS 123 requires use of option valuation models that were not developed for use in valuing stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. During March 1992, the Company adopted a Stock Option Plan (the "Plan") under which the board of directors is authorized to grant options to key directors, executives, employees and others for the purchase of up to 116,667 shares of the Company's common stock at prices not less than the fair market value of the common stock on the date of grant. The term over which the options are exercisable, which may not exceed five years, is determined by the board of directors at the time of the grant. Pursuant to the Plan, options to purchase 100,000 shares of the Company's common stock at an exercise price of $3.00 per share were granted (50,000 options each) to the Company's chief executive officer and chief financial officer. The options granted were fully vested on the grant date and expired in March 1997. During the year ended August 31, 1997, prior to the expiration of these options, options to purchase 50,000 shares were exercised. Options to purchase the remaining 50,000 shares of the Company's common stock subsequently expired in March 1997. In April 1997, the board of directors granted options to purchase 50,000 shares of the Company's common stock at an exercise price of $2.75 to the Company's chief executive officer/chief financial officer. The options granted vest 25,000 on the date of grant and 25,000 in April 1998. These options expire in April 2002. In December 1992 and January 1993, the Company's board of directors and shareholders, respectively, approved a second Stock Option Plan (the "Option Plan") under which all officers, employees, directors and consultants may participate. The Plan expires December 2002. Options granted under the Option Plan may be either incentive stock options or non-qualified stock options and will generally have a term of ten years from the date of grant, unless otherwise specified in the option agreement. The exercise prices of incentive stock options granted under the Option Plan will be at 100% of the fair market value of the Company's common stock on the date of grant. The exercise prices of non-qualified stock options granted under the Option Plan cannot be less than 85% of the fair market value of the Company's common stock on the date of grant. The maximum number of shares of the Company's common stock which may be optioned and sold under the Option Plan is 150,000, of which 13,608 remained available for the granting of F-14 Ophthalmic Imaging Systems Notes to Financial Statements (continued) 7. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLANS (CONTINUED) options as of August 31, 1997. As of August 31, 1997, stock options to purchase 122,992 shares at exercise prices ranging from $.94 to $4.25 were granted and outstanding under the Option Plan. During the year ended August 31, 1997 and 1996, 2,400 and 11,000 options were exercised, respectively. In August 1995, the Company's board of directors approved a Nonstatutory Stock Option Plan (the "Nonstatutory Plan") under which all officers, employees, directors and consultants may participate. The Nonstatutory Plan expires November 2005. Options granted under the Nonstatutory Plan are non-qualified stock options and will generally have a term of five years from the date of grant, unless otherwise specified in the option agreement. The exercise prices under the Nonstatutory Plan will be at 100% of the fair market value of the Company's common stock on the date of grant. The maximum number of shares of the Company's common stock which may be optioned and sold under the Nonstatutory Plan is 1,035,000, of which 50,000 options remained available for granting as of August 31, 1997. As of August 31, 1997, stock options to purchase 985,000 shares at exercise prices ranging from $0.94 to $4.50 were granted and outstanding under the Nonstatutory Plan and none of the granted options were exercised. A summary of the status of the Company's stock option plans and changes during the periods is presented below: Weighted Average Options Exercise Price ------------------------------------ Balance at August 31, 1995 744,171 $ 1.54 Options granted 290,000 $ 2.53 Options canceled (250) $ .94 Options exercised (at $.94) (11,000) $ .94 ---------- Balance at August 31, 1996 1,022,921 $ 1.83 Options granted 346,500 $ 2.70 Options canceled (59,029) $ 3.14 Options exercised (at $.94 to $3.00) (52,400) $ 2.91 ---------- Balance at August 31, 1997 1,257,992 $ 1.96 ========= The weighted average fair value of options granted during the years ended August 31, 1997 and August 31, 1996 was $2.26 and $.93, respectively. F-15 Ophthalmic Imaging Systems Notes to Financial Statements (continued) 7. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLANS (CONTINUED) The following table summarizes information about the stock options outstanding at August 31, 1997:
Options Outstanding Options Exercisable ------------------------------------------------ --------------------------- Weighted-Average Range of Exercise Remaining Weighted-Average Weighted-Average Prices Number Contractual Life Exercise Price Number Exercise Price - ----------------- ------ ---------------- ---------------- ------ ---------------- $0.94-$1.38 759,492 5.1 $1.30 330,513 $1.30 $1.38-$3.00 390,000 4.0 $2.59 167,708 $2.57 $3.00-$4.50 108,500 4.3 $4.34 21,531 $4.32 --------- ------- 1,257,992 $1.96 519,752 $1.84 ========= =======
Pro forma information regarding net loss and net loss per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to August 31, 1995 under the fair value method of that Statement. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the years ended August 31, 1996 and 1997, respectively; dividend yield of zero; volatility factors of the expected market price of the Company's common stock ranged from 1.052 to 1.125 for both years; risk-free interest rate of 6%; and a weighted-average expected life of 5 years. The Black-Scholes option valuation, model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-16 Ophthalmic Imaging Systems Notes to Financial Statements (continued) 7. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLANS (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: YEARS ENDED AUGUST 31, 1997 1996 --------------------------------- Pro forma net loss $(2,326,390) $ (1,453,678) ================================= Pro forma net loss per share $(.65) $ (.66) ================================= During the year ended August 31, 1997, the Company recorded deferred compensation of approximately $395,000 for financial reporting purposes to reflect the deemed fair value of the certain options granted to non-employees. Deferred compensation is being amortized over the vesting period of the related options. For the year ended August 31, 1997, the amortized deferred compensation expense was approximately $88,000. Since SFAS 123 is applicable only to options granted subsequent to August 31, 1995, its pro forma effect will not be fully realized until 2000. F-17 Ophthalmic Imaging Systems Notes to Financial Statements (continued) 8. INCOME TAXES There was no provision (benefit) for income taxes during the years ended August 31, 1997 or 1996. The significant components of the Company's deferred tax assets and liabilities as of August 31, 1997 are as follows: Deferred tax assets: Net operating loss carryforwards $ 1,310,000 Inventory reserves 549,000 Accrued warrant appreciation right 99,000 Payroll related accruals 98,000 Warranty accrual 67,000 Sales and accounts receivable reserves 39,000 Uniform capitalization 29,000 Other 3,000 ------------ Total deferred tax assets 2,194,000 Valuation allowance (2,192,000) ------------ Net deferred tax assets 2,000 Deferred tax liabilities: Depreciation 2,000 ------------ Total deferred tax liabilities 2,000 ------------ Net deferred taxes $ - ============ The valuation allowance as of August 31, 1996 was approximately $1,473,000 resulting in a net increase in the allowance of approximately $719,000 for the year. F-18 Ophthalmic Imaging Systems Notes to Financial Statements (continued) 8. INCOME TAXES (CONTINUED) The principal reasons for the difference between the effective tax rate and the federal statutory income tax rate are presented in the following table: YEAR ENDED AUGUST 31, 1997 1996 -------------------------- Federal benefit expected at statutory rates $ (718,000) $ (480,000) Net operating loss with no current benefit 718,000 480,000 -------------------------- $ - $ - ========================== In connection with the Company's private placement of common stock (Note 7) a change of ownership (as defined in Section 382 of the Internal Revenue Code of 1986, as amended) occurred. As a result of this change, the Company's federal and state net operating loss carryforwards generated through November 21, 1996 (approximately $4,800,000 and $2,500,000, respectively) and the Company's federal and state Research and Development credits (approximately $126,000 and $79,000, respectively) will be subject to a total annual limitation in the amount of approximately $107,000. As a consequence of the limitation, as discussed above, the Company has at August 31, 1997 a net operating loss carryover of approximately $3,580,000 for federal income tax purposes which expires between 2007 and 2011, and a net operating loss carryforward of approximately $1,521,000 for state income tax purposes which expires between 1997 and 2002. 9. 