SEC Company Response from OPHTHALMIC IMAGING SYSTEMS (CIK 0000885317) — May 20, 2005
OPHTHALMIC IMAGING SYSTEMS (CIK 0000885317)
Date: May 20, 2005 · CIK: 0000885317 · Accession: 0000910680-05-000378
AI Filing Summary & Sentiment
Referenced dates: April 12, 2005
Letter
[OIS LETTERHEAD] Martin James Senior Assistant Chief Accountant Division of Corporation Finance Mail Stop 0306 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549
RE: OPHTHALMIC IMAGING SYSTEMS FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2004 SEC FILE NO. 1-11140
Dear Mr. James:
Set forth herein are the responses of Ophthalmic Imaging Systems (the "COMPANY") to the comments contained in the comment letter of the staff of the Securities and Exchange Commission (the "COMMISSION"), dated May 9, 2005, with respect to the Company's Form 10-KSB for the year ended December 31, 2004 (the "FORM 10-KSB"). Attached hereto as Exhibit A is a clean version of the proposed Amendment to the Form 10-KSB (the "FORM 10-KSB/A").
Courtesy copies of this letter and clean and marked versions of the proposed Form 10-KSB/A have been sent to the Staff's examiners via courier. The marked copy of the Form 10-KSB/A indicates the changes from the Form 10-KSB as previously filed with the Commission.
For your convenience, we have reprinted the Staff's written comments below prior to the Company's responses.
FORM 10-KSB AS DECEMBER 31, 2004 --------------------------------
Financial Statements --------------------
Note 1: Summary of Significant Accounting Policies ------------------------------------------
Revenue Recognition -------------------
1. We note your response to our prior comment 2 in which you state that you typically require a deposit from the customer upon accepting an order. Please tell us how you account for the deposits and when you recognize the amounts into revenue.
The Company records the deposits it receives from customers as a liability on the balance sheet until we ship the product to the customer. When the invoice is generated for the shipment, the
<PAGE>
deposit amount is applied to total amount of the order shipped, thus reducing the balance due from the customer to reflect the amount that exceeded the deposit that was received.
The receipt of a deposit has no effect on when we recognize revenue. Our revenue recognition policy follows the guidelines presented under SAB 101, SAB 104 and EITF 00-21 as stated previously in our response letter filed on April 29, 2005 to comment 2 of your previous comment letter dated April 12, 2005.
2. In a related matter, you state that in order to assure collectibility you assist customers in obtaining leasing terms when appropriate. Supplementally address the following:
a) Identify the leased item or amount being financed in these arrangements.
We refer our customers to a third party leasing company (preferred provider) to finance their equipment over a period of time if they desire, or to pay us directly under our normal credit terms. If a customer chooses, and the leasing company accepts them, the agreement is between the customer and the third party leasing company. The Company retains no credit risk nor receives any commission in the leasing transactions. The customer typically finances the entire order if they decide to lease.
b) Tell whether you act as lessor in these arrangements and, if so, tell us whether these are capital leases or operating leases pursuant SFAS 13.
We do not act as lessor in these arrangements and as such SFAS 13 does not apply.
c) Discuss how you account for revenues and any leased equipment under these leasing arrangements and explain how your accounting complies with SFAS 13 and related guidance.
The Company's revenue recognition policy is not affected by our customer's decision to either pay us in full directly or to finance their equipment through a third party lessor.
3. Please refer to your response to our prior comment 5 and address the following:
a) We note that the Convertible Term Note agreement dated 4/27/04 and filed as an exhibit with your Form 8-K dated 4/29/04 indicates that the fixed conversion price was designated at $1.22 per share. Please explain how that agreement differs from the term sheet to which you refer in your response and explain why the term sheet supercedes the note agreement.
The term sheet does not differ from the Investment Agreement. The term sheet is the basis of understanding between the two parties in agreeing to the material terms to be included in the Investment Agreement, Registration Rights Agreement and other legal documents that encompass the entire agreement. Among the material items that were defined in the term sheet was the method of determining the conversion price that was to be set in the Investment Agreement between the Company and Laurus. The intent of the two parties was to set the fixed conversion price at a premium of 105% of the estimated fair value of the stock. The estimated
<PAGE>
fair value was to be set based on the average closing price of the three trading days with volume prior to the signing of the Investment Agreement. The 5% premium was then added to the estimated fair value to establish the $1.22 fixed conversion price. The term sheet does not supercede the Investment Agreement but defines the mechanism that was used in computing the conversion price that is included in the Investment Agreement.
b) In addition, clearly explain to us why a beneficial conversion feature did not exist at the date of note issuance although even when the terms of both the term sheet and note agreement resulted in a conversion price of $1.22 per share and that price was less than the $1.50 market value of your common stock on the same day.
