-----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, A735fx2IREz5k57njdIdlIp/IC5YN/VxOtI4fBAnLmLH8SRR0XgkuMy9/bMeinvL 3FfbkGL3IrJk1kY4YVHdvQ== 0001001277-00-000008.txt : 20000202 0001001277-00-000008.hdr.sgml : 20000202 ACCESSION NUMBER: 0001001277-00-000008 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000114 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: 10QSB SEC ACT: SEC FILE NUMBER: 001-11140 FILM NUMBER: 508056 BUSINESS ADDRESS: STREET 1: 221 LATHROP WAY STE 1 CITY: SACRAMENTO STATE: CA ZIP: 95815 BUSINESS PHONE: 9166462020 MAIL ADDRESS: STREET 1: 221 LATHROP WAY STREET 2: SUITE 1 CITY: SACRAMENTO STATE: CA ZIP: 95815 10QSB 1 FORM 10-QSB FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 1999 Commission File Number: 1-11140 OPHTHALMIC IMAGING SYSTEMS (Exact name of registrant as specified in its charter) California 94-3035367 (State of Incorporation) (IRS Employer Identification No.) 221Lathrop Way, Suite I, Sacramento, CA 95815 (Address of principal executive offices) (916) 646-2020 (Issuer's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes XX No As of January 14, 2000, 4,305,428 shares of common stock, at no par value, were outstanding. 1 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 2 Ophthalmic Imaging Systems Condensed Balance Sheet November 30, 1999 (Unaudited) Assets Current assets: Cash and equivalents $ 246,852 Accounts receivable, net 298,117 Inventories, net 354,351 Prepaid expenses and other current assets 48,991 ------------------- Total current assets 948,311 Furniture and equipment, net of accumulated depreciation and amortization of $1,030,706 285,765 Other assets 12,386 ------------------- $ 1,246,462 =================== Liabilities and Stockholders' Equity Current liabilities: Borrowings under line of credit $ 24,844 Borrowings under note payable to, and unsecured advances from significant shareholder 1,323,889 Accounts payable 867,012 Accrued liabilities 1,414,145 Accrued warrant appreciation right 300,442 Deferred extended warranty revenue 94,190 Customer deposits 687,652 Capitalized lease obligation and other notes payable 8,939 ------------------- Total current liabilities 4,721,113 Capitalized lease obligation and other notes payable, less current portion 17,331 Commitments Stockholders' deficit: Preferred stock, without par value, 20,000,000 shares authorized: Series A Junior Participating Preferred Stock, without par value, 100,000 shares authorized; none issued or outstanding -- Series B Preferred Stock, $.01 par value, 2,000 shares authorized; 150 issued and outstanding 3,750 Common stock, no par value, 20,000,000 shares authorized; 4,305,428 issued and outstanding 10,518,854 Deferred compensation (74,411) Accumulated deficit (13,940,175) ------------------- Total stockholders' deficit (3,491,982) ------------------- $ 1,246,462 =================== See accompanying notes.
3 Ophthalmic Imaging Systems Condensed Statements of Operations (Unaudited) Three months ended November 30, 1999 1998 ------------------ ------------------ Net revenues $ 1,010,168 $ 1,490,234 Cost of sales 746,346 972,421 ------------------ ------------------ Gross Profit 263,822 517,813 Operating expenses: Sales and marketing 548,647 525,387 General and administrative 247,348 299,864 Research and development 122,420 207,914 ------------------ ------------------ Total operating expenses 918,415 1,033,165 ------------------ ------------------ Income (loss) from operations (654,593) (515,352) Other expense, net (37,771) (42,010) ------------------ ------------------ Net income (loss) $ (692,364) $ (557,362) ================== ================== Shares used in the calculation of basic net income (loss) per share 4,221,362 4,155,428 ================== ================== Basic net income (loss) per share $ (0.16) $ (0.13) ================== ================== Shares used in the calculation of diluted net income (loss) per share 4,221,362 4,155,428 ================== ================== Diluted net income (loss) per share $ (0.16) $ (0.13) ================== ================== See accompanying notes.
4 Ophthalmic Imaging Systems Condensed Statements of Cash Flows Increase (Decrease) in Cash and Equivalents (Unaudited) Three months ended November 30, 1999 1998 ------------------ ----------------- Operating activities: Net loss $ (692,364) $ (557,362) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 31,359 32,924 Stock option compensation expense 19,722 32,365 Net decrease (increase) in current assets other than cash and equivalents 138,786 (67,633) Net increase in current liabilities other than short-term borrowings 509,243 479,002 ------------------ ----------------- Net cash provided by (used in) operating activities 6,746 (80,704) Investing activities: Purchases of furniture and equipment (13,994) -- Net (increase) decrease in other assets (5,001) (547) ------------------ ----------------- Net cash used in investing activities (18,995) (547) Financing activities: Principal payments on notes payable -- (132) Net (repayments of) proceeds from borrowings under note payable to and unsecured advances from significant shareholder (3,750) 9,289 Net proceeds from (repayments of) line-of-credit Net proceeds from sale of common stock 56,250 -- Net proceeds from sale of preferred stock 3,750 -- ------------------ ----------------- Net cash used in financing activities 81,094 (68,847) ------------------ ----------------- Net decrease in cash and equivalents 68,845 (150,098) Cash and equivalents at beginning of period 178,007 514,186 ------------------ ----------------- Cash and equivalents at end of period $ 246,852 $ 364,088 ================== ================= Supplemental schedule of noncash financing activities: Reduction of borrowings under note payable to and unsecured advances from significant shareholder in exchange for inventory, net $ 143,213 $ -- ================== ================= See accompanying notes.
