|
OPHTHALMIC IMAGING SYSTEMS - 10KSB/A - 20050606 - NOTES_TO_FINANCIAL_STATEMENT
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 accounting principles generally accepted in the United States of
America which require management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
Cash and Cash Equivalents
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.
At December 31, 2004, the Company had deposits with carrying amounts of
$1,990,185 and bank balances of $2,254,617. Federally insured balances
totaled $200,000 and uninsured balances totaled $2,054,617 at December
31, 2004.
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 comprised 10% or more of net sales, during the years ended
December 31, 2004 or 2003.
Revenues from sales to customers located outside of the United States
accounted for approximately 12% and 9% of net sales during the years
ended December 31, 2004 and 2003, respectively.
Inventories
Inventories, which consist primarily of purchased system parts,
subassemblies and assembled systems, are stated at the lower of cost
(determined using the first-in, first-out method) or market.
F-8
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Furniture and Equipment
Furniture and equipment are stated at cost and depreciated or amortized
on a straight-line basis over the estimated useful lives of the assets.
The estimated useful lives generally range from three to seven years.
Revenue Recognition and Warranties
The Company derives revenue primarily from the sale, installation and
training services of its products. In accordance with SEC Staff
Accounting Bulletin No. 104, Revenue Recognition, revenue is recognized
when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable, collectibility is
reasonably assured, contractual obligations have been satisfied, and
title and risk have been transferred to the customer. The Company
generally recognizes revenue from installation and training services
when such services are performed. The Company generally provides a
one-year warranty covering materials and workmanship and accruals are
provided for anticipated warranty expenses.
Customers may purchase extended warranty coverage for additional one or
two year periods. Revenues from the sale of these extended warranties
are deferred and recognized in net sales on a straight-line basis over
the term of the extended warranty contract.
Shipping and Handling Costs
Shipping and handling costs are included with cost of sales.
Advertising Costs
Advertising expenditures totaled approximately $82,413 and $50,864, for
the years ended December 31, 2004 and 2003, respectively.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets relate
primarily to estimated warranty claims, and deferred tax liabilities
relate primarily to property and equipment. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred tax
assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date
of enactment.
General business credits are accounted for as a reduction of federal
income taxes payable under the flow-through method.
F-9
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
At December 31, 2004 and 2003, the Company's financial instruments
included cash, cash equivalents, receivables, accounts payable, accrued
liabilities and borrowings. With the exception of borrowings, the fair
value of these financial instruments approximated their carrying value
because of the short-term nature of these instruments. The fair value
of the Company's borrowings approximated their carrying value based
upon management's review of market prices for financial instruments
with similar characteristics.
Earnings Per Share
Basic earnings per share (EPS), which excludes dilution, is computed by
dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock, such as stock
options, result in the issuance of common stock which shares in the
earnings of the Company. The treasury stock method is applied to
determine the dilutive effect of stock options in computing diluted
EPS.
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 (the intrinsic
value method). 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 8
for additional disclosures regarding the Company's stock option plans.
F-10
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Based Compensation (Continued)
Pro forma disclosures of stock-based employee compensation expense
disclosures are as follows:
Year Ended December 31,
------------------------------
2004 2003
-------------- -----------
Net income as reported $ 1,704,596 $ 1,438,194
Deduct: total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effect (8,666) (40,445)
-------------- -----------
Pro forma net income $ 1,695,930 $ 1,397,749
============== ===========
Basic earnings per share - as reported $ 0.12 $ 0.13
============== ===========
Basic earnings per share - pro forma $ 0.11 $ 0.12
============== ===========
Diluted earnings per share - as reported $ 0.11 $ 0.12
============== ===========
Diluted earnings per share - pro forma $ 0.11 $ 0.12
============== ===========
|
Impact of New Financial Accounting Standards
Stock-Based Compensation
In December 2004 the FASB issued Statement Number 123 (revised 2004)
(FAS 23 (R)), Share-Based Payments. FAS 123 (R) requires all entities
to recognize compensation expense in an amount equal to the fair value
of share-based payments such as stock options granted to employees. The
Company is required to apply FAS 23 (R) on a modified prospective
method. Under this method, the Company is required to record
compensation expense (as previous awards continue to vest) for the
unvested portion of previously granted awards that remain outstanding
at the date of adoption. In addition, the Company may elect to adopt
FAS 123 (R) by restating previously issued financial statements, basing
the expense on that previously reported in their pro forma disclosures
required by FAS 123. For companies filing under Regulation S-B, FAS 123
(R) is effective the beginning of the first interim or annual reporting
period that begins after December 15, 2005, which for the Company will
be the first quarter of the year ending December 31, 2006. The Company
anticipates adopting SFAS No 123 (R) beginning in the quarter ending
March 31, 2006. Management has not completed its evaluation of the
effect that FAS 123 (R) will have, but believes that the effect will be
consistent with its previous pro forma disclosures.
F-11
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS
151). SFAS 151 requires that abnormal amounts of idle facility expense,
freight, handling costs and spoilage be recognized as current-period
charges. Further, SFAS 151 requires the allocation of fixed production
overheads to inventory based on the normal capacity of the production
facilities. Unallocated overheads must be recognized as an expense in
the period in which they are incurred. SFAS 151 is effective for
inventory costs incurred beginning in 2006. The Company is currently
evaluating the effect of SFAS 151 on the financial statements and
related disclosures.
Reclassifications
Certain accounts have been reclassified to conform to the current
year's presentation.
2. INVENTORIES
Inventories consist of the following as of December 31, 2004 and 2003:
2004 2003
------------------ ------------------
Raw materials $ 315,367 $ 230,880
Work-in-process 119,634 59,145
Finished goods 80,390 126,395
------------------ ------------------
$ 515,391 $ 416,420
================== ==================
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following as of December 31,
2004 and 2003:
2004 2003
------------------ ------------------
Research and manufacturing equipment $ 148,941 $ 679,506
Office furniture and equipment 235,603 657,847
Demonstration equipment 19,368 197,104
------------------ ------------------
403,912 1,534,457
Less accumulated depreciation
and amortization (253,425) (1,383,545)
------------------ ------------------
$ 150,487 $ 150,912
================== ==================
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F-12
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
4. ACCRUED LIABILITIES AND PRODUCT WARRANTY
Accrued liabilities consist of the following as of December 31, 2004
and 2003:
2004 2003
------------------ ------------------
Accrued compensation $ 565,176 $ 555,817
Accrued warranty expenses 505,851 438,450
Other accrued liabilities 487,834 393,296
------------------ ------------------
$ 1,558,861 $ 1,387,563
================== ==================
Product Warranty and Deferred Warranty Revenue
----------------------------------------------
The Company generally offers a one year warranty to its customers. The
Company's warranty requires it to repair or replace defective products
during the warranty period. At the time product revenue is recognized,
the Company records a liability for estimated costs that may be
incurred under its warranties. The costs are estimated based on
historical experience and any specific warranty issues that have been
identified. (Although historical warranty costs have been within
expectations, there can be no assurance that future warranty costs will
not exceed historical amounts.) The Company periodically assesses the
adequacy of its recorded warranty liability and adjusts the balance as
necessary.
