-----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, J5QcFbRrwfkq4zJ1utVGaYTvdAHzpD7uq+1hOndqUdjQWpbaZcMF4uRvXIpFMoMA r7Gs6MrHQYunRFvwdC8qpQ== 0001001277-98-000138.txt : 19981216 0001001277-98-000138.hdr.sgml : 19981216 ACCESSION NUMBER: 0001001277-98-000138 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981215 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: 98769872 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 10KSB 1 10-KSB 1 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, 1998 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 (State or Other Jurisdiction (I.R.S. Employer Identification No.) of Incorporation 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: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, No Par Value (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. [X] The issuer's revenues for its most recent fiscal year was $6,277,370. The aggregate market value of the Common Stock of the issuer held by non-affiliates as of November 30, 1998, was approximately $1,170,537 by reference to the average bid and ask price of the Common Stock as quoted by Nasdaq OTC Bulletin Board on such date. As of November 30, 1998, there were 4,155,428 issued and outstanding shares of issuer's Common Stock. Traditional Small Business Disclosure Format (check one): Yes No XX 2 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. Premier Laser Systems, Inc., a California corporation ("Premier"), currently owns 51.3% of the Company's outstanding common stock. 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(TM) and WinStation 640(TM). 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, combined with lower cost imaging devices and systems, are emerging that allow physicians and managed care organizations to deliver a high quality of patient care while reducing costs. OIS is currently a market leader in the ophthalmic imaging field and plans to expand this role by applying its technology to the development of new ocular imaging devices and telemedicine/managed care applications targeted at the mass markets of general ophthalmology and optometry. The Company's objective is to become a leading provider of a diverse range of complimentary ophthalmic products and services for the ocular health care industry, while maintaining its position as a market leader in digital imaging. In this regard, the Company refocused its resources during 1998 on the marketing and sales of its WinStation digital imaging systems and the development of two ocular imaging devices, the Digital Fundus Imager ("DFI") and the Digital Slit Lamp Imager ("DSLI"). These two new products, which were introduced at the recently completed Annual Meeting of the American Academy of Ophthalmology (the "AAO") held in New Orleans in November 1998 (the "1998 AAO Meeting"), represent a paradigm shift in imaging for ocular health professionals by providing diagnostic imaging devices and digital imaging systems that are affordable to the general ophthalmology and optometry markets. The Company is currently focusing its development efforts on its DFI and DSLI products, as well as features and enhancements to its existing products. 3 On February 25, 1998, the Company entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Premier, pursuant to which, among other things: (i) Premier agreed to commence a tender offer ("Tender Offer") to acquire all shares of the Company's common stock not held by Premier or its affiliates in exchange for a combination of cash and Premier securities; and (ii) the Company agreed to recommend that shareholders tender their shares of the Company's common stock in the Tender Offer and not to solicit any competing acquisition proposals. As a condition to the Stock Purchase Agreement, the Company agreed to amend its Rights Agreement ("Rights Agreement") dated as of December 31, 1997 by and between the Company and American Securities Transfer, Inc., as rights agent, 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. Following the execution of the Stock Purchase Agreement, the Company and Premier worked together with regard to certain aspects of their respective businesses. In this regard, the Company provided management of certain of Premier's sales and marketing efforts and Premier assisted the Company in the manufacture of prototypes of certain of its new products and in the procurement of its inventory and payment of certain other expenses. In August 1998, Premier notified the Company that, due to a variety of factors, Premier would not be able to close the transactions contemplated under the Stock Purchase Agreement. On August 14, 1998, the Company issued a press release announcing the termination of the Stock Purchase Agreement. In view of the termination of the Stock Purchase Agreement, the Company is currently re-evaluating the alternatives available to it and is in active discussions with Premier regarding the nature of the future relationship between the two companies. In addition, the Company has received several informal indications of interest from third parties regarding, among other things, transactions involving potential joint business venture arrangements, acquisition of the Company's assets and equity investments in the Company. The Company intends to pursue these indications of interest in the context of the arrangements, if any, with Premier. For additional information regarding the terms and conditions of the Stock Purchase Agreement, see the Company's Form 8-K filed on March 9, 1998 and Note 9 of the Notes to Financial Statements included in this Form 10-KSB. 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, including the DFI and DSLI, 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 used for a variety of standard diagnostic test procedures which are performed in most eye care practices. The Industry There are approximately 16,000 ophthalmologists in the United States and 28,000 ophthalmologists practicing medicine in countries outside the United 4 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. There are approximately 29,000 practicing optometrists in the United States, with the preponderance of practicing optometrists worldwide located in the United States. Products The Company currently offers four products to the ophthalmic market. The Company's WinStation products, the WinStation 640 and the WinStation 1024, have been offered for a number of years. At the recently completed 1998 AAO Meeting, the Company introduced two new products targeted at the ophthalmic and optometric markets: a Digital Fundus Imager and a Digital Slit Lamp Imager. While the Company received significant initial purchase commitments for these products at the AAO convention, the Company does not anticipate commencing delivery of these products until the latter half of fiscal 1999. WinStation Systems (640 & 1024) The Company's WinStation systems and products (640 and 1024 resolution) are targeted primarily at the retina specialist and general ophthalmologist. These products 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. These digital images can 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 diagnostic test procedure which is yielding potentially new 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 5% of patient angiography by retinal specialists, is a dye procedure that can only be performed using a digital imaging system. Digital Fundus Imager The DFI is intended for use by a majority of eye care practitioners, including most ophthalmologists and optometrists. The DFI is a significantly 5 lower cost alternative to currently available fundus cameras for use in color fundus imaging and fluorescein angiography, with the emphasis on the posterior segment of the eye. The system is unique in that it is the first "digital only" fundus camera which utilizes a proprietary optical design allowing patients to be imaged through a small pupil. The DFI is also capable of real-time video capture, database management and archiving, all of which can benefit practitioners, particularly in the areas of patient screening, tracking and monitoring relative to certain ocular pathologies, primarily retinal, as well as patient record retention. In addition to optometrists and general ophthalmologists, the Company's target market for the DFI includes retail optometry chain outlets, teaching institutions and military hospitals. The Company is hopeful that there will be favorable market acceptance of the DFI and that the DFI and related products will become a significant product line for the Company. However, there can be no assurance that this product line will be accepted by the target market. Digital Slit Lamp Imager The DSLI is targeted at a market similar to that of the DFI with an emphasis on imaging the anterior segment of the eye. Slit lamps are imaging devices used in virtually all ophthalmic and optometric practices. The DSLI adapts to most slit lamp models and, similar to the DFI, is capable of real-time video capture, database management and archiving. Other The Company also developed the Glaucoma-Scope(R), 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(R) 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 camera 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. It is estimated that new fundus camera sales fluctuate between 800 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 2,000 in the U.S. OIS digital imaging system sales have also been driven in this segment by ICG angiography. ICG 6 angiography is a diagnostic test procedure which is yielding potentially new 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 approximately 5% of patient angiography by retinal specialists, it has been the catalyst to digital imaging system purchases. Competition is intense in the retinal community and it has been reported that those practices without ICG capability have been losing referral business from general ophthalmologists. The Company expects the demand for digital angiography to continue as it becomes a standard of care. The DFI and DSLI are intended for use by a majority of eye care practitioners, including most ophthalmologists and optometrists. The primary target markets for the DFI and DSLI products are optometrists, the majority of whom are among the approximately 29,000 practicing in the United States (which number includes those employed by or affiliated with retail optometry organizations); retinal specialists and general ophthalmologists who, combined, number approximately 16,000 in the United States; 5,000 retail optometry chain outlets in the United States; and teaching institutions and military hospitals. It is estimated that annually approximately 3,000 fundus cameras, including new and previously-owned, are sold worldwide at an average selling price of approximately $20,000. The fundus camera market is estimated to be approximately 65% penetrated in ophthalmology, with a significant number of fundus cameras currently in use estimated to be more than 5 years old, and approximately 5% in optometry. The DFI is a significantly lower cost alternative to currently available fundus cameras for use in color fundus imaging and fluorescein angiography, with the emphasis on the posterior segment of the eye and both the DFI and DSLI provide the features, capabilities and benefits of digital imaging. Although the Company no longer actively manufactures or markets the Glaucoma-Scope(R) for sale, it continues 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. In addition, as a result of the recent affiliation with Premier, during the past year the Company has assisted in the sales and marketing efforts of Premier with respect to its EyeSys products, principally in the areas of marketing and sales management. In contrast to the Company's products, the EyeSys product line includes corneal topography systems and devices used to assist eye care practitioners in patient assessment for refractive surgery and contact lens fitting. However, since the Stock Purchase Agreement was terminated, the Company has provided only limited assistance to Premier. The Company is currently negotiating with Premier as to whether these efforts will continue and, if so, the terms of such arrangements. 7 With respect to those marketing activities involving the Company's products, 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,, 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 9,675 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 WinStation 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 and video optical interfaces. The Glaucoma-Scope(R) optical head is also manufactured by the Company. With respect to the Company's two new products, the DFI and the DSLI, the Company has not yet finalized the manufacturing and production strategies for these product lines. The Company has limited capacity to manufacture the DFI and DSLI in its present facilities with its current employees. However, the Company is optimistic that these products will be readily accepted by the marketplace and that the demand will exceed its current capacity. The Company is analyzing the manufacturing alternatives available to it in the event that such demand should be realized, including, but not limited to, outsourcing opportunities and potential joint venture arrangements. No decision has been made at this time. The Company has been routinely audited by the Food and Drug Administration ( the "FDA") and was deemed to conform to Good Manufacturing Practices ("GMP"). The Company has 510(k)'s on file for both its digital angiography products, including its recently introduced DFI and DSLI, and the Glaucoma-Scope. 