As filed with the Securities and Exchange Commission on October 2, 2003
Commission File No. 333-106842
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PARADIGM MEDICAL INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 3841 87-0459536
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number)Identification Number)
2355 South 1070 West
Salt Lake City, Utah 84119
(801) 977-8970
(Address and telephone number of registrant's principal executive offices
and principal place of business)
Jeffrey F. Poore, President and Chief Executive Officer,
2355 South 1070 West
Salt Lake City, Utah 84119
(801) 977-8970
(Name, address and telephone number of agent for service)
----------------------
Copies to:
Randall A. Mackey, Esq.
Mackey Price & Thompson
350 American Plaza II
57 West 200 South
Salt Lake City, Utah 84101-3663
Telephone: (801) 575-5000
Approximate date of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 (the "Securities Act"), check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
=========================================================== ============ ================ ================ ==============
Title of each Proposed Proposed
class of Amount maximum maximum Amount of
securities to be to be offering price aggregate registration
registered registered per Share(1) offering price fee(1)
----------------------------------------------------------- ------------ ---------------- ---------------- --------------
----------------------------------------------------------- ------------ ---------------- ---------------- --------------
Common Stock, $.001 par value per share .............. 8,000,000 $.23 $1,840,000 $169.28
Resale of Common Stock issuable upon conversion of 41.93
Series G Preferred Stock.......................... 1,981,560 .23 435,759 26.02
Resale of Common Stock by certain holders of Common Stock 1,229,792 .23 282,852
Resale of Common Stock issuable upon exercise of 35.25
Series G Preferred Warrants........................ 510,869 .75 383,152
Resale of Common Stock issuable upon exercise of 17.59
Warrants........................................... 382,353 .50 191,177
Resale of Common Stock issuable upon exercise of 2.94
Warrants........................................... 200,000 .16 32,000 $293.01
Total Registration Fee...........................
=========================================================== ============ ================ ================ ==============
(1) Pursuant to Rule 457(c), the proposed maximum offering price and
registration fee have been calculated on the basis of the last reported
sale price of the common stock on the OTC Bulletin Board on September 30,
2003.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PROSPECTUS
SUBJECT TO COMPLETION DATED OCTOBER ___, 2003
12,304,574 Shares of Common Stock
PARADIGM MEDICAL INDUSTRIES, INC.
Paradigm Medical Industries, Inc. is offering 8,000,000 shares of common
stock on a "best efforts" basis directly through its officers and directors, who
will not receive any commissions or other remunerations for selling the shares.
We may also offer the shares through brokers or sales agents, who may receive
compensation in form of commissions, which total commissions will not exceed 10%
of the selling price of the shares.
We have not established any minimum amount of proceeds that must be
received in the offering before any proceeds may be accepted. Once accepted,
funds will be deposited into an account maintained by us and considered our
general assets. Funds will not be placed into escrow, trust or any other similar
arrangement.
The offering will commence promptly after the effectiveness of the
registration statement of which this prospectus is a part, and will made on a
continuous basis for a period of 90 days, unless extended by us in our
discretion, for up to an additional 90 days. The offering may be terminated by
us earlier if we sell all the shares being offered or we decide to cease selling
efforts.
Our common stock and Class A warrants are quoted on the over-the-counter
Bulletin Board under the symbols "PMED.OB" and "PMEDW.OB." On September 30,
2003, the last reported sale price of our common stock on the OTC Bulletin Board
was $.23 per share and the last sale price of our Class A Warrants was $.05 per
warrant.
We are also registering for resale a total of 4,304,574 shares of our
common stock. We are registering the resale of common stock for certain
securityholders and will only receive proceeds to the extent that outstanding
warrants are exercised. All other shares of our common stock being registered
are either outstanding or will be issued upon conversion of outstanding
preferred stock, and we will derive no proceeds from the conversion or
subsequent resale of such shares.
-------------------------
Investing in our common stock involves a high decree of risk. See "Risk Factors"
beginning on page 3 of this prospectus.
Per share Total
Public offering price........................................................ $ .23 $1,840,000
Commissions(1)............................................................... $ .023 $ 184,000
Proceeds, before expenses, to us............................................. $ .207 $1,656,000
-------------------------------------------------------------------------------- ------------ --------------
(1) Assumes total commission to be paid equal to 10% of the selling
price of the shares.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities or determined
if this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
The date of this prospectus is October ___, 2003.
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It may not
contain all of the information that is important to you. To understand this
offering fully, you should read the entire prospectus carefully, including the
risk factors and the financial statements.
The Company
We develop, manufacture, source, market and sell ophthalmic surgical and
diagnostic instrumentation and related accessories, including disposable
products. Our surgical equipment is designed for minimally invasive cataract
treatment. A cataract is a condition, which largely affects the elderly
population, in which the natural lens of the eye hardens and becomes cloudy,
thereby reducing visual acuity. Treatment consists of removal of the cloudy lens
and replacement with a synthetic lens implant, which restores visual acuity.
Cataract surgery is the single largest volume and revenue producing outpatient
surgical procedure for ophthalmologists worldwide. The Health Care Finance
Administration reports that in the United States approximately two million
cataract removal procedures are performed annually, making this the largest
outpatient procedure reimbursed by Medicare. Most cataract procedures are
performed using a method called phacoemulsification or "phaco", which employs a
high frequency (40 kHz to 60 kHz) ultrasonic probe needle device to fragment the
cataract while still in the eye and remove it in pieces by suction through a
small incision.
We sell our equipment and related products in all countries of the world
in which we are permitted to do so. The nature of the regulatory approval
processes in those countries vary by country but, in general terms, follow the
approach of the regulatory approval processes of the United States Food and Drug
Administration, or FDA, and the approval processes of the countries in the
European Union. The status of specific approvals is detailed in the table in the
Business section of this prospectus.
We market three cataract surgery systems with related accessories and
disposable products. Our cataract removal system, the Photon(TM) laser system,
is a laser cataract surgery system marketed as the next generation of cataract
removal. The Photon(TM) product has yet to be approved by the Food and Drug
Administration. The Photon(TM) is available for sale in many markets outside of
the United States. Both the Photon(TM) and the Precisionist ThirtyThousand (TM)
are manufactured as an Ocular Surgery Workstation(TM). We also offer the
SIStem(TM), a mid-range priced ultrasonic phaco that competes in the market
segment that only desires an ultrasonic phaco. At present the Photon(TM) and
other surgical products do not provide significant revenue to us because we have
de-emphasized this part of our product line and are undecided as to our future
plans for surgical equipment sales.
Our diagnostic products include a pachymeter, an A/B Scan, an UBM
biomicroscope, a perimeter, a corneal topographer and the Blood flow Analyzer
(TM). The diagnostic ultrasonic products, including the pachymeter, the A/B Scan
and the UBM biomicroscope were acquired from Humphrey Systems, a division of
Carl Zeiss, Inc. in 1998. We developed and offered for sale in the fall of 2000
the P45 which combines the A/B scope and the UBM biomicroscope in one machine.
The perimeter and the corneal topographer were added when we acquired the
outstanding shares of the stock of Vismed, Inc. d/b/a/ Dicon(TM) in June 2000.
We acquired Ocular Blood Flow, Ltd. in June of 2000, whose principal product is
the Blood Flow Analyzer(TM). This product is designed for the measurement of
intraocular pressure and pulsatile ocular blood flow volume for detection and
treatment of glaucoma. We are currently attempting to develop additional
applications for all of our diagnostic products.
We rely upon several products for revenues. For the six months ended June
30, 2003, 37% of our revenues were derived from the Dicon (TM) diagnostic
products sales (the perimeter and corneal topographer), 18% of revenues from
Blood Flow Analyzer(TM) sales, 15% of revenues from UBM biomicroscope sales, 9%
of revenues from Humphrey Systems diagnostic product sales (the pachymeter and
the A/B Scan), 4% of revenues from cataract removal surgery sales, and 17% of
revenues from services, disposables and other sales. For the fiscal year ended
December 31, 2002, 28% of our revenues were derived from the Dicon(TM)
diagnostic products sales (the perimeter and the corneal topographer), 9% of
revenues from Blood Flow Analyzer(TM) sales, 24% of revenues from UBM
biomicroscope sales, 11% of revenues from Humphrey systems diagnostic products
sales (the pachymeter and the A/B Scan), 5% of revenues from cataract removal
surgery sales, and 23% of revenues from services, disposables and other sales.
For the fiscal year ended December 31, 2001, 25% of our revenues were derived
from the Dicon(TM) diagnostic products sales (the perimeter and the corneal
topographer), 25% of revenues from Blood Flow Analyzer(TM) sales, 23% of
revenues from UBM biomicroscope sales, 7% of revenues from Humphrey Systems
diagnostic products sales (the pachymeter, the A-Scan and the A/B Scan), 8% of
revenues from cataract removal surgery sales, and 12% of revenues from services,
disposables and other sales. Our principal executive offices are located at 2355
South 1070 West, Salt Lake city, Utah 84119 and our telephone number is (801)
977-8970.
2
Unaudited revenues for the six months ended June 30, 2003, were $1,372,000
as compared to $2,816,000 for the comparable period for 2002, and audited
revenues for the fiscal year ended December 31, 2002, were $5,368,000 as
compared to $7,919,000 for the comparable period for fiscal 2001.
On March 23, 2003, our board of directors appointed Dr. Jeffrey F. Poore
as President and Chief Executive Officer of the company, replacing Thomas F.
Motter, who resigned as Chairman of the Board and Chief Executive Officer on
August 30, 2002. On June 23, 2003, our board of directors appointed Gregory Hill
as Vice President of Finance, Treasurer and Chief Financial Officer of the
company, replacing Heber C. Maughan, who resigned as Vice President of Finance,
Treasurer and Chief Financial Officer.
The Offering
Common stock we are offering ..... 8,000,000 shares
Other common shares registered
for resale........................ 4,304,574 shares consisting of the following:
o The resale of 1,981,561 shares
issuable upon conversion of
Series G preferred stock with a
conversion price of one share of
common stock for each share of
Series E preferred stock.
o The resale of 1,229,792 shares.
o The resale of 382,353 shares
issuable upon the exercise of
warrants by Series G preferred
holders with an exercise price
of $.50 per share.
o The resale of 510,869 shares
issuable upon the exercise of
warrants with an exercise price
of $.75 per share.
o The resale of 200,000 shares
issuable upon the exercise of
warrants with an exercise price
of $.16 per share.
Common stock outstanding prior to
this offering (1)................. 25,128,536 shares
Common stock to be outstanding after
this offering (1)................. 37,433,110 shares.
Use of proceeds................... The net proceeds of this offering will be used for sales and marketing, research and
development, acquisition of capital equipment, payment of outstanding obligations,
and working capital.
Risk factors...................... This offering involves a high degree of risk.
OTC Bulletin Board symbols
Common stock............. PMED.OB
Class A warrants......... PMEDW.OB
---------------------------
(1) Does not include 6,753 shares of common stock issuable upon conversion of
5,627 shares of Series A preferred stock, 10,783 shares of common stock
issuable upon conversion of 8,986 shares of Series B preferred stock,
80,000 shares of common stock issuable upon the conversion of 1,500 shares
of Series E preferred stock, 299,933 shares of common stock issuable upon
conversion of 5,602.75 shares of Series F preferred stock, 1,764,706 shares
of stock issuable upon conversion of 1,764,706 shares of Series G preferred
stock, options to purchase a total of 3,781,262 shares of common stock
issuable upon the exercise of stock options at prices ranging from $.16 to
$6.00 per share, and warrants to purchase 4,314,846 shares of common stock
issuable upon the exercise of warrants at prices ranging from $.16 to
$8.125 per share.
3
Summary Financial Information
------------------------------------------- --------------------------- ----------------------------
For the year ended For six months ended
December 31, June 30,
2002 2003
---- ----
Statement of Operations Data: 2001 2002 (Unaudited) (Unaudited)
----------------------------- ---- ----
Net Sales................................. $7,919,000 $5,368,000 $2,816,000 $1,372,000
Net cost of sales......................... 4,370,000 4,210,000 1,622,000 881,000
Operating expenses........................ 12,834,000 12,277,000 5,124,000 2,821,000
Operating loss............................ (9,285,000) (11,119,000) (3,930,000) (2,330,000)
Other income (expense).................... (858,000) (36,000) (14,000) (10,000)
Net loss ................................. (10,143,000) (11,155,000) (3,944,000) (2,340,000)
Net loss per common share................. $(.98) $(.63) $(.24) $(.10)
Shares used in computing net loss per share 13,245,000 17,736,000 16,221,000 22,985,000
---------------------------------------------- ------------ -------------- ------------- --------------
---------------------------------------------- ------------ -------------- ------------- --------------
Balance Sheet Data: December 31, 2002 June 30, 2003
------------------ ----------------- -------------
Current assets..................................... $3,868,000 $3,126,000
Current liabilities................................ 2,362,000 2,949,000
Working capital ................................... 1,506,000 177,000
Total assets....................................... 5,289,000 4,175,000
Accumulated deficit................................ (53,656,000) (55,998,000)
Stockholder's equity .............................. 2,847,000 1,146,000
RISK FACTORS
Before you invest in our common stock, you should be aware of the risks
described below which constitute all material risks to potential investors. You
should consider carefully these risk factors together with all of the other
information included in this prospectus before you decide to invest in our
common stock. If any of the following risks actually occurs, our business,
financial condition and results of operations could suffer, in which case the
trading price of our common stock could decline. No investment should be made by
any person who is not in a position to lose the entire amount of his investment.
Special Note Regarding Forward-Looking Statements
Some of the information in this prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. These statements discuss future expectations,
contain projections of results of operations or of financial condition or state
other "forward-looking" information. When considering such forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this Prospectus. The risk factors noted in this section and other
factors noted throughout this prospectus, including certain risks and
uncertainties, could cause our actual results to differ materially from those
contained in any forward-looking statement.
Our auditors have expressed substantial doubt about our ability to continue as a
going concern.
Due to our significant recurring losses and our inability to generate
sufficient cash flows from operations to satisfy our liabilities and sustain
operations, our auditors have expressed substantial doubt about our ability to
continue as a going concern. Although we have had success in raising working
capital from the sale of our common stock in the past, the going concern
language in our auditors' report could negatively affect our ability to raise
such funds in the future. Some investors are unwilling to invest with companies
that have going concern language in the auditors' report and others demand
substantial discounts from the market price. Unless we are able to raise
additional working capital through the sale of our common stock, we will not be
able to continue the development of our products nor will we be able to pay our
existing current liabilities, which could result in protection under bankruptcy
laws. There can be no assurance that we will be successful in raising working
capital from the sale of our common stock.
4
We have limited working capital, have accumulated significant losses, and expect
our losses to continue.