5 Ophthalmic Imaging Systems Notes to Condensed Financial Statements Three Month Periods ended November 30, 1999 and 1998 (Unaudited) Note 1. Basis of Presentation The accompanying unaudited condensed balance sheet as of November 30, 1999, condensed statements of operations for the three month periods ended November 30, 1999 and 1998 and the condensed statements of cash flows for the three month periods ended November 30, 1999 and 1998 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. It is suggested that these condensed financial statements be read in conjunction with the audited financial statements and notes thereto included in the registrant's (the Company's) Annual Report for the Fiscal Year Ended August 31, 1999 on Form 10-KSB/A. In the opinion of management, the accompanying condensed financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial position and results of operations for the periods presented. The results of operations for the period ended November 30, 1999 are not necessarily indicative of the operating results for the full year. Certain amounts in the fiscal 1999 financial statements have been reclassified to conform with the presentation in the fiscal 2000 financial statements. Note 2. Net Income (Loss) Per Share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share". Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All net income (loss) per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. 6 Note 2. Net Income (Loss) Per Share (continued) The following table sets forth the computation of basic and diluted income (loss) per share: Unaudited Three Months Ended November 30, 1999 1998 ----------- ----------- Numerator for basic and diluted net income (loss) per share $ (692,364) $ (557,362) =========== =========== Denominator for basic net income (loss) per share: Weighted average shares 4,221,362 4,155,428 Effect of dilutive securities: Employee/director stock -- -- options Warrants and other -- -- ------------ ----------- Dilutive potential common shares -- -- ------------ ----------- Denominator for diluted net income (loss) per share 4,155,362 4,155,428 =========== =========== Basic net income (loss) per share $ (0.16) $ (0.13) =========== =========== Diluted net income (loss) per share $ (0.16) $ (0.13) =========== =========== Note 3. Short-Term Borrowings The Company entered into an accounts receivable credit agreement (the "Agreement") with a bank (the "Bank") in July 1999. The Agreement allows for up to an 80% advance rate on eligible receivable balances. Borrowings are secured by substantially all assets of the Company and bear interest at the Bank's prime lending rate plus 10%. The minimum monthly amount charged by the Bank is the greater of interest calculated in accordance with the immediately preceding sentence or $1,200. The Agreement remains in effect from year to year unless terminated in writing by the Company or the Bank. At November 30, 1999, approximately $24,844 in principal was outstanding under the Agreement. Note 4. Note Payable to Related Party On April 30, 1998, the Company executed a promissory note (the "Note") in favor of Premier Laser Systems, Inc., a California corporation ("Premier"). Borrowings against the Note are available to the Company in the form of periodic advances. The maximum principal amount available under the Note is $500,000, which principal amount outstanding, together with any and all accrued interest, is payable the earlier of (i) written demand by Premier or (ii) April 30, 1999. Under the terms of the Note, borrowings bear interest at the rate of 8 1/2% per annum, are secured by certain of the Company's assets and are subordinate to borrowings against the accounts receivable credit line with 7 the Company's Bank (see Note 3). Premier also has made certain unsecured advances to the Company which are not covered by the Note. At November 30, 1999, the Company had recorded approximately $1,508,000 in principal and interest outstanding under the Note and unsecured advances, of which approximately $183,800 of accrued interest was included in other accrued liabilities. The principal amount is net of, among other things, an offset for inventory transferred to Premier pursuant to a Manufacturing Agreement entered into between the Company and Premier (see Note 5). In October 1999, the Company and Premier entered into a Merger Agreement whereby, among other things, the parties have agreed that no payments will be required with respect to amounts owing as of August 31, 1999 under the Note and unsecured advances during the term of the Merger Agreement (see Note 6). Note 5. Manufacturing Agreement In March 1999, the Company and Premier entered into a manufacturing agreement ("Manufacturing Agreement") whereby Premier will manufacture the majority of the Company's products. The Manufacturing Agreement will terminate upon the earlier of: (i) material breach by either party, which breach is not cured within thirty (30) days written notice thereof; (ii) ninety (90) days written notice by the Company to Premier; (iii) one hundred eighty (180) days written notice by Premier to the Company; or (iv) mutual written agreement of the parties. Under the terms of the Manufacturing Agreement, among other things, the Company charges Premier for certain inventory transferred to Premier and Premier charges the Company for products manufactured pursuant to the Manufacturing Agreement. Note 6. Merger Agreement On October 21, 1999, the Company and Premier entered into an agreement and plan of reorganization (the "Merger Agreement"), whereby, upon requisite shareholder approval and the satisfaction of certain other preconditions, the Company will become a wholly-owned subsidiary of Premier and each share of the Company's common stock, other than any dissenting shares and any stock then owned by Premier or its subsidiaries, will convert into 0.80 shares of Premier's common stock. The Merger Agreement will terminate on January 31, 2000 or earlier based on the occurrence of certain events set forth in the Merger Agreement. The parties are currently in discussion with regard to an extension of time to complete the transactions contemplated by the Merger Agreement. Under the Merger Agreement, among other things, the parties have agreed that no payments will be required during the term of the Merger Agreement with respect to amounts owing by the Company to Premier as of August 31, 1999 (see Note 4). 