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. During the past year, Premier assisted the Company in the procurement of the inventory components necessary for the 8 manufacturing of its products, including the advancement or assumption of certain costs. This arrangement, however, is not currently in effect and is a subject of current negotiations between the companies. 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. 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. With respect to the Company's new products, the DFI and the DSLI, the Company anticipates offering similar warranties, installation and training services and service plans. 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 one primary competitor in the U.S. which produces and is delivering digital fundus imaging systems in volume, Topcon. Four other companies are known to have systems in primarily the international market, and to a limited extent the U.S. 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 of fundus cameras from a wide variety of manufacturers. The primary competition for the DFI is expected to be traditional fundus cameras manufactured by Topcon, Kowa, Zeiss, Canon, Nidek and Nikon. None of the current digital fundus cameras include a digital imaging system or certain other features of the DFI, including live motion imaging. These fundus cameras, when combined with an imaging system comparable to the DFI, are significantly more expensive than the DFI. The Company is aware of two companies that currently have prototype units that could be similar in function to the DFI but such units have not yet been introduced. The Company is aware of five primary competitors for the DSLI, including Veatch, MVC, Kowa, Helioasis and Lombard. Additionally, there are approximately four other companies which manufacture low-end systems, but these systems have little market presence. To the Company's knowledge, however, the DSLI is the 9 only low-end product offering live motion imaging, database management, archiving and voice annotation. 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 further development of the DFI and DSLI, telemedicine applications of its imaging systems, the improvement of optics, software development targeting modules specific to particular ocular diseases (including the continued enhancement of WinStation) and hardware optimization. The Company's research and development expenditures in the periods ended August 31, 1998 and 1997, were $866,745 and $1,070,192, 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(R) 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. Additionally, the Company has recently developed a digital fundus imaging system incorporating its Digital Fundus Imager, and has initiated the patent protection process by filing a United States Provisional Patent Application describing the system. The Company's attorneys are presently evaluating patentability of the system in preparation for filing a further utility patent application. While the Company believes that this digital fundus imaging system is innovative and intends to aggressively pursue patent protection, there can be no assurance that a patent will ultimately be obtained, that such a patent will provide commercially valuable protection or that any patent, if obtained, will not be circumvented or invalidated. Further, although the Company believes that its 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(R), infringe 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 10 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. In that regard, the Company recently received from Winstation Systems Corporation ("WSC") a notice of an alleged trademark infringement. WSC is the owner of a federal trademark registration for WINSTATION and sells personal computers and related equipment under that name. For several years, the Company has used the "OIS WinStation" trademark for its ocular digital imaging systems. Because the Company's products are relatively expensive medical devices sold in a narrow specialty market channel to highly educated consumers, the Company does not believe there is any likelihood of confusion between the products of the two companies. The Company also believes that another word or words could be substituted for its use of "WinStation," if necessary, without material adverse impact on the Company's marketing efforts. For these reasons, the Company believes the infringement allegations can be resolved without a material adverse impact on the Company. However, there can be no assurance that WSC will not take legal action, and that such action, if taken, would not potentially have a material adverse affect on the Company (see "Legal Proceedings" in Item 3 of this Form 10-KSB). 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. 11 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 FDA which provides certain safety and effectiveness information concerning the Company's diagnostic imaging systems, including its recently developed DFI and DSLI, and the Glaucoma-Scope(R). The FDA has approved the Company's pre-marketing notification submittals thereby granting the Company permission to market its products, 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, 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. 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, 1998, 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. 12 Employees As of August 31, 1998, the Company had 27 employees, of which 26 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, on a month-to-month basis under a triple net lease, approximately 9,675 square feet of office, manufacturing, and warehouse space in Sacramento, California. 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 $7,700. 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. In October 1998, the Company was notified by its counsel that the case was voluntarily dismissed. On or about September 18, 1998, the Company received from WSC a notice of an alleged trademark infringement. WSC is the owner of a federal trademark registration for WINSTATION and sells personal computers and related equipment under that name. For several years, the Company has used the "OIS WinStation" trademark for its ocular digital imaging systems. Because the Company's products are relatively expensive medical devices sold in a narrow specialty market channel to highly educated consumers, the Company does not believe there is any likelihood of confusion between the products of the two companies. The Company also believes that another word or words could be substituted for its use of "WinStation," if necessary, without material adverse impact on the Company's marketing efforts. For these reasons, the Company believes the infringement allegations can be resolved without a material adverse impact on the Company. However, there can be no assurance that WSC will not take legal action, and that 13 such action, if taken, would not potentially have a material adverse affect on the Company (see "Patents, Trademarks and Other Intellectual Property" in Item 1 of this Form 10-KSB). 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. 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, 1998 covered by this Annual Report on Form 10-KSB. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The shares of common stock of the Company have been listed and principally quoted on the Nasdaq OTC Bulletin Board under the trading symbol "OISI" since May 28, 1998 and prior thereto on the Nasdaq Small-Cap Market. Through March 3, 1998, the Company's common stock also had been listed under, and traded on, the Boston Stock Exchange under the symbol "OIS." The following table sets forth the high ask and low bid prices for the Company's common stock as reported on the Nasdaq Small-Cap Market through May 27, 1998, and thereafter on the Nasdaq OTC Bulletin Board. These quotations reflect inter-dealer prices, without retail markup, markdown or commissions, and may not necessarily represent actual transactions. Fiscal Year 1997 Fiscal Year 1998 ------ ------------------- ----- ------------------- High Low High Low Ask Bid Dividend Ask Bid Dividend ------ ----- -------- ----- ----- -------- First Quarter...................................... 5-3/4 3-1/4 -- 1-3/16 3/4 -- Second Quarter..................................... 5-3/16 3 -- 2 1/2 -- Third Quarter...................................... 3-7/8 1-7/8 -- 2 9/16 -- Fourth Quarter..................................... 2-1/4 1/2 -- 1-5/16 7/16 --
On November 30, 1998 the closing price for the Company's common stock as reported by the Nasdaq OTC Bulletin Board was $.50 per share and there were approximately 138 shareholders of record. The Company was notified by Nasdaq that the Company no longer satisfied Nasdaq Small-Cap Market listing requirements and, in accordance with the terms of the Nasdaq Listing Qualifications Panel decision, the Company's common stock was delisted therefrom on May 27, 1998. 14 Due to the Company's inability to comply with the Boston Stock Exchange listing requirements, the Company's common stock was delisted therefrom on March 3, 1998. 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 with Imperial Bank, 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. See "Management's Discussion and Analysis or Plan of Operation" in Item 6 of this Form 10-KSB. 15 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 of demand for medical imaging equipment and services. New opportunities in telemedicine, combined with lower cost imaging devices and systems, are emerging that allow physicians and managed care organizations to deliver a high quality of patient care while reducing costs. OIS is currently a market leader in the ophthalmic imaging field and plans to expand this role by applying its technology to the development of new ocular imaging devices and telemedicine/managed care applications targeted at the mass markets of general ophthalmology and optometry. The Company's objective is to become a leading provider of a diverse range of complimentary ophthalmic products and services for the ocular health care industry, while maintaining its position as a market leader in digital imaging. In this regard, the Company has recently refocused its resources on the marketing and sales of its WinStation digital imaging systems and the development of two ocular imaging devices, the DFI and the DSLI. These two new products, which were introduced at the recently completed 1998 AAO Meeting, represent a paradigm shift in imaging for ocular health professionals by providing diagnostic imaging devices and digital imaging systems affordable to the general ophthalmology and optometry markets. The Company is focusing its current development efforts on its DFI and DSLI products, as well as features and enhancements to its existing products. The Company is hopeful that there will be favorable market acceptance of the DFI and the DSLI and that the DFI and DSLI and related products will become significant product lines for the Company. The Company has limited capacity to manufacture these products from its present facility with its current workforce. However, if future demand for the products meets or exceeds the Company's optimistic expectations, demand will exceed the Company's current production capacity. In such an event, the Company may need to seek additional funds and manufacturing capacity in order to produce and distribute its products in sufficient quantities to meet any such demand for these new products. In the longer term, the Company believes that it can generate significant 16 revenues from sales of said products which will be sufficient to fund the future production and distribution of these products. There can be no assurance, however, that there will be favorable market acceptance of these products. Furthermore, if there is favorable market acceptance, then there can be no assurance that the Company will be able to identify a suitable manufacturing alternative to alleviate any over-capacity situation or that there will be arrangements available to the Company to secure or otherwise generate the funds necessary to produce and distribute a large demand for these products or, if available, that such alternatives or financing arrangements will be on terms favorable to the Company. 