As of December 31, 2002, we had limited working capital of $1,506,000. As
of June 30, 2003, our working capital was $177,000. Our accumulated deficit was
$42,501,000 as of December 31, 2001, $53,656,000 as of December 31, 2002, and
$55,998,000 as of June 30,2003. Our net loss was $10,143,000 for the fiscal year
ended December 31, 2001, $11,155,000 for the fiscal year ended December 31,
2002, and $2,340,000 for the six months ended June 30, 2003. Such losses have
resulted principally from costs incurred in connection with research and
development, including clinical trials, of the laser surgery system. Medical
products were not sold by us until late 1992. Our ability to become profitable
largely depends on successfully developing clinical applications and obtain
regulatory approvals for our laser surgery products, including the Photon(TM)
laser system, and to effectively market such products. The problems and expenses
frequently encountered in developing new products and the competitive industry
in which we operate will impact whether we are successful. We may never achieve
profitability. Furthermore, we may encounter substantial delays and unexpected
expenses related to research, development, production, marketing, regulatory
matters or other unforeseen difficulties.
Because our securities trade on the OTC Bulletin Board, your ability to sell
your shares in the secondary market may be limited.
As of June 26, 2003, our shares trade on the OTC Bulletin Board. As a
result, it may be more difficult for an investor to dispose of our securities,
or to obtain accurate quotations on their market value. Furthermore, the prices
for our securities may be lower than might otherwise be obtained. On October 8,
2002, we received a notice from Nasdaq's Listing Qualifications staff that for
the previous 30 consecutive trading days, the price of our common stock closed
below the minimum $1.00 per share requirement for continued inclusion on Nasdaq.
The notice further provided that if at anytime before April 7, 2003, the bid
price of our common stock closed at $1.00 or more for a minimum of 10
consecutive trading days, we would be notified by the staff that we comply with
such rule.
On April 15, 2003, we received notice of a determination by Nasdaq's
Listing Qualifications staff that we failed to comply with the minimum bid price
rules for continued listing set forth in Nasdaq's rules. Specifically, the
notice stated that we have not regained compliance with the minimum $1.00
closing bid price per share requirement (noting that pursuant to the October 8,
2002, notice from the Nasdaq Listing Qualifications staff, we were provided 180
calendar days, or until April 7, 2003, to regain compliance with this
requirement) and we do not qualify with the $5,000,000 shareholders equity,
$50,000,000 market value of listed securities or $750,000 net income from
continuing operations requirement for an additional 180 calendar day compliance
period to comply with Nasdaq's rules. The April 15, 2003, notice further stated
that as of December 31, 2002, we reported stockholders' equity of $2,847,000 and
net losses from continuing operations of approximately $11,155,000, and as of
April 14, 2003, the market value of our listed securities was $4,208,108.
Accordingly, our common stock would be delisted from the Nasdaq SmallCap Market
at the opening of business on April 24, 2003. Separately, Nasdaq informed us
that listing fees of $22,500 and $18,000 under Rule 4310(c)(13) are owed to the
Nasdaq SmallCap Market.
We requested an oral hearing before a Nasdaq Listing Qualifications Panel
to review the staff's determination. The request automatically stayed the
delisting of our common stock. On April 23, 2003, we received formal notice from
Nasdaq that a hearing to consider our appeal would be held on May 29, 2003. On
May 29, 2003, Dr. Jeffrey F. Poore, our President and Chief Executive Officer;
Randall A. Mackey, our Chairman of the Board; and Dr. David M. Silver, a
director of the company, attended an oral hearing before a Nasdaq Listing
Qualifications Panel in Washington, D.C. At the hearing Dr. Poore presented to
the panel a definitive plan both for regaining compliance with the particular
deficiencies cited in the April 15, 2003, letter from the Nasdaq Listing
Qualifications staff and sustaining long term compliance with the Nasdaq
Marketplace Rules, including all applicable maintenance criteria. On June 24,
2003 we received notification from the Nasdaq Listing Qualifications Panel that
we were to be delisted from the Nasdaq Stock Market effective June 26, 2003. Our
securities trade on the OTC Bulletin Board effective June 26, 2003. Because our
securities are delisted from the Nasdaq SmallCap Market and now trade on the OTC
Bulletin Board, additional sales requirements on broker-dealers will adversely
effect the ability of purchasers to sell our securities and the trading price of
our securities could decline.
Moreover, because our securities currently trade on the OTC Bulletin Board,
they are subject to the rules promulgated under the Securities Exchange Act of
1934, as amended, which impose additional sales practice requirements on
broker-dealers that sell securities governed by these rules to persons other
than established customers and "accredited investors" (generally, individuals
with a net worth in excess of $1,000,000 or annual individual income exceeding
$200,000 or $300,000 jointly with their spouses). For such transactions, the
broker-dealer must determine whether persons that are not established customers
or accredited investors qualify under the rule for purchasing such securities
and must receive that person's written consent to the transaction prior to sale.
Consequently, these rules may adversely effect the ability of purchasers to sell
our securities and otherwise affect the trading market in our securities.
5
Because our shares may be deemed "penny stocks," you may have difficulty selling
them in the secondary trading market.
The Commission has adopted regulations which generally define a "penny
stock" to be any non-Nasdaq equity security that has a market price (as therein
defined) less than $5.00 per share or with an exercise price of less than $5.00
per share, subject to certain exceptions. For any transactions by broker-dealers
involving a penny stock (unless exempt), rules promulgated under the Securities
Exchange Act of 1934 require delivery, prior to a transaction in a penny stock,
of a risk disclosure document relating to the penny stock market. Disclosure is
also required to be made about compensation payable to both the broker-dealer
and the registered representative and current quotations for the securities.
Furthermore, monthly statements are required to be sent disclosing recent price
information for the penny stocks.
We are offering our shares on a best efforts basis and there is no guarantee
that we will sell the maximum shares offered.
No underwriter has been retained to purchase the shares offered in
connection with this prospectus. There can be no assurance that all of the
shares offered will be sold and that we will receive all of the estimated net
proceeds generated from such a sale of all of the common stock. If all of the
8,000,000 shares we are offering are not sold, we may be unable to fund all of
the intended uses for the net proceeds anticipated from this offering without
obtaining funds from alternative sources. Alternative sources of funds may not
be available to us at a reasonable cost.
If the litigants in the class action lawsuits succeed on any of their claims, it
could adversely effect our financial condition and operations.
On May 14, 2003, a complaint was filed in the United States District Court,
District of Utah, captioned Richard Meyer, individually and on behalf of all
others similarly suited v. Paradigm Medical Industries, Inc., Thomas Motter,
Mark Miehle and John Hemmer, Case No. 2:03 CV00448TC. The complaint also
indicates that it is a "Class Action Complaint for Violations of Federal
Securities Law and Plaintiffs Demand a Trial by Jury." The Company has been in
the process of reviewing the complaint, which appears to be focused on alleged
false and misleading statements pertaining to the Blood Flow Analyzer(TM) and
concerning a purchase order from Valdespino Associates Enterprises and Westland
Corp.
More specifically, the complaint alleges that we falsely stated in our
Securities and Exchange Commission filings and press releases that we had
received authorization to use an insurance reimbursement CPT code from the CPT
Code Research and Development Division of the American Medical Association in
connection with the Blood Flow Analyzer(TM), adding that the CPT code provides
for a reimbursement to doctors of $57.00 per patient for use of the Blood Flow
Analyzer(TM). The complaint also alleges that on July 11, 2002, we issued a
press release falsely announcing that we had received a purchase order from
Valdespino Associates Enterprises and Westland Corp. for 200 sets of our entire
portfolio of products, with $70 million in systems to be delivered over a two-
year period, then another $34 million of orders to be completed in the third
year.
On June 2, 2003, a complaint was filed in the same United States District
Court captioned Michael Marrone v. Paradigm Medical Industries, Inc., Thomas
Motter, Mark Miehle and John Hemmer, Case No. 2:03 CV00513 PGC. On or about June
11, 2003, a complaint was filed in the same United States District Court
captioned Milian v. Paradigm Medical Industries, Inc., Thomas Motter, Mark
Miehle and John Hemmer, Case No. 2:03 CV00617PGC. Both seek class action status.
Those cases are similar in nature to the Meyer case and are also under review.
It is likely all of these cases will be consolidated into a single action. The
Company intends to vigorously defend and protect its interests in the said
cases.
If we are unable to obtain additional capital, we would be required to eliminate
certain activities that would adversely effect our operations.
We may require substantial funds for various purposes, including continuing
research and development, expanding clinical trials, completing the FDA approval
process for our products (including the Photon(TM) laser system), and
manufacturing and marketing our existing products. We will need to seek
additional capital, possibly through public or private sales of our securities,
in order to fund our activities on a long-term basis. Adequate funds may not be
available when needed or on terms acceptable to us. Insufficient funds may
require us to delay, scale back or eliminate certain or all of our research and
development programs or to license third parties to commercialize products or
technologies that we would otherwise seek to develop ourself, which may
materially adversely affect our continued operations.
6
The recent loss of members of senior management could adversely affect our
operations.
Our success largely depends on a number of key employees. The loss of one
or more of these employees could have a material adverse effect on us, including
the development and sale of eye surgery systems. On August 30, 2002, Thomas F.
Motter resigned as our Chairman of the Board and Chief Executive Officer, and
Mark R. Miehle was terminated as our President and Chief Operating Officer. The
reason for these management changes was that the board of directors determined
that a change in the leadership and direction of our company was necessary due
to management's inability to meet certain goals including those relating to
sales and cost control. On June 3, 2003, Heber C. Maughan resigned as our Vice
President of Finance, Treasurer and Chief Financial Officer to pursue other
business opportunities. The recent loss of these members of senior management
could have a significant adverse effect on us and our operations and prospects.
We had no key man insurance on either Mr. Motter, Mr. Miehle or Mr. Maughan.
Our research activities may not result in any commercially profitable products.
The science and technology of medical products, including lasers, is
rapidly evolving. Our medical systems may require significant further research,
development, testing and regulatory clearances. They are also subject to the
risks of failure inherent in the development of products based on innovative
technologies. These risks include the possibility that any or all of the
proposed products will prove to be ineffective or unsafe; that they fail to
receive necessary regulatory clearances; that the proposed products are
uneconomical; that others hold proprietary rights which preclude us from
marketing such products; or that others market better products. Accordingly, we
are unable to predict whether our research and development activities will
result in any commercially profitable products. Further, due to the extended
testing and regulatory review process required, we may be unable to sell our
current and proposed products. There is also no guarantee that we will be able
to develop and sell a glaucoma surgery system.
We are uncertain of obtaining FDA approval for our Photon(TM) laser system and
further development of the Photon(TM) is on hold until our financial situation
improves.
We are subject to substantial regulation by the Food and Drug
Administration or FDA and other federal and state regulatory agencies. FDA
regulations require us to obtain either 510(k) clearance or pre-marketing
approval prior to marketing a product in the United States. We are also subject
to foreign regulation and must receive various types of approvals from foreign
government agencies prior to selling our products in some countries. The
clearance and approval processes for both the FDA and foreign regulatory
authorities are costly, time consuming and uncertain. In addition, we are
required to obtain FDA approval before exporting a device which has not received
FDA marketing clearance or approval. We may never be able to obtain these
required government approvals. Delays or failure to obtain such approvals would
materially and adversely effect us, as would changes in existing requirements.
We have received 510(k) clearance from the FDA for our ultrasonic surgery
systems allowing us to sell both devices in the United States. We have also
received 510(k) clearance to market our Blood Flow Analyzer(TM).
In May 1995, we were granted an investigational device exemption for our
Photon(TM) laser system allowing us to conduct clinical studies in support of
our application with the FDA to obtain approval to market the system. During the
clinical trials, we discovered that the Photon(TM) laser system may not
effectively remove hard (dense or impacted) cataracts. In May, 1998, we received
FDA clearance to conduct clinical tests on soft cataracts. We believe the FDA
will approve our 510(k) predicate device application for the Photon(TM) laser
system because in the United States most cataracts are removed before tissue
hardens. We received an FDA warning letter in August 2000 concerning
deficiencies in the Phase I clinical trials and, after making several
submissions to the FDA, we received a letter from the FDA in February 2001
stating that the deficiencies had been corrected and the clinical trials could
continue.
We have completed the authorized clinical studies and, in October 2001,
made a supplemental submission to the FDA regarding the 510(k) application. We
received a preliminary review from the FDA of our supplemental submission in
December 2001 and submitted additional clinical information to the FDA on
February 6, 2002. On May 7, 2002, we received a letter from the FDA requesting
further clinical information. We have generated additional clinical information
in response to the letter and are uncertain if we will make a submission to the
FDA with the additional clinical information. Because of the "going concern"
status of the company, management has focused efforts on those products and
activities that will, in its opinion, achieve the most resource efficient
short-term cash flow to the company. As reflected in the results for the quarter
ended June 30, 2003, diagnostic products are currently our major focus and the
Photon(TM) and other extensive research and development projects have been put
on hold pending future evaluation when our financial position improves.
We have also received FDA approval to manufacture and export the
Photon(TM) laser system internationally. However, we have not yet obtained
approval from some foreign countries to market the laser product where approval
is necessary. We anticipate that many contemplated applications of our currently
existing and planned products will be subject to the lengthy regulatory approval
process, including preclinical studies, clinical trials and extensive regulatory
review. This process could take many years and require the expenditure of
substantial resources.
7
Our executives lack operating experience.
Our executives rely on their experience and skill from their professional
occupations. None of our executives has direct experience in managing a company
that utilizes research and product development activities and technology to such
a high degree.
Purchasers of our common shares could experience dilution from our tendering
puts under a private equity line of credit agreement with Triton West.
On June 30, 2000, we entered into a private equity line of credit agreement
with Triton West Group, Inc., in which Triton agreed to provide an amount up to
$20,000,000 to us in order to purchase put common shares pursuant to the terms
and conditions of the agreement. Under the agreement, we may elect for a period
of three years from the effective date of December 8, 2000 (the date on which
the Securities and Exchange Commission declared effective a registration
statement registering shares to be purchased by Triton on put transactions with
us) to exercise our right to tender a put notice to Triton. The put notice
requires Triton to purchase shares of our common stock at 88% of the market
price on the trading day immediately following the valuation period, which is a
period of five trading days beginning two days before the trading day on which
the put notice is deemed to be delivered and two trading days after such date.
Under certain conditions, the purchase price will be reduced to 85% of the
market price of our common stock. The agreement provides certain restrictions on
the tendering of puts. The maximum amount of each put (which may vary from
$750,000 to $2,000,000) is to be determined according to a schedule based on the
trading price of our common stock at the time and the average 30 day volume of
such shares. There must be a minimum of 15 business days between puts. Moreover,
a registration statement must be effective registering the shares of common
stock covered by the put. There may be significant dilution associated with
tendering put notices under the agreement. Because a registration statement is
not effective registering the shares issuable under the equity line of credit,
our equity line of credit is currently not available as a source of equity.