Product warranty reserve changes consist of the following as of
December 31, 2004 and 2003:
2004 2003
------------------ ------------------
Warranty balance at beginning of the year $ 438,450 $ 370,680
Net provisions 236,901 272,770
Warranty costs incurred (169,500) (205,000)
------------------ -------------------
$ 505,851 $ 438,450
================== ==================
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In addition to the Company's one-year warranty, the Company offers an
extended warranty for an additional charge to the customer. The Company
records the sale of the extended warranty as deferred revenue and
amortizes the revenue over the term of the agreement, generally one to
two years. At December 31, 2004 and 2003, deferred extended warranty
revenue was $793,972 and $557,143, respectively.
F-13
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. NOTES PAYABLE
Notes payable consist of the following at December 31, 2004 and 2003:
2004 2003
------------------ ------------------
Laurus Master Fund Ltd. #1 $ 579,662 $ 1,173,250
Laurus Master Fund Ltd. #2 1,000,000
Other 35,038
------------------ ------------------
1,614,700 1,173,250
Less: current portion 776,338 409,613
------------------ ------------------
Long-term portion $ 838,362 $ 763,637
================== ==================
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Maturities of notes payable are as follows:
Year Ending
December 31,
------------
2005 $ 776,338
2006 701,252
2007 132,416
2008 4,694
------------------
$ 1,614,700
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Laurus Master Fund Ltd. #1
On September 25, 2003, the Company entered into a convertible term note
and securities purchase agreement with Laurus Master Fund, Ltd. #1
("Laurus 1"). Pursuant to the agreements, the Company sold to Laurus 1,
a secured convertible term note in the principal amount of $1,200,000
bearing interest at the rate of six and one-half percent (6.5%) per
annum, due September 25, 2006, convertible into shares of its common
stock at a conversion price of $1.07 per share. Under certain
circumstances, both the Company and Laurus 1 may exercise their right
to convert all or a portion of the outstanding principal and interest
into shares of common stock. Loan costs of $118,718 have been
capitalized and are being amortized over the three-year life of the
note. The Company granted to Laurus 1 a subordinated second priority
security interest in its assets to secure the obligations under the
note. Additionally, the Company issued a warrant to Laurus 1 to
purchase 375,000 shares of its common stock at exercise prices ranging
between $1.23 and $1.61 per share (Note 8).
In 2003, the Company opted to pay $26,458 of principal and $6,792 of
interest in 31,074 shares of common stock. In 2004, the Company opted
to pay $580,796 of principal and $35,869 of interest in 576,322 shares
of common stock.
F-14
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. NOTES PAYABLE (Continued)
Laurus Master Fund Ltd. #2
On April 27, 2004, the Company entered into a convertible term note and
securities purchase agreement with Laurus Master Fund, Ltd. #2 ("Laurus
2"). Pursuant to these agreements, the Company sold to Laurus 2, a
secured convertible term note in the principal amount of $1,000,000
bearing interest at the rate of six and one-half percent (6.5%) per
annum, due April 27, 2007, convertible into shares of its common stock
at a conversion price of $1.22 per share. Under certain circumstances,
both the Company and Laurus 2 may exercise their right to convert all
or a portion of the outstanding principal and interest into shares of
common stock. Loan costs of $70,980 have been capitalized and are being
amortized over the three-year life of the note. The Company granted to
Laurus 2 a subordinated second priority security interest in its assets
to secure the obligations under the note. Additionally, the Company
issued a warrant to Laurus 2 to purchase 313,000 shares of its common
stock at exercise prices ranging between $1.40 and $1.83 per share
(Note 8).
6. RELATED PARTY TRANSACTIONS
MediVision
During the period of August 2000 through July 1, 2001, the Company
executed several promissory notes in favor of MediVision Medical
Imaging LTD. ("MediVision"), an Israeli corporation and majority
shareholder in the Company. The "Short-Term Note" had a maximum
principal balance of $260,000 available, while the "Working Capital
Funding Agreement and Amendment No.1" to this agreement provided
additional funding of $2,500,000. Both the Note and the Amendment bear
interest at the rate of 9.3% per annum and are secured by all of the
Company's assets. The principal amount outstanding, together with any
and all accrued interest on the Working Capital Note and Amendment, was
payable by August 31, 2003, except that MediVision may, at its option,
at any time convert any amount of principal and interest then
outstanding into shares of the Company's common stock at a conversion
price of $.80 per share on the Working Capital Note and $0.185 per
share on the Amendment No.1 to the Working Capital Note.
In May 2003, the Company and MediVision entered in Amendment No. 2 to
the Working Capital Funding Agreement and the Short Term Note whereby
the repayment terms on the debt were extended on all principal and
interest due until January 1, 2005. As of December 31, 2004, the
Company has paid the debt owing MediVision by way of cash payments and
noncash intercompany revenue and expense transactions.
In June 2003, MediVision exercised its option, as stipulated in the
Working Capital Funding Agreement, Amendment No. 1, to convert
$1,150,000 of principal and interest at a conversion price of $0.185
per share into 6,216,216 common shares of stock. As a result of the
foregoing transactions, MediVision currently owns approximately 74% of
the Company's outstanding common stock.
F-15
6. RELATED PARTY TRANSACTIONS (Continued)
MediVision (Continued)
In August 2002, the Company's Board of Directors, at MediVision's
request, authorized the Company to guarantee and/or provide security
interests in its assets for certain of MediVision's loans with
financial institutions, on the maximum aggregate amount of
approximately $1,900,000. In August 2002, MediVision subordinated to
the financial institutions its security position in the Company's
assets, which had been granted in consideration of loans to the Company
from MediVision. In December 2002, the Company's Board of Directors
approved that the Company guaranteed certain obligations of MediVision
by issuing a security interest in the Company's assets (Note 10). The
amount guaranteed by the Company, as of December 31, 2004 was
approximately $447,000.
In March 2004, the Company's Board of Directors approved a line of
credit to MediVision of $1,000,000 at 9.3% interest for two years. In
January 2005, the Company's Board of Directors approved an additional
loan advance of $150,000 for a 30 day term. In March 2005, these
agreements were incorporated into a Loan and Security Agreement and
Promissory Note entered into between the parties (see Note 11).
At December 31, 2004, the Company had recorded approximately $1,056,000
of receivable due from MediVision as compared to $200,979 in aggregate
debt and accrued interest owed to MediVision as of December 31, 2003.
The changes are the result of cash payments and the net effect of other
intercompany revenue and expense transactions.
Sales to MediVision during the fiscal years ended December 31, 2004 and
2003 totaled approximately $744,000 and $482,000, respectively. Sales
derived from product shipments to MediVision are made at transfer
pricing which is based on similar volume discounts that would be
available to other resellers or distributors of the Company's products.