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. On February 25, 1998, the Company and Premier entered into the Stock Purchase Agreement whereby Premier made an offer to stockholders to buy those shares of the Company's common stock which were not already owned by it. As a result of the negotiation of the Stock Purchase Agreement, and in contemplation of its consummation, the Company incurred significant costs and expenses and diverted a significant amount of its resources away from its core business. In addition, the Company entered into various financing arrangements with Premier. On or about August 20, 1998, it was determined that the transactions contemplated under the Stock Purchase Agreement between the Company and Premier would not be consummated and the Stock Purchase Agreement was terminated. As a result of such termination, the Company has made demand to Premier for payment of the $500,000 termination fee (the "Termination Fee") as provided for in the Stock Purchase Agreement. The Termination Fee, however,among other things, is a subject of current negotiations between the companies. For additional information regarding the terms and conditions of the Stock Purchase Agreement, see the Company's Form 8-K filed on March 9, 1998, and as referenced in Note 9 of the Notes to Financial Statements included in this Form 10-KSB. See also "Management's Discussion and Analysis or Plan of Operation -- Liquidity and Capital Resources." As a result of the transactions contemplated under the Stock Purchase Agreement, together with certain private purchase agreements made simultaneously with the execution of the Stock Purchase Agreement, Premier currently owns approximately 51.3% of the Company's outstanding common stock. Results of Operations The Company incurred a net loss of $2,735,019, or $.68 per share, during 1998 compared to a net loss of $2,110,554, or $.59 per share, during 1997. The per share figures are basic amounts in accordance with Financial Accounting Standards No. 128 (see Note 1 of Notes to Financial Statements included in Item 7 of this Form 10-KSB). 17 The 1998 figures reflect the adverse impact on revenues and corporate operations resulting from efforts associated with the contemplated transaction with Premier. The Company has incurred significant costs and professional fees and expenses in connection therewith, 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 Company's revenues decreased approximately 5% to $6,277,370 in 1998 from $6,625,616 in 1997. The primary factor contributing to the reduced 1998 revenue level was the adverse impact of management's efforts being directed to the negotiations with Premier and less time devoted to the generation of sales. During the recently completed 1998 AAO Meeting, the Company introduced its low-cost digital imaging systems incorporating its recently developed ocular imaging devices, the DFI and the DSLI. The Company received substantially more purchase commitments for its products as compared to previous AAO meetings, with significant purchase commitments for the newly introduced products. As such, the Company will continue and direct the majority of its resources to both support the demand for its digital imaging products as well as pursue other opportunities in these and related markets, including general ophthalmology and optometry. Contribution to revenues from sales of Glaucoma-Scope(R) units have been negligible and management does not anticipate near-term sales improvement from the Glaucoma-Scope(R). Gross margins were approximately 34% in 1998 as compared to approximately 26% in 1997. This increase in gross margin percentage was attributable primarily to the adverse impact during the fourth quarter of 1997 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. Sales and marketing and general and administrative expenses accounted for approximately 63% of revenues for the fiscal year ended August 31, 1998 as compared to approximately 41% for the previous fiscal year. Expenses were $3,957,205 in 1998 as compared to $2,714,140 in 1997, representing an increase of approximately 46%. The primary factors contributing to this increase were significant investment banking, legal and other professional costs recognized during the second, third and fourth quarters of 1998 associated with the negotiation and termination of the Stock Purchase Agreement as well as on-going negotiations with Premier, the costs related to additional senior management personnel hired during the fourth quarter of fiscal 1997, the costs related to additional sales personnel hired during 1998 as well as increased compensation expense recognized in connection with stock options issued to non-employees and non-directors. The Company anticipates that recurring expenses in this area will continue to run above historical levels. 18 Research and development expenses decreased by approximately 19% to $866,745, or approximately 14% of revenues in 1998 from $1,070,192, or approximately 16% of revenues in 1997. The Company intends to focus its research and development efforts on its recently introduced digital image capture products, current product enhancements and reducing cost configurations for its current products. The Company anticipates that research and development expense will be maintained at or above current levels in the near term. Interest income was $1,381 during 1998 versus $13,912 during 1997. Interest expense accounted for $65,187 and $80,746 in 1998 and 1997, respectively. Export Sales Revenues from sales to customers located outside of the United States (primarily Europe) accounted for approximately 17% and 30% of the net sales for the years ended August 31, 1998 and 1997, 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. 19 Liquidity and Capital Resources - ------------------------------- The Company's operating activities used cash of $956,258 in 1998 as compared to $1,411,425 in 1997. The cash used in operations during 1998 was expended principally to fund the net loss during the year. This amount was offset in large measure by collections of accounts receivable and, to a lesser extent, increases in accrued liabilities, particularly those liabilities accrued in connection with significant investment banking, legal and other professional costs recognized during the second, third and fourth quarters of 1998 associated with the negotiation and termination of the Stock Purchase Agreement as well as on-going negotiations with Premier. The cash used in operations in 1997 was expended primarily to fund the loss during the period and the increase in accounts receivable associated with the timing of product deliveries toward the end of the period, which amount was partially offset by a significant reduction in inventory levels during the period. Net cash used in investing activities was $163,460 during 1998 as compared to $161,735 during 1997. 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. While the Company had anticipated that it would continue to upgrade its existing management information and corporate communication systems, the Company deferred significant capital acquisition decisions as a result of the contemplated acquisition of the Company pursuant to the Stock Purchase Agreement. The Company generated cash of $1,491,604 from financing activities during 1998 as compared to $664,135 during 1997. The principal sources of cash from financing activities in 1998 were the net proceeds from the exercise of certain warrants issued pursuant to a private placement of the Company's common stock in November 1995 and borrowings under the Premier Note (as defined below), which amounts were partially offset by net repayments of borrowings under the Credit Agreement which is more fully described immediately below. The cash generated from financing activities during 1997 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 issued to employees, which amounts were partially offset by the net repayments of borrowings under the Credit Agreement. See Note 9 of the Notes to Financial Statements included in this Form 10-KSB for a more detailed description of the private placement. Principal repayments on notes payable to parties other than Premier was negligible in both 1998 and 1997. As discussed in Note 4 of the Notes to Financial Statements included in this Form 10-KSB, on November 18, 1997, the Company entered into an accounts receivable credit agreement (the "Agreement") with Imperial Bank (the "Bank"). Advances outstanding under a line of credit agreement with the Bank which matured on November 7, 1997 (the "Credit Agreement") were recorded as the initial advances 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 remains in effect from year to year unless terminated in writing by the Company or the Bank. Borrowings under the Agreement bear interest at the Bank's prime lending 20 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. Additionally, on April 30, 1998, the Company executed a promissory note in favor of Premier (the "Premier Note"). Borrowings against the Premier 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 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 against the Agreement with the Company's Bank. Premier also has made certain unsecured advances to the Company which are not covered by the Premier Note. Approximately $1,487,000 in principal and interest was outstanding under the Premier Note and unsecured advances at August 31, 1998. The Company and Premier are currently in negotiations, among other things, to reduce the aggregate amount of the Company's debt to Premier by the $500,000 Termination Fee, to increase the maximum principal amount available under the Premier Note accordingly and to establish mutually acceptable repayment terms. While the parties have agreed in principle on these issues, there can be no assurance that a final agreement between the parties can be reached. In the event that no agreement can be reached, if demand for payment in full is made by Premier and the Company cannot obtain financing to make such payment, then the Company would not be able to satisfy such demand, thereby seriously jeopardizing, if not precluding, its ability to continue as a going concern. At August 31, 1998, the Company's cash and cash equivalents were approximately $514,200. Barring demand for payment of amounts owing under the Premier Note, the Company believes that its existing cash balances together with ongoing collections of its accounts receivable and available borrowing capacity under the Agreement could be adequate to meet its liquidity and capital requirements in the near term. However, demand for payment of amounts due under the alternative stock appreciation right with the Bank or the increase in demand for the Company's new products could result in the need for additional cash. While no request for payment has yet been made, principal and interest amounts due under the alternative stock appreciation right with the Bank, which amounts were approximately $268,000 as of August 31, 1998, are also currently due. If demand for payment were to be made by the Bank, then the Company would also have to seek financing to make such payment, including, but not limited to, debt or equity financing. Further, although the Company has capacity to produce the DFI and DSLI products from its present facility with its current workforce, if future demand meets the Company's optimistic expectations for these products, then the Company may need to seek additional funds and manufacturing capacity in order to produce and distribute that level of demand for these new products. The Company will 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 any of the contemplated financing arrangements described herein will be available and, if available, can be obtained on terms favorable to the Company. 21 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. 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 The Company filed a Current Report on Form 8-K and an Amendment No. 1 to that Current Report on Form 8-K on August 27, 1998 and September 8, 1998, respectively, to report the resignation of Ernst & Young LLP as the Company's auditors. On October 23, 1998, the Company retained the accounting firm of Perry-Smith & Co. to serve as the Company's independent auditors. 22 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Information required by Item 9 of Form 10-KSB is incorporated herein by reference to the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders for fiscal year 1998 which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the Registrant's fiscal year. ITEM 10. EXECUTIVE COMPENSATION Information required by Item 10 of Form 10-KSB is incorporated herein by reference to the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders for fiscal year 1998 which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the Registrant's fiscal year. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by Item 11 of Form 10-KSB is incorporated herein by reference to the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders for fiscal year 1998 which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the Registrant's fiscal year. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by Item 12 of Form 10-KSB is incorporated herein by reference to the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders for fiscal year 1998 which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the Registrant's fiscal year. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits 24 Footnote Exhibit Number Description of Exhibit Reference -------------- ---------------------------------------------- ---------- 2.1 Stock Purchase Agreement, dated as of February 25, 1998, by and between Registrant and Premier Laser Systems, Inc. (13) 3.1 Articles of Incorporation of the Registrant, as amended. * 3.1(a) Amendment to Articles of Incorporation (Certificate of Determination of Preferences of Series A Junior Participating Preferred Stock of Ophthalmic Imaging Systems). (11) 3.2 Amended Bylaws of the Registrant. * 3.3 Amendment to Amended Bylaws of the Registrant dated January 28, 1998. (16) 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. * 4.2 Specimen of Stock Certificate. * 4.3 Rights Agreement, dated as of December 31, 1997, between Registrant and American Securities Transfer, Inc., including form of Rights Certificate attached thereto. (10) 4.4 Amendment to Rights Agreement, dated as of February 25, 1998, between Registrant and American Securities Transfer, Inc. (14) 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 Registrant and Dennis J. Makes dated March 27, 1992. (1) 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. * 25 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 Cross-Indemnification Agreement, dated February 14, 1991, among Dennis Makes, Steven Verdooner, and Richard Wullaert. * 10.13 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. * 10.14 Stock Option Plan. (1) 10.15 Rental Agreement dated May 1, 1994 by and between the Registrant and Robert J. Rossetti. (2) 10.16 Security and Loan Agreement (with Credit Terms and Conditions) dated April 12, 1995 by and between the Registrant and Imperial Bank. (3) 10.16(a) General Security Agreement dated April 12, 1995 by and between the Registrant and Imperial Bank. (3) 26 10.16(b) Warrant dated November 1, 1995 issued by the Registrant to Imperial Bank to purchase 67,500 shares of common stock. (4) 10.16(c) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November 1, 1995. (4) 10.16(d) Registration Rights Agreement dated November 1, 1995 between the Registrant and Imperial Bank. (4) 10.16(e) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated April 4, 1996. (6) 10.16(f) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated July 12, 1996. (7) 10.16(g) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November 21, 1996. (7) 10.16(h) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated June 3, 1997. (8) 10.16(i) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated August 28, 1997. (9) 10.16(j) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated October 24, 1997. (9) 10.16(k) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November 3, 1997. (9) 10.16(l) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November 21, 1997. (9) 10.16(m) Agreement of Purchase of Receivable (Full Recourse) dated November 18, 1997 between Registrant and Imperial Bank. (9) 10.17 Employment Agreement dated November 20, 1995 between the Registrant and Steven R. Verdooner. (4) 10.17(a) Amendment dated effective July 14, 1997 to Employment Agreement dated November 20, 1995 between the Registrant and Steven R. Verdooner. (16) 10.18 The Registrant's 1995 Nonstatutory Stock Option Plan and sample form of Nonstatutory Stock Option Agreement. (5) 10.19 The Registrant's 1997 Nonstatutory Stock Option Plan and sample form of Nonstatutory Stock Option Agreement. (12) 27 10.20 Promissory Note dated April 30, 1998 from the Registrant to Premier Laser Systems, Inc. in the maximum amount of $500,000 due in full upon the earlier of (i) written demand by Premier or (ii) April 30, 1999. (15) 10.21 Security Agreement dated April 30, 1998 by and between the Registrant and Premier Laser Systems, Inc. (15) 10.22 Form of Indemnification Agreement dated January 23, 1998 between the Registrant and each of its directors, officers and certain key employees. (16) 11.1 Computation of net loss per share. (16) 23.1 Consent of Perry-Smith & Company LLP, Independent Auditors. (16) 23.2 Consent of Ernst & Young LLP, Independent Auditors. (16) 27 Financial Data Schedule (for SEC use only). (16) 99.1 Press release dated June 1, 1998. (15) 99.2 Press release dated August 14, 1998. (16) 99.3 Press release dated October 21, 1998. (16) ----------------------------------------------------------------- * Incorporated by reference to the 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. 28 (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) Incorporated by reference to the Registrant'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 Registrant's Form 8-K filed on January 2, 1998. (11) Incorporated by reference to Exhibit A of Exhibit 1 of the Registrant's Form 8-K filed on January 2, 1998. (12) Incorporated by reference to the Registrant'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 Registrant's Form 8-K filed on March 9, 1998. (14) Incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on March 9, 1998. (15) Incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended May 31, 1998 filed on July 15, 1998. (16) Exhibit filed herewith. B. Reports on Form 8-K A Form 8-K/A was filed on September 8, 1998, to report under Item 4 thereof a change in the Registrant's certifying accountant. On August 21, 1998, the Company was notified by Ernst & Young LLP ("EY") that as a result of the Company's majority ownership by Premier Laser Systems, Inc., a company which EY previously resigned as auditors, EY has chosen to terminate its auditor relationship with the Company. The reports of EY on the Company's financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and are not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits of the Company's financial statements for each of the two fiscal years ended August 31, 1997 and 1996, 29 and in the subsequent interim period, there were no disagreements with EY on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of EY would have caused EY to make reference to the matter in their report. 30 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: December 15, 1998 By /s/ 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. /s/ STEVEN R. VERDOONER Chief Executive Officer, Chief December 15, 1998 ------------------ Financial Officer, Secretary Steven R. Verdooner and Director (Principal Executive Officer and Principal Financial Officer) /s/ STEVEN C. Lagorio Director of Finance December 15, 1998 - --------------------- (Principal Accounting Officer) Steven C. Lagorio /s/ MARK S. BULMENKRANZ Director December 15, 1998 ------------------- Mark S. Blumenkranz, M.D. /s/ ROBERT W. MEDEARIS Director December 15, 1998 - ---------------------- Robert W. Medearis /s/ ROBERT I. SCHNUER Director December 15, 1998 - --------------------- Robert I. Schnuer /s/ Lawrence A. Yannuzzi, MD Director December 15, 1998 ---------------------- Lawrence A. Yannuzzi, M.D. 32 OPHTHALMIC IMAGING SYSTEMS FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 1998 AND INDEPENDENT AUDITOR'S REPORT F-1 Report of Perry-Smith & Co., 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, 1998, and the related statements of operations, stockholders' equity (deficit), and cash flows for the year ended August 31, 1998. 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 audit. The financial statements of Ophthalmic Imaging Systems as of August 31, 1997 were audited by other auditors, whose report dated October 21, 1997, expressed an unqualified opinion on those statements. We conducted our audit 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, in 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 audit provides 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 as of August 31, 1998, and the results of its operations and its cash flows for the year ended August 31, 1998, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 12 to the financial statements, current liabilities exceed current assets by $2,130,895. In addition, the Company has a history of losses from operations resulting in an accumulated deficit of $12,004,971. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Sacramento, California Perry-Smith & Co., LLP November 6, 1998 Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Stockholders Ophthalmic Imaging Systems We have audited the accompanying statements of operations, stockholders' equity, and cash flows for the year ended August 31, 1997 of Ophthalmic Imaging Systems, 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 audit. We conducted our audit in accordance with generally accepted auditing 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly respects, the results of operations and cash flows of Ophthalmic Imaging Systems for the year ended August 31, 1997, in confoinuty 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, 1998 ASSETS Current assets: Cash and cash equivalents $ 514,186 Accounts receivable, net of allowance for doubtful accounts of approximately $131,000 506,984 Inventories 687,409 Prepaid expenses and other current assets 25,964 ------------- Total current assets 1,734,543 Furniture and equipment, net 411,392 Other assets 7,385 Total assets $ 2,153,320 =============== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Short-term borrowings $ 98,175 Accounts payable 436,930 Accrued liabilities 1,375,345 Accrued warrant appreciation right 268,187 Deferred extended warranty revenue 113,171 Customer deposits 102,079 Note payable to related party due after one year 1,462,480 Capitalized lease obligation 9,071 -------------- Total current liabilities 3,865,438 Capitalized lease obligation 21,549 Total liabilities 3,886,987 Commitments Stockholders' deficit: Preferred stock, no par value, 20,000,000 shares authorized; none issued or outstanding - Common stock, no par value, 20,000,000 shares authorized; 4,155,428 shares issued and outstanding 10,462,604 Deferred compensation (191,300) Accumulated deficit (12,004,971) ---------------- Total stockholders' deficit (1,733,667) Total liabilities and stockholders' deficit $ 2,153,320 ================ The accompanying notes are an integral part of these financial statements. F-3 OPHTHALMIC IMAGING SYSTEMS STATEMENT OF OPERATIONS For the Years Ended August 31, 1998 and 1997 1998 1997 -------------- -------------- Revenues: Net sales $ 6,064,180 $ 6,480,055 Other revenue 213,190 145,561 -------------- -------------- Total revenues 6,277,370 6,625,616 Cost of sales 4,124,633 4,885,004 --------------- ------------- Gross profit 2,152,737 1,740,612 --------------- -------------- Operating expenses: Sales and marketing 1,929,752 1,624,470 General and administrative 2,027,453 1,089,670 Research and development 866,745 1,070,192 --------------- ------------- Total operating expenses 4,823,950 3,784,332 --------------- -------------- Loss from operations (2,671,213) (2,043,720) Other income (expense): Interest income 1,381 13,912 Interest expense (65,187) (80,746) ---------------- ------------- Net loss $ (2,735,019) $ (2,110,554) ================ ============== Basic loss per share $ (.68) $ (.59) ================ ============ Shares used in the calculation of net loss per share 4,030,428 3,597,879 ================ ============= The accompanying notes are an integral part of these financial statements. F-4 OPHTHALMIC IMAGING SYSTEMS STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) For the Years Ended August 31, 1998 and 1997 Total Common Stock Deferred Stockholders' -------------------- Compen- Accumulated Equity Shares Amount sation Deficit (Deficit) ----------- --------- ---------- ------------ ------------- Balance, September 1, 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 compen- sation expense 88,142 88,142 Net loss (2,110,554) (2,110,554) ------------- ------------- ------------ -------------- ------------- Balance, August 31, 1997 3,905,428 10,244,615 (306,894) (9,269,952) 667,769 Issuance of common stock upon exercise of warrants 250,000 213,750 213,750 Deferred compensation related to stock options granted to non-employees 4,239 (4,239) Stock option compen- sation expense 119,833 119,833 Net loss (2,735,019) (2,735,019) ----------- ------------- ------------ ------------- ------------ Balance, August 31, 1998 4,155,428 $ 10,462,604 $ (191,300) $(12,004,971) $(1,733,667) ========== ============== ============= ============= =============