Our products may become obsolete due to rapid technological change.
Our market is subject to rapid technological change. Development by others
of new or improved products, processes or technologies may make our products
obsolete or less competitive. Accordingly, we must continue investing in
research and development on our existing products and to develop new products.
Despite such investment, our current or proposed products may be unsuccessful.
Our Photon(TM) laser system could receive competition from other laser systems
that are well financed with well recognized trade names.
Our Photon(TM) laser system will potentially receive competition from other
laser systems, such as excimer, holmium (Ho:YAG), Erbium (Er:YAG), Nd:YLF
(Neodymium:Yttium-Lithium-Fluoride) or lasers of other wave lengths. Competition
may also come from other medical devices and other surgical techniques. Further,
the cataract surgical device industry is dominated by a small number of large
competitors that are well established in the marketplace, have experienced
management, are well financed and have a well recognized trade name related to
their product lines. We may be unable to penetrate the existing market and
acquire a sufficient market share to be profitable. Significant competitive
factors which will affect future sales include regulatory approvals,
performance, pricing, timely product shipment, safety, customer support,
convenience of use and patient and general market acceptance.
Our new products may incur unexpected production problems, which would impact
our sales and profits.
New ventures, particularly those involved in a highly technical industry
such as the medical industry, have substantial inherent risks. These risks are
in three general areas: technical, mechanical and human. Notwithstanding any
pre-production planning, new products can incur unexpected problems in full
scale production, which cannot always be foreseen or accurately predicted.
Designs can become unworkable, for unpredicted reasons. Quality control and
component sourcing failures can also be expected from time to time. Any
business, including ours, is substantially dependent upon the capabilities and
performance of both management and sales personnel. Mistakes in judgment or
performance can be costly and, in certain instances, disabling. Therefore,
management skill, experience, character and reliability are of significant
importance.
8
Mistakes may occur in the design and manufacture of our products, which could
prevent or limit the sales of our products.
The high-technology product line requires us to deal with suppliers and
subcontractors supplying highly specialized parts, operating highly
sophisticated and narrow tolerance equipment and performing highly technical
calculations. Components must be custom designed and manufactured, which is not
only complicated and expensive, but can also require a number of months to
accomplish. Slight mistakes in either the design or manufacture can result in
unsatisfactory parts that may not be correctable. Because our business requires
the talents of various professions, mistakes from very slight oversights or
miscommunications can occur, resulting not only in costly delays and lost
orders, but also in disagreements regarding liability and, in any event,
extended delays in production. Moreover, we rely on suppliers that are related
to each other for parts and equipment. When dealing with related suppliers the
terms on which parts and equipment are purchased may not be as favorable as
could be obtained from unrelated third-party suppliers.
No independent marketing studies have been made to confirm the commercial demand
for the Photon(TM) laser system and the Blood Flow Analyzer(TM).
We believe that there is substantial commercial demand for our Photon(TM)
laser system and our Blood Flow Analyzer(TM) for the eyes at a profitable price.
However, this belief is solely based on our management's experience and
judgment. At this time, there have been no independent marketing studies by
independent professional marketing firms to reliably confirm the extent of this
demand, the price ranges within which it exists and the amount of promotion
necessary to exploit whatever demand does exist.
Our Photon(TM) laser system may not be accepted in the marketplace because it
does not remove hard cataracts.
Our products may not be accepted in the marketplace. Such acceptance will
depend on a number of factors including receiving regulatory approvals,
demonstrating the safety, and advantages of our products over existing systems
and techniques. Our Photon(TM) laser system may never gain market acceptance
since the system does not effectively remove hard (dense or impacted) cataracts.
Further, we may be unable to successfully market our products even if they
perform successfully in clinical applications. Our Precisionist
ThirtyThousand(TM) Workstation(TM) may not gain acceptance unless we can reduce
or eliminate the vacuum surge and develop additional, complementary surgical
devices for installation in that host system. Vacuum surge is a phenomenon that
occurs when the tip of the ultrasonic needle is obstructed by target tissue,
allowing pressure to build up and, if the pressure is not released, a rush of
fluid goes from the chamber of the eye into the needle to equalize the pressure.
The result can be complications to the eye such as posterior capsule rupture,
iris capture and chamber collapse. We believe this phenomenon affects all other
ultrasonic cataract removal systems currently on the market.
Our pending patents may not be perfected and our present or future patents may
infringe upon the patents of others, which could restrict or prevent the
manufacture and sale of our products.
We depend on our ability to license and obtain patents and on the adherence
to confidentiality agreements executed by employees, consultants and
third-parties to maintain the proprietary nature of our technology and to
operate without infringing on the proprietary rights of others. Our laser probe
is protected by a United States patent issued in 1987 to Daniel M. Eichenbaum,
M.D. These patent rights expire in September 2004. Patents have also been
granted to the Blood Flow Analyzer(TM) in the United States and the United
Kingdom, to the Dicon(TM) Topographer in the United States, and to the Dicon(TM)
Perimeter in the United States, the United Kingdom, Germany and Switzerland. The
pending patents may not be perfected. Also, our present or future products may
be found to infringe upon the patents of others. If our products are found to
infringe on the patents, or otherwise impermissibly utilize the intellectual
property of others, our development, manufacture and sale of such products could
be severely restricted or prohibited. We may be required to obtain licenses to
utilize such patents or proprietary rights of others and acceptable terms may be
unavailable. If we do not obtain such licenses, the development, manufacture or
sale of products requiring such licenses would be materially adversely affected.
In addition, we could incur substantial costs in defending ourself against
challenges to our patents or infringement claims made by third parties or in
enforcing any patents we may obtain.
9
Because patents only provide limited protection, others could produce and
distribute products similar to the Photon(TM) laser system, the Mentor systems
and the Blood Flow Analyzer(TM).
We rely on the protections for our products that we hope to realize under
the United States and foreign patent laws. However, patents provide limited
protections. We have a United States and Japanese patent on the hand-held probe
design and applications for various foreign patents are either pending or
planned, and the patents for the Blood Flow Analyzer(TM) for the eyes are
reported by Occular Blood Flow, Ltd. to have been approved in the United States
and the United Kingdom. Similar devices, however, could be designed that do not
infringe on our patent rights, but that are similar enough to compete against
our patented products. Moreover, it is possible that an unpatented but prior
existing device or design may exist that has never been made public and
therefore is not known to us or the industry in general. Such a device could be
introduced into the market without infringing on our current patent. If any such
competing non-infringing devices are produced and distributed, our profit
potential would be seriously limited, which would seriously impair our
viability.
Some of our products may be denied reimbursement by third-party payors, such as
government programs and private insurance plans.
We anticipate that our medical devices will generally be purchased by
ophthalmologists and hospitals that will then bill various third-party payors,
such as government programs and private insurance plans, for the health care
services provided to their patients. Government agencies generally reimburse at
a fixed rate based on the procedure performed. Some of the potential procedures
for which our medical devices may be used, however, may be denied reimbursement
as elective. In addition, third-party payors may deny reimbursement if they
determine that the use of our products was unnecessary, inappropriate, not
cost-effective, experimental or used for a non-approved indication. Certain
purchasers of our Blood Flow Analyzer,(TM), for example, have had difficulty in
obtaining reimbursement from insurance carriers. Even if we receive FDA
clearances for our products, third-party payors may nevertheless deny
reimbursement. Furthermore, third-party payors increasingly challenge the prices
charged for medical products and services. Reimbursement from third-party payors
may be unavailable or if available, that reimbursement may be limited when
compared with reimbursement for competitive procedures, thereby materially
adversely affecting our ability to profitably sell products. The market for our
products could also be adversely affected by recent federal legislation that
reduces reimbursements under the capital cost pass- through system utilized in
connection with the Medicare program. Failure by hospitals and other users of
our products to obtain reimbursement from third-party payors or changes in
government and private third-party payors' policies toward reimbursement for
procedures employing our products would have a material adverse effect on us.
Congress may introduce legislation that could result in price limits and
utilization controls on our products.
Members of Congress have introduced legislation to change aspects of the
delivery and financing of health care services. Such legislation to control or
reduce public (Medicare and Medicaid) and private spending on health care, to
reform the methods of payment for health care goods and services by both the
public and private sectors, and to provide universal access to health care may
be passed. We cannot predict what form this legislation may take or the effect
of such legislation on our business. It is possible that the legislation
ultimately enacted by Congress will contain provisions resulting in price limits
and utilization controls which may reduce the rate of increase in the growth of
the ophthalmic laser market or otherwise adversely affect our business. It is
also possible that future legislation could result in modifications to the
nation's public and private health care insurance systems which will affect
reimbursement policies in a manner adverse to us. We also cannot predict what
other legislation relating to our business or the health care industry may be
enacted, including legislation relating to third-party reimbursement, or what
effect legislation may have on the results of our operations.
10
Because we have minimal direct sales experience, our sales program may be
unsuccessful.
We commenced a direct sales program in July 1993 with three sales
representatives to market our products. In July 2000, four additional sales
representative were hired. In August 2001, 15 additional sales representatives
were hired, bringing the total number of sales representatives to 22. The number
of sales representatives has been reduced to five as a result of our efforts to
reduce costs and absence of the anticipated FDA approval of the Photon(TM) laser
system. However, we have minimal direct sales experience and may need to recruit
additional qualified personnel for this purpose. Our sales program may be
unsuccessful or we may be unable to attract and retain qualified distributors on
favorable terms.
Our product liability insurance could be inadequate to cover liabilities if we
face significant product liability claims against us.
The nature of our business exposes it to risk from product liability claims
and there can be no assurance that we can avoid significant product liability
exposure. We maintain product liability insurance providing coverage up to
$2,000,000 per claim with an aggregate policy limit of $2,000,000. There is
substantial doubt that this amount of insurance would be adequate to cover
liabilities should we face significant claims. A successful products liability
claim brought against us could have a material adverse effect on our business,
operating results and financial condition. Further, product liability insurance
is becoming increasingly expensive, and there can be no assurance that we will
successfully maintain adequate product liability insurance at acceptable rates,
or at all. Should we be unable to maintain adequate product liability insurance,
our ability to market our products would be significantly impaired. Any losses
that we may suffer from future liability claims or a voluntary or involuntary
recall of our products and the damage that any product liability litigation or
voluntary or involuntary recall may do to the reputation and marketability of
our products would have a material adverse effect on our business, operating
results and financial condition.
Our future products sales in foreign countries could be adversely effected by a
significant increase in value of the U.S. dollar against local currencies,
economic and political instability, and changes in the regulatory processes and
other regulations.
We anticipate that a significant portion of our future product sales will
be in foreign countries. Because we quote prices for our products and accept
payment on sales principally in U.S. dollars, any significant increase in the
value of the U.S. dollar against local currencies may make our products less
competitive with foreign products. The economic and political instability of
some foreign countries also may affect the ability of ophthalmologists and
others to purchase our products, or the ability of potential customers to pay
for the procedures for which our products are used. In addition, other specific
risks in doing business in foreign countries include changes in the regulatory
processes affecting our products, in controls governing foreign payments by our
customers, and in regulations, taxes and customs duties or requirements that may
be imposed on the purchase of our products.
The market price of our securities could fluctuate significantly.
Our common stock and Class A warrants were delisted on The Nasdaq SmallCap
Market effective June 26, 2003 and currently trade on the OTC Bulletin Board.
Factors such as announcements by us of the regulatory status of products,
quarterly variations in our financial results, the gain or loss of material
contracts, changes in management, regulatory changes, trends in the industry or
stock market and announcements by competitors, among other things, could cause
the market price of such securities to fluctuate significantly.
11
We may issue preferred shares with preferences in an equal or prior rank to
existing preferred shares.
Our certificate of incorporation authorizes the issuance of shares of
"blank check" preferred stock, which will have such designations, rights and
preferences as may be determined from time to time by our board of directors.
Accordingly, our Board of Directors is empowered, without stockholder approval
(but subject to applicable government regulatory restrictions), to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
our common stock. Those terms and conditions may include preferences on an equal
or prior rank to existing preferred stock. Those shares may be issued on such
terms and for such consideration as the board then deems reasonable and such
stock shall then rank equally in all aspects of the series and on the
preferences and conditions so provided, regardless of when issued. In the event
of such issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of our company. As of August 31, 2003, the following preferred shares
were issued and outstanding: 5,627 shares of Series A preferred stock
convertible into 6,753 common shares; 8,986 shares of Series B preferred stock
convertible into 10,783 common shares; no shares of Series C preferred stock; no
shares of Series D preferred stock; 1,500 shares of Series E preferred stock
convertible into 80,000 common shares; 5,623.75 shares of Series F preferred
stock convertible into 299,933 common shares; and 1,764,706 shares of Series G
preferred stock convertible into 1,764,706 common shares.
Our preferred shares have rights that amount to a preference over the shares of
this offering.
Our preferred shares have dividend and liquidation rights that amount to
preferences over the shares of this offering. We must pay any cash dividends to
our holders of preferred shares before paying cash dividends to the holders of
the shares of this offering. The dividend rights of our preferred shares are as
follows: for Series A and Series B preferred shares, $.24 per share per annum
payable, at our option, in cash from surplus earnings; for Series C preferred
shares, 12% non-cumulative preferred shares payable, at our option, in common
stock or cash from surplus earnings; and for Series D, E, F and G preferred
shares, 8% non-cumulative preferred dividends payable, at our option, in common
stock or cash from surplus earnings. Upon our liquidation, we must pay
preferential distributions to our preferred shareholders before paying any
distributions to holders of the shares of this offering. The liquidation rights
of our preferred shares are as follows: for Series A preferred shares, $1.00 per
share, plus accrued and unpaid dividends; for Series B preferred shares, $4.00
per share, plus accrued and unpaid dividends; for Series C preferred shares, the
stated value of $100.00 per share, plus declared but unpaid dividends; for
Series D preferred shares, the stated value of $1.75 per share, plus declared
but unpaid dividends; for Series E, F, and G preferred shares, the greater of
(i) the amount of distributions such shares would have received had the holders
converted such preferred shares into common stock immediately prior to
liquidation, or (ii) the stated value of $100.00 per share, plus declared but
unpaid dividends.
Exercise of outstanding options and warrants will dilute existing stockholders
and could decrease the market price of our common stock
As of August 31, 2003, we had issued and outstanding 25,128,536 shares of
our common stock, shares of Series A, B, E, F and G preferred stock convertible
into 2,162,075 shares of common stock, and outstanding options and warrants to
purchase 8,096,708 additional shares of common stock. The existence of the
outstanding preferred shares, options and warrants may adversely effect the
market price of our common stock and the terms under which we could obtain
additional equity capital.