8 The Company's Board of Directors (the "Board") has approved the Merger Agreement and the transactions contemplated thereby, including the acquisition of the Company, and has agreed to submit the Merger Agreement to the Company's shareholders for their approval. To permit the acquisition by Premier and all other actions contemplated by the Merger Agreement, the Board, after considering the terms of the Merger Agreement and an opinion rendered by the Company's independent financial advisors as to the fairness of Premier's offer to the shareholders of the Company, amended the Company's Rights Agreement effective in October 1999. Note 7. Series B Preferred Stock and Related Agreements The Company and Premier also executed a Series B Preferred Stock Purchase Agreement on October 21, 1999 whereby, among other things, the Company agreed to sell to Premier, upon the issuance by the Company of shares of its common stock pursuant to the exercise of stock options, shares of the Company's Series B Preferred Stock at a price of $25 per share with each share carrying the voting power of 1,000 shares of the Company's common stock. Also on October 21, 1999, the Company, Premier and three of the Company's outside directors (the "exercising Directors") entered into a stock purchase agreement (the "Agreement") pursuant to which, among other things, the Exercising Directors each exercised options to purchase 50,000 shares of common stock at an exercise price of $0.375 per share resulting in net proceeds to the Company of $56,250. The stock purchased by the Exercising Directors is restricted and subject to repurchase by the Company until the earlier of May 9, 2000 or the Effective Date of the Company's acquisition by Premier, as defined in the Merger Agreement (see Note 6). Also under the terms of the Agreement, Premier purchased 150 shares of the Company's Series B Preferred Stock at a per share price of $25 in exchange for Premier's cancellation of certain of the Company's debt in the aggregate amount of $3,750. These 150 shares of Series B Preferred Stock are also restricted and subject to repurchase by the Company if the Company repurchases any of the common stock purchased by the Exercising Directors. As a result of the foregoing transactions, Premier owns approximately 49 1/2% of the Company's outstanding common stock and all 150 outstanding shares of the Company's Series B Preferred Stock, resulting in sole voting power of approximately 53%. Note 8. Ability to Continue as a Going Concern The Company has an accumulated deficit of $13,940,175 at November 30, 1999. In addition, current liabilities exceed current assets by $3,772,802 as of that date. These factors, 9 among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. During October 1999, the Company entered into an agreement and plan of reorganization (the "Merger Agreement") with Premier. The Company's Board of Directors has approved the Merger Agreement and the transactions contemplated thereby, and has agreed to submit the Merger Agreement to the Company's shareholders for their approval (see Note 6). Under the terms of the Merger Agreement, the Company would need to obtain Premier's prior consent with respect to securing additional capital beyond that generated from operations, and the Company has requested Premier's cooperation and assistance in that regard. There can be no assurance, however, that any financing arrangements for securing additional capital will be available, and, if available, can be obtained on terms favorable to the Company and acceptable to Premier. In addition, as a consequence of the Merger Agreement, certain holders of options to purchase shares of the Company's common stock may be inclined to exercise these stock options. The Company could receive substantial proceeds from the exercise of these stock options; however, there can be no assurance that any stock options will be exercised in the near term, if at all. In the event that the transactions contemplated under the Merger Agreement are not consummated, then the Company's ability to continue as a going concern would be seriously jeopardized, and would depend upon its ability to restructure payment terms and/or obtain substantial new financing to repay its debts and ensure continued supply of materials and services. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements within the meaning of the federal securities laws. The Company intends such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended, and in Section 21E of the Exchange Act of 1934, as amended. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on its operations and future prospects include, but are not limited to, changes in: economic conditions generally and the medical instruments market specifically, legislative or regulatory changes affecting OIS, including changes in healthcare regulation, the availability of working capital, the introduction of competing products, and other risk factors described herein. These risks and uncertainties, together with the other risks described from time to time in reports and documents filed by OIS with the SEC should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. Indeed, it is likely that some of the Company's assumptions will prove to be incorrect. The Company's actual results and financial position will vary from those projected or implied in the forward-looking statements, and the variances may be material. 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 primary target market for the Company's digital angiography systems has been retinal specialists. The Company is currently attempting to expand its role in the ophthalmic imaging field by developing new ocular imaging devices and applications targeted at the broader markets of general ophthalmology and optometry. In this regard, commencing in fiscal year 1998, OIS has applied significant resources to the development of two ocular imaging devices, the Digital Fundus Imager the ("DFI") and the Digital Slit Lamp Imager (the "DSLI"). The Company is focusing a majority of its current development, manufacturing, marketing and sales efforts on its DFI and DSLI products, and commenced delivering these products during the fourth quarter of fiscal 1999 after experiencing certain delays. At the 1998 Annual Meeting of the American Academy of Ophthalmology (the "1998 AAO Meeting") held during the first quarter of fiscal 1999, the DFI received considerable interest and the Company has received significant purchase commitments for the product. However, the Company has limited financial and operational resources, including manufacturing, marketing and selling capacity 11 to meet any significant demand resulting from the introduction of this product. To address this situation, during the third quarter of fiscal 1999, the Company entered into the Manufacturing Agreement with Premier Laser Systems, Inc. a California corporation ("Premier"), whereby Premier began assembling and manufacturing the Company's products, including the DFI and DSLI. Initial deliveries of revenue generating products manufactured by Premier under the Manufacturing Agreement were made during the third quarter of fiscal 1999. The Company entered into the Manufacturing Agreement to reduce the cost of manufacturing its products and to take advantage of Premier's manufacturing capabilities, but there can be no assurance that this arrangement will provide the Company the anticipated benefits. To date, the Company has incurred increased costs and significant delays in deliveries of its products under the Manufacturing Agreement. In addition, the Company recently agreed with Premier on co-marketing and selling arrangements whereby, among other things: (a) the Company will distribute in the United States and Canada certain of Premier's EyeSys products; and (b) Premier will distribute the Company's products in certain international markets. In anticipation of these arrangements, the Company and Premier have been selling their ophthalmic products through a jointly managed EyeSys Vision Group, which made its debut at the American Society of Cataract and Refractive Surgery meeting in April 1999. To date, the Company has incurred increased costs under these arrangements and it is unclear at this time whether these arrangements will result in significant, if any, benefit to OIS. 