The intent of the parties was to set the fixed conversion price at a 5% premium over the estimated fair value of the Company's stock based on the mechanism in the term sheet as described in our response to comment 3(a). The basis for determining the fair value of a stock cannot be established by using one single point in time. The closing price that the Commission suggests actually occurred after the agreement was signed. If one point in time were to be used, it should have been the opening price on the agreement date, the latest price available to determine fair value, which was $1.05 per share. The premium would still have been added to the per share price in establishing the fixed conversion price which then would have been set at $1.10 per share.
The closing price of our stock after the agreement was signed was not indicative of the average trading price of our stock and in management's opinion and according to the agreement between the parties, was not equal to the fair value. The closing price for that day was an anomaly. For the month of April 2004, including and subsequent to the agreement date, the average closing trading price of our stock was $1.18 per share. For the month of May 2004, the average closing price of our stock was $1.10 per share. Additionally, the shares associated with the agreement were not registered and therefore were not freely transferable.
Based on the information provided, the company firmly believes that there was no beneficial conversion feature that existed on the date the agreement was signed.
c) Provide us with a materiality analysis of the impact on your balance sheet and statements of operations of correctly recording the beneficial conversion feature on these notes as of April 27, 2004. We may have further comments.
Based on the information provided in response to comments 3(a) and 3(b) above, the Company believes that the Investment Agreement transaction was recorded properly, thus there is no impact on our balance sheet or statement of operations and therefore an analysis is not applicable.
Item 8, Controls and Procedures - Page 20 -----------------------------------------
4. Please refer to our prior comment 9. Note that the definition of disclosure controls and procedures contains two parts:
<PAGE>
o Controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.
o Controls and procedures are designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosures.
It appears that your proposed statement still refers only to timely alerting management. See Exchange Act Rule 13a-15(e). If true, revise your disclosure to simply state that the disclosure controls and procedures were effective. Otherwise, you should include the full definition of disclosure controls and procedures as provided in the Exchange Act.
The requested changes have been made in the Form 10-KSB/A.
* * * * * *
Thank you for your assistance in this matter. Please feel free to call me at 916-646-2020 if you have any questions about this letter.
Sincerely,
/s/ Ariel Shenhar
Show Raw Text
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<TEXT>
[OIS LETTERHEAD]
Martin James
Senior Assistant Chief Accountant
Division of Corporation Finance
Mail Stop 0306
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: OPHTHALMIC IMAGING SYSTEMS
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2004
SEC FILE NO. 1-11140
Dear Mr. James:
Set forth herein are the responses of Ophthalmic Imaging Systems (the
"COMPANY") to the comments contained in the comment letter of the staff of the
Securities and Exchange Commission (the "COMMISSION"), dated May 9, 2005, with
respect to the Company's Form 10-KSB for the year ended December 31, 2004 (the
"FORM 10-KSB"). Attached hereto as Exhibit A is a clean version of the proposed
Amendment to the Form 10-KSB (the "FORM 10-KSB/A").
Courtesy copies of this letter and clean and marked versions of the
proposed Form 10-KSB/A have been sent to the Staff's examiners via courier. The
marked copy of the Form 10-KSB/A indicates the changes from the Form 10-KSB as
previously filed with the Commission.
For your convenience, we have reprinted the Staff's written comments below
prior to the Company's responses.
FORM 10-KSB AS DECEMBER 31, 2004
--------------------------------
Financial Statements
--------------------
Note 1: Summary of Significant Accounting Policies
------------------------------------------
Revenue Recognition
-------------------
1. We note your response to our prior comment 2 in which you state that you
typically require a deposit from the customer upon accepting an order.
Please tell us how you account for the deposits and when you recognize the
amounts into revenue.
The Company records the deposits it receives from customers as a liability on
the balance sheet until we ship the product to the customer. When the invoice is
generated for the shipment, the
1
<PAGE>
deposit amount is applied to total amount of the order shipped, thus reducing
the balance due from the customer to reflect the amount that exceeded the
deposit that was received.