We do not expect to pay any cash dividends in the foreseeable future.
We issued a stock dividend on our Series A preferred stock and Series B
preferred stock on January 8, 1996, to stockholders of record as of December 31,
1994. We have not paid any cash dividends on our common shares and do not expect
to declare or pay any cash or other dividends in the foreseeable future so that
we may reinvest earnings, if any, into the development of the business. The
holders of our Series A preferred stock, Series B preferred stock, Series C
preferred stock, Series D preferred stock, Series E preferred stock and Series F
preferred stock are entitled to non-cumulative cash dividends paid out of
surplus earnings.
12
None of the proceeds from the sale of shares in this offering will be placed in
escrow and therefore there are no investor protections for the return of
subscription funds once accepted.
We have not established a minimum amount of proceeds that we must receive
in the offering before any proceeds may be accepted. Once accepted, the funds
will be deposited into an account maintained by us and considered general assets
of Paradigm. None of the proceeds will be placed in any escrow, trust or other
arrangement. Therefore, there are no investor protections for the return of
subscription funds once accepted.
We have sole discretion in allocating the proceeds from the offering.
All of the net proceeds of the offering, if any, have been allocated to
working capital (and not otherwise allocated for a specific purpose) and will be
used for such purposes as management may determine in its sole discretion
without the need for stockholder approval with respect to any such allocations.
We have indemnification agreements with certain officers and directors that may
require us to indemnify them in a civil or criminal action.
Our certificate of incorporation eliminates in certain circumstances the
liability of directors for monetary damages for breach of their fiduciary duty
as directors. We have entered into indemnification agreements with certain
directors and officers. Each such indemnification agreement provides that we
will indemnify the indemnitee against expenses, including reasonable attorneys'
fees, judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of his performance of his duties as a
director or officer, other than an action instituted by the director or officer.
The indemnification agreements will also require that we indemnify the director
or other party thereto in all cases to the fullest extent permitted by
applicable law. Each indemnification agreement will permit the director or
officer that is party thereto to bring suit to seek recovery of amounts due
under the indemnification agreement and to recover the expenses of such a suit
if he or she is successful.
Our Board of Directors has the right to issue additional shares of common stock
and to create a new series of preferred stock which could dilute holders of
common stock.
Our board of directors has the inherent right under applicable Delaware
law, for whatever value the board deems adequate, to issue additional common
shares up to the limit of shares authorized by the certificate of incorporation,
and, upon such issuance, all holders of shares of common stock, regardless of
when they are issued, thereafter generally rank equally in all aspects of that
class of stock, regardless of when issued. Our board of directors likewise has
the inherent right, limited only by applicable Delaware law and provisions of
the Certificate of Incorporation to increase the number of preferred shares in a
series, to create a new series of preferred shares and to establish preferences
and all other terms and conditions in regard to such newly-created series. Any
of those actions will dilute the holders of common shares and also affect the
relative position of the holders of any series of any class. Current
stockholders have no rights to prohibit such issuances nor inherent "preemptive"
rights to purchase any such stock when offered.
USE OF PROCEEDS
Our net proceeds from the sale of the 8,000,000 shares of common stock
being offered hereby at an estimated offering price of $.23 per share are
estimated to be $1,581,000, after deducting offering expenses and commissions,
which are estimated to be approximately $259,000. The net proceeds are intended
to be used over the next 12 months as follows:
Application of Proceeds Amount Percentage
----------------------- ------ ----------
Sales and Marketing(1)......................................... $400,000 25.3%
Research and Development(2).................................... 480,000 30.3
Acquisition of Capital Equipment(3)............................ 50,000 3.2
Payment of Outstanding Obligations(4).......................... 400,000 25.3
Working Capital(5)............................................. 251,000 15.9
-------- ----
Total..................................................... $1,581,000 100.0%
=======
-------------------------------
(1) Represents funds required for the implementation of our direct sales force,
attendance at trade shows and production and dissemination of promotional
materials.
(2) A majority of these funds will be used for the enhancement and upgrading of
our current products approved for sale. These funds will also pay expenses
associated with conducting and evaluating the clinical trials and seeking
government approvals for our products and developing new products and
patents.
(3) Represents funds required to expand in-house manufacturing capabilities to
reduce product costs.
(4) These funds will be used to pay our obligations to suppliers and vendors as
well as royalty obligations.
(5) Working capital will be available for use as a reserve for contingencies.
In the event cash generated from operations is insufficient to fund
corporate overhead, working capital may be used to cover such deficiency.
13
The allocation of the net proceeds set forth above represents our estimates
based upon our current operating plans and upon certain assumptions regarding
the progress of the development of our products, technological advances and
changing competitive conditions, and assumptions regarding industry and general
economic conditions and other conditions. If all of the shares are not sold in
the offering, the priority of each application of proceeds noted above will be
reduced proportionately. Future events, including problems, delays, expenses and
complications frequently encountered by companies developing new products, as
well as changes in competitive conditions and the success or lack thereof of our
research and development or marketing efforts, may make it necessary or
advisable for us to reallocate the net proceeds among the above users or use
portions of the net proceeds for other purposes.
Any reallocation of the net proceeds other than as provided above, will be
at the discretion of our board of directors. We estimate that the net proceeds
will be sufficient to fund our proposed business and operations for a period of
12 months from the closing of the offering. If our estimates prove incorrect, we
will have to seek alternative sources of financing during such period, including
debt and equity financing and the reduction of operating cost and projected
growth plans. No assurance can be given that such financing could be obtained by
us on favorable terms, if at all, and if we are unable to obtain needed
financing, our business would be materially adversely affected. The timing and
amount of expenditures of the net proceeds of this offering may vary depending
upon the pace of our growth.
Regarding the common shares being registered for resale in the offering
that are issuable upon the exercise of warrants held by certain warrantholders,
the holders of such warrants are not obligated to exercise any of their
warrants. The last reported sale price of our common shares on the OTC Bulletin
Board on September 25, 2003, was $.26 per share. Only 200,000 of our common
shares underlying the warrants are exercisable for less than $.26 per share. As
a consequence, except for the warrants to purchase 200,000 common shares, the
outstanding warrants are not likely to be exercised unless the trading price
increases substantially. All other shares of our common stock being registered
for resale are either outstanding or will be issued upon conversion of
outstanding Series G preferred stock and we will derive no proceeds from the
conversion or subsequent resales of such shares. If there are any net proceeds
from the exercise of any warrants, we will use these net proceeds to fund
working capital requirements.
Pending application, the net proceeds of the offering will be invested in
short-term, high-grade interest-bearing savings accounts, certificates of
deposit, United States government obligations, money market accounts or
short-term interest bearing obligations.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Dividends paid in cash pursuant to outstanding shares of our Series A,
Series C, Series D, Series E and Series F preferred stock are only payable from
our surplus earnings and are non-cumulative and therefore, no deficiencies in
dividend payments from one year will be carried forward to the next. We
currently intend to retain future earnings, if any, to fund the development and
growth of our proposed business and operations. Any payment of cash dividends in
the future on the common stock will be dependent upon our financial condition,
results of operations, current and anticipated cash requirements, plans for
expansion, restrictions, if any, under any debt obligations, as well as other
factors that our board of directors deems relevant.
14
CAPITALIZATION
The following table sets forth our capitalization on an actual basis as of
June 30, 2003.
June 30,
2003
Long-term obligations(2).............................................................. $ 80,000
Stockholders' Equity:
Series A Preferred Stock, $.001 par value per share; -
500,000 shares authorized, 5,627 issued and outstanding..........................
Series B Preferred Stock, $.001 par value per share; 500,000 -
shares authorized, 8,986 issued and outstanding..................................
Series C Preferred Stock, $.001 par value per share; -
30,000 shares authorized, 0 issued and outstanding..............................
Series D Preferred Stock, $.001 par value per share; -
1,140,000 shares authorized, 0 issued and outstanding............................
Series E Preferred Stock, $.001 par value per share; -
50,000 shares authorized, 1,500 issued and outstanding...........................
Series F Preferred Stock, $.001 par value per share; -
50,000 shares authorized, 5,623,75 issued and outstanding........................
Common Stock, $.001 par value per share; 80,000,000 shares
authorized, 25,128,536 issued and outstanding (33,128,536 25,000
issued and outstanding, as adjusted).............................................
57,413,000
Additional paid-in-capital, common stock.........................................
(294,000)
Stock subscription receivable....................................................
(55,998,000)
Accumulated deficit..............................................................
1,146,000
Total stockholders' equity ...........................................................
$ 1,225,000
Total Capitalization..................................................................
15
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our authorized capital stock consists of 80,000,000 shares of common stock,
$.001 par value per share, and 5,000,000 shares of preferred stock, $.001 par
value per share. We have created six classes of preferred stock, designated as
Series A preferred stock, Series B preferred stock, Series C preferred stock ,
Series D preferred stock, Series E preferred stock, Series F preferred stock and
Series G preferred stock.
Our common stock and Class A warrants trade on the OTC Bulletin Board under
the respective symbols of "PMED.OB" and "PMEDW.OB." Prior to July 22, 1996,
there was no public market for the common stock. From July 22, 1996 to June 25,
2003, our common stock and Class A warrants were listed on the Nasdaq SmallCap
Market. As of September 30, 2003, the closing sale prices of the common stock
and Class A warrants were $.23 per share and $.05 per warrant, respectively. The
following are the high and low sale prices for the common stock and Class A
warrants by quarter as reported by Nasdaq since January 1, 2000.
Common Stock Class A Warrants
Price Range Price Range
Period (Calendar Year) High Low High Low
---- --- ---- ---
2000
First Quarter........................................... 14.50 6.88 6.50 2.63
Second Quarter.......................................... 10.50 4.19 3.63 1.19
Third Quarter........................................... 6.19 3.38 2.00 .50
Fourth Quarter.......................................... 4.94 1.31 1.25 .50
2001
First Quarter........................................... 4.13 1.50 1.00 .19
Second Quarter.......................................... 3.50 1.61 .74 .19
Third Quarter........................................... 2.75 1.86 .45 .16
Fourth Quarter.......................................... 3.08 1.94 .39 .17
2002
First Quarter........................................... 3.31 2.21 .38 .19
Second Quarter.......................................... 1.91 .60 .32 .05
Third Quarter........................................... 1.50 .16 .20 .08
Fourth Quarter.......................................... .30 .13 .10 .01
2003
First Quarter........................................... .42 .14 .12 .01
Second Quarter.......................................... .74 .14 .44 .01
Third Quarter........................................... .42 .18 .18 .01
Our Series A preferred stock, Series B preferred stock, Series C preferred
stock, Series D preferred stock, Series E preferred stock, Series F preferred
stock and Series G preferred stock are not publicly traded. As of June 30, 2003,
there were 717 record holders of common stock, six record holders of Series A
preferred stock, four record holders of Series B preferred stock, no record
holders of Series C preferred stock, no record holders of Series D preferred
stock, 14 record holders of Series E preferred stock, 52 record holders of
Series F preferred stock, and two record holders of Series G preferred stock.
We have never paid any cash dividends on our common stock and does not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We must pay cash dividends to holders of our Series A preferred, Series
B preferred, Series C preferred, Series D preferred stock, Series E preferred,
Series F preferred stock and Series G preferred stock before it can pay any cash
dividend to holders of our common stock. Dividends paid in cash pursuant to
outstanding shares of our Series A, Series B, Series C, Series D, Series E,
Series F and Series G preferred stock are only payable from our surplus
earnings, and are non-cumulative and therefore, no deficiencies in dividend
payments from one year will be carried forward to the next.
We currently intend to retain future earnings, if any, to fund the
development and growth of our proposed business and operations. Any payment of
cash dividends in the future on the common stock will be dependent upon our
financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, restrictions, if any, under any debt
obligations, as well as other factors that our board of directors deems
relevant. We issued 6,764 shares of our Series A preferred and 6,017 shares of
our Series B preferred on January 8, 1996 as a stock dividend to Series A and
Series B preferred shareholders of record as of December 31, 1994.
15
SELECTED FINANCIAL DATA
The following table sets forth our selected financial data for the years
ended December 31, 2001 and 2002, and the six months ended June 30, 2002 and
2003. The selected financial data as of and for the years ended December 31,
2000 and 2001 are derived from our financial statements which have been audited
by Tanner & Co. The selected financial data as of and for the six months ended
June 30, 2002 and 2003 are derived from our unaudited quarterly financial
statements. The following financial information should be read in conjunction
with the Financial Statements, and related notes thereto, included at Exhibit
"A" attached hereto.
------------------------------------------- --------------------------- ----------------------------
For the year ended For six months ended
December 31, June 30,
------------------------------------------- --------------------------- ----------------------------
------------------------------------------- ------------ -------------- ------------- --------------
2002 2003
---- ----
Statement of Operations Data: 2001 2002 (Unaudited) (Unaudited)
----------------------------- ---- ----
------------------------------------------- ------------ -------------- ------------- --------------
------------------------------------------- ------------ -------------- ------------- --------------
Net Sales.............................. $7,919,000 $5,368,000 2,816,000 $1,372,000
Net cost of sales...................... 4,370,000 4,210,000 1,622,000 881,000
Operating expenses..................... 12,834,000 12,277,000 5,124,000 2,821,000
Operating loss......................... (9,285,000) (11,119,000) (3,930,000) (2,330,000)
Other income (expense)................. (858,000) (36,000) (14,000) (10,000)
Net loss .............................. (10,143,000) (11,155,000) (3,944,000) (2,340,000)
Net loss per common share.............. $(.98) $(.63) $(.24) $(.10)
Shares used in computing net loss per 13,245,000 17,736,000 16,221,000 22,985,000
share..................................
------------------------------------------- ------------ -------------- ------------- --------------
--------------------------------------------------- ------------------ ---------------
As of As of
Balance Sheet Data: December 31, 2002 June 30, 2003
------------------ ----------------- -------------
--------------------------------------------------- ------------------ ---------------
--------------------------------------------------- ------------------ ---------------
Current assets................................. $3,868,000 $3,126,000
Current liabilities............................ 2,362,000 2,949,000
Working capital ............................... 1,506,000 177,000
Total assets................................... 5,289,000 4,175,000
Accumulated deficit............................ (53,656,000) (55,998,000)
Stockholder's equity .......................... 2,847,000 1,146,000
--------------------------------------------------- ------------------ ---------------
MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
This report contains forward-looking statements and information relating to
us that is based on beliefs of management as well as assumptions made by, and
information currently available to management. These statements reflect our
current view respecting future events and are subject to risks, uncertainties
and assumptions, including the risks and uncertainties noted throughout the
document. Although we have attempted to identify important factors that could
cause the actual results to differ materially, there may be other factors that
cause the forward-looking statements not to come true as anticipated, believed,
projected, expected or intended. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, projected, estimated, expected or intended.