401(K) PLAN The Company has a tax deferred investment plan (the "401(k) Plan"). All full-time employees are eligible to participate in the 401(k) Plan. The 401(k) Plan originally required mandatory employer contributions of 10% of the participants contributions. The 401(k) Plan was subsequently amended to provide for discretionary employer contributions. The Company did not make any matching contributions during either of the years ended August 31, 1997 or 1996. F-19 Ophthalmic Imaging Systems Notes to Financial Statements (continued) 10. SUBSEQUENT EVENT On November 18, 1997, the Company entered into an accounts receivable credit agreement (the "Agreement") with the Bank, and all amounts outstanding under the Credit Agreement were considered to be the initial advance under the Agreement. The Agreement allows for up to an 80% advance rate on eligible accounts receivable balances, and the maximum borrowing base under the Agreement is $1.2 million. The Bank has full recourse against the Company. The Agreement expires in November 1998. Borrowings under the Agreement bear interest at the Bank's prime lending rate plus 4%. In addition, the Bank will charge monthly an administrative fee equal to the greater of .5% of the average daily balance for the month or $1,200. Under the terms of the Agreement, borrowings are secured by substantially all of the Company's assets. EX-10 2 Exhibit 10.19(i) IMPERIAL BANK 2460 Sand Hill Road, Suite 102 Menlo Park, California 94025 (415) 233-3000 August 28, 1997 OPHTHALMIC IMAGING SYSTEMS 221 Lathrop Way, Suite I Sacramento, CA 95815 Attention: Mr. Steven R. Verdooner, President Mr. Steven C. Lagorio, Director of Finance Re: Imperial Bank Loan No. 700000559 Gentlemen: With reference to the Credit Terms and Conditions ("CTC") dated April 12, 1995 with addendum dated April 10, 1995 between Imperial Bank ("Bank") and Ophthalmic Imaging Systems ("Borrower"), the Bank hereby modifies the following numbered terms and conditions of the addendum attached to the CTC (hereinafter referred to as the "Addendum"): 1. Paragraph 2 of the Addendum, as previously modified, is deleted in its entirety and is replaced with the following: "2. TERM AND REPAYMENT The line of credit will require monthly payments of interest through and including October 5, 1997, at which time all outstanding principal, accrued but unpaid interest and other charges thereinafter shall be due and payable in full." 2. Paragraph 3 of the Addendum, is deleted in its entirety and is replaced with the following: "3. BORROWING BASE Advances will be limited to the lesser of: (i) 70% of Eligible Accounts (as hereinafter defined); or (ii) $750,000. As used herein, "Eligible Accounts" shall only include such accounts as Bank in its sole discretion shall from time to time determine are eligible. Eligible Accounts shall also not include any of the following: a. Accounts with respect to which the account debtor is an officer, director, shareholder, employee, subsidiary or affiliate of Borrower. b. Accounts due from a customer if more than twenty-five percent (25%) or more of the aggregate amount of accounts of such customer have at that time remained unpaid for more than ninety (90) days from the invoice date. (CROSS AGE) Ophthalmic Imaging Systems August 28, 1997 Page 2 of 4 c. Accounts representing billings for service or maintenance contracts or for inventory or equipment on rent to the account debtor. d. Accounts with respect to international transactions unless insured or covered by a letter of credit in a manner and form acceptable to the Bank. e. Salesman's accounts for promotional purposes. f. The amount by which any one account exceeds fifteen percent (15%) of the total accounts receivable balance. (CONCENTRATION) g. Accounts where the account debtor is a seller to borrower, to the extent that a potential offset exists. (CONTRA) h. Accounts due from customers that remain unpaid after ninety (90) days from the invoice date. i. United States government accounts unless properly documented." 3. Paragraph 5 of the Addendum, as previously modified, is deleted in its entirety and is replaced with the following: "5. PRICING Interest Rate: Bank's Prime Rate + 3% per annum. Rate shall be reduced to Bank's Prime Rate + 2% per annum following the achievement of two consecutive fiscal quarters of operating and after-tax profitability in excess of $100,000 each. Facility Fee: $1,875 4. Sub-section B of Paragraph 6 of the Addendum is deleted in its entirety and is replaced with the following: "B. Borrower to provide to Bank: 1) Unqualified audited financial statements within 90 days after each fiscal year end. 2) Company prepared monthly financial statements and Compliance Certificate within 25 days after the end of each month. 3) Borrower to provide Bank with agings of accounts receivable and accounts payable, along with a Borrowing Base Certificate, Bank forms AC1-AR and Inventory Transaction Report; AC11-Computation of Ineligible AR; and AC12-Monthly AR Reconciliation upon such a schedule as determined by Bank in Bank's sole discretion. All customer collections (wire transfer, checks, cash) shall be applied to the outstanding loan balance, and such collections shall Ophthalmic Imaging Systems August 28, 1997 Page 3 of 4 reduce the gross AR availability as calculated on the Borrowing Base Certificate by the amounts collected. New invoices during the same period shall increase the gross A/R availability as calculated on the Borrowing Base Certificate by the amounts involved. 4) Budgets, sales projections, operating plan, or other financial exhibits which Bank may reasonably request. In addition to the modifications above, Borrower shall be subject to the following additional conditions: 1. Concurrently with execution hereof, Borrower shall pay Bank the $7,375.80 in fees that are due to the Bank per the Invoice dated May 5, 1997 (these are in addition to the "Facility Fee" in Paragraph 3 above). 2. Bank and Borrower agree that Borrower is subject to following obligations under the stock appreciation right set forth in Section 1.3 of the Warrant to Purchase Stock issued November 1, 1995 ("SAR"): A. The principal amount due from Borrower to Bank under the SAR is $219,750.00, which represents the spread between the closing price of Borrower's stock on Friday May 24, 1996 ($6.125) and the exercise price per the Warrant to Purchase Stock ($1.73) multiplied by 50,000 warrant shares (reduced from 67,500 pursuant to the occurrence of certain events stipulated in the letter agreement dated November 1, 1995). Interest due on the principal balance is accruing at the Bank's prime rate and has been accruing from the exercise date of the SAR which was May 28, 1996. (Principal and accrued interest due on the SAR shall hereinafter be referred to as the "SAR Balance"). B. Borrower shall pay to Bank the SAR Balance as detailed in the following schedule: 1. Within 5 days after the receipt of any new equity or subordinated debt up to $300,000, Borrower shall apply 20% of such equity or subordinated debt amounts to the SAR Balance. Within 5 days after the receipt of any new equity for amounts in excess of $300,000, Borrower shall apply 30% of such equity amounts to the remaining SAR Balance. In any event, the SAR Balance shall be due and payable in full November 30, 1997. 3. Borrower shall provide Bank with a revised annual forecast by September 30, 1997. Ophthalmic Imaging Systems August 28, 1997 Page 4 of 4 Except for the above-described modifications, the Addendum shall remain unaltered and in full force and effect. Please acknowledge your approval by signing and returning the original of this letter to me. Sincerely, THOMAS D. JORGENSEN Thomas D. Jorgensen Assistance Vice President Special Markets Group Accepted and agreed to: OPHTHALMIC IMAGING SYSTEMS By: STEVEN R. VERDOONER Title: Chief Executive Officer Date: September 19, 1997 EX-10 3 Exhibit 10.19(j) IMPERIAL BANK 2460 Sand Hill Road, Suite 102 Menlo Park, California 94025 (415) 233-3000 October 24, 1997 OPHTHALMIC IMAGING SYSTEMS 221 Lathrop Way, Suite I Sacramento, CA 95815 Attention: Mr. Steven R. Verdooner, President Mr. Steven C. Lagorio, Director of Finance Re: Imperial Bank Loan No. 700000559 Gentlemen: With reference to the Credit Terms and Conditions dated April 12, 1995 (as previously amended the "CTC") with addendum dated April 10, 1995 (as previously amended the "Addendum") between Imperial Bank ("Bank") and Ophthalmic Imaging Systems ("Borrower"), (the CTC and the Addendum herein jointly referred to as the "Agreement") defaults have occurred in the following covenants of the of the Agreement: Pursuant to Section 6, A, 2 of the Addendum the Borrower is required to maintain Working Capital of not less than $750,000. As shown on the financial statement for the fiscal quarter ending 8/31/97 the Working Capital was $579,000. Pursuant to Section 6, A, 3 of the Addendum the Borrower is required to maintain Tangible Net Worth of not less than $1,000,000. As shown on the financial statement for the fiscal quarter ending 8/31/97 the Tangible Net Worth was $715,000. Pursuant to Section 6, A, 3 of the Addendum the Borrower is required to maintain Total Liabilities to Tangible Net Worth of not more than 2.25 to 1.00. As shown on the financial statement for the fiscal quarter ending 8/31/97 this ratio was 3.29 to 1.00. As a result of the above breaches the Bank has certain rights and remedies pursuant to the Agreement and law. The Bank will forebear from enforcing those rights, provided the Bank my revoke this forbearance at any time. Section 2 of the Addendum deleted in its entirety and is replaced with the following: "2. TERM AND REPAYMENT The line of credit will require monthly payments of interest through and including October 30, 1997, at which time all outstanding principal, accrued but unpaid interest and other charges thereinafter shall be due and payable in full." Ophthalmic Imaging Systems October 24, 1997 Page 2 The above forbearance and amendment are specific as to content and time, and other than the forbearance and amendment mentioned above this letter is not a forbearance, waiver or modification of any other rights or remedies that the Bank may have pursuant to any agreement or law as a result of the above defaults or of any other violations past, present, or future of any agreement between the Borrower and the Bank, and the Bank reserves all rights, powers and remedies available to it. The Bank and the Borrower hereby agree that except as modified herein the Agreement remains in full force and effect. Sincerely, THOMAS D. JORGENSEN Thomas D. Jorgensen Assistance Vice President Special Markets Group Accepted and agreed to: OPHTHALMIC IMAGING SYSTEMS By: STEVEN R. VERDOONER Title: Chief Executive Officer Date: October 27, 1997 EX-10 4 Exhibit 10.19(k) IMPERIAL BANK 2460 Sand Hill Road, Suite 102 Menlo Park, California 94025 (415) 233-3000 November 3, 1997 