The receipt of a deposit has no effect on when we recognize revenue. Our revenue
recognition policy follows the guidelines presented under SAB 101, SAB 104 and
EITF 00-21 as stated previously in our response letter filed on April 29, 2005
to comment 2 of your previous comment letter dated April 12, 2005.
2. In a related matter, you state that in order to assure collectibility you
assist customers in obtaining leasing terms when appropriate.
Supplementally address the following:
a) Identify the leased item or amount being financed in these
arrangements.
We refer our customers to a third party leasing company (preferred provider) to
finance their equipment over a period of time if they desire, or to pay us
directly under our normal credit terms. If a customer chooses, and the leasing
company accepts them, the agreement is between the customer and the third party
leasing company. The Company retains no credit risk nor receives any commission
in the leasing transactions. The customer typically finances the entire order if
they decide to lease.
b) Tell whether you act as lessor in these arrangements and, if so, tell
us whether these are capital leases or operating leases pursuant SFAS
13.
We do not act as lessor in these arrangements and as such SFAS 13 does not
apply.
c) Discuss how you account for revenues and any leased equipment under
these leasing arrangements and explain how your accounting complies
with SFAS 13 and related guidance.
The Company's revenue recognition policy is not affected by our customer's
decision to either pay us in full directly or to finance their equipment through
a third party lessor.
3. Please refer to your response to our prior comment 5 and address the
following:
a) We note that the Convertible Term Note agreement dated 4/27/04 and
filed as an exhibit with your Form 8-K dated 4/29/04 indicates that
the fixed conversion price was designated at $1.22 per share. Please
explain how that agreement differs from the term sheet to which you
refer in your response and explain why the term sheet supercedes the
note agreement.
The term sheet does not differ from the Investment Agreement. The term sheet is
the basis of understanding between the two parties in agreeing to the material
terms to be included in the Investment Agreement, Registration Rights Agreement
and other legal documents that encompass the entire agreement. Among the
material items that were defined in the term sheet was the method of determining
the conversion price that was to be set in the Investment Agreement between the
Company and Laurus. The intent of the two parties was to set the fixed
conversion price at a premium of 105% of the estimated fair value of the stock.
The estimated
2
<PAGE>
fair value was to be set based on the average closing price of the three trading
days with volume prior to the signing of the Investment Agreement. The 5%
premium was then added to the estimated fair value to establish the $1.22 fixed
conversion price. The term sheet does not supercede the Investment Agreement but
defines the mechanism that was used in computing the conversion price that is
included in the Investment Agreement.
b) In addition, clearly explain to us why a beneficial conversion feature
did not exist at the date of note issuance although even when the
terms of both the term sheet and note agreement resulted in a
conversion price of $1.22 per share and that price was less than the
$1.50 market value of your common stock on the same day.
The intent of the parties was to set the fixed conversion price at a 5% premium
over the estimated fair value of the Company's stock based on the mechanism in
the term sheet as described in our response to comment 3(a). The basis for
determining the fair value of a stock cannot be established by using one single
point in time. The closing price that the Commission suggests actually occurred
after the agreement was signed. If one point in time were to be used, it should
have been the opening price on the agreement date, the latest price available to
determine fair value, which was $1.05 per share. The premium would still have
been added to the per share price in establishing the fixed conversion price
which then would have been set at $1.10 per share.
The closing price of our stock after the agreement was signed was not indicative
of the average trading price of our stock and in management's opinion and
according to the agreement between the parties, was not equal to the fair value.
The closing price for that day was an anomaly. For the month of April 2004,
including and subsequent to the agreement date, the average closing trading
price of our stock was $1.18 per share. For the month of May 2004, the average
closing price of our stock was $1.10 per share. Additionally, the shares
associated with the agreement were not registered and therefore were not freely
transferable.
Based on the information provided, the company firmly believes that there was no
beneficial conversion feature that existed on the date the agreement was signed.
c) Provide us with a materiality analysis of the impact on your balance
sheet and statements of operations of correctly recording the
beneficial conversion feature on these notes as of April 27, 2004. We
may have further comments.
Based on the information provided in response to comments 3(a) and 3(b) above,
the Company believes that the Investment Agreement transaction was recorded
properly, thus there is no impact on our balance sheet or statement of
operations and therefore an analysis is not applicable.