Critical Accounting Policies
Revenue Recognition. The Company recognizes revenue in compliance with
Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 details four criteria that must exist before revenue is
recognized:
1. Persuasive evidence of an arrangement exits. Prior to shipment of
product, we require a signed purchase order and, with most customers, a down
payment toward the final invoiced price
16
2. Delivery and performance has occurred. Unless the purchase order
requires specific installation or customer acceptance, we recognize revenue when
the product ships. If the purchase order requires specific installation or
customer acceptance, we recognize revenue when such installation or acceptance
has occurred. Title to the product passes to our customer upon shipment. This
revenue recognition policy does not differ among our various different product
lines. We guarantee the functionality of our product. If our product does not
function as marketed when received by the customer, we either make the necessary
repairs on site or have the product shipped to us for the repair work. Once the
product has been repaired and retested for functionality, it is re-shipped to
the customer. We provide warranties that generally extend for one year from the
date of sale. Such warranties cover the necessary parts and labor to repair the
product as well as any shipping costs that may be required. We maintain a
reserve for estimated warranty costs based on our historical experience and
management's current expectations.
3. The sales price is fixed or determinable. The purchase order received
from the customer includes the agreed-upon sales price. We do not accept
customer orders, and therefore do not recognize revenue, until the sales price
is fixed.
4. Collectibility is reasonably assured. With limited exceptions, we
require down payments on product prior to shipment. In some cases we require
payment in full prior to shipment. We also perform credit checks on new
customers and ongoing credit checks on existing customers. We maintain an
allowance for doubtful accounts receivable based on historical experience and
management's current expectations.
Recoverability of Inventory. Since our inception, we have purchased
several complete lines of inventory. In some circumstances we have been able to
utilize certain items acquired and others remain unused. On a quarterly basis,
we attempt to identify inventory items that have shown relatively no movement or
very slow movement. Generally, if an item has shown little or no movement for
over a year, it is determined to be obsolete and a reserve is established for
that item. In addition, if we identify products that have become obsolete due to
product upgrades or enhancements, a reserve is established for such products. We
intend to make efforts to sell these items at significantly discounted prices.
If items are sold, the cash received would be recorded as revenue, but there
would be no cost of sales on such items due to the reserve that has been
recorded. At the time of sale, the inventory would be reduced for the item sold
and the corresponding inventory reserve would also be reduced. To date we have
not sold any of the inventory items that have been determined to be obsolete.
Recoverability of Goodwill and Other Intangible Assets. Our intangible
assets consist of goodwill, product and technology rights, engineering and
design costs, and patent costs. Intangibles with a determined life are amortized
on a straight-line basis over their determined useful life and are also
evaluated for potential impairment if events or circumstances indicate that the
carrying amount may not be recoverable. Intangibles with an indefinite life,
such as goodwill, are not amortized but are tested for impairment on an annual
basis or when events and circumstances indicate that the asset may be impaired.
Impairment tests include comparing the fair value of a reporting unit with its
carrying net book value, including goodwill. To date, our determination of the
fair value of the reporting unit has been based on the estimated future cash
flows of that reporting unit.
General
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations, contains forward-looking statements which involve
risks and uncertainty. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors
discussed in this section. Our fiscal year is from January 1 through December
31.
17
We are engaged in the design, development, manufacture and sale of high
technology diagnostic and surgical eye care products. Given the "going concern"
status of Paradigm Medical, management has focused efforts on those products and
activities that will, in its opinion, achieve the most resource efficient
short-term cash flow. As seen in the results for the six months ended June 30,
2003, diagnostic products have been the major focus and the Photon(TM) and other
extensive research and development projects have been put on hold pending future
evaluation when our financial position improves. The new management team has
reviewed our financial position including the financial statements. In the
course of this review, management made certain adjustments that are included in
the six months ended June 30, 2003, including an increase in the reserve of
obsolete inventory of $332,000, an increase in the allowance for doubtful
accounts receivable of $160,000, impairment of fixed assets and intangibles of
$159,000, and increases in accruals to settle outstanding disputes in the amount
of $443,000. Although management believes these adjustments are sufficient, it
will continue to monitor and evaluate our financial position and the
recoverability of our assets.
Our ultrasound diagnostic products include a pachymeter, an A/B Scan and a
biomicroscope, the technology for which was acquired from Humphrey Systems in
1998. We introduced the P45 in the fall of 2000, which combines the A/B Scan,
and the biomicroscope in one machine. In addition, we market our Blood Flow
Analyzer(TM) acquired in the purchase of Ocular Blood Flow Ltd. in June 2000.
Other diagnostic products are the Dicon(TM) Perimeter and the Dicon (TM) Corneal
Topographer which were acquired in the acquisition of Vismed d/b/a Dicon in June
2000. We purchased the inventory, design and production rights of the SIStem(TM)
from Mentor Corporation in October 1999 which was designed to perform minimally
invasive cataract surgery. In November 1999, we entered into a Mutual Release
and Settlement Agreement with the manufacturer of the Precisionist
ThirtyThousand(TM) in which we purchased the raw material and finished goods
inventory to bring the manufacturing of this product in-house. Because of the
"going concern" status of the company, management has focused efforts on those
products and activities that will, in its opinion, achieve the most resource
efficient short-term cash flow to the company. As reflected in the results for
the quarter ended June 30, 2003, diagnostic products are currently our major
focus and the Photon(TM) and other extensive research and development projects
have been put on hold pending future evaluation when the financial position of
the company improves.
Activities for the six months ended June 30, 2003, included sales of the
Company's products and related accessories and disposable products. In March
2003, the Company named a new president and chief executive officer, Dr. Jeffrey
F. Poore. The Company named a new vice president of sales and marketing, Ray
Cannefax, during the first quarter of 2003 and a new vice president of finance
and chief financial officer, Gregory C. Hill, during the second quarter of 2003.
Activities for the twelve months ended December 31, 2002 included sales of
our products and related accessories and disposable products. On May 7, 2002, we
received a letter from the FDA requesting further clinical information. We are
in the process of generating the additional clinical information in response to
the letter. We cannot market or sell the Photon(TM) in the United States until
FDA approval is granted. On November 4, 2002, we received FDA approval for
expanded indications of use of the Blood Flow Analyzer(TM) for pulsatile ocular
blood flow, volume and pulsatility equivalence index. Also, we are continuing
our efforts to educate the payers of Medicare claims throughout the country
about the Blood Flow Analyzer(TM), its purposes and the significance of our
performance in patient care in order to achieve reimbursements to the providers.
These efforts should lead to a more positive effect on sales.
In April 2001, we received written authorization from the CPT Editorial
Research and Development Department of the American Medical Association to use a
common procedure terminology or CPT code number 92120 for our Blood Flow
AnalyzerTM that provides for a reimbursement to doctors. However, certain payers
have elected not to reimburse doctors using the Blood Flow Analyzer. The
American Medical Association letter recommending the use of CPT code number
92120 is dated April 25, 2001, and signed by Desiree Rozell of the CPT Editorial
Research and Development Department of the AMA. We believe the reasons why
insurance payors initially elected not to reimburse doctors using the CPT code
were the relatively high volume of claims that began to be submitted under CPT
code number 92120 compared to the limited volume of claims previously submitted
under this code, and the time consumed by the Blood Flow Analyzer(TM) test,
which some payors may have believed was less than what is allowed under CPT code
number 92120. This trend began shortly after payors were presented with
reimbursement requests under this code, and we believe these reasons were the
basis for the initiation of non-payment. The impact of this nonpayment by
certain payors on our future operations is a lower volume of sales, particularly
in those states where reimbursement is not yet approved or is delayed.
Currently, there is full reimbursement by payors in 22 states and partial
reimbursement in four other states.
There were a number of factors that contributed to the decrease in sales
of the Blood Flow Analyzer (TM) and other products. September 11, 2001, the
ensuing Afghanistan conflict, and the Iraq war had a significant impact on our
international sales. The US recessionary economic trend has impacted our
domestic sales. Additionally, we are restructuring our sales organization and
sales channels by decreasing our direct sales force from 10 direct sales
employees on January 1, 2003, to four direct sales employees on March 31, 2003.
Pursuant to the sales force reduction, we have initiated the effort to sell our
diagnostic products through independent sales representatives and ophthalmic
equipment distributors. The benefits of these two new sales channels will become
evident as these individuals and groups gain familiarity, through training, of
our diagnostic products. Due to poor trade show attendance, we exhibited at only
two trade shows during the first half of 2003. Monitoring trade show attendance
will determine whether we will exhibit at future trade shows.
18
In April 2002, we announced the closure of our San Diego facility in
anticipation of the termination of the lease for that location. The operations
were transferred to the Salt Lake City facility. We incurred a reduction of
force of 28 San Diego personnel. The consolidation was intended to save costs
and to eliminate duplicities in functions and facilities that occurred with the
acquisition of Dicon. The cost of the consolidation was approximately $80,000.
In January 2002, we purchased certain assets and lease obligations of
Innovative Optics, Inc. by issuing an aggregate of 1,272,825 shares of our
common stock (636,412 shares are held in escrow pending the result of a project
to reduce the cost of the disposable razor blades utilized by the microkeratome,
which was acquired in the transaction), warrants to purchase 250,000 shares of
our common stock at $5.00 per share, exercisable over a period of three years
from the closing date, and $100,000 in cash. The transaction was accounted for
as a purchase in accordance with Statement of Financial Accounting Standards No.
141.
We acquired from Innovative Optics the raw materials, work in process and
finished goods inventories. Additionally, it acquired the patents and trade name
associated with the product, the furniture and equipment of Innovative Optics
used in the manufacturing process of the microkeratome console and the
inspection and packaging of the disposable blades. We subsequently issued
477,039 shares of common stock that were held in escrow at a value of $630,000,
based in the market price of such shares on the date of issuance. This amount
was charged to in-process research and development because the issuance of such
shares related to the continuing research and development of the microkeratome
blades.
We were unsuccessful in reducing the costs of the blade production process
and were unable to supply blades to the user base. We terminated our marketing
and sales efforts for the microkeratome, but we continue to search for an
alternative source of blades or a purchaser of the product line. Because we
determined that we could not manufacture the blades to support our customer base
at an economical cost, in accordance with Statement of Financial Accounting
Standards No. 142, due to the lack of projected future cash flows, during 2002
we recorded an impairment expense of $2,082,000 for the remaining book value of
property and equipment and intangible assets purchased from Innovative Optics.
In addition, we recorded an inventory reserve for the remaining inventory
purchased from Innovative Optics of approximately $160,000.
On September 19, 2002, we completed a transaction with International
Bio-Immune Systems, Inc., a Delaware corporation, in which we acquired
2,663,254, or 19.9%, of its outstanding shares and warrants to purchase
1,200,000 shares of its common stock at $2.50 per share for a period of two
years, through the exchange and issuance of 736,945 shares of our common stock,
the lending of 300,000 shares of our common stock to the company, and the
payment of certain of its expenses through the issuance of an aggregate of
94,000 shares of our common stock to the company and its counsel. The issuance
of 736,945 shares were valued based on the market price of our common stock on
the date of the transaction and resulted in an investment in International
Bio-Immune Systems, when combined with a cash investment of $65,000 made in
2000, of $879,000. The 300,000 shares were also valued at the market price on
the date of issuance and were recorded as a stock subscription receivable of
$294,000 because such shares will either be paid for or returned in the future.
International Bio-Immune Systems is a privately held biotechnology based,
cancer diagnostic and immunotherapy company, located in Great Neck, New York,
with potential clinically effective products for the diagnosis, treatment and
imaging of patients with major tumor types (e.g. colon, lung, cervix, pancreas
and breast). International Bio-Immune Systems does not produce significant
revenues as its products have not received FDA approval. Due to the uncertainty
of future cash flows and the fact that the products have not been approved by
the FDA, we were unable to support the value of the investment by substantiated
methods and determined that the likelihood of recovery of our investment was
remote. Therefore, in accordance with generally accepted accounting principles,
the investment of $879,000 was charged to impairment expense.
The tragic events of September 11, 2001, the Afghanistan conflict and the
Iraq war combined with a recessionary trend in the economy have had a negative
effect on our sales. International attendance at the trade shows following
September 11, 2001, and through 2003 were down markedly. The absence of these
professionals eliminates many opportunities for us to demonstrate and sell our
products to this sector. It is difficult to quantify how much an effect that
these events have had on us, but we believe that we have suffered some negative
impact due to September 11, 2001, the Afghanistan conflict, the Iraq war and the
downturn in the economy in general, which may continue for an indefinite period
of time.
19
Results of Operations
Six Months Ended June 30, 2003, Compared to Six Months Ended June 30, 2002
Net sales decreased by $1,444,000, or 51%, to $1,372,000 for the six
months ended June 30, 2003, from $2,816,000 for the comparable period in 2002.
Sales of our diagnostic products were $1,085,000, or 79% of total revenues,
during the first six months of 2003 compared with $1,907,000, or 68% of total
revenues, for the comparable period of 2002. Sales of surgical products totaled
$48,000, or 4% of total revenues, for the first six months of the current year
in comparison with $211,000, or 7%, of total revenues in the comparable period
of 2002. In the first six months of 2003 sales of the Ultrasonic Biomicroscope
were $210,000, or 15% of total revenues, compared to $831,000, or 30% of total
revenues, in the same period of 2002. Sales from the Blood Flow Analyzer (TM)
increased by $108,000 to $243,000, or 18% of total revenues, during the first
two quarters of 2003 compared with $135,000, or 5% of total revenues, in the
same period of last year. During the first half of 2003 sales from other
ultrasonic products totaled $129,000, or 9% of total revenues, compared with
$346,000, or 12% of total revenues, in the same period last year. Sales of the
perimeter and corneal topographer generated $502,000, or 37% of total revenues,
in the first two quarters of 2003 compared with $595,000, or 21% of total
revenues, during the same period of 2002.
There were a number of material reasons that contributed to the decrease
in sales during the three months ended June 30, 2003, compared to the same
period of 2002. Along with generally weak economic conditions in the United
States, we initiated the restructuring of our sales organization and the
development of new sales channels during the six months ended June 30, 2003. In
addition, there were only five direct domestic sales representatives during the
first six months of 2003 compared to more than twice that number of sales
representatives during the comparable period of 2002. International sales were
impacted by weakness in the economies of the large industrial countries and by
the residual impact of the Afghanistan situation, which had a negative impact on
sales to the Middle East, Pakistan, India and other countries in that region.
Other reasons for the decrease in sales were the uncertainties resulting from
our efforts to reduce costs and constraints on availability of funds that
reduced our ability to upgrade and enhance our products and pursue further
regulatory approvals for our products. Additionally, changes in the exchange
rate between these periods have generally made our products more expensive to
customers outside of the United States. Our objective is to focus our sales
efforts on the products with the highest potential for sales and strong margins.