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. The Company has experienced operating losses for each fiscal year since its initial public offering in 1992. At November 30, 1999, the Company had an accumulated deficit in excess of $13 million and its current liabilities exceeded its current assets by more than $3 million. The Company continues to experience cash flow deficits and there can be no assurance that the Company will be able to achieve or sustain significant positive cash flows, revenues or profitability in the future. On February 25, 1998, the Company and Premier entered into a Stock Purchase Agreement (the "Stock Purchase Agreement"), whereby Premier would offer to buy those shares of the Company's common stock not already owned by it. As a condition to the Stock Purchase Agreement, the Company agreed to amend its Rights Agreement to permit Premier to acquire up to 51.3% of the Company's outstanding common stock in private purchase agreements made simultaneously with the execution of the Stock Purchase Agreement. In August 1998, Premier notified that Company that, due to a variety of factors, Premier would not be able to close the transactions contemplated under the Stock Purchase Agreement. As a result, the Stock Purchase Agreement was terminated. As a result of such termination, the Company made demand to Premier for payment of a $500,000 termination fee (the "Termination Fee") as provided for in the Stock Purchase Agreement. The Termination Fee, however, among other things, was the subject of subsequent negotiations between the companies. 12 On October 21, 1999, the Company and Premier entered into an Agreement and Plan of Reorganization (the "Merger Agreement") whereby, upon requisite shareholder approval, the Company will become a wholly-owned subsidiary of Premier. The Company's Board of Directors (the "Board") has approved the Merger Agreement and the transactions contemplated thereby, including the acquisition of the Company, and has agreed to submit the Merger Agreement to the Company's shareholder for their approval. The Merger Agreement will terminate on January 31, 2000 or earlier based on the occurrence of certain events set forth in the Merger Agreement and the parties are currently in discussion with regard to an extension of time to complete the transactions contemplated by the Merger Agreement. To permit the acquisition by Premier and all other actions contemplated by the Merger Agreement, the Board, after considering various factors, amended the Company's Rights Agreement effective in October 1999. In addition, the Company and Premier entered into two stock purchase agreements on October 21, 1999 with respect to the Company's Series B Preferred Stock whereby, among other things, Premier purchased 150 shares of the Company's Series B Preferred Stock with each share carrying the voting power of 1,000 shares of the Company's common stock, at a per share price of $25 in exchange for Premier's cancellation of certain of the Company's debt in the aggregate amount of $3,750. As a result of the foregoing transactions, Premier currently owns 49 1/2% of the Company's outstanding common stock and all 150 outstanding shares of the Company's Series B Preferred Stock, thereby giving Premier majority voting control. The Company's results of operations have historically fluctuated from quarter to quarter due to a number of factors and are not necessarily indicative of the results to be expected for any future period or expected for the fiscal year ending August 31, 2000. There can be no assurance that revenue growth or profitability can be achieved or sustained in the future. The following discussion should be read in conjunction with the unaudited interim financial statements and the notes thereto which are set forth elsewhere in this Report on Form 10-QSB. In the opinion of management, the unaudited interim period financial statements include all adjustments, all of which are of a normal recurring nature, that are necessary for a fair presentation of the results of the periods. Results of Operations The Company incurred a net loss of $692,364, or $.16 per share, for the first quarter of fiscal 2000 as compared to a net loss of $557,362, or $.13 per share, for the first quarter of fiscal 1999. The per share figures are basic amounts in accordance with Financial Accounting Standards No. 128 (see Note 2 of Notes to Condensed Financial Statements included in Item 1 of this Form 10-QSB). The 1999 figures reflect the negative impact attributable to continuing diversion of the Company's resources and management's attention to acquisition matters during the period. The results of operations for the first quarter of 2000 figures reflect the adverse impact on revenues and corporate operations resulting from delays in delivery of the Company's products associated with the outsourcing of the manufacture and assembly of the Company's products during the 13 period under the Manufacturing Agreement with Premier. In addition, the Company has incurred higher than normal costs and professional fees and expenses in connection the contemplated transactions with Premier, while diverting a significant amount of the Company's resources and management's attention and selling efforts away from the Company's core operations during this period. The results of operations do not include any amounts with respect to a potential contingent liability in connection with the collection of taxes from the Company's customers, which amount has been estimated on the basis of numerous factors and assumptions that might, in the least favorable combination, reach $1.3 million. Management believes that the probability of such an assessment is remote and accordingly, has not