OPHTHALMIC IMAGING SYSTEMS 221 Lathrop Way, Suite I Sacramento, CA 95815 Attention: Mr. Steven R. Verdooner, President Mr. Steven C. Lagorio, Director of Finance Re: Imperial Bank Loan No. 700000559 Gentlemen: With reference to the Credit Terms and Conditions dated April 12, 1995 (as previously amended the "CTC") with addendum dated April 10, 1995 (as previously amended the "Addendum") between Imperial Bank ("Bank") and Ophthalmic Imaging Systems ("Borrower"), (the CTC and the Addendum herein jointly referred to as the "Agreement"), Bank hereby modifies the Addendum as follows: Section 2 of the Addendum deleted in its entirety and is replaced with the following: "2. TERM AND REPAYMENT The line of credit will require monthly payments of interest through and including November 7, 1997, at which time all outstanding principal, accrued but unpaid interest and other charges thereinafter shall be due and payable in full." This amendment is specific as to content and time, and other than the amendment mentioned above this letter is not a forbearance, waiver or modification of any other rights or remedies that the Bank may have pursuant to any agreement or law as a result of the above defaults or of any other violations past, present, or future of any agreement between the Borrower and the Bank, and the Bank reserves all rights, powers and remedies available to it. The Bank and the Borrower hereby agree that except as modified herein the Agreement remains in full force and effect. Sincerely, THOMAS D. JORGENSEN Thomas D. Jorgensen Assistance Vice President Special Markets Group Ophthalmic Imaging Systems November 3, 1997 Page 2 Accepted and agreed to: OPHTHALMIC IMAGING SYSTEMS By: STEVEN C. LAGORIO Title: Director of Finance Date: November 6, 1997 EX-10 5 Exhibit 10.19(l) IMPERIAL BANK 2460 Sand Hill Road, Suite 102 Menlo Park, California 94025 (415) 233-3000 November 21, 1997 OPHTHALMIC IMAGING SYSTEMS 221 Lathrop Way, Suite I Sacramento, CA 95815 Attention: Mr. Steven R. Verdooner, President Mr. Steven C. Lagorio, Director of Finance Re: Imperial Bank Loan No. 700000559 Gentlemen: With reference to the Credit Terms and Conditions dated April 12, 1995 (as previously amended the "CTC") with addendum dated April 10, 1995 (as previously amended the "Addendum") between Imperial Bank ("Bank") and Ophthalmic Imaging Systems ("Borrower"), (the CTC and the Addendum herein jointly referred to as the "Agreement"), Bank and Borrower hereby agree to the following modification: With reference to Paragraph 2, Section B, Sub-Section 1 of Page 3 of the letter agreement dated August 28, 1997, the due date for the SAR Balance is extended to April 1, 1998, at which time the SAR Balance shall be due and payable in full. The above modification is specific as to content and time, and other than the modification mentioned above this letter is not a forbearance, waiver or modification of any other rights or remedies that the Bank may have pursuant to any agreement or law as a result of the above defaults or of any other violations past, present, or future of any agreement between the Borrower and the Bank, and the Bank reserves all rights, powers and remedies available to it. The Bank and the Borrower hereby agree that except as modified herein the Agreement remains in full force and effect. Sincerely, THOMAS D. JORGENSEN Thomas D. Jorgensen Assistance Vice President Special Markets Group Ophthalmic Imaging Systems November 21, 1997 Page 2 Accepted and agreed to: OPHTHALMIC IMAGING SYSTEMS By: STEVEN R. VERDOONER Title: Chief Executive Officer Date: November 24, 1997 EX-10 6 Exhibit 10.19(m) IMPERIAL BANK AGREEMENT FOR PURCHASE OF RECEIVABLE (Full Recourse) THIS AGREEMENT is made on November 18, 1997 by and between Ophthalmic Imaging Systems having its principal place of business at 221 Lathrop Way, Suite I, Sacramento, CA 95825, County of Sacramento, State of CA, 95815, (the "Seller") and Financial Accounts Management Services, a division of Imperial Bank, having a place of business at 226 Airport Parkway, San Jose, California 95110 (the "Purchaser"). 1. DEFINITIONS. The following terms shall have the meanings stated: 1.1 "ACCOUNT BALANCE" - on any given day, the gross amount of all Purchased Receivable and other Obligations unpaid on that day. 1.2 "ACCOUNT DEBTOR" - the Obligor on a Purchased Receivable. 1.3 "ADJUSTMENTS" - all discounts, allowances, returns, disputes, counterclaims, offsets, defenses, rights of recoupment, rights of return, warranty claims, or short payments asserted by or on behalf of any Account Debtor with respect to any Purchased Receivable. 1.4 "ADVANCE" - the dollar amount computed with respect to each Purchased Receivable, equal to the Advance Rate multiplied by the face amount of the Purchased Receivable. 1.5 "ADVANCE RATE" - 80% 1.6 "COLLATERAL" - 1.6.1 All now owned and hereafter acquired right title and interest in, to and in respect of all accounts, interests in goods represented by accounts, returned, reclaimed or repossessed goods with respect thereto and rights as an unpaid vendor; contract rights; chattel paper; general intangibles (including but not limited to, tax refunds, registered and unregistered patents, trademarks, service marks, copyrights, trade names, applications for the foregoing, trade secrets, goodwill, customer lists, licenses, whether as licenser or licensee, chooses in action and other claims, and existing and future leasehold interests in equipment, real estate and fixtures); documents; instruments; letters of credit, bankers' acceptances or guaranties; deposits, securities, bank accounts, deposit accounts, credits and other property now or hereafter held in any capacity by Purchaser, or its affiliates; 1.6.2 All now owned and hereafter acquired right, title and interest in, to and in respect of all goods, including but not limited to: 1.6.2.1 All inventory, wherever located, whether no owned or hereafter acquired, of whatever kind, nature or description, including all raw materials, work-in-process, finished goods; 1.6.2.2 All equipment and fixtures, wherever located, whether now owned or hereafter acquired, and any and all additions, substitutions, replacements (including spare parts), and accessions thereof and thereto; 1.6.2.3 All present and future books and records relating to any of the above including, without limitation, all computer programs, printed output and computer readable data in the possession or control of the Seller, any computer service bureau or other third party; 1.6.2.4 All products and proceeds of the foregoing in whatever form and wherever located, including, without limitation, all insurance proceeds, all claims against third parties for loss or destruction of or damage to any of the foregoing, and all income from the lease or rental of any of the foregoing. 1.7 "CUSTOMER PAYMENTS" - all good funds received by Purchaser from or on behalf of an Account Debtor with respect to Purchased Receivables. 1.8 "Face Amount of Purchased Receivables" - the gross amount due from the Account Debtor, less all discounts allowed to the Account Debtor, computed on the shortest selling terms stated in the invoice evidencing the Purchased Account. 1.9 "Factor Fee" - rate of Imperial Bank's Prime Rate plus 4% calculated on the daily net funds employed. Insert A 1.10 "Administrative Fee" - rate of 0.5% of the average daily balance for each monthly period. The minimum monthly fee is $1,200.00. Insert B 1.11 "Obligations" - all obligations now or hereafter owed by the Seller to the Purchaser, including but not limited to the obligations created hereunder. 1.12 "Obligor" - the Seller and all guarantors and other entities who may be obligated to pay the Obligations. 1.13 "Purchased Receivables" - all those accounts, chattel paper, instruments, contract rights, documents, general intangibles, and rights to payment, and proceeds thereof, arising out of the invoices and other agreements identified on or delivered with any Transmittal Sheet provided by Seller to Purchaser. 1.14 "Receivables" - all present and future accounts and general intangibles of the Seller. Insert C 1.15 "Remittance" - the amount, if any, which Purchaser owes to Seller at each Settlement Date, according to the accounting prepared by Purchaser equal to: 1.15.1 The sum of: 1.15.1.1 The Reserve as of the beginning of the last Settlement Date, Plus 1.15.1.1.1 The Reserve created for each Purchased Receivable purchase during since last Settlement Date, minus 1.15.2 The total since the last Settlement Date of: 1.15.2.1 The Administrative Fees on paid Purchased Receivables, 1.15.2.2 Factor Fee on paid Purchased Receivables; 1.15.2.3 Adjustments; 1.15.2.4 Repurchase Amounts (to the extent Purchaser has agreed to accept payment thereof by deduction from the Remittance); and 1.15.2.5 The Reserve based on the Account Balance as of the Settlement Date. 1.16 "Repurchase Amount" - see 4.1 below. 1.17 "Reserve" - a percentage of the Account Balance, computed as the difference between the Face Amount of Purchased Receivables and the Advance, which shall be determined by Purchaser in its reasonable sole discretion, based on the nature and quality of the Purchased Receivables, and which shall not be less than 30% less all fees on unpaid Purchased Receivables. The Reserve shall be the book balance maintained in the records of Purchaser and shall not be a segregated fund. Insert C 1.18 "Settlement Date" - the day that remittance is calculated and paid. 1.19 "Transmittal Sheet" - the forms supplied by Purchaser to Seller which identify the receivables of Seller which it requests that Purchaser purchase. 2. Purchase of Receivables. 2.1 Seller for and in consideration of the Advances and other valuable consideration, does hereby absolutely sell, assign and transfer to Purchaser, its successors and assigns, all of Seller's right, title and interest in and to the Purchased Receivables and all moneys due or which may become due upon such Purchased Receivables. 2.2 Purchaser is not obligated to purchase any Receivables from Seller. 2.3 Purchaser may exercise its sole discretion in approving the credit of each Account Debtor before buying any Receivables. 