Item 8, Controls and Procedures - Page 20
-----------------------------------------
4. Please refer to our prior comment 9. Note that the definition of disclosure
controls and procedures contains two parts:
3
<PAGE>
o Controls and other procedures of an issuer that are designed to ensure
that information required to be disclosed by the issuer in the reports
that it files or submits under the Act is recorded, processed,
summarized and reported, within the time periods specified in the
Commission's rules and forms.
o Controls and procedures are designed to ensure that information
required to be disclosed by an issuer in the reports that it files or
submits under the Act is accumulated and communicated to the issuer's
management, including its principal executive and principal financial
officers, or person performing similar functions, as appropriate to
allow timely decisions regarding required disclosures.
It appears that your proposed statement still refers only to timely
alerting management. See Exchange Act Rule 13a-15(e). If true, revise your
disclosure to simply state that the disclosure controls and procedures were
effective. Otherwise, you should include the full definition of disclosure
controls and procedures as provided in the Exchange Act.
The requested changes have been made in the Form 10-KSB/A.
* * * * * *
Thank you for your assistance in this matter. Please feel free to call me
at 916-646-2020 if you have any questions about this letter.
Sincerely,
/s/ Ariel Shenhar
Ariel Shenhar, Chief Financial Officer
cc: Heather C. Tress
U.S. Securities and Exchange Commission
Henry I. Rothman, Esq.
Troutman Sanders LLP
4
<PAGE>
EXHIBIT A
---------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _____________
Commission File No. 1-11140
OPHTHALMIC IMAGING SYSTEMS
(Exact name of Registrant as specified in its charter)
California 94-3035367
---------- ----------
(State or other jurisdiction (I.R.S. Employer of incorporation or
organization) Identification No.)
221 Lathrop Way, Suite I, Sacramento, CA 95815
---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (916) 646-2020
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par
value
Check whether the issuer: (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 /X/ No /
/.
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B 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. Yes / / No /X/.
The issuer's revenues for its most recent fiscal year were $10,818,379
The aggregate market value of the voting and non-voting common stock of
the issuer held by non-affiliates as of February 18, 2005 was approximately
$4,136,898 based upon the average bid and ask price of the common stock as
quoted by Nasdaq OTC Bulletin Board on such date. As of February18, 2005, there
were 15,033,585 issued and outstanding shares of issuer's common stock.
Traditional Small Business Disclosure Format (check one):
Yes /X/ No / /
<PAGE>
EXPLANATORY NOTE
Ophthalmic Imaging Systems (the "Company") is filing this Amendment No.
1 on Form 10-KSB/A to amend its Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2004, as filed with the Securities and Exchange Commission on
March 18, 2005 (the "Original Filing"). The purpose of this Amendment No. 1 is
to make certain amendments to Item 8A and to exhibits 31.1 and 31.2. This
Amendment No. 1 does not otherwise update information in the Original Filing to
reflect facts or events occurring subsequent to the date of the Original Filing.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) Business Development
Ophthalmic Imaging Systems (the "Company" or "OIS") was incorporated
under the laws of the State of California on July 14, 1986. The Company,
headquartered in Sacramento, California, is engaged in the business of
designing, developing, manufacturing and marketing digital imaging systems,
image enhancement and analysis software and informatics solutions for use by
practitioners in the ocular health field. The Company's products are used for a
variety of standard diagnostic test procedures performed in most eye care
practices.
Since its inception, the Company has developed products that have
addressed primarily the needs of the ophthalmic angiography markets, both
fluorescein and indocyanine green. The current flagship products in the
Company's angiography line are its WinStation digital imaging systems. These
WinStation products are targeted primarily at retinal specialists and general
ophthalmologists in the diagnosis and treatment of retinal diseases and other
ocular pathologies.
The Company believes, however, that as the U.S. healthcare system moves
toward managed care, the needs of managed care providers are changing the nature
of demand for medical imaging equipment and services. New opportunities in
telemedicine (i.e., the electronic delivery and provision of health care and
consultative services to patients through integrated health information systems
and telecommunications technologies), combined with lower cost imaging devices
and systems, are emerging to allow physicians and managed care organizations to
deliver a high quality of patient care while reducing costs. OIS is applying its
technology in the ophthalmic imaging field to the development of new ocular
imaging devices and exploring 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 complimentar