recorded a liability in its financial statements. However, there can be no assurance that the amount that might ultimately be assessed for prior periods would not materially affect the Company's results of operations or cash flows in any given reporting period. The Company's revenues for the first quarter of fiscal 2000 were $1,01,168 representing a decrease of approximately 32% from revenues of $1,490,234 for the first quarter of fiscal 1999. The reduced revenue levels during fiscal 2000 resulted, in large part, from delays in delivery of the Company's products associated with the outsourcing of the manufacture and assembly of the Company's products during the period under the Manufacturing Agreement with Premier. In addition, this reduction reflects, to some extent, the adverse impact of management's efforts being directed to the negotiation of the Merger Agreement with Premier during the period and less time devoted to the generation of sales. Lastly, the fiscal 2000 first quarter revenue levels were negatively affected by the allocation of the Company's selling resources away from its core WinStation products. Substantial selling resources were allocated during the period to EyeSys products in support of co-marketing and co-selling arrangements with Premier as well as the Company's low-cost digital imaging systems incorporating its recently developed ocular imaging devices, the DFI and the DSLI. These low-cost digital imaging products were introduced at the 1998 AAO Meeting and the Company has received significant purchase commitments for these products. While the Company made its initial commercial deliveries of these products during the fourth quarter of fiscal 1999, revenues from the sales of these units to date have been below management's initial expectations for a variety of reasons, including those noted above as well as certain delays inherent in the launch of new technology-based products. As a result of the foregoing, the Company currently has a significant backlog of orders. Gross margins were approximately 26% during the first quarter ended November 30, 1999 versus approximately 35% for the comparable quarter of 1999. As a consequence of fixed expense levels representing a higher percentage of revenues during the first quarter of fiscal 2000 versus the comparable period of fiscal 1999, the lower gross margin percentage during the first quarter of 2000 is due in large measure to the significantly reduced revenue levels. The Company continues to evaluate its expenses in this area consistent with current and anticipated business conditions. The Company hopes its current manufacturing relationship with Premier will provide certain efficiencies and improve gross margins. To date, however, the Company has expended considerable resources in connection with the outsourcing arrangements under the Manufacturing Agreement 14 and has experienced delays in the timely delivery of certain of its products during the transition period, both of which have adversely impacted gross margins. While both companies are collaborating to maximize efficiencies with respect to the production of the Company's products under the Manufacturing Agreement, continued delays in delivering products, if significant, would adversely impact the Company. Sales and marketing and general and administrative expenses accounted for approximately 79% of total revenues during the first quarter of fiscal 2000 as compared with approximately 55% during the first quarter of fiscal 1999, with the increased percentage resulting principally as a function of the reduced revenue levels during the first quarter of 2000. Actual expense levels decreased slightly, to $795,995 during the first quarter of 2000 versus $825,251 during the first quarter of 1999. Primary contributing factors to the decreased expenses were reduced commissions and other costs associated with decreased revenue levels during the first quarter of 2000 versus the comparable period 1999. The Company is currently implementing marketing and selling alternatives in an effort to reduce costs and/or improve efficiencies in this area, including consolidating its current product offerings and entering into co-marketing and selling arrangements with Premier. Research and development expenses decreased by approximately 41% to $122,420, or approximately 12% of revenues in the first quarter of fiscal 2000 from $207,914, or approximately 14% of revenues in fiscal 1999. The Company intends to continue to focus its research and development efforts on its new digital image capture products and reducing cost configurations for its current products. The extent and focus of future research and development efforts will depend, in large measure, on whether Premier and OIS consummate the transactions contemplated under the Merger Agreement. Other expense was $37,771 during the first quarter of fiscal 2000 versus $42,010 during the same period of 1999 and in both periods was comprised principally of interest expense associated with borrowings and unsecured advances from Premier, as well as borrowings under credit facilities with the Company's bank. Liquidity and Capital Resources The Company's operating activities generated cash of $6,746 in the first quarter of fiscal 2000 and used cash of $80,704 in the first quarter of fiscal 1999. The cash generated from operations during the first quarter of fiscal 2000 was principally from increases in customer deposits from orders generated at the recently completed 1999 Annual Meeting of the American Academy of Ophthalmology, increased accounts payable and accrued liability levels and collection of accounts receivable, which amounts essentially offset cash expended to fund the net loss during the period. The cash used in operations during the first quarter of 1999 was expended principally to fund the net loss during the period. This amount was significantly offset by increases in customer deposits from orders generated at the 1998 AAO Meeting and increases in accrued liabilities, including those liabilities accrued in connection with professional costs associated with on-going negotiations with Premier as well as interest associated with borrowings from Premier (see Note 4 of Notes to Condensed 15 Financial Statements included in Item 1 of this Form 10-QSB). Cash used in investing activities was $18,995 during the first quarter of 2000 as compared to $547 during the same period for 1999. The Company's primary investing activities consist of equipment and other capital asset acquisitions. The Company does not currently have any pending material commitments for capital