During the year ended December 31, 2004 and 2003, the Company paid
$687,100 and $263,200 to MediVision for research and development
performed on behalf of the Company.
MediStrategy Ltd.
The Company has a service agreement with MediStrategy Ltd. ("MS"), an
Israeli company owned by Noam Allon, a Director of the Company, serving
on the Board until December 2004. Under the terms of the agreement, MS
provides services to the Company primarily in the business development
field in ophthalmology, including business cooperation, mergers and
acquisitions, identifying and analyzing new lines of business and
defining new product lines or business opportunities to be developed.
All services provided by MS are performed solely by Noam Allon.
F-16
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. RELATED PARTY TRANSACTIONS (Continued)
In consideration for the services provided, the Company agreed to pay
MS a monthly sum of $3,300. In addition, MS is to be paid a yearly
performance bonus of up to $20,000 upon achievement of goals under the
terms of the agreement determined by MS, Noam Allon and the Company's
Chairman of the Board. During the year ended December 31, 2004, MS
earned fees in the amount of $39,600 and a bonus subject to approval,
which has not yet been finalized. $19,800 of the fees has been paid
with the balance being accrued as of December 31, 2004. During the year
ended December 31, 2003, MS earned fees of $39,600 and a bonus of
$10,000, all of which were accrued at December 31, 2003 and paid in
2004.
7. LINE OF CREDIT
In May 2003, the Company entered into a $150,000 line of credit
agreement with its bank. The line is secured by a pledged investment
with the bank equal to the amount of the line of credit. Advances on
the line bear interest at prime (5.25% at December 31, 2004 and 4% at
December 31, 2003) with interest due monthly. The line matures on
September 10, 2008.
8. STOCKHOLDERS' EQUITY
Stock Option Plans
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.
The Company has five stock-based compensation plans and Individual
Stock Option Agreements. Options granted under these plans generally
have a term of ten years from the date of grant unless otherwise
specified in the option agreement. The plans generally expire ten years
from the inception of the plans. Options granted under these agreements
have a vesting period of three to four years. Incentive stock options
under these plans are granted at fair market value on the date of grant
and non-qualified stock options granted can not be less than 85% of the
fair market value on the date of grant. A summary of the Company's
plans as of December 31, 2004 is presented below:
Options Range of Available
Authorized Plan Options Exercise for Future
Plan Name Per Plan Expiration Outstanding Prices Grants
------------------------------------- ----------- ------------------ ------------- ---------- -------
1992 Option Plan 150,000 December 2002 36,500 $0.48 - $4.25
1995 Nonstatutory Plan 1,035,000 November 2005 75,000 $0.48 - $0.50 920,000
1997 Nonstatutory Plan 1,000,000 October 2002 60,000 $0.63 - $1.38
Individual Stock Option
Agreements 126,360 November 1998 105,300 $0.63
2000 Option Plan 1,500,000 September 2010 1,383,333 $0.41 89,999
2003 Option Plan 750,000 October 2013 659,000 $0.68 91,000
----------- -----------
2,319,133 1,100,999
=========== ===========
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F-17
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
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, January 1, 2003 1,715,952 $ 0.46
------------------
Options granted 650,000 $ 0.41
Options canceled (576,666) $ 0.41
Options exercised (18,334) $ 0.47
------------------
Balance December 31, 2003 1,770,952 $ 0.46
------------------
Options granted 684,000 $ 0.67
Options canceled (26,666) $ 0.41
Options lapsed (55,819) $ 0.94
Options exercised (53,334) $ 0.48
------------------
Balance December 31, 2004 2,319,133 $ 0.51
==================
|
The weighted average fair value of options granted during the years
ended December 31, 2004 and 2003 were $.67 and $.41, respectively.
The following table summarizes information about the stock options
outstanding at December 31, 2004:
Options Outstanding Options Exercisable
-------------------------------------------- -----------------------------
Weighted
Average Weighted- Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Number Life Price Number Price
------------------------------------ ------------- ------------- ------------- ------------- --------------
$ .31 - $ 1.37 2,292,633 8.3 years $ 0.50 1,525,300 $ 0.43
$ 1.38 - $ 3.00 25,000 1.8 years $ 1.38 25,000 $ 1.38
$ 3.01 - $ 4.50 1,500 1.7 years $ 4.25 1,500 $ 4.25
------------- -------------
2,319,133 1,551,800
============= =============
|
F-18
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
Pro forma information regarding net income and net income 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 December 31, 2004 and 2003, respectively; dividend yield of zero;
volatility factors of the expected market price of the Company's common
stock ranged from 91% to 95% for the years ended December 31, 2004 and
2003, risk-free interest rate of 4.04% and 3.98%; respectively, and a
weighted-average expected life of 10 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:
2004 2003
------------------ ------------------
Pro forma net income $ 1,695,930 $ 1,397,749
================== ==================
Pro forma basic and diluted net income per share $ 0.11 $ 0.12
================== ==================
|
Warrants
The Company issued a warrant in September 2003 pursuant to the issuance
of a note payable (Note 5). The warrant permits the holder to purchase
up to 375,000 shares of common stock at a price of $1.23 per share for
the first 100,000 shares; $1.39 per share for the next 125,000 shares
and $1.61 per share for the remaining 150,000 shares. The warrant is
exercisable through September 26, 2010.
The Company issued a warrant in April 2004 pursuant to the issuance of
a note payable (Note 5). The warrant permits the holder to purchase up
to 313,000 shares of common stock at a price of $1.40 per share for the
first 83,000 shares; $1.59 per share for the next 105,000 shares and
$1.83 per share for the remaining 125,000 shares. The warrant is
exercisable through April 27, 2009.