As of June 30, 2003, we had approximately four sales people as compared to eight
at June 30, 2002.
Gross profit for the six months ended June 30, 2003 was 36% of total
revenues, compared to 42% for the same period in 2002. Cost of goods sold for
the six months ended June 30, 2003 included an increase in the reserve for
obsolete inventory of $382,000 whereas cost of goods sold for the six months
ended June 30, 2002, did not include significant write downs of inventory. Since
our inception, we have purchased several complete lines of inventory. While our
initial intention was to utilize the substantial majority of inventory acquired
in the manufacture of our products, in some circumstances we have been unable to
utilize certain items acquired.
On a quarterly basis, we attempt to identify inventory items that have
shown relatively no movement or very slow movement. Generally, if an item has
shown little or no movement for over a year, it is determined to be obsolete and
a reserve is established for that item. In addition, if we identify products
that have become obsolete due to product upgrades or enhancements, a reserve is
established for such products. Such analysis has resulted in material increases
in the reserve for obsolete inventory in both 2002 and 2003. We believe we have
now identified all obsolete inventory and reserved for such inventory and do not
expect material increases in the reserve in future periods, however there can be
no assurance that we will not identify further obsolete inventory due to
significant declines in sales of certain products or technological advances of
products. We intend to make efforts to sell these items at significantly
discounted prices. If items are sold, the cash received would be recorded as
revenue, but there would be no cost of sales on such items due to the reserve
that has been recorded. At the time of sale, the inventory would be reduced for
the item sold and the corresponding inventory reserve would also be reduced. To
date we have not sold any of the inventory items that have been determined to be
obsolete. We do not expect the sales of these items, if any, to be significant.
Marketing and selling expenses decreased by $1,210,000, or 69%, to
$552,000 for the six months ended June 30, 2003, from $1,762,000 for the
comparable period in 2002 due primarily to the lower headcounts of sales persons
and travel related and associated sales expenses.
20
General and administrative expenses decreased by $462,000, or 23%, to
$1,536,000 for the six months ended June 30, 2003, from $1,998,000 for the same
period in 2002, reflecting the results of our efforts to reduce costs,
specifically costs associated with maintaining two manufacturing facilities and
consulting costs. As noted above, in April 2002, we announced the closure of our
San Diego facility in anticipation of the termination of the lease for that
location. All operations associated with the San Diego facility were transferred
to the Salt Lake City facility. We incurred a reduction of force of 28 San Diego
personnel. The consolidation was intended to save costs and to eliminate
duplicities in functions and facilities that occurred with the acquisition of
Dicon. The cost of the consolidation was approximately $80,000. We believe that
the annual cost savings of the closure of the San Diego facility are
approximately $2 million. Consulting expenses decreased from approximately
$372,000 for the six months ended June 30, 2002 to approximately $103,000 in the
same period in 2003. Depreciation and amortization expense, which includes
amortization of leasehold improvements, decreased by approximately $40,000, or
15%, to $214,000 during the first six months of 2003 compared to the same period
of last year. General and administrative expenses for the six months ended June
30, 2003, included $83,000 for additions to the allowance for doubtful accounts
and increases in accruals of $443,000 to settle outstanding disputes. In
addition, general and administrative expense for the six months ended June 30,
2003, included $190,000 for 1,262,000 shares of common stock issued to settle
potential litigation.
Research, development and service expenses decreased by $790,000, or 58%,
to $574,000 for the six months ended June 30, 2003, from $1,364,000 for the same
period in 2002. Expenses associated with the development of new products during
the first six months of 2003 decreased compared to the same period in 2002 as a
consequence of our efforts to reduce costs and focus on products that are fully
developed and have the highest potential for sales and strong margins.
Impairment of assets was $159,000 for the six months ended June 30, 2003,
compared to $0 recorded in the same period of 2002. The impairment expense was
due to a reserve established for anticipated asset disposals and a reduction in
the value of certain intangible assets based on their currently estimated fair
value.
Other income and (expense) decreased by $4,000 to $(10,000) for the six
months ended June 30, 2003 from $(14,000) for the same period in 2002. We had a
reduction in interest income due to lower cash balances and interest rates and a
reduction in interest expense from a decrease in interest expense related to
capital leases.
Fiscal Year Ended December 31, 2002 Compared to Fiscal Year Ended December
31, 2001
Consolidated sales for the twelve months ended December 31, 2002 were
$5,368,000 compared to $7,919,000 for the same period for 2001, approximately a
32% decrease due principally to a decline in sales of the Blood Flow
Analyzer(TM)_ We have experienced a general decline in sales during 2002. The
reduction of our domestic sales force, competition and the downturn in the
economy are all factors contributing to the decline in sales. Additionally,
certain payers have elected not to reimburse the doctors per the common
procedure terminology or CPT code assigned to us by the American Medical
Association, which has caused decreased sales of the Blood Flow Analyzer(TM) in
2002.
There were a number of material reasons that contributed to the decrease
in sales during fiscal year 2002 compared to fiscal 2001. Along with generally
weak economic conditions in the United States, we initiated a major
restructuring of our sales organization and the development of new sales
channels during 2002. International sales were impacted by the weak economies of
the large industrial countries and by the residual impact of the Afghanistan
situation, which had a negative impact on sales to the Middle East, Pakistan,
India and other countries in that region. Other reasons for the decrease in
sales were the uncertainties resulting from our efforts to reduce costs and
constraints on availability of funds that reduced our ability to upgrade and
enhance our products and pursue further regulatory approvals for products.
Additionally, changes in the exchange rate in 2002 compared with 2001 generally
made our products more expensive to customers outside of the United States.
The revenues generated from sales of the Blood Flow Analyzer(TM) were
$458,000 and slightly less than $2,000,000, or 9% and 25% of total revenues for
2002 and 2001, respectively. On November 4, 2002, we received FDA approval for
expanded indications of use of the Blood Flow Analyzer(TM) for pulsatile ocular
blood flow, volume and pulsatility equivalence index. Also, we are continuing
our aggressive campaign to educate the payers about the Blood Flow Analyzer(TM),
its purposes and the significance of its performance in patient care in order to
achieve reimbursements to the providers. This effort should have a positive
effect on sales.
21
Sales of the Ultrasonic Biomicroscope were approximately $1,303,000 during
2002, or 24% of total annual revenues, compared to sales of $1,584,000, or 20%
of total revenues for the same period of 2001. Revenues from the ultrasonic
product line, not including the Ultrasonic Biomicroscope, totaled approximately
$606,000 during 2002, or 11% of total annual revenues, compared to $647,000, or
8% of total revenues for the same period last year. We have seen a recent
interest in certain of our ultrasound products and are endeavoring to take
advantage of this interest to the best of our capabilities.
Sales of the perimeter and corneal topographer decreased by $649,000, from
$2,128,000 in 2001, or 27% of total revenues to $1,479,000, or 28% of total
revenues. The perimeter and corneal topographer, both mature products, declined
in sales in 2002 from those in 2001 by approximately 30%. One of the strategies
of the Dicon/Paradigm merger in June of 2000 was to piggyback these products
with the phaco surgical line to achieve penetration into the ophthalmic market,
in addition to the optometric market, resulting in a growth in the sales of the
Dicon products. This anticipated growth has not occurred and may continue to
decrease in the future or remain at a lower level than originally expected.
The phaco surgical line accounted for approximately $245,000, 5% of total
revenues for the twelve months ended December 31, 2002 compared to $594,000, or
8% of total revenues for the same period in 2001. We concentrated much of our
marketing focus on our diagnostic products (Blood Flow Analyzer(TM) and the
Ultrasonic Biomicroscope Workstation or P45) during 2002 and 2001. We also
continued aggressively in our efforts to obtain FDA approval for our Photon(TM)
laser system. We sold one Photon(TM) laser system in 2002 and none in 2001. The
Photon(TM) cannot be sold within the United States until FDA approval is
received. International sales of the Photon(TM) have not occurred due in part to
the lack of FDA approval. Although not required in the international market, we
believe many potential customers rely on the FDA approval of products before
purchasing.
The gross profit on sales for the fiscal year 2002 was approximately 22 %
compared to 45% for the same period in 2001. The profit margin decline can be
attributed principally to an increase of $1,755,000 in the reserved for obsolete
inventory. Due to the lack of significant sales volume of certain products, many
inventory items were reduced in cost to reflect obsolescence, technological
advances and product enhancements. Of this amount, approximately $160,000
related to inventory purchased from Innovative Optics in 2002, and the remainder
was mainly related to the Mentor surgical line of products, namely the SIStem,
Odyssey and the Surg-E-trol, which have not experienced significant sales in
2002 and 2001. Since our inception, we have purchased several complete lines of
inventory, such as the Mentor surgical line. While our initial intention was to
utilize the substantial majority of inventory acquired in the manufacture of our
products, in some circumstances we have been unable to utilize certain items
acquired.
On a quarterly basis, we attempt to identify inventory items that have
shown relatively no movement or very slow movement. Generally, if an item has
shown little or no movement for over a year, it is determined to be obsolete and
a reserve is established for that item. In addition, if we identify products
that have become obsolete due to product upgrades or enhancements, a reserve is
established for such products. Such analysis resulted in a material increases in
the reserve for obsolete inventory in 2002. There can be no assurance that we
will not identify further obsolete inventory due to significant declines in
sales of certain products or technological advances of products in the future.
We intend to make efforts to sell these items at significantly discounted
prices. If items are sold, the cash received would be recorded as revenue, but
there would be no cost of sales on such items due to the reserve that has been
recorded. At the time of sale, the inventory would be reduced for the item sold
and the corresponding inventory reserve would also be reduced. To date we have
not sold any of the inventory items that have been determined to be obsolete. We
do not expect the sales of these items, if any, to be significant. During 2002,
we also reduced sales prices during the year in an attempt to increase sales,
which has reduced our margins. International sales contributed a greater portion
in 2002, compared to 2001, which sales also produce lower gross margins.
Marketing and selling expenses decreased $1,967,000, or 41%, to $2,795,000
for the twelve months ended December 31, 2002 from $4,762,000 for the comparable
period in 2001. Our sales force decreased to five domestic sales people during
2002 resulting in a reduction of personnel and travel costs of $1,356,000 from
the prior year. Marketing efforts were reduced, including the number of trade
shows attended, which resulted in a cost reduction of $611,000 during the fiscal
year ended December 31, 2002, compared to the same period in 2001.
22
General and administrative expenses decreased by $1,423,000, or 28%, to
$3,702,000 for the 2002 fiscal year from $5,125,000 for the comparable period in
2001, due principally to our ongoing efforts to reduce costs, primarily in the
areas of maintaining two manufacturing facilities and consulting expenses.
During 2002, we closed our San Diego manufacturing facility and consolidated
operations in our Salt Lake City facility. This resulted in a reduced workforce
of 28 individuals. Payroll related costs included in general and administrative
expense decreased by approximately $197,000 during the twelve months ended
December 31, 2002 compared to the same period in 2001 reflecting our reduced
number of employees. In addition, our efforts to reduce consulting expense
resulted in a decrease of $932,000 in 2002 as compared with 2001. In the past,
we have relied heavily on consultants for research and development, financing
activities, marketing, accounting, and other administrative functions. We have
made efforts to minimize the use of such consultants and use the abilities of
our trained employees and board members to accomplish many of the tasks
previously performed by consultants. Travel related costs declined $139,000 and
general operating costs were reduced by $169,000 due principally to the
reduction of personnel and the closure of the San Diego facility.
Research, development and service expenses (which includes production and
manufacturing support and the service department expenses) decreased by
$128,000, or 4%, to $2,819,000 for the twelve months ended December 31, 2002
from $2,947,000 for the same period in 2001. The closure of the San Diego office
resulted in lower payroll related expenses of $927,000 in 2002 compared to the
same period in 2001. Pursuant to the asset purchase agreement with Innovative
Optics, Inc., we issued 477,000 shares of common stock, which was valued at
$630,000 based upon the current market value of the stock at the time of issue.
This amount was recorded as in-process research and development costs related to
the blade cost reduction project. No such expense was recorded in 2001.
Consulting fees related to software development and enhancements increased by
$71,000 during 2002 compared to the year ended December 31, 2001.
We recognized impairment expenses of $2,961,000 during the year ended
December 31, 2002, principally due to the requirements of SFAS No. 142, which
requires impairment of intangible assets if the valuation cannot support the
asset value recorded. The impairment of $2,961,000 consisted of $1,419,000 of
goodwill obtained in the acquisition of Innovative Optics; $530,000 related to
patents, rights, and trade name acquired from Innovative Optics; $98,000 of
additional costs capitalized in connection with the acquisition of Innovative
Optics; $30,000 of property and equipment acquired from Innovative Optics; our
investment in International Bio-Immune Systems of $879,000; and $5,000 of costs
related to unissued patents.
We acquired the assets of Innovative Optics, Inc. in January 2002. The
principal product was a microkeratome with the corresponding disposable blades.
This acquisition resulted in goodwill of $1,419,000 and other intangible assets
of $530,000. During our third quarter, based on the work performed in efforts to
reduce the cost of manufacture of the microkeratome blades, it became evident
that our earlier cash flow projections were too high. Accordingly, we revised
the projections to reflect management's best estimates of future cash flows as
of September 30, 2002. This revision in estimated future cash flows resulted in
an impairment expense during the third quarter of $700,000 to the goodwill
related to the Innovative Optics acquisition. During the fourth quarter we were
unsuccessful in producing the blades for the user base at a cost that was
economically feasible and the original manufacturing process proved unworkable
and unprofitable. We decided not to continue supporting the product, thus
creating an event that resulted in a complete impairment of the goodwill, other
intangible assets, property and equipment, and other capitalized intangible
costs of $2,077,000. To date, we have analyzed impairment charges based on a
cash flow projection analysis as allowed under SFAS 142. Due to our decision to
not continue with development, marketing, and sale of the microkeratome blade,
we revised our initial cash flow projections related to the assets acquired from
Innovative Optics to $0. Therefore, an impairment charge for the net book value
of all assets acquired in connection with Innovative Optics was recorded. This
resulted in an impairment charge of $1,377,000 in the fourth quarter. The total
impairment expense recorded in 2002 related to assets acquired from Innovative
Optics was $2,077,000.
On September 19, 2002, we completed a transaction with International
Bio-Immune Systems, Inc., a Delaware corporation, in which we acquired
2,663,254, or 19.9% of the outstanding shares of its common stock, and warrants
to purchase 1,200,000 shares of its common stock at $2.50 per share for a period
of two years, through the exchange and issuance of 736,945 shares of our common
stock, the lending of 300,000 shares of our common stock to the company, and the
payment of certain of its expenses through the issuance of an aggregate of
94,000 shares of our common stock to the company and its counsel. The issuance
of 736,945 shares were valued on the basis of the market price of our common
stock on the date of the transaction and resulted in an investment in
International Bio-Immune Systems, when combined with a cash investment of
$65,000 made in 2000, of $879,000. The 300,000 shares were also valued at the
market price on the date of issuance and were recorded as a stock subscription
receivable of $294,000 because such shares will either be paid for or returned
in the future.