expenditures and the Company has deferred significant capital acquisition decisions pending improved cash flow. The Company generated cash from financing activities of $81,094 during the first quarter of fiscal 2000 as compared to using cash of $68,847 during the same period of fiscal 1999. The cash generated from financing activities during the first quarter of fiscal 2000 was resulted from the exercise of stock options by the Exercising Directors during the period as well as an increase in the amount of borrowings under the credit facility with Imperial Bank (the "Bank"). In addition, pursuant to certain stock purchase agreements with respect to the Company's Series B Preferred Stock, Premier purchased 150 shares of the Company's Series B Preferred Stock at a per share price of $25 in exchange for Premier's cancellation of certain of the Company's debt in the aggregate amount of $3,750. The use of cash in financing activities during the 1999 period was principally repayments of borrowings under the credit facility with the Bank, which amount was partially offset by an increase in the amount of borrowings under the note payable to and unsecured advances by Premier. Principal repayments on notes payable to parties other than Premier were negligible in 1999. As discussed in further detail in Note 3 of the Notes to Condensed Financial Statements included in Item 1 of this Form 10-QSB, on July 13, 1999, the Company entered into an accounts receivable credit agreement (the "Credit Agreement") with the Bank. The Credit Agreement allows for up to an 80% advance rate on eligible accounts receivable balances. The Bank has full recourse against the Company under the Credit Agreement and the Credit Agreement remains in effect from year to year unless terminated in writing by the Company or the Bank. Borrowings under the Credit Agreement bear interest at the Bank's prime lending rate plus 10%. The minimum monthly amount charged by the Bank is the greater of interest calculated in the manner described above or $1,200. Under the terms of the Credit Agreement, borrowings are secured by substantially all of the Company's assets. Approximately $24,800 was outstanding under the Credit Agreement at November 30, 1999. Additionally, as discussed further in Note 4 of the Notes to Condensed Financial Statements included in Item 1 of this Form 10-KSB, on April 30, 1998, the Company executed a promissory note in favor of Premier (the "Premier Note"). The Company has borrowed the maximum principal amount of $500,000 available under the Premier Note, which principal amount outstanding, together with any and all accrued interest, was payable the earlier of written demand by Premier or April 30, 1999. Under the terms of the Premier Note, borrowings bear interest at the rate of 8 1/2% per annum, are secured by certain of the Company's assets and are subordinate to borrowings under the Credit Agreement with the Bank. Premier also has made certain unsecured advances to the Company which are not specifically covered by the Premier Note. At November 30, 1999, the Company had recorded 16 approximately $1.5 million of indebtedness to Premier, including principal and interest outstanding under the Note and unsecured advances, as well as charges and credits pursuant to the terms of the Manufacturing Agreement, and excluding a $500,000 termination fee in connection with the terminated Stock Purchase Agreement in 1998 over which there is disagreement between Premier and the Company as to whether the Company is entitled to said termination fee and whether such termination fee can be used as an offset to the Company's debt to Premier. Pursuant to terms of the Merger Agreement, the parties have agreed that no payments will be required with respect to amounts owing as of August 31, 1999 during the term of the Merger Agreement. If the transactions contemplated under the Merger Agreement are not consummated and demand for payment is made by Premier, the Company's ability to continue as a going concern could be seriously jeopardized, and would depend upon its ability to obtain new financing to repay the debt to Premier. At November 30, 1999, the Company's cash and cash equivalents were $246,852. Even if no demand is made for payment of amounts owing under the Premier Note and the transactions contemplated under the Merger Agreement are consummated, the Company's existing cash balances together with ongoing collections of its accounts receivable and available borrowing capacity under the Credit Agreement may not be adequate to meet its liquidity and capital requirements in the immediate term. Substantial delays in the delivery of the Company's products, including the mass introduction of its DFI and DSLI products, would result in reduced anticipated cash flow from sales of such products as well as potential increased costs associated therewith. Additionally, such delays could prompt customers to request return deposits which would further adversely impact the Company's cash position. Further, demand for payment by the Bank of amounts claimed pursuant to a stock appreciation right granted to the Bank in connection with a Credit Agreement could also result in the immediate need for additional cash. At November 30, 1999, the Company had accrued approximately $300,000 in contingent liability under the stock appreciation right. Under the terms of the Merger Agreement, the Company would need to obtain Premier's prior consent with respect to securing additional capital beyond that generated from operations, and the Company has requested Premier's cooperation and assistance in that regard. There can be no assurance, however, that any financing arrangements for securing additional capital will be available, and, if available, can be obtained on terms favorable to the Company and acceptable to Premier. In addition, as a consequence of the Merger Agreement, certain holders of options to purchase shares of the Company's common stock may exercise those options. The Company could receive substantial proceeds from the exercise of these stock options; however, there can be no assurance that any stock options will be exercised in the near term, if at all. In the event that the transactions contemplated under the Merger Agreement are not consummated, the Company will likely have difficulty in meeting any significant demand for its products without an infusion of capital or other improvements in its liquidity position. Its ability to continue as a going concern would be seriously jeopardized, and would depend upon its ability to restructure payment terms and/or obtain substantial new financing to repay its debts and ensure continued supply of materials and services. 