2.4 Purchaser shall have with respect to the Purchased Receivables, all the rights and remedies of an unpaid seller under the Uniform Commercial Code and other applicable law, including the rights of replevin, claim and delivery, reclamation, and stoppage in transit. Insert D 3. Terms of Purchase. 3.1 Each Transmittal Sheet shall reasonably identify the Purchased Receivables, correctly state the amount owed by the Account Debtor, and shall be signed by an authorized signatory of Seller. 3.2 Seller hereby authorizes Purchaser to insert in the Transmittal Sheet information to describe the Purchased Receivables. 3.3 Purchaser is entitled to rely on the contents of any Transmittal Sheet delivered by Seller, to treat the Receivables described therein as Purchased Receivables, and to rely on the signature as an authorized signatory of Seller. 3.4 Upon acceptance and purchase by Purchaser of the Receivables described on each Transmittal Sheet and upon Seller's request, Purchaser shall pay the Advance to Seller. 3.5 Should Purchaser determine at any time in the reasonable exercise of its discretion that the nature and quality of the Purchased Receivables has deteriorated, Purchaser may change the Advance Rate with respect to all future purchases of Receivables. Insert E 3.6 As Purchaser collects Customer Payments from or on behalf of Account Debtors, Purchaser shall promptly credit the Customer Payments to the Account Balance on a daily basis as funds clear, as determined by Seller in its reasonable discretion. In the alternative, Purchaser shall have the right to delay credit to the Account Balance for a fixed number of days with respect to all Customer Payments, to allow for clearance and collection of funds. 3.7 If Seller is in default under this Agreement, all Customer Payments will be applied to any Obligations in such order and manner as Purchaser shall determine, irrespective of contrary instructions which may be received from Seller or the payor. 3.8 Purchaser shall charge and be entitled to, and Seller shall pay on each Settlement Date the Administrative Fee and the Factor Fee on all paid Purchased Receivables. 3.9 Purchaser shall prepare and send to Seller, after close of business each month, an accounting of the transactions for that month. The accounting shall be deemed correct and conclusive, and shall constitute an account stated between the parties unless Seller makes written objection to Purchaser within 30 days after mailing of the accounting to the Seller. 3.10 Purchaser shall pay the Remittance to Seller within ten days after the Settlement Date. 3.11 In the event the calculation of the Remittance results in an amount due to Purchaser from Seller, Seller shall make such payment in the same manner as set forth in Section 4.2. 4. Repurchase and Recourse. Purchaser's purchase of Purchased Receivables from Seller shall be with full recourse. 4.1 Purchaser may increase the Reserve, and Seller agrees to pay to Purchaser on demand, the full amount or any unpaid portion thereof, of any Purchased Receivable (the "Repurchase Amount"): 4.1.1 Which remains unpaid ninety (90) calendar days after invoice date; 4.1.2 Which is owed by an Account Debtor which has filed, or has had filed against it, any bankruptcy case or insolvency proceeding or who has become insolvent (as defined in the Federal Bankruptcy Code) or who is generally not paying its debts as such debts become due; 4.1.3 With respect to which there has been any breach of warranty set forth in Section 6 hereof or any breach of any covenant contained in this Agreement; or 4.1.4 With respect to which the account debtor asserts any discount, allowance, return, dispute, counterclaim, offset, defense, right of recoupment, right of return, warranty claim, or short payment, together with all reasonable attorneys' and professional fees and expenses and all court costs incurred by Purchaser in collecting the Purchased Receivable and/or enforcing its rights under this Agreement. 4.2 Purchaser may, in its sole discretion, demand that the Repurchase Amount be paid by Seller (A) in cash immediately upon demand therefor; (B) by delivery of substitute invoices acceptable to Purchaser which shall thereupon become Purchased Receivables; or (C) by deduction from the Remittance which would otherwise be due to Seller, or by any combination of the foregoing as Purchaser may from time to time choose. 5. Power of Attorney. Seller hereby irrevocably appoints Purchaser and its successors and assigns as Seller's true and lawful attorney in fact, with respect to Purchased Receivables and Collateral, (A) to sell, assign, transfer, pledge, compromise, or discharge the whole or any part of such Receivables; (B) to demand, collect, receive, sue and give releases for moneys due or which may become due upon such receivables and to compromise, prosecute, or defend any action, claim, case, or proceeding relating to such Receivables, including the filing of a claim or the voting of such claims in any bankruptcy case, all in Purchaser's name or Seller's name, as Purchaser may choose; (C) to prepare, file and sign Seller's name on any notice, claim, assignment or satisfaction of lien or mechanics' lien or similar document; (D) to notify all account debtors to pay Purchaser directly; (E) to receive, open, and dispose of all mail addressed to Seller for the purpose of collecting such Receivables; (F) to endorse Seller's name on any checks or other forms of payment on receivables; (G) to sign Seller's name to any form UCC-1 or other document necessary to perfect any security interest granted by Seller to Purchaser; (H) to complete, execute and file any franchise tax return or other documents necessary to qualify Seller to do business in any state which Purchaser deems necessary to enforce collection of Receivables, and to pay, on Seller's behalf any taxes or fees which may be due by Seller in connection therewith (all such fees and taxes shall be added to the Account Balance) and (I) to do all acts and things necessary or expedient, in furtherance of any such purpose. Insert D Insert F 6. Representations, Warranties & Covenants. To induce Purchaser to render its services available to Seller, and with full knowledge that the truth and accuracy of the following are being relied upon by the Purchaser in determining whether to accept purchase Receivables the Seller represents, warrants, covenants and agrees, with respect to each Transmittal Sheet delivered to Purchaser, that: 6.1 The Seller is the absolute owner of each receivable set forth in each Transmittal Sheet and has full legal right to make said sale, assignment and transfer thereof; 6.2 The correct amount of each Receivable is as set forth in the Transmittal Sheet and is not in dispute; 6.3 The payment of each receivable is not contingent upon the fulfillment of any obligation or contract, past or future, and any and all obligations required of the Seller have been fulfilled as of the date of each Transmittal Sheet; 6.4 Each Receivable set forth in a Transmittal Sheet is based on an actual sale and delivery of goods and/or services actually rendered, is presently due and owing to Seller, is not past due or in default, has not been previously sold, assigned, transferred, or pledged, and is free of any encumbrance or lien except to Purchaser; 6.5 There are no defenses, offsets, or counterclaims against any of the Receivables, and no agreement has been made under which the Account Debtor may claim any deduction or discount, except as otherwise stated on each invoice submitted to Purchaser which is listed on the Transmittal Sheet; 6.6 Each Purchased Receivable shall be the property of the Purchaser and shall be paid directly to Purchaser, but if for any reason it should be paid to Seller, Seller shall promptly notify Purchaser of such payment, shall hold any checks, drafts, or moneys so received in trust for the benefit of Purchaser, and shall promptly transfer and deliver the same to the Purchaser; 6.7 Purchaser shall have the right to endorse, and also the right to require endorsement by Seller, on all payments received in connection with each Purchased Receivable and any proceeds of Collateral; 6.8 The Seller, and to Seller's best knowledge, each Account Debtor set forth in the Transmittal Sheet, are and shall remain solvent as that term is defined in the Federal Bankruptcy Code; 6.9 Each Account Debtor named in the Transmittal Sheet will not object to the payment for or the quality or the quantity of the subject matter of the Receivable and is liable for the amount set forth on the Transmittal Sheet; 6.10 Each Account Debtor shall be promptly notified after acceptance by Purchaser that the Purchased Receivable has been transferred to and is payable to Purchaser, and Seller shall not take or permit any action to countermand such notification; 6.11 The Seller's place of business, and the place where records concerning all Receivables herein referred to are kept, is the one set forth at the beginning of this Agreement, and Seller will promptly advise Purchaser in writing if such place of business or record keeping is changed or a new place of business or record keeping is added; 6.12 Seller is not and will not hold any letter of credit or negotiable instrument as support for or in payment of any Purchased Receivable, and any such documentation received by Seller will be immediately turned over to Purchaser, with any necessary assignment or endorsement; 6.13 Seller will not assign, transfer, sell or grant any lien or security interest in the Collateral to any other party without Purchaser's prior written consent; and 6.14 No Account Debtor is affiliated with Seller, either by common ownership or family relationship. 6.15 All Receivables forwarded to and accepted by Purchaser after the date hereof, and thereby becoming Purchased Receivables, shall comply with each and every one of the foregoing representations, warranties, covenants and agreements referred to above in this section 6. 