23
International Bio-Immune Systems is a privately held biotechnology based,
cancer diagnostic and immunotherapy company with potential clinically effective
products for the diagnosis, treatment and imaging of patients with major tumor
types (e.g., colon, lung, cervix, pancreas and breast). The company is located
in Great Neck, New York. It does not produce significant revenues as its
products have not received FDA approval. Due to the uncertainty of future cash
flows and the fact that the products have not been approved by the FDA, we were
unable to support the value of the investment by substantiated methods and
determined that the likelihood of recovery of the investment was remote.
Therefore, in accordance with generally accepted accounting principles, the
investment of $879,000 was charged to impairment expense.
Net interest expense was $36,000 during 2002 compared to net interest
income of $7,000 for the twelve months ended December 31, 2001 due to interest
expense incurred from capital leases for the purchase of certain fixed assets
and due to smaller amounts of cash on deposit during 2002. Other expense
included a charge to expense in 2001of $812,000 representing the value of the
350,000 shares of common stock issued to Mentor Corporation in settlement of a
dispute concerning whether the 485,751 shares of our common stock issued to
Mentor Corporation pursuant to an asset purchase transaction were required to
have been registered in our registration statement declared effective on January
5, 2000.
We incurred a net loss of $11,155,000, or ($.63) per share based upon
17,736,0000 weighted average shares outstanding for the year ended December 31,
2002. This compares to a net loss applicable to common shareholders of
$13,044,000, or ($.98) per share, based on 13,245,000 weighted average shares
outstanding for the year ended December 31, 2001. For the year ended December
31, 2001, the net loss attributable to common shareholders included a reduction
of $2,901,000 in connection with two private placements offered by us in 2001
($2,587,000 was attributable to the beneficial conversion feature included in
the Series E and Series F Preferred Stock offerings and $314,000 represented the
computed value of the warrants associated with the Series E Preferred Stock
offering). No such calculation was included in the net loss for the fiscal year
2002. The net loss for 2002 included $2,961,000 of impairment expense due
principally to the write down of intangible assets in excess of current
valuation.
Liquidity and Capital Resources
We used no cash in operating activities for the six months ended June 30,
2003, compared to $1,868,000 for the six months ended June 30, 2002. The
reduction in cash used by operating activities for the first six months of 2003
was primarily attributable to reduced operating costs, including the closure of
the San Diego facility, as well as other savings resulting from our ongoing
efforts to substantially reduce costs and management of our current assets and
current liabilities. We used $1,000 in investing activities for the six months
ended June 30, 2003, compared to $234,000 in the same period in 2002. Cash used
in investing activities in the first six months of 2002 was primarily due to the
cash paid in the acquisition of certain assets of Innovative Optics and capital
equipment. Net cash generated in financing activities was $391,000 for the six
months ended June 30, 2003 versus cash used of $42,000 in the same period in
2002 During the six months ended June 30, 2003, we raised approximately $84,000
through a $20,000,000 equity line of credit under an investment banking
arrangement and $333,000 through a private placement from the sale of our common
stock. However, this equity line of credit is not currently available as a
source of equity because a registration statement is not currently effective
registering the shares issuable under the equity line of credit. In the past, we
have relied heavily upon sales of our common and preferred stock to fund
operations. There can be no assurance that such equity funding will be available
on terms acceptable to us in the future.
We will continue to seek funding to meet our working capital requirements
through collaborative arrangements and strategic alliances, additional public
offerings and private placements of our securities, and bank borrowings. We are
uncertain whether or not the combination of existing working capital, benefits
from sales of our products and the private equity line of credit will be
sufficient to assure continued operations through December 31, 2003. As of June
30, 2003, we had accounts payable of $898,000, a significant portion of which is
over 90 days past due. We have contacted many of the vendors or companies that
have significant amounts of payables past due in an effort to delay payment,
renegotiate a reduced settlement payment, or establish a longer-term payment
plan. While some companies have been willing to renegotiate the outstanding
amounts, others have demanded payment in full. Under certain conditions, a group
of payees could force us into bankruptcy due to our inability to pay the
liabilities at this point in time. In addition to the accounts payable noted
above, we also have noncancellable capital lease obligations and operating lease
obligations that require the payment of approximately $103,000 in 2003, $51,000
in 2004, $38,000 in 2005, and $14,000 in 2006.
24
At June 30, 2003, we had net operating loss carryforwards of approximately
$42,000,000 and research and development tax credit carry-forwards of
approximately $34,000. These loss carryforwards are available to offset future
taxable income, if any, and have begun to expire in 2001 and extend for twenty
years. Our ability to use net operating loss carryforwards to offset future
income is dependant upon certain limitations as a result of the pooling
transaction with Vismed and the tax laws in effect at the time of the loss
carryforwards can be utilized. The Tax Reform Act of 1986 significantly limits
the annual amount that can be utilized for certain of these loss carryforwards
as a result of change of ownership.
We used cash in operating activities of $2,872,000 for twelve months ended
December 31, 2002, compared to $8,799,000 for the twelve months ended December
31, 2001. We decreased our inventory balance by $952,000 during the year by
decreasing purchases as compared to 2001 and utilizing the inventory on hand in
our production. In anticipation of building product to meet sales demand, more
specifically for the Blood Flow Analyzer and the P45 ultrasonic Biomicroscope
workstation plus, we purchased significant amounts of inventory in 2001. Trade
receivables decreased by $1,473,000 mainly due to the increased collection of
outstanding accounts and to lower sales during 2002.
We used cash in investing activities of $299,000 for the twelve months
ended December 31, 2002, compared to $246,000 for the year 2001 due mainly to
less fixed asset additions during 2002 compared to the same period in 2001. Net
cash generated in financing activities for the twelve months ended December 31,
2002 was $503,000, compared to $9,553,000 for the year ended December 31, 2001.
We received $8,965,000 in net proceeds from two private placements, the Series E
and Series F Preferred Stock offerings during 2001, compared to net proceeds
from one private placement of common stock in 2002 of $631,000. We also sold
392,000 shares of our common stock under the $20,000,000 equity line for
$673,000 in 2001 reducing the amount available under the equity line to
approximately $18,500,000. No sales of common stock under the equity line
occurred during 2002. Debt reduction for the year was $59,000.
As of June 30, 2003, we had raised approximately $1,584,000 through a
$20,000,000 equity line of credit under an investment banking arrangement. As of
June 30, 2003, approximately $18,416,000 was available under the equity line of
credit. However, the equity line of credit is currently unavailable as a source
of equity because there is currently no registration statement that is effective
registering the shares of our common stock that may be sold under the equity
line of credit. In the past, we have relied heavily upon sales of our common and
preferred stock to fund operations. There can be no assurance that such equity
funding will be available on terms acceptable to us in the future. We will
continue to seek funding to meet our working capital requirements through
collaborative arrangements and strategic alliances, additional public offerings
and/or private placements of our securities or bank borrowings. We are uncertain
whether or not the combination of existing working capital, benefits from sales
of our products and the private equity line of credit will be sufficient to
assure our operations through December 31, 2003.
We have taken measures to reduce the amount of uncollectible accounts
receivable such as more thorough and stringent credit approval, improved
training and instruction by sales personnel, and frequent direct communication
with the customer subsequent to delivery of the system. The allowance for
doubtful accounts was 13% of total outstanding receivables as of December 31,
2001, compared to 27% as of December 31, 2002 and 46% as of June 30, 2003. Much
of the increase in the allowance relates to our outstanding receivable balance
pertaining to our international dealers. The downturn in the economy worldwide
has resulted in increased difficulty in collecting certain accounts. Certain
international dealers have some aged unpaid invoices that have not been
resolved. We have addressed our credit procedures and collection efforts during
2002 and have instituted changes that require more payments at the time of sale
via letters of credit and not on a credit term basis. We intend to continue our
efforts to reduce the allowance as a percentage of accounts receivable. While
the allowance as a percentage of accounts receivable has grown substantially, it
is mainly a result of the significant decline in sales. The total amount of the
allowance has only increased from $347,000 at December 31, 2002, to $430,000 at
June 30, 2003. The majority of the receivables included in the allowance for
doubtful accounts are a result of sales before we implemented the various
changes to improve the collectibility of our receivables. During 2002, we had a
net recovery of receivables previously allowed for of $23,000 and during the six
months ended June 30, 2003, we had bad debt expense of $83,000. We believe that
by requiring a large portion of payment prior to shipment, we have greatly
improved the collectibility of our receivables.
25
We carried an allowance for obsolete inventory of $2,508,000 at June 30,
2003, and $2,126,000 as of December 31, 2002, or approximately 56% and 45% of
total inventory, respectively. This inventory reserve was increased by $382,000
in the first six months of 2003 and $1,755,000 during 2002 mainly due to sales
declines and the discontinuance of the microkeratome purchased from Innovative
Optics in 2002. Our means of expansion and development of product has been
largely from acquisition of businesses, product lines, existing inventory, and
the rights to specific products. Through such acquisitions, we have acquired
substantial inventory, some of which the eventual use and recoverability was
uncertain. In addition, we have a significant amount of inventory relating to
our Photon(TM) laser system, which does not yet have FDA approval in order to
sell the product domestically. Therefore, the allowance for inventory was
established to reserve for these potential eventualities.
On a quarterly basis, we attempt to identify inventory items that have
shown relatively no movement or very slow movement. Generally, if an item has
shown little or no movement for over a year, it is determined to be obsolete and
a reserve is established for that item. In addition, if we identify products
that have become obsolete due to product upgrades or enhancements, a reserve is
established for such products. We intend to make efforts to sell these items at
significantly discounted prices. If items are sold, the cash received would be
recorded as revenue, but there would be no cost of sales on such items due to
the reserve that has been recorded. At the time of sale, the inventory would be
reduced for the item sold and the corresponding inventory reserve would also be
reduced. To date we have not sold any of the inventory items that have been
determined to be obsolete. We do not expect the sales of these items, if any, to
be significant.
Effect of Inflation and Foreign Currency Exchange
We have not realized a reduction in the selling price of our products as a
result of domestic inflation. Nor have we experienced unfavorable profit
reductions due to currency exchange fluctuations or inflation with its foreign
customers. All sales transactions to date have been denominated in U.S. Dollars.
Impact of New Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." Statement of Financial
Accounting Standards 149 provides for certain changes in the accounting
treatment of derivative contracts. Statement of Financial Accounting Standards
No. 149 is effective for contracts entered into or modified after June 30, 2003,
except for certain provisions that relate to SFAS No. 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
which should continue to be applied in accordance with their respective
effective dates. The guidance should be applied prospectively. We anticipate
that the adoption of Statement of Financial Accounting Standards No. 149 will
not have a material impact on our consolidated financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This new
statement changes the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. It requires that those
instruments be classified as liabilities in balance sheets. Most of the guidance
in Statement of Financial Accounting Standards 150 is effective for all
financial instruments entered into or modified after May 31, 2003. We anticipate
that the adoption of Statement of Financial Accounting Standards 150 will not
have a material impact on our consolidated financial statements.
The Emerging Issues Task Force issued EITF No. 00-21, "Revenue
Arrangements with Multiple Deliverables" addressing the allocation of revenue
among products and services in bundled sales arrangements. EITF 00-21 is
effective for arrangements entered into in fiscal periods after June 15, 2003.
We do not expect the adoption of EITF 00-21 to have a material impact on our
financial position or future operations.
In April 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 145, "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement requires the classification of gains or losses from the
extinguishments of debt to meet the criteria of Accounting Principles Board
Opinion No. 30 before they can be classified as extraordinary in the income
statement. As a result, companies that use debt extinguishment as part of their
risk management cannot classify the gain or loss from that extinguishment as
extraordinary. The statement also requires sale-leaseback accounting for certain
lease modifications that have economic effects similar to sale-leaseback
transactions. We do not expect the adoption of Statement No. 145 to have a
material impact on our financial position or future operations.
26
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." This standard, which is effective for exit or
disposal activities initiated after December 31, 2002, provides new guidance on
the recognition, measurement and reporting of costs associated with these
activities. The standard requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date the
company commits to an exit or disposal plan. We do not expect the adoption of
Statement of Financial Accounting Standards No. 146 to have a material impact on
our financial position or future operations.
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of Financial Accounting
Standards Board Statement No. 123," which is effective for all fiscal years
ending after December 15, 2002. Statement No. 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation under Statement No. 123 from
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25. Statement 148 also changes the disclosure
requirements of Statement No 123, requiring a more prominent disclosure of the
pro-forma effect of the fair value based method of accounting for stock-based
compensation. We do not expect the adoption of Statement No. 148 to have a
material impact on our financial position or future operations.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable Interest Ethics, which
addresses consolidation by business enterprises of variable interest entities.
Interpretation No. 46 clarifies the application of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties.
Interpretation No. 46 applies immediately to variable interest entities created
after January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable interest entities in
which an enterprise holds a variable interest that it acquired before February
1, 2003. We do not expect to identify any variable interest entities that must
be consolidated. In the event a variable interest entity is identified, we do
not expect the requirements of Interpretation No. 46 to have a material impact
on our financial condition or future operations.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others.
Interpretation No. 45 requires certain guarantees to be recorded at fair value,
which is different from current practice to record a liability only when a loss
is probable and reasonably estimable, as those terms are defined in Financial
Accounting Standard Board Statement No. 5, Accounting for Contingencies.
Interpretation No. 45 also requires us to make significant new disclosures about
guarantees. The disclosure requirements of Interpretation No. 45 are effective
for us in the first quarter of fiscal year 2003. Interpretation No. 45's initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. Our previous
accounting for guarantees issued prior to the date of the initial application of
Interpretation No. 45 will not be revised or restated to reflect the provisions
of Interpretation No. 45. We do not expect the adoption of Interpretation No. 45
to have a material impact on our consolidated financial position, results of
operations or cash flows.
BUSINESS
General
We develop, manufacture, source, market and sell ophthalmic surgical and
diagnostic instrumentation and related accessories, including disposable
products. Our surgical equipment is designed for minimally invasive cataract
treatment. We market three cataract surgery systems with related accessories and
disposable products. Our cataract removal system, the PhotonTM laser system, is
a laser cataract surgery system marketed as the next generation of cataract
removal. Because of the "going concern" status of the company, management has
focused efforts on those products and activities that will, in its opinion,
achieve the most resource efficient short-term cash flow to the company. As
reflected in the results for the quarter ended June 30, 2003, diagnostic
products are currently our major focus and the Photon(TM) and other extensive
research and development projects have been put on hold pending future
evaluation when the financial position of the company improves. The PhotonTM can
be sold in markets outside of the United States. Both the PhotonTM and the
Precisionist ThirtyThousand TM are manufactured as an Ocular Surgery
WorkstationTM. We are considering marketing the PhotonTM and other lasers for
use in eye care. We also offer the SIStemTM, a mid-range priced ultrasonic phaco
that competes in the market segment that only desires an ultrasonic phaco.