17 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES On October 18, 1999, the Company filed with the California Secretary of State a certificate of determination establishing the rights and privileges of the Company's convertible Series B Preferred Stock. Reference is made to the Company's Form 8-K filed on November 24, 1999 summarizing those rights and privileges. On October 21, 1999, the Company and Premier executed a Series B Preferred Stock Purchase Agreement whereby, among other things, the Company agreed to sell to Premier, upon the issuance by the Company of shares of its common stock pursuant to the exercise of stock options, shares of the Company's Series B Preferred Stock at a price of $25 per share with each share carrying the voting power of 1,000 shares of the Company's common stock. Also on October 21, 1999, the Company, Premier and three of the Company's outside directors (the "exercising Directors") entered into a stock purchase agreement (the "Agreement") pursuant to which, among other things, the Exercising Directors each exercised options to purchase 50,000 shares of common stock at an exercise price of $0.375 per share resulting in net proceeds to the Company of $56,250. The stock purchased by the Exercising Directors is restricted and subject to repurchase by the Company until the earlier of May 9, 2000 or the Effective date of the Company's acquisition by Premier, as defined in the Merger Agreement (see Note 6). Also under the terms of the Agreement, Premier purchased 150 shares of the Company's Series B Preferred Stock at a per share price of $25 in exchange for Premier's cancellation of certain of the Company's debt in the aggregate amount of $3,750. These 150 shares of Series B Preferred Stock are also restricted and subject to repurchase by the Company if the Company repurchases any of the common stock purchased by the Exercising Directors. As a result of the foregoing transactions, Premier owns approximately 49 1/2% of the Company's outstanding common stock and all 150 outstanding shares of the Company's Series B Preferred Stock, resulting in sole voting power of approximately 53%. The sale of Series B Preferred Stock to Premier was exempt under the federal securities laws by virtue of Regulation D. Premier is a corporation with total assets in excess of $5 million, the total purchase price was of the transaction was less than $1 million and there was no general solicitation 18 with respect to the transaction. ITEM 3. DEFAULTS UPON SENIOR SECURITIES As indicated in Note 4 of the Notes to Condensed Financial Statements, and addressed further in the Liquidity and Capital Resources discussion of Item 2 of Part I of this report, the Company is in default of its principal and interest payment obligations under the Note with Premier. In addition, the Company also has recorded liability to Premier for unsecured advances made to the Company by Premier. The aggregate amount recorded as liability at November 30, 1999 under the Note and unsecured advances, including principal and interest, was approximately $1,508,000, which amount was net of certain offset charges pursuant to the terms of the Manufacturing Agreement described in Note 5 of the Notes to Condensed Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The exhibits listed on the accompanying Index to Exhibits below are filed as a part hereof and are incorporated by reference as noted. (b) On November 15, 1999, Issuer filed a Form 8-K to report that its past results of operations do not include any charges related to a potential contingent liability for sales taxes payable in an amount to be estimated on the basis of numerous probabilities that might, in the least favorable combination, reach $1.3 million. On November 24, 1999, Issuer filed a Form 8-K to report (a) the filing of a certificate of determination with the California Secretary of State on October 18, 1999, establishing the rights and privileges of Issuer's convertible Series B Preferred Stock; (b) the further amendment of Issuer's Right's Agreement; (c) the execution of that certain Series B Preferred Stock Purchase Agreement, dated October 21, 1999, by and between Issuer and Premier, allowing Premier to purchase shares of Series B Stock; (d) the execution of that certain Agreement, dated October 21, 1999, by and among the Issuer, Premier and three of Issuer's outside directors, and the resulting issuance of 150 shares of Series B Stock to Premier on October 21, 1999; and (e) the execution of the Merger Agreement. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the undersigned has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OPHTHALMIC IMAGING SYSTEMS (Registrant) By: /s/ STEVEN R. VERDOONER ---------------------------------- Steven R. Verdooner, Chief Executive Officer By: /s/ STEVEN C. LAGORIO ---------------------------------- Steven C. Lagorio, Chief Financial Officer (principal accounting officer) Dated: January 14, 2000 20 INDEX TO EXHIBITS Footnote Exhibit Number Description of Exhibit Reference --------------- ---------------------- --------- 2.1 Stock Purchase Agreement, dated as of February 25, 1998, by and between OIS and (13) Premier. 2.2 Agreement and Plan of Reorganization By and Among Premier, Ophthalmic Acquisition (18) Corporation and OIS, dated as of October 21, 1999. 2.3 Series B Preferred Stock Purchase Agreement dated as of October 21, 1999 by and among (19) OIS and Premier. 2.4 Agreement dated as of October 21, 1999 by and among OIS, Premier, Walt Williams, (20) Daniel S. Durrie and Randall C. Fowler. 3.1 Articles of Incorporation of OIS, as amended. * 3.2 Amendment to Articles of Incorporation (Certificate of Determination of Preferences (11) of Series A Junior Participating Preferred Stock of OIS). 3.3 Amendment to Articles of Incorporation (Certificate of Determination of Preferences (21) of Series B Preferred Stock of OIS). 3.4 Amended Bylaws of OIS. * 3.5 Amendment to Amended Bylaws of OIS dated January 28, 1998. (16) 4.1 Specimen of Stock Certificate. * 4.2 Rights Agreement, dated as of December 31, 1997, between OIS and American Securities (10) Transfer, Inc., including form of Rights Certificate attached thereto. 4.3 Amendment to Rights Agreement, dated as of February 25, 1998, between OIS and (14) American Securities Transfer, Inc. 4.4 Second Amendment to Rights Agreement, effective as of October 20, 1999, between OIS (22) and American Securities Transfer, Inc. 10.1 Lease Agreement, dated as of July 10, 1987, between OIS (as tenant) and * Transamerica/Emkay Income Properties I, as amended on July 23, 1990 and June 11, 1991. 