F-19
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. INCOME TAXES
The income tax (benefit) expense for the years ended December 31, 2004
and 2003 consisted of the following:
Federal State Total
------------------ ------------------ ------------------
2004
----
Current $ (22,000) $ (7,000) $ (29,000)
Deferred 376,000 88,000 464,000
Change in valuation allowance (890,000) (103,000) (993,000)
------------------ ------------------ ------------------
Total income tax (benefit) $ (536,000) $ (22,000) $ (558,000)
================== ================== ==================
2003
----
Current $ 22,000 $ 22,000 $ 44,000
Deferred (109,000) (21,000) (130,000)
Change in valuation allowance (219,000) (100,000) (319,000)
------------------ ------------------ ------------------
Total income tax (benefit) $ (306,000) $ (99,000) $ (405,000)
================== ================== ==================
|
The Company's effective tax rate for the years ended December 31, 2004
and 2003 was (49)% and (39)%. The reconciliation of the statutory rate
to the effective rate is as follows:
2004 2003
------------------ ------------------
Statutory rate 34% 34%
State income taxes, net of Federal benefit 6 6
Other (11) (29)
(19) (32)
Change in valuation allowance (46) (31)
---------------- ----------------
Total (49)% (39)%
================ ================
|
F-20
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. INCOME TAXES (Continued)
The significant components of the Company's deferred tax assets and
liabilities are as follows:
December 31,
--------------------------------------
2004 2003
------------------ ------------------
Deferred tax assets:
Net operating loss carryforwards $ 1,481,000 $ 1,850,000
Inventory reserves 962,000 1,119,000
Payroll related accruals 143,000 171,000
Warranty accrual 217,000 188,000
Sales and accounts receivable reserves 165,000 186,000
Uniform capitalization 70,000 77,000
Deferred revenue 340,000 239,000
R&D credit carryover 175,000 175,000
------------------ ------------------
Total deferred tax assets 3,553,000 4,005,000
Valuation allowance (2,504,000) (3,497,000)
------------------ ------------------
Net deferred tax assets 1,049,000 508,000
Deferred tax liabilities:
Depreciation (20,000) (8,000)
------------------ ------------------
Net deferred tax assets $ 1,029,000 $ 500,000
================== ==================
|
At December 31, 2004 and 2003, management reviewed recent operating
results and projected future operating results. At the end of each of
these years, management determined that it was more likely than not
that a portion of the deferred tax assets attributable to net operating
losses would likely be realized. Due to the Company's limited history
of profitable operations, management has recorded a valuation allowance
of $2,504,000 and $3,497,000 at December 31, 2004 and 2003,
respectively. The amount of the valuation allowance will be adjusted in
the future when management determines that it is more likely than not
the deferred assets will be realized.
The Company has at December 31, 2004, a net operating loss carryover of
approximately $4,531,200 for Federal income tax purposes which expires
between 2007 and 2020, and a net operating loss carryforward of
approximately $1,305,700 for California state income tax purposes which
expires through 2010. The State of California has suspended the
application of net operating losses for the 2002 and 2003 fiscal years
and extended the carry forward period two years. Federal tax credit
carryforwards of approximately $174,900 will begin to expire in 2007.
Due to changes in ownership which occurred in prior years, Section 382
of the Internal Revenue Code provides for significant limitations on
the utilization of net operating loss carryforwards and tax credits. As
a result of these limitations, a portion of these loss and credit
carryovers may expire without being utilized.
F-21
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. COMMITMENTS AND CONTINGENCIES
Security Interest
In December 2002, the Company granted a security interest in
substantially all assets of the Company to the United Mizrahi Bank Ltd.
and Bank Leumi (the "banks"), as security for amounts borrowed by
MediVision from the banks and advanced to the Company under the note
agreements (Note 6).
Equity Line of Credit
On December 28, 2004, the Company entered into an investment agreement
with Dutchess Private Equities Fund II, LP (Dutchess) providing for an
equity line of credit. Pursuant to the investment agreement, Dutchess
has agreed to provide the Company with up to $9,000,000 of funding
during the thirty month period beginning on the date that a
registration statement the Company agreed to file providing for the
resale of the shares of common stock issuable under the investment
agreement is declared effective by the Securities and Exchange
Commission. During this thirty month period, the Company may request a
drawdown under the investment agreement by selling shares of its common
stock to Dutchess, and Dutchess will be obligated to purchase the
shares. The Company is under no obligation to request any drawdowns
under the investment agreement.
The amount that the Company can request in any drawdown notice is, at
the Company's election, the greater of (A) up to 200% of the average
daily volume of the Company's common stock for the ten trading days
prior to the date of the drawdown notice multiplied by the average of
the three daily closing bid prices for the common stock immediately
preceding the date of the drawdown notice or (B) $100,000; provided
that the Company may not request more than $1,000,000 in any single
drawdown.
Operating Leases
The Company leases its corporate headquarters and manufacturing
facility under a noncancellable operating lease that expires in June
2007. The lease agreement provides for minimum lease payments of
approximately $105,864 for the years ended December 31, 2005 and 2006,
respectively and $53,532 for the year ended December 31, 2007. The
Company also leases a sales office under a month-to-month lease
requiring a minimum lease payment of approximately $300 per month.
Rental expense charged to operations for all operating leases was
approximately $96,000 and $104,000, respectively during the years ended
December 31, 2004 and 2003.
F-22
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
11. SUBSEQUENT EVENT
On March 2, 2005, the Company and MediVision entered into a Loan and
Security Agreement evidenced by and payable in accordance with the note
executed by MediVision whereby the Company agreed to loan MediVision up
to two million dollars ($2,000,000). Under the terms of the agreement,
interest accrues at 7.25% per annum and is payable on February 28, 2006
along with all outstanding principal due at that date. The note is
secured by 2,409,000 shares of the Company's stock owned by MediVision.
In the event that MediVision were to sell any stock it owns in the
Company during the period of the agreement, a minimum of 50% of the
proceeds from such sales would be required to pay down the amount owed
to the Company.
F-23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None of the principal accountant's reports on the financial statements
for either of the past two years contains an adverse opinion or disclaimer of
opinion, and none was modified as to uncertainty, audit scope or accounting
principles. There were no disagreements with Perry-Smith LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure.
ITEM 8A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Report, management of the
Company, with the participation of the Company's Chief Executive Officer
(principal executive officer) and the Company's Chief Financial Officer
(principal financial officer), evaluated the effectiveness of the Company's
"disclosure controls and procedures," as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934. Based on that evaluation, these officers
concluded that, as of December 31, 2004, the Company's disclosure controls and
procedures were effective.
During the quarter ended December 31, 2004, there were no changes in
the Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
-21-
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
(a) Directors and Executive Officers
The following is a list of the names and ages of the Company's
directors and executive officers:
Name Age Position
--------------------------------------------------------------------------------
Gil Allon 43 Chief Executive Officer and Director
Ariel Shenhar 39 Chief Financial Officer, Vice President,
Secretary, and Director
Yigal Berman 56 Director, Chairman of the Board
Alon Harris, Ph.D. 45 Director
Michael Benoff 50 Director
|
Gil Allon has served as a member of the Company's Board of Directors
since August 2000 and has served as the Company's Chief Executive Officer since
January 2002. Mr. Allon has acted in the capacity of the Company's Chief
Executive Officer since August 2000. Mr. Allon is also a member of the
Compensation, Option and Nomination Committees of the Company's Board of
Directors. Mr. Allon has also served as the Vice President, Chief Operating
Officer and a member of the Board of Directors of MediVision since MediVision's
inception in June 1993 until December 2004. Mr. Allon received his B.A. and
M.Sc. in Computer Science, both with distinction, from the Technion Israel
Institute of Technology in Haifa, Israel in May 1987 and December 1989,
respectively, and his M.B.A. with distinction in Business Management from the
University of Haifa in September 1999.