7. Adjustments. In the event of a breach of any of the representations, warranties, or covenants set forth in Section 6, or in the event any Adjustment or dispute is asserted by any Account Debtor, Seller shall promptly advise Purchaser and shall, subject to the Purchaser's approval, resolve such disputes and advice Purchaser of any adjustment. Unless reassigned to Seller, Purchaser shall remain the absolute owner of any Purchased Receivable, which is subject to Adjustment or Repurchase under Sections 1.3 or 4 hereof, and any rejected, returned, or recovered personal property, with the right to take possession thereof at any time. If such possession is not taken by Purchaser, Seller is to resell it for Purchaser's account at Seller's expense with the proceeds made payable to Purchaser. While Seller retains possession of said returned goods, Seller shall segregate said goods and mark them "property of Financial Accounts Management Services." Insert F 8. Security Interest 8.1 This Agreement for Purchase of Receivables is the security agreement referred to in the Transmittal Sheet. 8.2 In order to secure the Obligations Seller hereby grants to Purchaser a continuing lien upon and security interest in all Seller's now existing or hereafter arising rights and interest in the Collateral. 8.3 Seller is not authorized to sell, transfer or otherwise convey any Collateral without Purchaser's consent, except for the sale of finished goods inventory in the Seller's ordinary course of business. Purchaser shall have the right, upon default by Seller hereunder, to withdraw its consent to Seller's sale of finished goods inventory, and Seller agrees that Purchaser may notify the Account Debtors of this withdrawal of consent. 8.4 Seller agrees to sign all UCC financing statements required by and in a form satisfactory to Purchaser. 8.5 Purchaser shall have the right at any time to notify Seller's Account Debtors of its security interest. Said notification may be in the form of Exhibit A hereto. 9. Default 9.1 The following shall constitute Events of Default: 9.1.1 Seller fails to pay as when due any Obligations owed to Purchaser. 9.1.2 There shall be commenced by or against any Obligor any voluntary or involuntary case under the Federal Bankruptcy Code, or any assignment for the benefit of creditors, or appointment of a receiver or custodian for a substantial portion of its assets; 9.1.3 Any Obligor shall become insolvent, in that its debts are greater than the fair value of its assets, or such entity is generally not paying its debts as they become due; 9.1.4 Any involuntary lien, levy, garnishment, attachment or the like is issued against or attaches to the Purchased Receivables or the Collateral and the same is not released within fifteen (15) days; or 9.1.5 Seller shall breach any covenant, agreement, warranty, or representation set forth herein, and the same is not cured to Purchaser's satisfaction within ten (10) days after Purchaser has given Seller written notice thereof. 9.2 Upon the occurrence of an Event of Default 9.2.1 Without implying the existence of any obligation to Purchaser to buy receivables, which implication is specifically negated by the terms hereof, Purchaser may cease buying Receivables; 9.2.2 Purchaser may immediately exercise its rights and remedies with respect to the Purchased Receivables and the Collateral, as a secured party under this Agreement, the Uniform Commercial Code, and applicable law; 9.2.3 Purchaser shall have the rights as set forth in Section 8 hereof. 10. Nonpayment of Obligations. If any Obligation is not paid when due (including amounts due under section 3.11, Repurchase Amounts due under section 4, or professional fees and expenses under section 11), such amount may be added to the Account Balance and shall be subject to the Factor Fee rate until payment in full. Insert G 11. Professional Fees. The Seller will pay all reasonable fees and expenses of attorneys and other professionals that Purchaser incurs in negotiating, amending, and enforcing this Agreement and protecting or enforcing its interest in the Purchased Receivables or the Collateral, in collecting Purchased Receivables, or in the representation of Purchaser in connection with any bankruptcy case or insolvency proceeding involving Seller, the Collateral, any Account Debtor, or any Purchased Receivable. 12. Severability and Choice of Law. In the event that any provision of this Agreement is deemed invalid by reason of law, this Agreement will be construed as not containing such provision and the remainder of the Agreement shall remain in full force and effect. This Agreement has been transmitted by Seller to Purchaser at Purchaser's office in the State of California and has been executed and accepted by Purchaser in the State of California. This Agreement shall be governed by and interpreted in accordance with the laws of the State of California without reference to choice of law. 13. Account Collection Service. In the event that Purchaser requires that all of Seller's Receivables be paid to Purchaser, subject to Purchaser's rights in the Collateral, Purchaser agrees to remit the amount of collections on the Receivables it receives and does not own to Seller after deducting a handling fee of 0% of such amount received. It is understood and agreed by Seller that this Section does not impose any affirmative duty on Purchaser to do any act other than to turn over such amounts. All such Receivables and collections are Collateral and in the event of Seller's Default hereunder, Purchaser shall have no duty to remit collections of Collateral and may apply same to the Obligations until said Default is cured. Insert H 14. Term and Termination. The term of this Agreement shall be for one (1) year from the date hereof, and from year to year thereafter unless terminated in writing by Purchaser or Seller. Seller and Purchaser each have the right to terminate at any time provided that there is no outstanding Account Balance and no fees, charges or other obligations owed to Purchaser at the time of termination. Any termination of this Agreement shall not affect Purchaser's security interest in the Collateral and Purchaser's ownership of the Purchased Receivables, and this Agreement shall continue to be effective, until all transactions entered into and Obligations incurred hereunder have been completed and satisfied in full. IN WITNESS WHEREOF, the Seller has executed this Agreement on the date and year above written, and the Purchaser has accepted by its authorized representative. SELLER: Ophthalmic Imaging Systems By: STEVEN R. VERDOONER Steven R. Verdooner, Chief Executive Officer ACCEPTED AT SAN JOSE, CALIFORNIA FINANCIAL ACCOUNTS MANAGEMENT SERVICES, a division of Imperial Bank By: GARY HANSON Gary Hanson, President IMPERIAL BANK AGREEMENT FOR PURCHASE OF RECEIVABLE NOVEMBER 18, 1997 Insert A Section 1.9 "Daily Net Funds Employed" refers to the amount advanced against factored receivables that remains unpaid. Insert B Section 1.10 The "monthly period" is the number of days in the month. The "average daily balance" is the average amount of unpaid factored invoices outstanding during the monthly period. Insert C Section 1.15 and Section 1.18 It is our understanding that the Purchaser generally pays excess reserves bi-monthly, on the 1st day and the 15th day of the month, and, if requested by the Seller and in the sole discretion of the Purchaser, the Purchaser may pay excess reserves on an as requested basis. Insert D Section 3 (inclusive) Section 6 (inclusive) For receivables pending installation, the advance rate is reduced to 50% from 80%. This is subject to all other TERMS OF PURCHASE as outlined in Section 3 of the Agreement for Purchase of Receivable. Insert E Section 3.6 It is our understanding that the Purchaser normally credits the Account Balance on the date that Purchaser receives payment, with a maximum delay of 1 day for in-state checks and 3 days for out-of-state checks. Insert F Section 6 (inclusive) Section 8 (inclusive) It is our understanding that the Purchaser will subordinate its security position in vendor-financed equipment or inventory exclusive of Accounts Receivable, provided Seller is not in default. Reference facsimile dated 11/18/97 (FileName: IMP1118A.DOC) attached hereto and included as a part hereof. IMPERIAL BANK AGREEMENT FOR PURCHASE OF RECEIVABLE NOVEMBER 18, 1997 (continued) Insert G Section 11 All reasonable fees and expenses of attorneys and other professionals will be paid to the prevailing party. Insert H Section 14 There is no pre-payment penalty. Insert I Section 15 Insert I has been deleted. OPHTHALMIC IMAGING SYSTEMS 221 Lathrop Way, Suite I Sacramento, CA 95815 (916) 646-2020 18 November, 1997 VIA FACSIMILE Gary Hanson Imperial Bank Financial Accounts Management Services Dear Gary: This letter is intended to confirm the salient points our conversation today regarding a third party loaning funds to Ophthalmic Imaging Systems ("OIS" or the "Company"), and the potential ramifications of said transaction in light of the factoring relationship and related agreements currently contemplated between the Company and Imperial Bank (the "Bank"). - - It is our understanding that Imperial Bank will allow this third party to loan funds to the Company and the Company will not be in violation of any agreements in accepting such loans. - - It is the Bank's intention to allow the Company to accept the loan for use as general working capital for purposes of assisting the Company in fulfilling its obligations to deliver products to its customers. - - The Bank will subordinate to the third party, receivables specifically identified in a schedule to be submitted to the Bank by the Company, the funds received in payment therefore which will be used to repay the third party in accordance with said schedule. - - The Bank will exclude from its collateral the receivables specifically identified in said schedule and, with regard to said receivables, will subordinate to the third party under all circumstances. If the foregoing accurately reflects our understanding, then please so note by signing below and returning to my attention via return facsimile. Thank you again for your flexibility in working with OIS and I look forward to a continued positive business relationship with Imperial Bank. Sincerely, STEVEN R. VERDOONER Steven R. Verdooner Chief Executive Officer SRV/s IMPERIAL BANK BY: TITLE: DATE: While it is