The accompanying notes are an integral part of these financial statements. F-5 OPHTHALMIC IMAGING SYSTEMS STATEMENT OF CASH FLOWS For the Years Ended August 31, 1998 and 1997 1998 1997 --------- --------- Cash from operating activities: Net loss $(2,735,019) $(2,110,554) Adjustments to reconcile net loss to net cash used in operating activities: Accrued warrant appreciation right 16,690 27,215 Depreciation and amortization 133,038 142,148 Provision for doubtful accounts 30,747 (6,116) Stock option compensation expense 119,830 88,142 Net changes in operating assets and liabilities: Accounts receivable 1,106,810 (566,421) Inventories 106,643 786,483 Prepaid expenses and other current assets 67,444 (28,460) Other assets 79,250 Accounts payable (379,579) (120,950) Accrued liabilities 581,040 196,664 Deferred extended warranty revenue 19,557 12,417 Customer deposits (23,459) 88,757 ------------ ---------- Net cash used in operating activities (956,258) (1,411,425) ------------ ---------- Cash flows used in investing activities: Cash expenditures for furniture and equipment (163,460) (161,735) ------------ ----------- Cash flows from financing activities: Proceeds from short-term borrowings 308,000 Repayment of short-term borrowings (212,827) (546,998) Proceeds from note payable to related party 1,462,480 Capitalized lease obligation 30,435 Principal payments on notes payable (2,234) (6,250) Issuance of common stock 213,750 909,383 ------------ ----------- Net cash provided by financing activities 1,491,604 664,135 ------------ ----------- Net increase (decrease) in cash and cash equivalents 371,886 (909,025) Cash and cash equivalents, beginning of the year 142,300 1,051,325 ------------ ----------- Cash and cash equivalents, end of the year $ 514,186 $ 142,300 ============ ============ The accompanying notes are an integral part of these financial statements. F-6 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS 1. 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 year 1998 or 1997 comprised 10% or more of net sales. Revenues from sales to customers located outside of the United States (primarily Europe) accounted for approximately 17% and 30% of net sales during the years ended August 31, 1998 and 1997, 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. 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 generally 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. F-7 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue Recognition and Warranties (Continued) ---------------------------------- 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 ------------------ In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share. Statement No. 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 similar to the previously reported fully diluted earnings per share. Diluted earnings per share has not been presented for 1998 or 1997 as the inclusion of potential common shares would have an antidilutive effect on the loss per share. All net loss per share amounts have been restated to conform to Statement No. 128 requirements. 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 $41,000 and $64,000 during the years ended August 31, 1998 and 1997, respectively. Cash paid for income taxes amounted to approximately $800 for each of the years ended August 31, 1998 and 1997. Stock Based Compensation ------------------------ 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 9 for pro forma disclosures of compensation expense. F-8 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 2. INVENTORIES Inventories consist of the following as of August 31, 1998: Raw materials $ 482,165 Work-in-process 47,891 Finished goods 157,353 --------------- $ 687,409 =============== 3. FURNITURE AND EQUIPMENT Furniture and equipment consist of the following as of August 31, 1998: Research and manufacturing equipment $ 643,086 Office furniture and equipment 433,059 Demonstration equipment 183,938 Vehicles 58,991 --------------- 1,319,074 Less accumulated depreciation and amortization (907,682) $ 411,392 ============== 4. SHORT-TERM BORROWINGS The Company entered into an accounts receivable credit agreement (the "Agreement") with a bank (the "Bank") on November 18, 1997. The Agreement allows for up to an 80% advance rate on eligible accounts receivable balances with a maximum borrowing base of $1.2 million. Borrowings are secured by substantially all assets of the Company and bear interest at the Bank's prime lending rate plus 4%. In addition, the Bank charges an administrative fee equal to the greater of .5% of the average daily balance for the month or $1,200. The Agreement remains in effect from year to year unless terminated in writing by the Company or the Bank. Advances outstanding under a line of credit agreement with the Bank (which matured November 7, 1997) were recorded as the initial advance under the Agreement. 5. ACCRUED LIABILITIES Accrued liabilities consist of the following as of August 31, 1998: Accrued compensation $ 269,762 Accrued warranty expenses 319,071 Other accrued liabilities 786,512 --------------- $ 1,375,345 =============== F-9 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 6. CAPITALIZED LEASE OBLIGATIONS The Company leases certain office equipment under the terms of a capital lease. Payments of $740 with interest at 9.8% are due in 60 monthly installments. The equipment has a net book value of approximately $28,500 at August 31, 1998. Future minimum lease payments are as follows: Year Ending August 31, 1999 $ 8,886 2000 8,886 2001 8,886 2002 8,886 2003 1,710 --------------- 37,254 Less amount representing interest (6,819) --------------- $ 30,435 =============== 7. NOTE PAYABLE TO RELATED PARTY On April 30, 1998, the Company executed a promissory note (the "Note") in favor of a related party (the "Related Party"). 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 the Related Party; 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 substantially all of the Company's assets and are subordinate to borrowings against the Line of Credit with the Company's Bank (see Note 4). At August 31, 1998, $1,486,925 in principal and interest was outstanding under the Note, of which $24,445 of accrued interest included in other accrued liabilities. At August 31, 1998, the Company and the Related Party were in negotiations to, among other things, modify the payment terms and increase the maximum principal amount available under the Note accordingly. 8. COMMITMENTS Operating Leases The Company leases its facility under a month-to-month lease. The lease agreement requires minimum lease payments of approximately $7,000 per month. Rental expense charged to operations for all operating leases was approximately $120,000 and $126,000 during the years ended August 31, 1998 and 1997, respectively. F-10 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 8. COMMITMENTS (Continued) Employment Agreement The Company has an employment agreement with its chief executive officer. The agreement calls for an annual salary of $150,000 and a performance-based bonus plan. The agreement has a 24 month term expiring in July 1999. 9. STOCKHOLDERS' EQUITY Common Stock Of the 15,844,572 shares of common stock authorized but unissued as of August 31, 1998, 2,338,267 shares are reserved for issuance under the stock option plans. 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 were $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 were 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. 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. The private placement underwriter was issued a warrant to purchase 250,000 shares of the Company's common stock at $.95 per share. The warrant was transferred to a Related Party in connection with a transaction executed concurrently with a Stock Purchase Agreement defined immediately below. The proceeds noted herein are net of, among other things, the underwriters' commission equal to 10% of the gross proceeds received by the Company. Stock Purchase Agreement On February 25, 1998, the Company entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with a related party (the "Related Party") pursuant to which, among other things: (i) the Related Party agreed to commence a tender offer ("Tender Offer") to acquire all shares of the Company's common stock not held by the Related Party or its affiliates in exchange for a combination of cash and the Related Party's securities; and (ii) the Company agreed to recommend that shareholders tender their shares of the Company's common stock in the Tender Offer and not to solicit any competing acquisition proposals. As a condition to the Stock Purchase Agreement, the Company agreed to amend its Rights Agreement ("Rights Agreement") dated as of December 31, 1997, by and between the Company and its rights agent, to permit the Related Party to acquire up to 51.3% of the Company's outstanding Common Stock in private transactions to be made simultaneously with the execution of the Stock Purchase Agreement. F-11 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 9. STOCKHOLDERS' EQUITY (Continued) Stock Purchase Agreement (Continued) Simultaneous with the execution of the Stock Purchase Agreement, the Related Party entered into individual purchase agreements with certain shareholders, providing for these parties to sell to the Related Party an aggregate of 730,360 shares of the Company's common stock. Additionally, the Related Party purchased from one of the shareholders a warrant to purchase 250,000 shares of the Company's common stock. The Related Party exercised the warrants on February 26, 1998, resulting in aggregate net proceeds to the Company of approximately $214,000. In August 1998, the Company was notified by the Related Party that the Related Party would be unable to proceed with its previously proposed acquisition of the remaining 48.7% interest in the Company by the termination date of the Stock Purchase Agreement. As a result, the Stock Purchase Agreement was terminated. As a result of such termination, the Company made demand to the Related Party for a $500,000 termination fee (the "Termination Fee") as provided for in the Stock Purchase Agreement. The Related Party has not yet acknowledged the validity of the Termination Fee and the Termination Fee, among other things, is the subject of current negotiations between the Company and the Related Party. Accordingly, the Company has not recognized the Termination Fee in its financial statements. Other Warrants In 1993, the Company issued a warrant to the Bank that provided a line-of-credit. The warrant was amended several times in connection with amendments to the line-of-credit. 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 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 with interest, $268,187, and it is reflected as a current liability on the accompanying balance sheet. The Appreciation Right was due on April 1, 1998. Stock Option Plans 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 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. F-12 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 9. STOCKHOLDERS' EQUITY (Continued) Stock Option Plans (Continued) In 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 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. The maximum number of shares of the Company's common stock which may be optioned and sold under the Plan is 116,667, of which 1,667 options remained available for granting as of August 31, 1998. As of August 31, 1998, stock options to purchase 65,000 shares at exercise prices ranging from $1.00 to $2.75 were granted and outstanding under the Plan. No options were exercised during the year ended August 31, 1998 and options to purchase 50,000 shares were exercised during the year ended August 31, 1997. In 1992 and 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 26,024 remained available for granting of options as of August 31, 1998. As of August 31, 1998, stock options to purchase 110,576 shares at exercise prices ranging from $.94 to $4.25 were granted and outstanding under the Option Plan. No options were exercised during the year ended August 31, 1998 and options to purchase 2,400 shares were exercised during the year ended August 31, 1997. In 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 5,000 options remained available for granting as of August 31, 1998. As of August 31, 1998, stock options to purchase 1,030,000 shares at exercise prices ranging from $1.00 to $4.50 were granted and outstanding under the Nonstatutory Plan and none of the granted options were exercised. F-13 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 9. STOCKHOLDERS' EQUITY (Continued) Stock Option Plans (Continued) In October 1997, the Company's Board of Directors approved a Nonstatutory Stock Option Plan (the "1997 Nonstatutory Plan") under which all officers, employees, directors and consultants may participate. The 1997 Nonstatutory Plan expires October 2002. Options granted under the 1997 Nonstatutory Plan are non-qualified stock options and will have a term of not longer than ten years from the date of grant. The exercise prices under the 1997 Nonstatutory Plan will be at 100% of the fair market value of the Company's common stock on the date of grant, unless otherwise specified in the option agreement. The maximum number of shares of the Company's common stock which may be optioned and sold under the Plan is 1,000,000, of which 800,500 options remained available for granting as of August 31, 1998. As of August 31, 1998, stock options to purchase 199,500 shares at exercise prices ranging from $1.09 to $1.94 were granted and outstanding under the 1997 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 Exercise Options Price --------------- ------------- Balance, September 1, 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, August 31, 1997 1,257,992 $ 1.96 Options granted 272,000 $ 1.17 Options canceled (24,916) $ 3.13 --------------- Balance, August 31, 1998 1,505,076 $ 1.80 ===============