10.2 Seventh Amendment to Lease Agreement, effective as of July 18, 1996. (7) 21 10.3 Confidentiality Agreement, dated March 27, 1992 between OIS and Steven R. Verdooner. * 10.4 Assignment dated October 23, 1990 of U.S. Patent Application for Apparatus and Method * for Topographical Analysis of the Retina to the Issuer 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). 10.5 Form of International Distribution Agreement used by OIS and sample form of End User * Software License Agreement. 10.6 Original Equipment Manufacturer Agreement, dated April 1, 1991, between the Issuer * and SONY Medical Electronics, a division of SONY Corporation of America. 10.7 Original Equipment Manufacturer/Value Added Reseller Agreement, dated May 7, 1991, * between the Issuer and Eastman Kodak Company. 10.8 The Company's 1992 Nonstatutory Stock Option Plan and sample form of Nonstatutory * Stock Option Agreement. 10.9 Cross-Indemnification Agreement, dated February 14, 1991, among Dennis Makes, Steven * Verdooner and Richard Wullaert. 10.10 Key Man Life Insurance Policies in the amount of $1,000,000 for each of Dennis J. Makes * and Steven R. Verdooner, with the Issuer as the named beneficiary. 10.11 Stock Option Plan. (1) 10.12 Rental Agreement dated May 1, 1994 by and between the Issuer and Robert J. Rossetti. (2) 10.13 Security and Loan Agreement (with Credit Terms and Conditions) dated April 12, 1995 (3) by and between the Issuer and Imperial Bank. 10.14 General Security Agreement dated April 12, 1995 by and between the Issuer and (3) Imperial Bank. 10.15 Warrant dated November 1, 1995 issued by the Issuer to Imperial Bank to purchase (4) 67,500 shares of common stock. 10.16 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November (4) 1, 1995. 10.17 Registration Rights Agreement dated November 1, 1995 between the Issuer and Imperial (4) Bank. 22 10.18 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated April 4, (6) 1996. 10.19 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated July 12, (7) 1996. 10.20 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November (7) 21, 1996. 10.21 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated June 3, (8) 1997. 10.22 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated August (9) 28, 1997. 10.23 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated October (9) 24, 1997. 10.24 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November (9) 3, 1997. 10.25 Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November (9) 21, 1997. 10.26 Agreement of Purchase of Receivable (Full Recourse) dated November 18, 1997 between (9) the Issuer and Imperial Bank. 10.27 Agreement of Purchase of Receivable dated July 13, 1999 between the Issuer and (23) Imperial Bank. 10.28 Employment Agreement dated November 20, 1995 between the Issuer and Steven R. (4) Verdooner. 10.29 Amendment dated effective July 14, 1997 to Employment Agreement dated November 20, (16) 1995 between the Issuer and Steven R. Verdooner. 10.30 The Company's 1995 Nonstatutory Stock Option Plan and sample form of Nonstatutory (5) Stock Option Agreement. 10.31 The Company's 1997 Nonstatutory Stock Option Plan and sample form of Nonstatutory (12) Stock Option Agreement. 10.32 Promissory Note dated April 30, 1998 from the Issuer to Premier Laser Systems, Inc. (15) in the maximum amount of $500,000 due in full upon the earlier of (i) written demand by Premier or (ii) April 30, 1999. 10.33 Security Agreement dated April 30, 1998 by and between the Issuer and Premier Laser (15) Systems, Inc. 23 10.34 Form of Indemnification Agreement between the Issuer and each of its directors, (16) officers and certain key employees. 10.35 Manufacturing Agreement dated March 7, 1999 between the Issuer and Premier Laser (17) Systems, Inc. 27 Financial Data Schedule (for SEC use only). (23)
* Incorporated by reference to the Company's Registration Statement on Form S-18, number 33-46864-LA. (1) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1993, filed on November 26, 1993. (2) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1994, filed on November 29, 1994. (3) Incorporated by reference to the Company's 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 Company'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 Company's Registration Statement on Form S-8, filed on May 28, 1996, number 333-0461. (6) Incorporated by reference to the Company'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 Company'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 Company's Quarterly Report on Form 10-QSB for the quarterly period ended May 31, 1997, filed on July 15, 1997. (9) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1997, filed on December 1, 1997. (10) Incorporated by reference to Exhibit 1 of the Company's Form 8-K, filed on January 2, 1998. (11) Incorporated by reference to Exhibit A of Exhibit 1 of the Company's Form 8-K, filed on January 2, 1998. 24 (12) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended November 30, 1997, filed on January 14, 1998. (13) Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K, filed on March 9, 1998. (14) Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K, filed on March 9, 1998. (15) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended May 31, 1998, filed on July 15, 1998. (16) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1998, filed on December 15, 1998. (17) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended February 28, 1999, filed on April 14, 1999. (18) Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K, filed on November 24, 1999. (19) Incorporated by reference to Exhibit 4.2 of the Company's Form 8-K, filed on November 24, 1999. (20) Incorporated by reference to Exhibit 4.3 of the Company's Form 8-K, filed on November 24, 1999. (21) Incorporated by reference to Exhibit 3.1 of the Company's Form 8-K, filed on November 24, 1999. (22) Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K, filed on November 24, 1999. (23) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1999, filed on November 29, 1999. EX-27 2 ARTICLE 5
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE FROM 10-QSB FOR OPHTHALMIC IMAGING SYSTEMS FOR THE PERIOD ENDED NOVEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS AUG-31-1999 NOV-30-1999 246,852 0 298,117 0 354,351 948,311 1,316,471 (1,030,706) 1,246,462 4,721,113 0 0 0 0 0 (74,411) 1,010,168 1,010,168 746,346 746,346 918,415 0 37,771 (692,364) 0 (692,364) 0 0 0 (692,364) (0.16) 0
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