Ariel Shenhar has served as a member of the Company's Board of
Directors since August 2000, has served as the Company's Vice President and
Chief Financial Officer since July 2002 and has served as the Company's
Secretary since August 2002. Mr. Shenhar has also served as a member of the
Board of Directors of MediVision from August 1994 until December 2004 and as its
Vice President and Chief Financial Officer since January 1997. Mr. Shenhar
served as a member of the Board of Directors of Fidelity Gold Real Estate
Markets Ltd., an Israeli public company engaged in real estate, from 1994 to
1998, as an accountant at Nissan Caspi & Co. Certified Public Accountants in
Jerusalem, Israel in 1996, and at Witkowski &Co. Certified Public Accountants in
Tel Aviv, Israel from 1994 to 1995. Mr. Shenhar received his B.A. in Economics
and Accounting in June 1992 and his M.B.A. in Finance, with distinction, in June
1999 both from the Hebrew University in Jerusalem, Israel, and has been a
Certified Public Accountant since January 1997.
Yigal Berman has served as a member of the Company's Board of Directors
since December 2004. Mr. Berman was appointed as Chairman of the Board of
Directors in January 2005 as well as Chairman of each of the Audit,
Compensation, Option and Nomination Committees of the Company's Board of
Directors. Yigal Berman has also served as a member of the Board of Directors of
MediVision from July 1996 until December 2004. In addition, since 1991, Mr.
Berman has served as Vice President of Finance and Secretary of Intergamma
Investment Ltd. Since 1989, Mr. Berman has served as a member of the Board of
Directors of Delta Trading, the majority shareholder of MediVision. Mr. Berman
received his B.A. in Economics and his M.B.A. in Business Management from the
Tel Aviv University in Israel in April 1974 and December 1976 respectively.
-22-
Alon Harris has served as a member of the Company's Board of Directors
since November 2001. Professor Harris also served as a member of the Audit
Committee of the Company's Board of Directors until December 2004. Professor
Harris has been Director of the Glaucoma Research and Diagnostic Laboratories
(the "Laboratory") in the Department of Ophthalmology at the Indiana University
School of Medicine ("Indiana") since 1993. The Laboratory, founded by Professor
Harris, specializes in investigation of ocular blood flow and its relationship
to eye diseases such as glaucoma, age-related macular degeneration and diabetic
retinopathy. He has been the Letzter Chair of Ophthalmology at Indiana since
2000 and has been a Professor of Ophthalmology and Physiology and Biophysics at
Indiana since 1999. Professor Harris is the 1995 recipient of the Research to
Prevent Blindness International Scholar Award and holds the Letzter Endowed
Chair of Ophthalmology.
Michael Benoff has served as a member of the Company's Board of
Directors since June 2004. Mr. Benoff was also appointed to the Audit,
Compensation and Option Committees of the Company's Board of Directors during
2004. Mr. Benoff has been a private investor since 1999. From 1987 until 1999,
he served in several senior financial management positions, most recently as
Executive Vice President and Chief Financial Officer of the Money Store Inc.
Prior to this he held the position of Vice President of Investment Banking at
Matthew & Wright, Inc. Mr. Benoff graduated from Princeton University, magna cum
laude, with a Bachelor of Arts in politics. He was also a member of the Phi Beta
Kappa Society.
(b) Audit Committee Financial Expert
The Company's Board of Directors has determined that Yigal Berman, the
Chairman of the Audit Committee, qualifies as an independent financial expert
serving on its audit committee. This qualification is based upon his experience,
more fully described above in his biography.
(c) Section 16 (a) Compliance
Section 16 (a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers and holders of more than
10% of the Company's common stock to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of the Company.
The Company believes that during the year ended December 31, 2004, its
acting officers, directors and holders of more than 10% of its outstanding
common stock complied with all Section 16(a) filing requirements, except that
Noam Allon, Gil Allon, Ariel Shenhar, Jonathan Adereth, Michael Benoff and Alon
Harris were late in filing reports concerning the grant to them of options to
purchase 40,000, 90,000, 75,000, 40,000, 40,000 and 20,000 shares of the
Company's common stock, respectively, and Yigal Berman was late in filing
reports concerning his initial statement of beneficial ownership of securities
in the Company.
(d) Code of Ethics
(i) The Company has adopted a Code of Ethics that applies to its
principal executive officer and principal financial officer. The Company's Code
of Ethics is attached to this Form 10-KSB as Exhibit 14. The Company will
provide to any person upon request, without charge, a copy of the Code of
Ethics. Such request is to be submitted in writing to the Company at: Ophthalmic
Imaging Systems, Attention: Ariel Shenhar, 221 Lathrop Way, Suite I, Sacramento,
Ca. 95815
-23-
ITEM 10. EXECUTIVE COMPENSATION
(a) Summary Executive Compensation Table
SUMMARY COMPENSATION TABLE
NAME AND
PRINCIPAL FISCAL OTHER ANNUAL
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)
-------- ---- ---------- --------- ----------------
Gil Allon 2004 $137,754 $ 70,000(1) $ 42,969(2)
Chief Executive Officer 2003 132,000 53,755(3) 34,860(4)
2002 122,769 39,892(5) 36,126(6)
Ariel Shenhar 2004 $120,000 $34,325(7) $ 42,504(8)
Vice-President, Chief Financial 2003 115,500 38,000 8,737(9)
Officer 2002 48,231(10) 38,000(11) 5,528(12)
|
(1) Represents bonus accrued in the financial statements as of December 31,
2004 and to be paid in 2005.
(2) Represents $24,000 in housing expenses, $10,000 in tuition expenses for
children and approximately $8,969 in automobile expenses for Mr. Allon
paid by the Company
(3) $44,921 of the bonus was paid by the Company to Mr. Allon in 2003. The
balance of $8,834 was accrued in the financial statements and paid in
2004
(4) Represents $26,123 in housing expenses paid by MediVision and charged
to the Company and approximately $8,737 in automobile expenses for Mr.
Allon paid by the Company.
(5) $10,000 of this amount was paid by the Company to Mr. Allon in 2002 and
the balance was paid in 2003.
(6) Represents $25,800 in housing expenses paid by MediVision and charged
to the Company and approximately $10,326 in automobile expenses for Mr.
Allon paid by the Company.
(7) Represents bonus accrued in the financial statements as of December 31,
2004, and to be paid in 2005, of which $14,325 of the amount to be paid
by the Company was charged to MediVision.
(8) Represents $24,000 in housing expenses, $10,000 in tuition expenses for
children and approximately $8,504 in automobile expenses for Mr.
Shenhar paid by the Company
(9) Represents approximately $8,737 in automobile expenses for Mr. Shenhar
paid by the Company. (10) Represents salary from July 22, 2002 through
December 31, 2002 (11) Represents bonus accrued in the financial
statements and paid in 2003. (12) Represents approximately $5,528 in
automobile expenses for Mr. Shenhar paid by the Company.