The weighted average fair value of options granted during the years ended August 31, 1998 and August 31, 1997 was $.86 and $2.26, respectively. F-14 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 9. STOCKHOLDERS' EQUITY (Continued) Stock Option Plans (Continued) The following table summarizes information about the stock options outstanding at August 31, 1998: Options Outstanding Options Exercisable Weighted Average Weighted- Weighted- Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Number Life Price Number Price - ---------------- --------- ---------- -------- -------- --------- $0.94 - $1.38 1,017,076 4.4 $ 1.26 782,726 $ 1.25 $1.38 - $3.00 395,000 2.1 $ 2.52 289,600 $ 2.53 $3.00 - $4.50 93,000 3.4 $ 4.36 40,640 $ 4.34 ------------ ---------- 1,505,076 1,112,966 ============ ========== 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, 1998 and 1997, respectively; dividend yield of zero; volatility factors of the expected market price of the Company's common stock ranged from 1.436 to 1.052 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. 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, 1998 1997 -------------- -------------- Pro forma net loss $ (2,982,019) $ (2,326,390) ================ ================ Pro forma net loss per share $ (.74) $ (.65) ================ ================= F-15 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 9. STOCKHOLDERS' EQUITY (Continued) Stock Option Plans (Continued) During the years ended August 31, 1998 and 1997, the Company recorded deferred compensation of approximately $4,000 and $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, 1998 and 1997, the amortized deferred compensation expense was approximately $120,000 and $88,000, respectively. 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. 10. INCOME TAXES There was no provision (benefit) for income taxes during the years ended August 31, 1998 or 1997. The significant components of the Company's deferred tax assets and liabilities as of August 31, 1998 are as follows: Deferred tax assets: Net operating loss carryforwards $ 1,566,000 Inventory reserves 637,000 Accrued warrant appreciation right 112,000 Payroll related accruals 118,000 Warranty accrual 133,000 Sales and accounts receivable reserves 79,000 Uniform capitalization 50,000 Deferred revenue 50,000 Other 2,000 --------------- Total deferred tax assets 2,747,000 Valuation allowance 2,740,000 -------------- Net deferred tax assets 7,000 -------------- Deferred tax liabilities: Depreciation 7,000 -------------- Total deferred tax liabilities 7,000 Net deferred taxes $ - =============== The valuation allowance as of August 31, 1997 was approximately $2,192,000 resulting in a net increase in the allowance of approximately $548,000 for the year. F-16 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 10. 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: Years Ended August 31, 1998 1997 ------------- ---------- Federal benefit expected at statutory rates $(930,000) $(718,000) Net operating loss with no current benefit 930,000 718,000 ------------ ------------ $ - $ - ============ ============= In connection with the Company's private placement of common stock (Note 9) a change of ownership (as defined in Section 382 of the Internal Revenue Code) 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. During 1998 another change of ownership occurred when a shareholder acquired more than 50% of the Company's common stock (Note 9). The resulting limitation on net operating loss and tax credit carry forwards is approximately $168,000 per year. As a consequence of these limitations, as discussed above, the Company has at August 31, 1998, a net operating loss carryover of approximately $4,179,000 for federal income tax purposes which expires between 2007 and 2012, and a net operating loss carryforward of approximately $2,360,000 for state income tax purposes which expires between 1998 and 2003. 11. 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, 1998 or 1997. F-17 OPHTHALMIC IMAGING SYSTEMS NOTES TO FINANCIAL STATEMENTS (Continued) 12. ABILITY TO CONTINUE AS A GOING CONCERN For the years ended August 31, 1998 and 1997, the Company incurred losses of $2,735,019 and $2,110,554 respectively and at August 31, 1998, the Company had an accumulated deficit of $12,004,971. In addition, current liabilities exceed current assets by $2,130,895. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company is currently negotiating with a Related Party regarding, among other things, the repayment terms of the Note described in Note 7 and the Termination Fee described in Note 9. While Management is confident that the negotiations will result in extended repayment terms and that the aggregate amount owing under the Note will be reduced by the $500,000 Termination Fee, there can be no assurances that the Company will generate sufficient liquidity from operations to meet obligations as they become due even if the Note is renegotiated. In addition, the Company has recently received several informal indications of interest from third parties regarding, among other things, transactions involving potential joint business venture arrangements, acquisition of the Company's assets and equity investments in the Company. The Company intends to pursue these indications of interest in the context of the arrangements, if any, with the Related Party. In addition, the Company will continue to evaluate alternative sources of capital to meet its cash requirements, including debt financing, issuing equity securities and entering into other financing arrangements and/or strategic alliances. There can be no assurance, however, that any of the contemplated financing arrangements described herein will be available and, if available, can be obtained on terms favorable to the Company. 32 EXHIBIT INDEX Footnote Exhibit Number Description of Exhibit Reference - -------------- ------------------------------------------ --------- 2.1 Stock Purchase Agreement, dated as of February 25, 1998, by and between Registrant and (13) Premier Laser Systems, Inc. 3.1 Articles of Incorporation of the Registrant, as amended. * 3.1(a) Amendment to Articles of Incorporation (Certificate of Determination of Preferences of (11) Series A Junior Participating Preferred Stock of Ophthalmic Imaging Systems). 3.2 Amended Bylaws of the Registrant. * 3.3 Amendment to Amended Bylaws of the Registrant dated January 28, 1998. (16) 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. 4.2 Specimen of Stock Certificate. * 4.3 Rights Agreement, dated as of December 31, 1997, between Registrant and American (10) Securities Transfer, Inc., including form of Rights Certificate attached thereto. 4.4 Amendment to Rights Agreement, dated as of February 25, 1998, between Registrant and (14) American Securities Transfer, Inc. 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 Registrant and (1) Dennis J. Makes dated March 27, 1992. 10.3 Confidentiality Agreement, dated March 27, 1992 between the Registrant and Dennis J. * Makes. 33 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 Cross-Indemnification Agreement, dated February 14, 1991, among Dennis Makes, Steven * Verdooner, and Richard Wullaert. 10.13 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. 10.14 Stock Option Plan. (1) 10.15 Rental Agreement dated May 1, 1994 by and between the Registrant and Robert J. Rossetti. (2) 34 10.16 Security and Loan Agreement (with Credit Terms and Conditions) dated April 12, 1995 by (3) and between the Registrant and Imperial Bank. 10.16(a) General Security Agreement dated April 12, 1995 by and between the Registrant and (3) Imperial Bank. 10.16(b) Warrant dated November 1, 1995 issued by the Registrant to Imperial Bank to purchase (4) 67,500 shares of common stock. 10.16(c) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November 1, (4) 1995. 10.16(d) Registration Rights Agreement dated November 1, 1995 between the Registrant and Imperial (4) Bank. 10.16(e) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated April 4, (6) 1996. 10.16(f) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated July 12, (7) 1996. 10.16(g) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November (7) 21, 1996. 10.16(h) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated June 3, (8) 1997. 10.16(i) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated August 28, (9) 1997. 10.16(j) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated October 24, (9) 1997. 10.16(k) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November 3, (9) 1997. 10.16(l) Amended Loan and Security Agreement (with Credit Terms and Conditions) dated November (9) 21, 1997. 10.16(m) Agreement of Purchase of Receivable (Full Recourse) dated November 18, 1997 between (9) Registrant and Imperial Bank. 10.17 Employment Agreement dated November 20, 1995 between the Registrant and Steven R. (4) Verdooner. 35 10.17(a) Amendment dated effective July 14, 1997 to Employment Agreement dated November 20, 1995 (16) between the Registrant and Steven R. Verdooner. 10.18 The Registrant's 1995 Nonstatutory Stock Option Plan and sample form of Nonstatutory (5) Stock Option Agreement. 10.19 The Registrant's 1997 Nonstatutory Stock Option Plan and sample form of Nonstatutory (12) Stock Option Agreement. 10.20 Promissory Note dated April 30, 1998 from the Registrant 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. 10.21 Security Agreement dated April 30, 1998 by and between the Registrant and Premier Laser (15) Systems, Inc. 10.22 Form of Indemnification Agreement dated January 23, 1998 between the Registrant and each (16) of its directors, officers and certain key employees. 11.1 Computation of net loss per share. (16) 23.1 Consent of Perry-Smith & Company LLP, Independent Auditors. (16) 23.2 Consent of Ernst & Young LLP, Independent Auditors. (16) 27 Financial Data Schedule (for SEC use only). (16) 99.1 Press release dated June 1, 1998. (15) 99.2 Press release dated August 14, 1998. (16) 99.3 Press release dated October 21, 1998. (16)
* Incorporated by reference to the 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. 36 (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) Incorporated by reference to the Registrant'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 Registrant's Form 8-K filed on January 2, 1998. (11) Incorporated by reference to Exhibit A of Exhibit 1 of the Registrant's Form 8-K filed on January 2, 1998. (12) Incorporated by reference to the Registrant'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 Registrant's Form 8-K filed on March 9, 1998. (14) Incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on March 9, 1998. (15) Incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended May 31, 1998 filed on July 15, 1998. (16) Exhibit filed herewith. EX-3.(II) 2 AMENDMENT TO BYLAWS Exhibit 3.3 AMENDMENT TO AMENDED BYLAWS OF OPHTHALMIC IMAGING SYSTEMS The following amendment to the bylaws originally certified on July 21, 1986, and amended on May 9, 1992 and January 23, 1993, (together "Amended Bylaws"), was approved by the Board of Directors (the "Board") of Ophthalmic Imaging Systems (the "Company") at a duly called meeting of the Board held on January 28, 1998. 1. Article IV, Section 2 of the Company's Amended Bylaws has been deleted and replaced with the following: "Section 2. Annual Meetings. An annual meeting of the Shareholders for the election of directors and for the transaction of any other business as may properly come before the meeting shall be held on such date and at such time as the Board of Directors may specify by resolution." CERTIFICATE I, Steven R. Verdooner, Secretary of Ophthalmic Imaging Systems, a California corporation, do hereby certify that the foregoing amendment of the Amended Bylaws of Ophthalmic Imaging Systems is true and correct as of the date hereof. Dated: January 28, 1998 OPHTHALMIC IMAGING SYSTEMS /s/ STEVEN R. VERDOONER By: ------------------------------ Steven R. Verdooner, Secretary EX-10 3 EMPLOYMENT AGREEMENT Exhibit 10.17(a) OPHTHALMIC IMAGING SYSTEMS EMPLOYMENT AGREEMENT AMENDMENT NUMBER 1 JULY 14, 1997 THIS EMPLOYMENT AGREEMENT AMENDMENT NUMBER 1 IS MADE PURSUANT TO ACTION BY THE BOARD OF DIRECTORS OF OPHTHALMIC IMAGING SYSTEMS, OR AN APPROPRIATE COMMITTEE THEREOF, DURING A MEETING CONVENED ON THE 13TH DAY OF SEPTEMBER 1997. THIS EMPLOYMENT AGREEMENT AMENDMENT NUMBER 1 is made effective the 14th day of July 1997 and hereby amends the Employment Agreement made and entered into as of the 20th day of November 1995, by and between OPHTHALMIC IMAGING SYSTEMS, a California corporation ("Employer") and STEVE VERDOONER ("Employee") as follows: Paragraph 1. is eliminated in its entirety and replaced with the following: o Employee's Duties and Authority. Employer hereby employs Employee, and Employee hereby accepts employment with Employer, as Chief Executive Officer of the Employer. Employee's duties shall be as provided in Employer's bylaws and as specified by Employer's board of directors from time to time. Paragraph 4. is eliminated in its entirety and replaced with the following: o 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 Amendment Number 1 to this Agreement. Paragraph 5.A. is eliminated in its entirety and replaced with the following: o 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 FIFTY THOUSAND DOLLARS ($150,000) per year, payable in accordance with the Company's standard payroll policies. Paragraph 5.F. is added as follows: o Employee shall be eligible for an annual bonus. The criteria and/or formulae by which the actual bonus amount, if any, is calculated will be determined pursuant to a separate agreement. Except as noted above, the Employment Agreement made and entered into as of the 20th day of November 1995, by and between Employer and Employee, remains in full force and effect. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first written above. EMPLOYER: OPHTHALMIC IMAGING SYSTEMS, a California corporation By: /s/ROBERT I. SCHNUER -------------------- Robert I. Schnuer Its: Compensation Committee Chairman EMPLOYEE: /s/ STEVEN R. VERDOONER ------------------- Steven R. Verdooner EX-10 4 INDEMNIFICATION AGREEMENT Exhibit 10.22 INDEMNIFICATION AGREEMENT INDEMNIFICATION AGREEMENT ("Agreement") made and entered into as of January 23, 1998, by and between OPHTHALMIC IMAGING SYSTEMS, a California corporation (the "Corporation", which term shall include any one or more of its subsidiaries where appropriate), and the individual whose name appears on the signature page hereof (the "Indemnitee"). WHEREAS, highly competent persons are becoming more reluctant to serve corporations as directors or officers or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to, and activities on behalf of, such corporations; and WHEREAS, the current impracticability of obtaining adequate insurance and the uncertainties relating to indemnification have increased the difficulty of attracting and retaining such persons; WHEREAS, the Board of Directors of the Corporation (the "Board") has determined that the difficulty in attracting and retaining such persons is detrimental to the best interests of the Corporation's shareholders and that the Corporation should act to assure such persons that there will be increased certainty of such protection in the future; ----- WHEREAS, it is reasonable, prudent, and necessary for the Corporation contractually to obligate itself to indemnify such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Corporation free from undue concern that they will not be so indemnified; and WHEREAS, Indemnitee is willing to serve, continue to serve and/or to undertake additional service for or on behalf of the Corporation on the condition that he be so indemnified; NOW, THEREFORE, in consideration of the promises and the covenants contained herein, the Corporation and Indemnitee do hereby covenant and agree as follows: 1. Services by Indemnitee. Indemnitee agrees to serve or continue to serve as a director and/or officer of the Corporation for so long as Indemnitee is duly elected or appointed and qualified or until such time as Indemnitee (subject to any contractual obligation or any obligation imposed by operation of law) tenders his resignation in writing or is removed as a director and/or officer. This Agreement shall not impose any obligation on the Indemnitee or the Corporation to continue the Indemnitee's position with the Corporation beyond any period otherwise applicable. 2. General. (a) The Corporation shall indemnify, and shall advance Expenses (as hereinafter defined) to, Indemnitee as provided in this Agreement and to the fullest extent permitted by law in effect on the date hereof and to such greater extent as applicable law may thereafter from time to time permit. (b) The Corporation shall not adopt any amendments to its Articles of Incorporation ("Articles") or bylaws ("Bylaws") the effect of which would be to deny, diminish, or encumber Indemnitee's rights to indemnity pursuant to the Articles, Bylaws, or the California General Corporation Law ("CGCL"), or any other applicable law as applied to any act or failure to act occurring in whole or in part prior to the date upon which such amendment was approved by the Board or the Corporation's stockholders, as the case may be ("Effective Date"). In the event that the Corporation shall adopt any amendment to its Articles or Bylaws, the effect of which is to deny, diminish, or encumber Indemnitee's right to indemnity pursuant to the Articles, Bylaws, or CGCL, or any other such law, such amendment shall apply only to acts of failures to act occurring entirely after the Effective Date thereof. 3. Proceedings Other than Proceedings by or in the Right of the Corporation. Indemnitee shall be entitled to the rights of indemnification provided in this Section 3 if, wholly or partly by reason of his Corporate Status (as hereinafter defined), he is, or is threatened to be made, a party to any threatened, pending or completed Proceeding (as hereinafter defined), other than a Proceeding by or in the right of the Corporation. Pursuant to this Section 3, Indemnitee shall be indemnified against Expenses, judgments, fines, and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue, or matter therein, if he acted in good faith and in a manner he reasonably believed to be in the best interests of the Corporation, and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. 4. Proceedings By or In the Right of the Corporation. Indemnitee shall be entitled to the rights of indemnification provided in this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be made, a party to any threatened, pending, or completed Proceeding brought by or in the right of the Corporation to procure a judgment in its favor. Pursuant to this Section 4, Indemnitee shall be indemnified against Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if he acted in good faith and in a manner he believed to be in the best interests of the Corporation and its stockholders. Notwithstanding the foregoing, no indemnification against such Expenses shall be made in respect of any claim, issue, or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation if such indemnification is not permitted by California or other applicable law; provided, however, that indemnification against Expenses shall nevertheless be made by the Corporation in such event to the extent that the Superior Court of the State of California, or the court in which such proceeding shall have been brought or is pending, shall determine. 5. Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues, or matters in such Proceeding, the Corporation shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue, or matter. For purposes of this Section 5 and without limitation, the termination of any claim, issue, or matter in such a Proceeding by dismissal or withdrawal with or without prejudice, shall be deemed to be a successful result as to such claim, issue, or matter. 6. Advance of Expenses. The Corporation shall advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding within twenty (20) days after the receipt by the Corporation of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. 7. Procedure for Determination of Entitlement to Indemnification. (a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Corporation a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Corporation shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to Section 7(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: (i) if a Change in Control (as hereinafter defined) shall have occurred, by Independent Counsel (as hereinafter defined) in a written opinion to the Board, a copy of which shall be delivered to Indemnitee (unless Indemnitee shall request that such determination be made by the Board or the stockholders, in which case the determination shall be made in the manner provided below in Section 7(b)(ii) or 7(b)(iii); (ii) if a Change of Control shall not have occurred, (A) by the Board by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), (B) if a quorum of the Board consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee, or (C) by the stockholders of the Corporation; or (iii) as provided in Section 8(b) of this Agreement. If it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons, or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons, or entity upon reasonable advance request any documentation or information that is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating shall be borne by the Corporation (irrespective of the determination as to Indemnitee's entitlement to indemnification), and the Corporation hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 7(b) of this Agreement, the Independent Counsel shall be selected as provided in this Section 7(c). If a Change of Control shall not have occurred, the Independent Counsel shall be selected by the Board, and the Corporation shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change of Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board, in which event the preceding sentence shall apply), and Indemnitee shall given written notice to the Corporation advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee of the Corporation, as the case may be, may within seven (7) days after such written notice of selection shall have been given, deliver to the Corporation or to Indemnitee, as the case may be, a written objection to such selection. Such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirement of "Independent Counsel" as defined in Section 14 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is made, the Independent Counsel so selected may not serve as Independent Counsel unless and until a court has determined that such objection is without merit. If, within twenty (20) days after submission by Indemnitee of a written request for indemnification pursuant to Section 7(a) of this Agreement, no Independent Counsel shall have been selected or, if selected, shall have been objected to, in accordance with this Section 7(c), either the Corporation or Indemnitee may petition the Superior Court of the State of California or other court of competent jurisdiction for resolution for resolution of any objection that shall have been made by the Corporation or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court or by such other person as the Court shall designate, and the person with respect to whom an objection is favorably resolved or the person so appointed shall act as Independent Counsel under Section 7(b) of this Agreement. The Corporation shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 7(b) of this Agreement, and the Corporation shall pay all reasonable fees and expenses incident to the procedures of this Section 7(c), regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 9(a)(iii) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). 8. Presumptions and Effect of Certain Proceedings. (a) If a Change of Control shall have occurred, in making a determination with respect to entitlement to indemnification hereunder, the person, persons, or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 7(a) of this Agreement, and the Corporation shall have the burden of proof to overcome that presumption in connection with the making by any person, persons, or entity of any determination contrary to that presumption. (b) If the person, persons, or entity empowered or selected under Section 7 of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made such determination within sixty (60) days after receipt by the Corporation of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made, and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such sixty-day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons, or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating thereto; and provided, further, that the foregoing provisions of this Section 8(b) shall not apply (i) if the determination of entitlement to indemnification is to be made by the shareholders pursuant to Section 7(b) of this Agreement and if (A) within fifteen (15) days after receipt by the Corporation of the request for such determination the Board has resolved to submit such determination to the shareholders for their consideration at an annual meeting thereof to be held within seventy-five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of shareholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat, or (ii) if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 7(b) of this Agreement. (c) The termination of any Proceeding or of any claim, issue, or matter therein by judgment, order, settlement, or conviction, or upon a plea of nolo contendre or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner that he reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. 9. Remedies of Indemnitee. (a) If (i) a determination is made pursuant to Section 7 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 6 of this Agreement, (iii) the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 7(b) of this Agreement and such determination shall not have been made and delivered in a written opinion within ninety (90) days after receipt by the Corporation of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 5 of this Agreement within ten (10) days after receipt by the Corporation of a written request therefor, or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 7 or 8 of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of California, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator, pursuant to the rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within one hundred eighty (180) days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 9(a). The Corporation shall not oppose Indemnitee's right to any such adjudication or award in arbitration. (b) In the event that a determination shall have been made pursuant to Section 7 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 9 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. If a Change of Control shall have occurred, in any judicial proceeding or arbitration commenced pursuant to this Section 9, the Corporation shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. (c) If a determination shall have been made or deemed to have been made pursuant to Section 7 or 8 of this Agreement that Indemnitee is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 9, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification or (ii) a prohibition of such indemnification under applicable law. (d) The Corporation shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 9 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Corporation is bound by all the provisions of this Agreement. (e) If Indemnitee, pursuant to this Section 9, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any and all expenses (of the types described in the definition of Expenses in Section 14 of this Agreement) actually and reasonably incurred by him in such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated. 10. Security. To the extent requested by the Indemnitee and approved by the Board, the Corporation may at any time and from time to time provide security to the Indemnitee for the Corporation's obligations hereunder through an irrevocable bank line of credit, funded trust, or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior written consent of Indemnitee. 