Bank's intention "in principle" to agree to a future subordination of some specific invoices, any future subordination agreement must in a form that is acceptable to Bank's legal counsel. (TO BE MAILED ONLY IN THE EVENT OF DEFAULT) EXHIBIT A (Letterhead of Financial Accounts Management Services) (Date) (Name and Address of Customer) Re: Ophthalmic Imaging Systems ("Debtor") Gentlepersons: Please be advised that the Ophthalmic Imaging Systems has assigned all its present and future accounts to FAMS. To the extent that you are now indebted or may in the future become indebted to Debtor on an account, any payments must be made to FAMS and not to Debtor or any other entity. The payments should be mailed to us at the above address. PAYMENTS MADE IN ANY OTHER MANNER MAY EXPOSE YOU TO MULTIPLE LIABILITY. We also hereby notify you that we have revoked Debtor's right to sell inventory free and clear of our security interest therein. Consequently, any inventory of the Debtor (or proceeds thereof) which you receive subsequent to your receipt of this letter shall be subject to our security interest therein, and we hereby demand that you turn over any such inventory and/or proceeds to us at the address set forth above. This letter may only be revoked by a writing signed by one of our officers the authenticity of which you have verified by telephone or facsimile. Thank you. Sincerely yours, Financial Accounts Management Services By: Title: CERTIFICATE OF RESOLUTIONS I, Steven R. Verdooner, do hereby certify that: 1. I am the duly elected Chief Executive Officer of Ophthalmic Imaging Systems (the "Corporation"). 2. At a meeting of the Board of Directors of the Corporation, duly convened and held in accordance with the Corporation's By-Laws and the laws of the state of incorporation, at which a quorum was present and acting throughout or by unanimous written consent of all the Directors if permitted by law, the following resolutions were adopted: RESOLVED that the Corporation be and hereby is authorized to sell the Corporation's accounts receivable to Financial Accounts Management Services, a division of Imperial Bank, and to grant to Financial Accounts Management Services a security interest in the Corporation's personal property. RESOLVED FURTHER that the officers of the Corporation be and hereby are authorized and directed to execute and deliver certain agreements in connection with the sale of accounts receivable, and the grant of security interests in the Corporation's personal property to Financial Accounts Management Services, including, without limitation, Agreement for Purchase of Accounts, Certification of Officers, Certification of Resolutions, [other Agreements that might be needed] and UCC Financing Statements. RESOLVED FURTHER that the following named officers of the Corporation ("Authorized Officers") be, and any of them hereby are, authorized, empowered, and directed to execute and deliver to Financial Accounts Management Services on behalf of the Corporation, the agreements listed in the foregoing resolution, and to do or cause to be done all such acts and things and make, execute, and deliver or cause to be made, executed and delivered, on behalf of the Corporation, all such further agreements and instruments as may be deemed necessary or advisable in order fully effectuate the purposes and intent of the foregoing resolutions. STEVEN R. VERDOONER, CHIEF EXECUTIVE OFFICER WILLIAM L. MINCE, PRESIDENT (Names of Authorized Officers) RESOLVED FURTHER that any one of the Corporate Officers shall execute and deliver to Financial Accounts Management Services a certificate of these resolutions. 3. The foregoing resolutions have not been modified, amended or rescinded in any respect and are in full force as of today's date. IN WITNESS WHEREOF, I have hereunder signed my name on November 18, 1997. STEVEN R. VERDOONER Steven R. Verdooner, Chief Executive Officer CERTIFICATION OF OFFICERS The undersigned, being all Officers of Ophthalmic Imaging Systems, a CA corporation, (the "Corporation") hereby certify to Financial Accounts Management Services that: 1. The correct name of the Corporation is as set forth in the Articles of Incorporation. 2. The Corporation was incorporated on 7/14/86 under the laws of the State of CA and is in good standing under such laws. 3. The chief place of the Corporation, being the place at which the Corporation maintains its books and records pertaining to accounts, accounts receivable, contract rights, chattel paper, general intangibles, instruments, documents, inventory, and equipment, is located at: 221 Lathrop Way, Suite I Sacramento, CA 95815 4. The Corporation has other places of business at the following addresses: 5. There is no provision in the Certificate of Incorporation, Articles of Incorporation, or Bylaws of the Corporation, or in the laws of the state of its incorporation, requiring any vote or consent of shareholders to authorize the sale of accounts receivable or the grant of security interest in any assets of the Corporation. Such power is vested exclusively in the Corporation's Board of Directors. 6. The officers of the Corporation, and their respective titles are as follows: CHIEF EXECUTIVE OFFICER: Steven R. Verdooner Other: VICE PRESIDENT: Other: SECRETARY: Steven R. Verdooner Other: Other: Other: 7. Except as indicated in this paragraph 7, each of the officers listed in paragraph six has signatory powers with respect to all the Corporation's transactions with Financial Accounts Management Services, a division of Imperial Bank. 8. The undersigned shall give Imperial Bank Financial Accounts Management Services prompt written notice of any change or amendment with respect to any of the foregoing. Until further notice is received by Financial Accounts Management Services, it shall be entitled to rely upon the foregoing in all respects. IN WITNESS WHEREOF, the undersigned have executed this Certification of Officers on 11/18/97. STEVEN R. VERDOONER Other Steven R. Verdooner Chief Executive Officer Vice President Other STEVEN R. VERDOONER Other Steven R. Verdooner Secretary SIGNATURE AUTHORIZATION Date: November 18, 1997 Each person whose specimen signature appears below is hereby authorized and empowered to transact any and all business with the Financial Accounts Management Services division of Imperial Bank, San Jose, California, which the undersigned could in any way transact and is further authorized to execute, acknowledge and/or deliver on behalf of the undersigned any and all assignments, documents, instruments and agreements which he may deem necessary or convenient in transaction of such business of the undersigned. Signatures and titles are as follows: Name (print or typewrite) Title Specimen of Signature STEVEN R. VERDOONER CEO STEVEN R. VERDOONER WILLIAM L. MINCE PRESIDENT WILLIAM L. MINCE STEVEN C. LAGORIO DIRECTOR OF STEVEN C. LAGORIO FINANCE Ophthalmic Imaging Systems By: STEVEN R. VERDOONER VALIDITY INDEMNIFICATION Financial Accounts Management Services (FAMS) a division of Imperial Bank 226 Airport Blvd. San Jose, California 95110 Re: Ophthalmic Imaging Systems ("Seller") and Financial Accounts Management Services ("Purchaser") Agreement for Purchase of Receivables and related documents ("Agreements") dated 11/18/97. The undersigned is the CEO of the Seller. In order to induce Purchaser to purchase accounts receivable from the Seller, pursuant to the Agreements between Purchaser and Seller, the undersigned hereby represents and warrants to Purchaser, on behalf of the Seller, as follows: 1. All Seller accounts which have been or will be reported to Purchaser by or on behalf of the Seller and in which Purchaser holds a security interest ("Accounts"), whether such reports are in the form of agings, borrowing base certificates, collateral reports, transmittals or financial statements, are genuine and in all respects what they purport to be, represent bonafied obligations of delivery of merchandise and or services sold by the Seller (the "Sold Goods/Services") in the ordinary course of its business and in accordance with and in full and complete performance of customer's (each, an "Account Debtor") order therefore. 2. All original checks, drafts, notes, letters of credit, acceptances and other proceeds of the Accounts, received by the Seller, will be held in trust for Purchaser and will immediately be forwarded to Purchaser upon receipt, in kind, in accordance with the terms of Agreements. 3. None of the Accounts are or will be the subject of any offsets, defenses or counterclaims of any nature whatsoever, and Seller will not in any way impede or interfere with the normal collection and payment of the Accounts. 4. Seller is presently solvent. 5. The sold Goods/Services are and will be up to the point of sales, the sole and absolute property of the Seller, and the Accounts and sold Goods/Services will be free and clear of all liens and security interests, except your security interest. 6. The due dates of the Accounts will be as reported to Purchaser by or on behalf of the Seller. 7. Seller will promptly report to Purchaser all disputes, rejections, returns and resales of sold Goods/Services and all credits allowed by the Seller upon all accounts. 8. All reports which Purchaser receives from the Seller, including BUT NOT LIMITED TO those concerning its Accounts and its inventory, will be true and accurate except for minor inadvertent errors. 