-24-
(b) Summary Option Grants
During the year ended december 31, 2004, the following options were
granted to named executive officers:
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
% of total
Number of Options/
Securities SARs Granted
Underlying to Employees
Options/SARs in Fiscal Exercise or Base
Name Granted (#) Year Price ($/Share) Expiration Date
------------------------------------------------------------------------------------------------------------
Gil Allon 90,000 13% $0.68 October 24, 2014
Chief Executive Officer
Ariel Shenhar
Vice President, Chief 75,000 11% $0.68 October 24, 2014
Financial Officer
|
(c) Aggregated Option Exercises and Fiscal Year End Values
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
Number of Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Shares Value FY-End (#) FY-End ($)
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
-------------------------------- ------------- -------------- ----------------------- ----------------------
Gil Allon -- -- 323,334/126,666(1)(2) $224,393/63,156
Chief Executive Officer
Ariel Shenhar
Vice President, Chief -- -- 183,333/91,667(3) $127,233/42,992
Financial Officer
|
All options had a market value of $1.10 per share at December 31, 2004.
(1) The exercise price on all shares exercisable was $0.406 per share. The
exercise price on 36,666 and 90,000 unexercisable shares was $.406 and
$0.681, respectively.
(2) Includes 26,667 shares exercisable and 13,333 shares unexercisable by
indirect ownership through spouse.
(3) The exercise price on all shares exercisable was $0.406 per share. The
exercise price on 16,667 and 75,000 unexercisable shares was $.406 and
$0.681, respectively.
-25-
(d) Compensation of Directors
The Company has entered into an employment agreement with Mr. Allon,
dated December 1, 2001, for his services as Chief Executive Officer, for a term
of approximately one year, which agreement may be renewed for successive one
year intervals upon mutual agreement of the parties. Under the terms of the
agreement, revised in May 2004, Mr. Allon is to receive an annual salary of
$140,000 effective April 1, 2004 and a bonus to be determined annually by the
Board of Directors based on the Company meeting certain performance goals.
During 2004, the Board approved a housing subsidy payment of $2,000 per month
and payments of $10,000 per year for tuition expenses for his children. Mr.
Allon will also be eligible to participate in the Company's health and welfare
insurance plans and is provided an automobile for business use. The agreement
between the parties was renewed on December 15, 2002, but was revised to provide
for an indefinite term. The agreement also stipulates that either party may
terminate the agreement with six months advance notice.
The Company also entered into an employment agreement with Mr. Shenhar
for his services as Chief Financial Officer, for a term of approximately one
year, commencing on July 22, 2002, and expiring on June 30, 2003. Under the
terms of the agreement, revised in December 2003 to provide for an indefinite
term, Mr. Shenhar's salary was increased from $114,000 to $120,000 annually
effective October 1, 2003, and he is to receive a bonus to be determined
annually by the Board of Directors based on the Company meeting certain
performance goals. During 2004, the Board approved a housing subsidy payment of
$2,000 per month and payments of $10,000 per year for tuition expenses for his
children. Mr. Shenhar will also be eligible to participate in the Company's
health and welfare insurance plans and is provided an automobile for business
use. The agreement also stipulates that either party may terminate the agreement
with six months advance notice.
In addition, Jonathan Adereth received $36,000 for his services as
Chairman of the Board and an additional $3,500 for meetings attended in 2004.
Mr. Adereth was also granted a stock option to purchase 40,000 shares at an
exercise price of $0.68 per share in October 2004.
Pursuant to a letter agreement executed on October 24, 2001, between
Dr. Harris and the Company, and as subsequently modified by the parties, the
Company agreed to the following in connection with his service as a director:
(i) to grant to Dr. Harris options to purchase up to 20,000 shares of the
Company's Common Stock, at a per share exercise price not less that fair market
value on the date of the grant, (ii) to pay to Dr. Harris, in four equal
quarterly installments, an annual retainer in the aggregate amount of $4,000,
(iii) to pay to Dr. Harris a per meeting fee of $500 for attending
non-telephonic meetings of the Board, (iv) to pay to Dr. Harris an hourly fee of
$100 for attending telephonic meetings of the Board, and (v) to reimburse Dr.
Harris for reasonable expenses incurred in connection with his services as a
director. Dr. Harris's agreement was revised in September 2002 to provide for a
quarterly payment of $1,500 for his services as a director, eliminating the
payments to him for his individual attendance at telephonic and non-telephonic
meetings of the Board. For his services as a director during the year, Dr.
Harris earned approximately $6,000, of which approximately $3,000 remained
accrued but unpaid as of December 31, 2004. The above referenced options were
granted in January 2002 at a per share exercise price of $.10, which price
exceeded the closing price of the Company's common stock on the date of grant.
Dr. Harris was also granted a stock option to purchase 20,000 shares at an
exercise price of $0.68 per share in October 2004.
Pursuant to a letter agreement executed on June 25, 2004 between Mr.
Benoff and the Company agreed to the following in connection with his service as
a director: (i) to grant Mr. Benoff options to purchase up to 40,000 shares of
the Company's Common Stock, at a per share price not less than fair market value
on the date of the grant, (ii) to pay Mr. Benoff, in four equal quarterly
installments, an annual retainer in the aggregate amount of $6,000 for
attendance at up to 2 Board meetings per quarter,
-26-
(iii) to pay to Mr. Benoff a fee of $100 per hour, not to exceed $500 per day,
for attendance at meetings in excess of 2 Board meetings per quarter and
reimbursement for related expenses. For his services as a director during the
year, Mr. Benoff earned approximately $3,600 of which approximately $1,500
remained accrued but unpaid as of December 31, 2004. . The above referenced
options were granted by the Board in October 2004 at a per share exercise price
of $0.68.
No standard arrangement regarding compensation of the directors has
been adopted by the Board, and, except as noted above, no director has been paid
any compensation by the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of February 18, 2005, by (i) each
person who "beneficially" owns more than 5% of all outstanding shares of common
stock, (ii) each director and the executive officer identified above in Item 10,
and (iii) all directors and the executive officers as a group. Unless otherwise
indicated, the address for each beneficial owner is 221 Lathrop Way, Suite I,
Sacramento, Ca. 95815
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Owner Percent of Class
--------------------------------------------------------------------------------
MediVision Medical Imaging Ltd. 11,130,151(1)(2) 74.0%
P.O. Box 45, Industrial Park
Yokneam Elit
20692 Israel
Gil Allon 341,667(3)(4) 2.2%
Ariel Shenhar 191,667 1.3%
Alon Harris, Ph.D 20,000(3) *
Michael Benoff 0 *
Yigal Berman 0 *
Directors and Officers as a group 553,334(3) 3.5%
(total of 5 persons)
|
* Represents less than 1%.
(1) As indicated in a Schedule 13D filed by MediVision on June 25, 2004.
(2) Includes 2,409,000 shares pledged as security on a $2,000,000
promissory note payable to the Company.
(3) Represents shares subject to stock options exercisable within 60 days
from February 18, 2005.
(4) Includes indirect beneficial ownership by spouse of stock options to
purchase 33,333 shares.