11. Non-Exclusivity; Duration of Agreement; Insurance; Subrogation. (a) The rights to be indemnified and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Articles, as amended, or Bylaws, any other agreement, a vote of shareholders or a resolution of directors, or otherwise. This Agreement shall continue until, and terminate upon, the latter of: (a) ten (10) years after the date that Indemnitee shall have ceased to serve as a director and officer of the Corporation or fiduciary of any other corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise that Indemnitee served at the request of the Corporation; or (b) the final termination of all pending Proceedings in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 9 of this Agreement relating thereto. This Agreement shall be binding upon the Corporation and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors, and administrators. (b) If the Corporation maintains an insurance policy or policies providing liability insurance for directors or officers of the Corporation or fiduciaries of any other corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise that such person serves at the request of the Corporation, Indemnitee shall be covered by such policy or policies in accordance with the terms thereof to the maximum extent of the coverage available for any such director or officer under such policy or policies. (c) If any payment is made under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Corporation to bring suit to enforce such rights. (d) The Corporation shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement, or otherwise. 12. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal, or unenforceable for any reason whatsoever: (a) the validity, legality, and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal, or unenforceable, that is not itself invalid, illegal, or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal, or unenforceable, that is not itself invalid, illegal, or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal, or unenforceable. 13. Exception to Right of Indemnification or Advancement of Expenses. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification or advancement of Expenses under this Agreement with respect to any Proceeding, or any claim, issue, or matter therein, brought or made by him against the Corporation, except as may be provided in Section 9(e) of this Agreement. 14. Definitions. For purposes of this Agreement: (a) "Change in Control" means a change in control of the Corporation of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item or any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the "Act"), whether or not the Corporation is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Corporation representing 20% or more of the combined voting power of the Corporation's then outstanding securities without the prior approval of at least two-thirds of the members of the Board in office immediately prior to such person attaining such percentage interest; (ii) the Corporation is a party to a merger, consolidation, sale of assets, or other reorganization, or a proxy contest, as a consequence of which members of the Board in office immediately prior to such transaction or event constitute less than a majority of the Board thereafter; or (iii) during any period of two (2) consecutive years, individuals who at the beginning of such period constituted the Board (including for this purpose any new director whose election or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board. (b) "Corporate Status" describes the status of a person who is or was or has agreed to become a director of the Corporation, or is or was an officer, employee, agent, or fiduciary of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise that such person is or was serving at the request of the Corporation. (c) "Disinterested Director" means a director of the Corporation who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (d) "Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts and witnesses, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the type customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, or investigating a Proceeding. (e) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither at the time of designation is, nor in the five years immediately preceding such designation was, retained to represent: (i) the Corporation or Indemnitee in any matter material to either such party or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Corporation or Indemnitee in an action to determine Indemnitee's rights under this Agreement arising on or after the date of this Agreement, regardless of when the Indemnitee's act or failure to act occurred. (f) "Proceeding" includes any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing and any other proceeding (including any appeals from any of the foregoing) whether civil, criminal, administrative or investigative, except one initiated by an Indemnitee pursuant to Section 9 of this Agreement to enforce his rights under this Agreement. 15. Headings. The headings of the sections of this Agreement are inserted for convenience of reference only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 16. Modification and Waiver. This Agreement may be amended from time to time to reflect changes in California law or for other reasons. No supplement, modification, or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 17. Notice by Indemnitee. Indemnitee agrees promptly to notify the Corporation in writing upon being served with any summons, citation, subpoena, complaint, indictment, information, or other document relating to any Proceeding or matter that may be subject to indemnification or advancement of Expenses covered hereunder; provided, however, that the failure to give any such notice shall not disqualify the Indemnitee from indemnification hereunder. 18. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (a) if delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, at the time of delivery, (b) if mailed by certified mail (return receipt requested) with postage prepaid, on the third business day after the date on which it is so mailed, or (c) if sent by facsimile or by telegraph, when confirmation of transmission is indicated by the sender's telecopy or facsimile machine, and addressed: (i) if to the Corporation, to 221 Lathrop Way, Suite 1, Sacramento, California 95815, Attention: Secretary, or (ii) if to Indemnitee, to the address listed on the signature page hereof, or (iii) to such other address as any party hereto have specified in a notice given in accordance with this Section 18. 19. Governing Law. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California applicable to contracts made and to be performed in such state without giving effect to the principles of conflicts of laws. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above set forth. OPHTHALMIC IMAGING SYSTEMS By: ____________________________ Name: ____________________________ Title: ____________________________ INDEMNITEE: ---------------------------------- (Signature) ---------------------------------- (Printed Name) Address:__________________________ EX-11.1 5 CALCULATION OF NET LOSS PER SHARE EXHIBIT 11.1 OPHTHALMIC IMAGING SYSTEMS CALCULATION OF NET LOSS PER SHARE The following table sets forth the calculation of basic and diluted loss per share: 1998 1997 ============ ========== Numerator for basic and diluted net loss per share $ (2,735,019) $ (2,110,554) ============ ========== Denominator for basic net loss per share: Weighted average shares 4,030,428 3,784,332 Effect of dilutive securities (1): Employee stock options -- -- Warrants and other -- -- ------------ ----------- Dilutive potential common shares -- -- ============= =========== Denominator for diluted net loss per share 4,030,428 3,784,332 ============= =========== Basic net loss per share $ (0.68) $ (0.59) ============= =========== Diluted net loss per share $ (0.68) $ (0.59) ============= =========== (1) No amounts are included, as amounts are anti-dilutive. EX-23 6 CONSENT OF PERRY-SMITH Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT We hereby consent to the incorporation by reference in this Form 10-KSB, Item 7 of our report, dated November 6, 1998 relating to the financial statements of Ophthalmic Imaging Systems. PERRY-SMITH & CO., LLP Sacramento, California December 15, 1998 EX-23 7 CONSENT OF ERNST & YOUNG Exhibit 23.2 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 1997 financial statements of Ophthalmic Imaging Systems Annual Report (Form 10-KSB) for the year ended August 31, 1998. ERNST & YOUNG Sacramento, California December 14,1998 EX-99.2 8 PRESS RELEASE Exhibit 99.2 Page 1 of 1 JR BOTHE & ASSOCIATES STRATEGIC BUSINESS CONSULTING & FINANCIAL PUBLIC RELATIONS JR BOTHE & ASSOCIATES CONTACT: Jack Bothe 12035 Sutton Way, Suite A 800.261.8552 Grass Valley, Ca 95945 OPHTHALMIC IMAGING SYSTEMS FOR IMMEDIATE RELEASE 221 Lathrop Way, Suite I Sacramento, CA 95815 Ophthalmic Imaging Systems Comments on Transaction with Premier Laser Systems, Inc. SACRAMENTO, Calif., August 14, 1998 - Ophthalmic Imaging Systems (OTCBB: OISI) today announced that it has been advised by Premier Laser Systems that, due to the unavailability of Premier's financial statements, Premier will be unable to proceed with its previously proposed acquisition of the remaining 49% interest in OIS by the August 21, 1998 termination date of the acquisition agreement between the companies. OIS is in the process of considering various alternatives available to it, including the possible restructuring of the transaction with Premier. As of the date hereof, Premier continues to own a 51% stock ownership of OIS. Ophthalmic Imaging Systems is the leading provider of ophthalmic digital imaging systems. The Company designs, develops, manufactures, and markets digital imaging and image enhancement systems and analysis software. With over a decade in the ophthalmic imaging business, OIS has consistently been the first to introduce new technology and features. The Company offers customer support through a worldwide network of service technicians. NOTE: This press release contains forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in the forward looking statements. These forward looking statements represent Ophthalmic Imaging Systems' judgment as of the date of this release. OIS disclaims any intent or obligation to update these forward-looking statements. ------------------------------------------------------------------------ 12035 Sutton Way, Suite A o Grass Valley, California 95945 Tel: 530.274.8197 Fax: 530.274.8198 Email: jrba@jrbothe.com EX-99.3 9 PRESS RELEASE Exhibit 99.3 OPHTHALMIC IMAGING SYSTEMS CONTACT:Steven R. Verdooner, CEO 221 Lathrop Way, Suite I (916) 646-2020 Sacramento, CA 95815 FOR IMMEDIATE RELEASE OPHTHALMIC IMAGING SYSTEMS ANNOUNCES ANNUAL MEETING OF SHAREHOLDERS SACRAMENTO, Calif., October 21, 1998 -- Ophthalmic Imaging Systems (OTCBB: OISI) today announced that the Company's Board of Directors (the "Board") has tentatively scheduled an annual meeting of its shareholders to be held on January 7, 1999. The Board recognizes that the Company did not hold an annual meeting of its shareholders last year in anticipated completion of a transaction with Premier Laser Systems, Inc. ("Premier") pursuant to an agreement between the parties entered into in February 1998. As previously announced, however, the agreement with Premier was terminated in August 1998 due to Premier's inability to close. Accordingly, in view of the fact that the agreement with Premier has been terminated, the Board has determined that it would be appropriate to schedule its annual meeting of shareholders as soon as practicable following the release of the Company's audited financial statements for the year ended August 31, 1998. The Company anticipates the distribution of proxy materials and other requisite information to its shareholders in early December 1998. Ophthalmic Imaging Systems is the leading provider of ophthalmic digital imaging systems. The Company designs, develops, manufactures and markets digital imaging and image enhancement systems and analysis software. With over a decade in the ophthalmic imaging business, OIS has consistently been the first to introduce new technology and features. The Company offers customer support through a worldwide network of service technicians. NOTE: THIS PRESS RELEASE CONTAINS FORWARD LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS REPRESENT OPHTHALMIC IMAGING SYSTEMS' JUDGMENT AS OF THE DATE OF THIS RELEASE. OIS DISCLAIMS ANY INTENT OR OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS. EX-27 10 FDS
5 (THIS SCHEDULE FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-QSB FOR OPHTHALMIC IMAGING SYSTEMS FOR THE PERIOD ENDED AUGUST 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANICAL STATEMENTS. 12-MOS AUG-31-1998 AUG-31-1998 514,186 0 637,984 131,000 687,409 1,734,543 1,319,074 (907,682) 2,153,320 3,865,438 0 0 0 10,462,604 0 2,153,320 6,064,180 6,277,370 4,124,633 4,124,633 4,823,950 0 65,187 (2,735,019) 0 (2,735,019) 0 0 0 (2,735,019) (0.68) 0
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