9. Seller will not sell its inventory except in the ordinary course of business. The undersigned, on behalf of the Seller, hereby indemnifies Purchaser and holds Purchaser harmless from any direct, indirect, or consequential damage or loss which Purchaser may sustain as a result of the breach of any representation or warranty contained herein, (all of which are continuing and irrevocable for so long as the Seller is indebted to Purchaser), or of Purchaser's reliance (whether such reliance was reasonable) upon any misstatement (whether or not intentional), fraud, deceit or criminal act on the part of any officer, employee, or agent of the Seller, or any costs (including reasonable attorney's fees and expenses) incurred by Purchaser in the enforcement of any rights granted Purchaser hereunder. All such sums will be paid by the undersigned to Purchaser on demand. Nothing herein contained shall be in any way impaired or affected by any change in or amendment of any of the Agreements. This indemnification shall be binding upon the undersigned corporation, its successors and assigns. Very truly yours, INDEMNITOR'S INFORMATION Name OPHTHALMIC IMAGING SYSTEMS Address 221 Lathrop Way, Suite I Signature STEVEN R. VERDOONER City State Sacramento, CA 95815 CEO Dated Signed November 18, 1997 SS# 94-3035367 It is the sole intent that this indemnification be made by Ophthalmic Imaging Systems, a corporation, and not by any individual. IMPERIAL BANK TRANSMITTAL SHEET (Schedule A) Trans # Date Page Relationship # Seller Name Ophthalmic Imaging Systems Account Customer Name Invoice Invoice Purchase Net Code (Detail if Needed)** Number Date Order # Sale Special Instructions: This section to be completed by FAMS. Gross Total 100% Reserve % Detail of Charges/Reason Charges/ for Adjustment: Adjustments Net Advance **Please include contact person, Method of Disbursement: phone number, fax number, and Check #, Account #, Other address for all new Customers, or when needed. Include location for customers with multiple billing/processing centers. The undersigned hereby sells and assigns to Financial Accounts Management Services, a division of Imperial Bank, a security interest in the accounts listed in the above schedule, monies due and to become due upon the same, and all merchandise returned or rejected. The undersigned, to the best of his/her knowledge, represents that the above schedule correctly sets forth accounts now owing the undersigned for bonafide sales and deliveries of merchandise and/or service; that there are no offsets or counterclaims of any nature whatsoever against any of the accounts; that none of said accounts are past due; that proper entries have been made on the books of the undersigned disclosing the sale and assignment of such accounts to Financial Accounts Management Services; that none of said accounts have been sold or assigned to any other party; that said accounts are sold and assigned pursuant to and in accordance with all the terms and provisions of the Agreement for Purchase of Receivable executed by Financial Accounts Management Services and the undersigned relating to advances made by Financial Accounts Management Services on such accounts and the assignment thereof; and that all such accounts are eligible accounts as defined in said Agreement for Purchase of Receivable. Authorized signer Signature (LETTERHEAD OF SELLER) (Please Complete one for all DBA's) All future advances under the "Agreement for Purchase of Receivable" are subject to Bank's receipt of an Assignment letter that is acceptable to Bank. EX-10 7 Exhibit 10.23 OPHTHALMIC IMAGING SYSTEMS EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is made and entered into as of this 14 day of July 1997, by and between OPHTHALMIC IMAGING SYSTEMS, a California corporation ("Employer") and WILLIAM L. MINCE ("Employee"). NOW, THEREFORE, in consideration of the mutual promises set forth below, the parties to this Agreement mutually agree as follows: AGREEMENTS 1. EMPLOYEE'S DUTIES AND AUTHORITY. Employer hereby employs Employee, and Employee hereby accepts employment with Employer, as President/Chief Operating Officer of Employer. Employee's duties shall be as provided in Employer's bylaws and/or as specified by Employer's board of directors from time to time. 2. LIMITATIONS ON OUTSIDE ACTIVITIES. During the term of this Agreement, Employee shall devote his best efforts, full energies, abilities and productive time to the performance of his duties under this Agreement and shall not, without Employer's prior written consent, render to others services of any kind for compensation, or engage in any other business activities that would materially interfere with the performance of his duties under this Agreement. 3. COMPETITION, SOLICITATION. A. During the term of this Agreement, Employee shall not, directly or indirectly, whether as a partner, employee, creditor, shareholder or otherwise, promote, participate or engage in any activity or other business competitive with Employer's business. B. Because of his employment by Employer, Employee will have access to trade secrets, customer lists and customers and its methods of doing business. Employee agrees not to use or disclose, directly or indirectly, to any person, organization or entity: (1) any confidential information or knowledge concerning the business and affairs of the company or (2) any inventions, discoveries, improvements, products, processes, technology, trade secrets, customer lists or any other confidential materials whether acquired before or after the effective date of this Agreement is disclosure or use would adversely affect the business of the company or accord to a competitor of Employer a material commercial advantage. This paragraph does not restrict Employee from disseminating or 2 using any information which is published or available to the general public, except where such publication or availability results from Employee's acts. C. Employee agrees that for a period of three (3) years after expiration or earlier termination of this Agreement, he will not, directly or indirectly, solicit any of the customers of Employer's to transact business with any other firm or enterprise which is engaged in competition with Employer. 4. TERM OF AGREEMENT. Subject to earlier termination as provided in this Agreement, the term of this Agreement shall be two (2) years from the date of this Agreement. 5. COMPENSATION. Employer makes no representations and provides no advice concerning the treatment by taxing authorities of any Employee compensation set forth in this Agreement. Employer strongly urges Employee to consult with his own independent tax advisers. Employer shall compensate Employee according to the terms of this Agreement as follows: A. In consideration for the services to be rendered by Employee under this Agreement, the Employer agrees to pay, and Employee agrees to accept as compensation, an annual salary of ONE HUNDRED FORTY THOUSAND DOLLARS ($140,000) per year, payable in accordance with the Company's standard payroll policies. B. Employee shall be eligible for an annual bonus in an amount not to exceed FORTY TWO THOUSAND DOLLARS ($42,000), which amount is equal to 30% of Employee's annual salary. The criteria and/or formulae by which the actual bonus amount is calculated will be determined pursuant to a separate agreement. With respect to 50% of the actual bonus amount Employee agrees to accept as payment thereof, and Employer agrees to issue as payment, unregistered shares of the Company's Common Stock, which includes customary transfer restrictions, the fair market value ("FMV") of which at the date of issuance, is equal to 50% of the actual bonus payment. FMV of each share so issued shall be the closing price on the applicable national securities exchange on the date of issuance. C. Employer agrees to grant, and Employee agrees to accept, a stock option to purchase 100,000 shares of the Company's Common Stock at the closing market price of the stock on the date duly granted by the Company's Board of Directors, which date will not be before the date of this Agreement, nor later than the minimum period practicable after the date of this Agreement and in any event no later than the day before any public announcement of Employee's hiring. The option shall vest and become exercisable with respect to TWENTY FIVE THOUSAND (25,000) of the shares at the completion of Employee's sixth month of employment and with respect to TWO THOUSAND FIVE HUNDRED (2,500) of the shares at the completion of each of the subsequent 30 months thereafter for a total vesting period of 36 months, subject to the 3 terms and conditions of the Stock Option Agreement pursuant to which stock option is granted. D. In consideration for relocation expenses to be incurred by the Employee, including, but not limited to temporary housing, meals, moving and other related expenses, Employer agrees to pay, and Employee agrees to accept as a relocation allowance, up to THIRTY THOUSAND DOLLARS ($30,000), with such allowance to be used at the sole discretion of the Employee. E. Employee shall be entitled to up to five (5) days of professional development during the first year of employment for which time the Employer agrees to pay the Employee's salary. Employee shall be entitled to be reimbursed for expenses incurred in connection with such development, including, but not limited to, expenses of travel and entertainment, meals, lodgings and other expenses of a business nature, upon presentation of appropriate vouchers. F. Employee shall be reimbursed for ordinary and necessary business expenses incurred in connection with his employment, including, but not limited to, expenses of travel and entertainment, meals, lodgings and other expenses of a business nature, upon presentation of appropriate vouchers. G. Employee shall be entitled to such fringe benefits, including life, disability, accident, health, wage continuation and other insurance and contributions to retirement plans, employee benefits plans, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans stock option, incentive or other bonus plans, paid vacations and other similar plans or programs, if any, subject in each case to the generally applicable terms and conditions of the plan or program in question and to the determination of any committee administering such plan or program. H. Salary increases, if any, will be made only at the sole discretion of Employer during the term of this Agreement. I. Employee shall receive full compensation and benefits for any period of illness or incapacity during the term of this Agreement, provided, however, Employer shall have the right to terminate this agreement if such illness or incapacity shall be of such a character as to totally disable Employee from rendering any services to Employer for a period of more than sixty (60) days, by giving at least twenty-one (21) days' written notice of its intention to do so. If Employee shall resume his duties within the twenty-one (21) day period following receipt of such notice, and shall perform such duties on a regular basis for sixty (60) days thereafter, this Agreement and Employee's employment hereunder shall continue in full force and effect, and Employer's notice of intention to terminate shall have no further force or validity. 