-27-
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Executive Officers and Directors
In January 2004, the Company entered into a service agreement,
effective January 1, 2003 with MediStrategy Ltd. ("MS"), an Israeli company
owned by Noam Allon, a director of the Company until December 2004. Under the
terms of the agreement, MS will provide services to the Company primarily in the
business development field in ophthalmology including business cooperation,
mergers and acquisitions allocating new lines of business and analyzing of such,
defining new product lines or business opportunities to be developed. All
services provided by MS shall be performed solely by Noam Allon.
In consideration for the services to be provided, the Company agrees to
pay MS a monthly sum of $3,300 paid quarterly. In addition, MS is to be paid a
yearly performance bonus of up to $20,000 upon achievement of goals under the
terms of the agreement determined by MS, Noam Allon and the Company's Chairman
of the Board. During the year ended December 31, 2004, MS earned fees in the
amount of $39,600 and a bonus, which has not been finalized. $19,800 of the fees
has been paid with the balance being accrued as of December 31, 2004. During the
year ended December 31, 2003, MS earned fees of $39,600 and a bonus of $10,000,
all of which were accrued as of 2003 and paid in 2004.
(b) Transactions with Security Holders
As discussed in greater detail in the Business Development section of
Item 1 and in Management's Discussion and Analysis or Plan of Operation section
of Item 6 of this annual report, the Company and MediVision entered into a
series of transactions which resulted in MediVision owning approximately 74% of
the Company's outstanding common stock at fiscal year end 2004.
-28-
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit Footnote
Number Description of Exhibit Reference
------ ---------------------- ---------
3.1 Articles of Incorporation of the Company, as amended. *
3.2 Amendment to Articles of Incorporation (Certificate of Determination of (4)
Preferences of Series A Junior Participating Preferred Stock of the Company).
3.3 Amendment to Articles of Incorporation (Certificate of Determination of (7)
Preferences of Series B Preferred Stock of the Company).
3.4 Amended Bylaws of the Company. *
3.5 Amendment to Amended Bylaws of the Company dated January 28, 1998. (6)
4.1 Specimen of Stock Certificate. *
4.2 Securities Purchase Agreement dated September 25, 2003 by and between the (13)
Company and Laurus.
4.3 Secured Convertible Term Note dated September 25, 2003 issued to Laurus. (14)
4.4 Common Stock Purchase Warrant dated September 25, 2003 by and between the (15)
Company and Laurus.
4.5 Registration Rights Agreement dated September 25, 2003 by and between the (16)
Company and Laurus.
4.6 Security Agreement dated September 25, 2003 by and between the Company and (17)
Laurus.
4.7 Securities Purchase Agreement dated April 27, 2004 by and between the Company (21)
and Laurus.
4.8 Secured Convertible Term Note dated April 27, 2004 issued to Laurus. (22)
4.9 Common Stock Purchase Warrant dated April 27, 2004 by and between the Company (23)
and Laurus.
4.10 Registration Rights Agreement dated April 27, 2004 by and between the Company (24)
and Laurus.
4.11 Security Agreement dated April 27, 2004 by and between the Company and Laurus. (25)
10.1 Lease Agreement, dated as of April 21, 2001, between the Company and (11)
Jackson-Jahn, Inc.
10.2 First Amendment to the Lease Agreement dated as of April 21, 2001 between the (27)
Company and Jackson-Jahn, Inc.
10.3 Second Amendment to the Lease Agreement dated as of April 21, 2001 between (27)
the Company and Jackson-Jahn, Inc.
-29-
|
10.4 Confidentiality Agreement dated March 27, 1992 between the Company and Steven *
R. Verdooner.
10.5 Assignment dated October 23, 1990 of U.S. Patent Application for Apparatus *
and Method for Topographical Analysis of the Retina to the Company 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).
10.6 Form of International Distribution Agreement used by the Company and sample *
form of End User Software License Agreement.
10.7 Stock Option Plan. (1)+
10.8 Rental Agreement dated May 1, 1994 by and between the Company and Robert J. (2)
Rossetti.
10.9 The Company's 1995 Nonstatutory Stock Option Plan and sample form of (3)+
Nonstatutory Stock Option Agreement.
10.10 The Company's 1997 Nonstatutory Stock Option Plan and sample form of (5)+
Nonstatutory Stock Option Agreement.
10.11 Form of Indemnification Agreement between the Company and each of its (6)
directors, officers and certain key employees.
10.12 Working Capital Funding Agreement dated as of July 13, 2000 by and between (8)
MediVision and the Company.
10.13 Amendment No. 1 to Working Capital Funding Agreement dated as of July 1, 2001 (10)
by and between MediVision and the Company.
10.14 Loan and Security Agreement dated as of July 13, 2000 by and between (8)
MediVision and the Company.
10.15 Registration Rights Agreement dated as of August 2000 by and between (8)
MediVision and the Company.
10.16 Secured Convertible Working Capital Note dated August 2000 from the Company (8)
to MediVision in the principal amount of $260,000.
10.17 Secured Promissory Note dated July 21, 2000 from the Company to MediVision in (8)
the principal amount of $1,500,000.
10.18 Secured Convertible Working Capital Promissory Note dated July 1, 2001 by and (10)
between MediVision and the Company in the principal amount of $1,000,000.
10.19 Cooperation and Project Funding Agreement dated January 21, 2001, among (9)
Israel- United States Binational Industrial Research and Development
Foundation, MediVision and the Company.
10.20 2000 Stock Option Plan. (11)+
10.21 Secured Debenture Agreement by and between United Mizrahi Bank LTD and the (12)
Company dated December 9, 2002.
10.22 Commercial Security Agreement by and among Bank Leumi, MediVision and (19)
Ophthalmic Imaging Systems dated April 30, 2003 and Commercial Guaranty of
Ophthalmic Imaging Systems.
-30-
|
10.23 Amendment No. 2 to Working Capital Funding Agreement dated as of May 21, 2003 (18)
by and between MediVision and the Company.
10.24 2003 Stock Option Plan. (19)
Investment Agreement dated as of December 28, 2004 by and between the Company
10.25 and Dutchess Private Equities Fund II, LP. (25)
10.26 Registration Rights Agreement dated as of December 28, 2004 by and between (26)
the Company and Dutchess Private Equities Fund II LP.
10.27 Loan and Security Agreement dated as of February 28, 2005 by and between the (27)
Company and MediVision Medical Imaging Ltd.
10.28 Promissory Note dated as of February 28, 2005 by and between the Company and (27)
MediVision Medical Imaging Ltd.
14 Code of Ethics. (27)
23.1 Consent of Perry-Smith LLP, Independent Auditors (27)
31.1 Rule 13a 14a/15d 14(a) Certification. (28)
31.2 Rule 13a 14a/15d 14(a) Certification. (28)
32 Certification of principal executive officer and principal financial officer (28)
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference to the Company's Registration Statement
on Form S-18, number 33-46864-LA.
(1) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended August 31, 1993, filed on November 26, 1993.
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended August 31, 1994, filed on November 29, 1994.