4 J. Employee shall be entitled to severance pay if Employer terminates Employee's employment under this Agreement, except as set forth in Section 7, below, or if Employee resigns because of Employer's breach of this Agreement or because of a reduction in scope of Employee's responsibilities or corresponding change in title. Employer agrees to pay, and Employee agrees to accept, as full and complete severance, if applicable, an amount equal to the greater of: (i) SEVENTY THOUSAND DOLLARS ($70,000); or (ii) one twelfth of Employee's annual salary for each month of employment, not to exceed ONE HUNDRED FORTY THOUSAND DOLLARS ($140,000). The severance pay is deemed to be a reasonable estimate of Employee damages, the exact amount of which cannot be ascertained. 6. INDEMNIFICATION BY EMPLOYER. Employer shall, to the maximum extent permitted by law, indemnify and hold Employee harmless against expenses, including reasonable attorney's fees, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of Employee's employment by Employer. Employer shall advance to Employee any expenses incurred in defending any such proceeding to the maximum extent permitted by law. 7. TERMINATION. Employer shall be entitled at its option to terminate Employee's employment under this Agreement at any time, for the following reasons: A. Because of Employee's fraud, misappropriation, embezzlement or theft; B. Because of Employee's conviction of a felony; C. Because Employee has engaged in competitive activities in breach of his covenants under Section 3 above; D. Because Employee has abandoned his duties; or E. As provided in Section 5I, above. F. Without cause, and for any reason, provided that in such event Employer shall pay to Employee, and Employee shall accept, severance pay as provided in Section 5J, above. Such a termination of Employee's employment shall not constitute a breach of this Agreement by Employer. Upon a termination under subsection 7A, 7B, 7C or 7D, Employer shall be obligated to pay only compensation which has accrued due to actions to Employee before such termination. Employee shall not be entitled to severance pay or continuing benefits of any kind upon such termination, other than such benefits mandated by law. 8. PROPRIETARY INFORMATION AND INVENTIONS. All processes, inventions, patents, copyrights, trademarks and other intangible rights that may be conceived or developed by Employee, either alone or with others, during the term of Employee's employment, whether or not conceived or developed during Employee's working hours, and with respect to which the 5 equipment, supplies, facilities or trade secret information of Employer was used, or that relate to the ocular health care business of Employer, or that result from any work performed by Employee for Employer, shall be the sole property of Employer. Employee shall disclose to Employer all inventions conceived during the term of employment, whether or not the property of Employer under the terms of preceding sentence provided that such disclosure shall be received by Employer in confidence. Employee shall execute all documents, including patent applications and assignments, required by Employer to establish Employer's rights under this section. This section does not apply to any invention that qualifies fully under the provisions of section 2870 of the California Labor Code, a copy of which attached hereto as Exhibit A. 9. VACATION. Employee shall be entitled to vacation benefits as made available by the Company in accordance with standard Company vacation policy, except that Employee shall be entitled to 15 vacation days per year during the term of this Agreement, during which time his compensation shall be paid in full. 10. DEATH DURING EMPLOYMENT. If Employee dies during the term of this Agreement, this Agreement shall terminate immediately, and Employer shall pay to the estate of Employee the basic annual salary and expense requirement which would otherwise be payable to Employee through the last day of the calendar year in which his death shall have occurred, provided that the salary payment shall not, in any event, represent less than one (1) month salary. 11. MISCELLANEOUS. A. NO CONFLICT. Employee hereby warrants that he is not now under any legal or contractual obligation that would conflict in any manner whatsoever with the obligations and duties by him herein undertaken, and that the execution of this Agreement will not breach any agreement to which Employee is presently a party. B. CONSTRUCTION. This Agreement shall be governed by, and shall be construed in accordance with, the laws of the State of California and shall be binding upon, and shall inure to the benefit of the heirs, executors, assigns, transferees and successors in interest of the parties hereto, notwithstanding the reorganization, merger, consolidation or change in personnel or Employer. C. NOTICES. Any notice to Employer required or permitted under this Agreement shall be given in writing to Employer, either by personal service or by registered or certified mail, postage prepaid, addressed to Employer at its then principal place of business. Any such notice to Employee shall be given in a like manner, and if mailed, shall be addressed to Employee at his home address then shown in Employer's files. For the purpose of determining compliance with any time limit in this Agreement, a notice shall be deemed to have been duly given (a) on the date of service, if personally served on the party to whom notice is to be given, or (b) on the second business day after mailing, if mailed to the party to whom the notice is to be given in the manner provided in his section. 6 D. WAIVER OF BREACH. The waiver of either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any provision or of any subsequent breach of the same provision or of any subsequent breach of the same provision thereof. E. ENTIRE AGREEMENT. This instrument contains the entire agreement of the parties and supersedes all prior and contemporaneous, oral or written, agreements, understandings and the like between the parties. It may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. F. SEVERABILITY. If any portion of this Agreement is held by a court of competent jurisdiction to conflict with any federal, state or local law, such portion or portions of this Agreement are hereby declared to be of no force or effect in such jurisdiction, and this Agreement shall otherwise remain in full force and effect and be construed as if such portion had not been included herein. G. SECTION HEADINGS. The section headings used herein are provided for informational purposes only and shall effect neither the meaning of the terms nor the intent of the parties. H. ATTORNEYS' FEES. If any action is commenced to enforce or interpret the terms of this Agreement, the prevailing party is such action shall be entitled to recover his or its attorneys' fees and other costs incurred. I. ASSIGNABILITY; SUCCESSORS AND MERGERS. Neither party hereunder shall have the right to assign this Agreement or any rights or obligations hereunder without the consent of the other party; provided, however, that upon the sale of all or substantially all the assets, business and goodwill of Employer to another corporation, or upon the merger or consolidation of Employer with another corporation or corporations, this Agreement shall inure to the benefit of and be binding upon, both Employee and the corporation purchasing such assets, business or goodwill or surviving such merger or resulting from such consolidation, as the case may be, in the same manner and to the same extent as though such other corporation were Employer. J. REMEDIES. If any of the covenants or agreements contained in paragraphs 3 or 8 here of are violated, Employee agrees and acknowledges that such violation or threatened violation will cause irreparable injury to Employer and that the remedy at law for such violation or threatened violation will be inadequate and that Employer will be entitled to injunctive relief without the necessity of proving actual damages. 7 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first written above. EMPLOYER: OPHTHALMIC IMAGING SYSTEMS, a California corporation By: STEVEN R. VERDOONER Its: Chief Executive Officer EMPLOYEE: WILLIAM L. MINCE William L. Mince EX-11 8 Exhibit 11.1 OPHTHALMIC IMAGING SYSTEMS CALCULATION OF NET LOSS PER SHARE 1997 1996 Net loss.......................... $(2,110,554) $(1,413,183) =========== =========== Weighted average common shares outstanding..................... 3,597,879 2,204,506 Common stock equivalents (1)...... -- -- ----------- ----------- 3,597,879 2,204,506 =========== =========== Net loss per share................ $ (.59) $ (.64) =========== =========== (1) No amounts are included, as amounts are anti-dilutive. EX-23 9 Exhibit 23.1 Consent of Ernst & Young LLP, Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-57518 and Form S-8 No. 333-0461) pertaining to the Stock Option Plan and the 1995 Nonstatutory Stock Option Plan of Ophthalmic Imaging Systems of our report dated October 21, 1997 (except for Note 10, as to which the date is November 18, 1997), with respect to the financial statements of Ophthalmic Imaging Systems included in the Annual Report (Form 10-KSB) for the year ended August 31, 1997. ERNST & YOUNG LLP Sacramento, California November 25, 1997 EX-27 10
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-KSB FOR THE PERIOD ENDED AUGUST 31, 1997 FOR OPHTHALMIC IMAGING SYSTEMS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS AUG-31-1997 AUG-31-1997 142,300 0 1,644,541 (100,346) 794,052 2,674,301 1,155,613 (774,831) 3,062,468 2,394,699 0 0 0 10,244,615 (9,576,846) 3,062,468 6,480,055 6,625,616 4,885,004 4,885,004 3,784,332 (2,043,720) 80,746 (2,110,554) 0 (2,110,554) 0 0 0 (2,110,554) (.59) 0
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