(3) Incorporated by reference to the Company's Registration Statement
on Form S-8, filed on May 28, 1996, number 333-0461.
(4) Incorporated by reference to Exhibit A of Exhibit 1 of the Company's Form
8-K, filed on January 2, 1998.
(5) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended November 30, 1997,
filed on January 14, 1998.
(6) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended August 31, 1998, filed on December 15, 1998.
(7) Incorporated by reference to Exhibit 3.1 of the Company's Form 8-K, filed on
November 24, 1999.
(8) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended August 31, 2000, filed on December 13, 2000.
-31-
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(9) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the transition period from September 1, 2000 to December 31, 2000, filed on
March 29, 2001.
(10) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 2001, filed on
November 14, 2001.
(11) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2001, filed on
March 26, 2002.
(12) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2002, filed on
March 27, 2003.
(13) Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K, filed on
October 1, 2003.
(14) Incorporated by reference to Exhibit 4.2 of the Company's Form 8-K, filed on
October 1, 2003.
(15) Incorporated by reference to Exhibit 4.3 of the Company's Form 8-K, filed on
October 1, 2003.
(16) Incorporated by reference to Exhibit 4.4 of the Company's Form 8-K, filed on
October 1, 2003.
(17) Incorporated by reference to Exhibit 4.5 of the Company's Form 8-K, filed on
October 1, 2003.
(18) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 2003, filed on August 14, 2003.
(19) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2003, filed on March 25, 2004
(20) Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K, filed on
April 29, 2004
(21) Incorporated by reference to Exhibit 4.2 of the Company's Form 8-K, filed on
April 29, 2004
(22) Incorporated by reference to Exhibit 4.3 of the Company's Form 8-K, filed on
April 29, 2004.
(23) Incorporated by reference to Exhibit 4.4 of the Company's Form 8-K, filed on
April 29, 2004
(24) Incorporated by reference to Exhibit 4.5 of the Company's Form 8-K, filed on
April 29, 2004
(25) Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed on
December 30, 2004
(26) Incorporated by reference to Exhibit 10.2 of the Company's Form 8-K filed on
December 30, 2004
(27) Incorporated by reference to the Company's Form 10-KSB/A filed on March 18, 2005
+ Management contract or compensatory plan or arrangement.
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-32-
B. Reports on Form 8-K.
On October 19, 2004, the Company filed a Form 8-K disclosing that the
Company issued a press release reporting that it will launch two new products at
the first Joint Meeting of the American Academy of Ophthalmology (AAO) and the
European Society of Ophthalmology (SOE) being held from October 23 to 26, 2004
in New Orleans, Louisiana.
On November 4, 2004 the Company filed a Form 8-K disclosing that the
Company issued a press release announcing its results of operations for the
Company's third quarter and nine months ended September 30, 2004.
On November 10, 2004 the Company filed a Form 8-K disclosing that the
Company issued a press release reporting that it will provide imaging systems
for a leading European ophthalmic imaging company, of which the Company's lead
shareholder, MediVision Medical Imaging Ltd., acquired 54%.
On December 30, 2004 the Company filed a Form 8-K disclosing that on
December 28, 2004, it entered into an investment agreement with Dutchess Private
Equities Fund II, LP providing an equity line of credit to the Company. Pursuant
to the investment agreement, Dutchess agreed to provide the Company with up to
$9,000,000 of funding during the thirty month period beginning on the date that
the registration statement the Company agreed to file providing for the resale
of the shares of common stock issuable under the investment agreement is
declared effective by the Securities and Exchange Commission.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
For the fiscal years ended December 31, 2004 and December 31, 2003,
Perry-Smith LLP has billed the Company the following fees for services rendered
in connection with the audit and other services in respect to these years:
2004 2003
Audit Fees (1) $54,200 $52,318
Audit-Related Fees 2,900 0
Tax Fees (2) 14,400 13,615
All Other Fees (3) 0 320
------- -------
Total $71,500 $66,253
======= =======
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(1) Services rendered for the audit of the Company's annual financial
statements included in its report on Form 10-KSB and the reviews of the
financial statements included in its reports on Form 10-QSB filed with
the SEC.
(2) Services in connection with the preparation of tax returns and the
provision of tax advice.
(3) Services related to exercising of options under the Company's Stock
Option Plans.
All of the fees described above were approved by the Company's Audit
Committee.
The Audit Committee does not currently have any pre-approval policies.
-33-
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
OPHTHALMIC IMAGING SYSTEMS
By: /s/ Gil Allon
-------------------------------
Gil Allon
Chief Executive Officer
By: /s/ Ariel Shenhar
-------------------------------
Ariel Shenhar
Chief Financial Officer
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In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Company and in the capacities and on
the dates indicated.
/s/ Gil Allon Director June 6, 2005
------------------------------------
Gil Allon
/s/ Ariel Shenhar Director June 6, 2005
------------------------------------
Ariel Shenhar
/s/ Yigal Berman Director, Chairman of the Board June 6, 2005
------------------------------------
Yigal Berman
/s/ Michael Benoff Director June 6, 2005
------------------------------------
Michael Benoff
/s/ Alon Harris Director June 6, 2005
------------------------------------
Alon Harris
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EXHIBIT 31.1
FORM OF 302 CERTIFICATION FOR ANNUAL REPORT ON FORM 10-KSB
I, Gil Allon, certify that:
1. I have reviewed this annual report on Form 10-KSB/A of Ophthalmic
Imaging Systems;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that occurred
during the small business issuer's most recent fiscal quarter (the
small business issuer's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the small business
issuer's ability to record, process, summarize and report
financial information; and (b) Any fraud, whether or not material,
that involves management or other employees who have a significant
role in the small business issuer's internal control over
financial reporting.
Date: June 6, 2005
/s/ Gil Allon
--------------------------
Gil Allon
Chief Executive Officer
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EXHIBIT 31.2
FORM OF 302 CERTIFICATION FOR ANNUAL REPORT ON FORM 10-KSB
I, Ariel Shenhar, certify that:
1. I have reviewed this annual report on Form 10-KSB/A of Ophthalmic
Imaging Systems;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that occurred
during the small business issuer's most recent fiscal quarter (the
small business issuer's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the small business
issuer's ability to record, process, summarize and report
financial information; and (b) Any fraud, whether or not material,
that involves management or other employees who have a significant
role in the small business issuer's internal control over
financial reporting.
Date: June 6, 2005
/s/ Ariel Shenhar
--------------------------
Ariel Shenhar
Chief Financial Officer
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EXHIBIT 32
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the financial statements of Ophthalmic
Imaging Systems ("Registrant") for the fiscal year ended December 31,
2004 (the "Report"), each of the undersigned hereby certifies, to such
officer's knowledge, that:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
Registrant.
/s/ Gil Allon
--------------------------
Gil Allon
Chief Executive Officer
/s/ Ariel Shenhar
--------------------------
Ariel Shenhar
Chief Financial Officer
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