27
Our diagnostic products include a pachymeter, an A/B Scan, an UBM
biomicroscope, a perimeter, a corneal topographer and the Blood flow AnalyzerTM.
The diagnostic ultrasonic products including the pachymeter, the A-Scan, the A/B
Scan and the UBM biomicroscope were acquired from Humphrey Systems, a division
of Carl Zeiss in 1998. We developed and offered for sale in the fall of 2000 the
P45, which combines the A/B Scan and the UBM in one machine. The perimeter and
the corneal topographer were added when we acquired the outstanding shares of
the stock of Vismed, Inc. d/b/a/ DiconTM in June 2000. We purchased Ocular Blood
Flow, Ltd. in June 2000 whose principal product is the Blood Flow AnalyzerTM.
This product is designed for the measurement of intraocular pressure and
pulsatile ocular blood flow volume for detection and treatment of glaucoma. We
are currently developing additional applications for all of its diagnostic
products.
A cataract is a condition, which largely affects the elderly population,
in which the natural lens of the eye hardens and becomes cloudy, thereby
reducing visual acuity. Treatment consists of removal of the cloudy lens and
replacement with a synthetic lens implant, which restores visual acuity.
Cataract surgery is the single largest volume and revenue producing outpatient
surgical procedure for ophthalmologists worldwide. The Health Care Finance
Administration reports that in the United States approximately two million
cataract removal procedures are performed annually, making this the largest
outpatient procedure reimbursed by Medicare. Most cataract procedures are
performed using a method called phacoemulsification or "phaco", which employs a
high frequency (40 kHz to 60 kHz) ultrasonic probe needle device to fragment the
cataract while still in the eye and remove it in pieces by suction through a
small incision.
In June 1997, we received FDA clearance to market the Blood Flow
AnalyzerTM for measurement of intraocular pressure and pulsatile ocular blood
flow for the detection of glaucoma and other retina related diseases. Ocular
blood flow is critical, the reduction of which may cause nerve fiber bundle
death through oxygen deprivation, thus resulting in visual field loss associated
with glaucoma. Our Blood Flow AnalyzerTM is a portable automated in-office
system that presents an affordable method for ocular blood flow testing for the
ophthalmic and optometric practitioner. In June 2000, we purchased Occular Blood
Flow, Ltd., the manufacturer of the Blood Flow AnalyzerTM. The terms and
conditions of the sale were $100,000 in cash and 100,000 shares of common stock.
In April 2001, we received authorization to use a common procedure terminology
or CPT code from the American Medical Association for procedures performed with
the Blood Flow AnalyzerTM which provides for a reimbursement to doctors using
the device. However, certain payers have elected not to reimburse doctors using
the Blood Flow Analyzer(TM).
On July 23, 1998, we entered into an Agreement for Purchase and Sale of
Assets with the Humphrey Systems Division of Carl Zeiss, Inc. to acquire the
ownership and manufacturing rights to certain assets of Humphrey Systems that
are used in the manufacturing and marketing of an ultrasonic
microprocessor-based line of ophthalmic diagnostic instruments, including the
Ultrasonic Biometer Model 820, the A/B Scan System Model 837, the Ultrasound
Pachymeter Model 855, and the Ultrasound Biomicroscope Model 840, and all
accessories, packaging and end-user collateral materials for each of the product
lines for the sum of $500,000, payable in the form of 78,947 shares of common
stock which were issued to Humphrey Systems and 26,316 shares of common stock
which were issued to business broker Douglas Adams. If the net proceeds received
by Humphrey Systems from the sale of the shares issued pursuant to the Agreement
was less than $375,000, after payment of commissions, transfer taxes and other
expenses relating to the sale of such shares, we would be required to issue
additional shares of common stock, or pay additional funds to Humphrey Systems
as would be necessary to increase the net proceeds from the sale of the assets
to $375,000. Since Humphrey Systems realized only $162,818 from the sale of
78,947 shares of our common stock, we issued 80,000 additional shares in January
1999 to enable Humphrey Systems to receive its guaranteed amount. The amount of
$21,431 was paid to us as excess proceeds from the sale of this additional
stock.
The rights to the ophthalmic diagnostic instruments, which have been
purchased from Humphrey Systems, complement both our cataract surgical equipment
and our ocular Blood Flow AnalyzerTM. The Ultrasonic Biometer calculates the
prescription for the intraocular lens to be implanted during cataract surgery.
The Ultrasound Pachymeter measures corneal thickness for the new refractive
surgical applications that eliminate the need for eyeglasses and for optometric
applications including contact lens fitting. The A/B Scan System combines the
Ultrasonic Biometer and ultrasound imaging for advanced diagnostic testing
throughout the eye and is a viable tool for retinal specialists. The Ultrasound
Biomicroscope utilizes microscopic digital ultrasound resolution for detection
of tumors and improved glaucoma management. We introduced the P45 in the fall of
2000, which combines the A/B Scan, and the Ultrasonic Biometer in one machine.
28
On October 21, 1999, we purchased Mentor's surgical product line,
consisting of the Phaco SIStemTM, the OdysseyTM and the Surg-E-TrolTM. This
acquisition rounds out our cataract surgery product line by adding entry-level,
moderately priced cataract surgery products. The transaction was paid for with
$1.5 million worth of our common stock.
On June 5, 2000, we purchased Vismed Inc. d/b/a DiconTM under a pooling of
interest accounting treatment. The purchase included the DiconTM perimeter
product line consisting of the LD 400, the TKS 5000, the SSTTM, FieldLinkTM,
FieldViewTM and Advanced FieldView and the corneal topographer product line, the
CT 200TM, the CT 50 and an ongoing service and software business. Perimeters are
used to determine retinal sensitivity testing the visual pathway. Corneal
topographers are used to determine the shape and integrity of the cornea, the
anterior surface of the eye. Corneal topographers are used for the refractive
surgical applications that eliminate the need for eyeglasses and for optometric
applications including contact lens fitting.
In January 2002, we purchased the Innovatome(TM) microkeratome of
Innovative Optics, Inc. by issuing an aggregate of 1,272,825 shares of its
common stock, warrants to purchase 250,000 shares of our common stock at $5.00
per share, exercisable over a period of three years from the closing date, and
$100,000 in cash. The transaction was accounted for as a purchase in accordance
with Statement of Financial Accounting Standards No. 141.
We acquired from Innovative Optics, Inc., the raw materials, work in
process and finished goods inventories. Additionally, we acquired the furniture
and equipment used in the manufacturing process of the microkeratome console and
the inspection and packaging of the disposable blades. We were unsuccessful in
supplying the disposable blades. We discontinued the marketing and sales efforts
of this product during the third quarter of 2002. On April 1, 2002, we entered
into a consulting agreement with John Charles Casebeer, M.D. to develop and
promote the microkeratome. For Dr. Casebeer's services during the period from
April 1, 2002 to September 30, 2002, we issued him a total of 43,684 shares of
our common stock, representing payment of $100,000 in stock for his services.
On September 19, 2002, we completed a transaction with International
Bio-Immune Systems, Inc., a Delaware corporation , in which we acquired
2,663,254 shares, or 19.9% of the outstanding shares of its common stock, and
warrants to purchase 1,200,000 shares of its common stock of at $2.50 per share
for a period of two years, through the exchange and issuance of 736,945 shares
of our common stock, the lending of 300,000 shares of our common stock to the
company and the payment of certain of its expenses through the issuance of an
aggregate of 94,000 shares of our common stock to the company and its counsel.
International Bio-Immune Systems, Inc. may sell the 300,000 shares of our
common stock loaned by us and the proceeds therefrom shall be deemed a loan from
us payable on the earlier of September 19, 2002, or the closing of any private
placement or public offering of the securities of International Bio-Immune
Systems, any merger involving more than 50% of the outstanding shares of
International Bio-Immune Systems, or any sale, dissolution, transfer, or
assignment of corporate assets other than in the ordinary course of business.
Interest shall accrue on the unpaid principal of the loan at the rate of 10% per
annum. If International Bio-Immune Systems does not sell the shares by September
19, 2004, it is required to return the shares, or any amount which has not been
sold, to us. International Bio-Immune Systems currently controls the voting
decisions regarding these shares.
Background
Corporate History: Our business originated with Paradigm Medical, Inc., a
California corporation formed in October 1989. Paradigm Medical Industries, Inc.
developed our present ophthalmic business and was operated by our founders
Thomas F. Motter and Robert W. Millar. In May 1993, Paradigm merged with us. At
the time of the merger, we were a dormant public shell existing under the name
French Bar Industries, Inc. French Bar had operated a mining and tourist
business in Montana. Prior to its merger with Paradigm in 1993, French Bar had
disposed of its mineral and mining assets in a settlement of outstanding debt
and had returned to the status of a dormant entity. Pursuant to the merger, we
caused a 1-for-7.96 reverse stock split of our shares of common stock. We then
acquired all of the issued and outstanding shares of common stock of Paradigm
using shares of our own common stock as consideration. As part of the merger, we
changed our name from French Bar Industries, Inc. to Paradigm Medical
Industries, Inc. and the management of Paradigm assumed control of the company.
In April 1994, we caused a 1-for-5 reverse stock split of our shares of common
stock. In February 1996, we re-domesticated to Delaware pursuant to a
reorganization.
29
Overview
Disorders of the Eye: The human eye is a complex organ which functions
much like a camera, with a lens in front and a light-sensitive screen, the
retina, in the rear. The intervening space contains a transparent jelly-like
substance, the vitreous, which together with the outer layer, the sclera and
cornea, helps the eyeball to maintain its shape. Light enters through the
cornea, a transparent domed window at the front of the eye. The size of the
pupil, an aperture in the center of the iris, controls the amount of light that
is then focused by the lens onto the retina as an upside-down image. The lens is
the internal optical component of the eye and is responsible for adjusting
focus. The lens is enclosed in a capsule. The retina is believed to contain more
than 130 million light-receptor cells. These cells convert light into nerve
impulses that are transmitted right-side up by the optic nerve to the brain,
where they are interpreted. Muscles attached to the eye control its movements.
Birth defects, trauma from accidents, disease and age related
deterioration of the components of the eye could all contribute to eye
disorders. The most common eye disorders are either pathological or refractive.
Many pathological disorders of the eye can be corrected by surgery. These
include cataracts (clouded lenses), glaucoma (elevated pressure in the eye),
corneal disorders such as scars, defects and irregular surfaces and
vitro-retinal disorders such as the attachment of membrane growths to the retina
causing blood leakage within the eye. All of these disorders can impair vision.
Many refractive disorders can be corrected through the use of eyeglasses and
contact lenses. Myopia (nearsightedness), hyperopia (farsightedness) and
presbyopia (inability to focus) are three of the most common refractive
disorders.
Ultrasound Technology: Ultrasound devices have been used in ophthalmology
since the late 1960's for diagnostic and surgical applications when treating or
correcting eye disorders. In diagnostics, ultrasound instruments are used to
measure distances and shapes of various parts of the eye for prescription of
eyeglasses and contact lenses and for calculation of lens implant prescriptions
for cataract surgery treatment. These devices emit sound waves through a
hand-held probe that is placed onto or near the eye with the sound waves emitted
being reflected by the targeted tissue. The reflection "echo" is computed into a
distance value that is presented as a visual image, or cross-section of the eye,
with precise measurements displayed and printed for diagnostic use by the
surgeon.
Surgical use of ultrasound in ophthalmology is limited to treatment of
cataract lenses in the eye through a procedure called phacoemulsification or
"phaco." A primary objective of cataract surgeries is the removal of the
opacified (cataract) lens through an incision that is as small as possible. The
opacified lens is then replaced by a new synthetic lens intraocular implant.
Phaco technology involves a process by which a cataract is broken into small
pieces using ultrasonic shock waves delivered through a hollow, open-ended metal
needle attached to a hand-held probe. The fragments of cataracts tissue are then
removed through aspiration. Phaco systems were first designed in the late 1960's
after various attempts by surgeons to use other techniques to remove opacified
lenses, including crushing, cutting, freezing, drilling and applying chemicals
to the cataract. By the mid-1970's, ultrasound had proven to be the most
effective technology to fragment cataracts. Market Scope's (Manchester,
Missouri), "The 2001 Report on the Worldwide Cataract Market", January 2001
indicates that phaco cataract treatment was the technology for cataract removal
used in over 80% of surgeries in the United States and over 20% of all foreign
surgeries.
Laser Technology: The term "laser" is an acronym for Light Amplification
by Stimulated Emission of Radiation. Lasers have been commonly used for a
variety of medical and ophthalmic procedures since the 1960's. Lasers emit
photons into a highly intense beam of energy that typically radiates at a single
wavelength or color. Laser energy is generated and intensified in a laser tube
or solid-state cavity by charging and exciting photons of energy contained
within material called the lazing medium. This stored light energy is then
delivered to targeted tissue through focusing lenses by means of optical mirrors
or fiber optics. Most laser systems use solid state crystals or gases as their
lazing medium. Differing wavelengths of laser light are produced by the
selection of the lazing medium. The medium selected determines the laser
wavelength emitted, which in turn is absorbed by the targeted tissue in the
body. Different tissues absorb different wavelengths or colors of laser light.
The degree of absorption by the tissue also varies with the choice of wavelength
and is an important variable in treating various tissues. In a surgical laser,
light is emitted in either a continuous stream or in a series of short duration
"pulses", thus interacting with the tissue through heat and shock waves,
respectively. Several factors, including the wavelength of the laser and the
frequency and duration of the pulse or exposure, determine the amount of energy
that interacts with the targeted tissue and, thus, the amount of surgical effect
on the tissue.
30
Lasers are widely accepted in the ophthalmic community for treatment of
certain eye disorders and are popular for surgical applications because of their
relatively non-invasive nature. In general, ophthalmic lasers, such as argon,
Nd:YAG and excimer (argon-fluoride) are used to coagulate, cut or ablate
targeted tissue. The argon laser is used to treat leaking blood vessels on the
retina (retinopathy) and retinal detachment. The excimer laser is used in
corneal refractive surgery. The Nd:YAG pulsed laser is used to perforate clouded
posterior capsules (posterior capsulotomy) and to relieve glaucoma-induced
elevated pressure in the eye (iridotomy, trabeulorplasty, transcleral
cyclophotocoagulation). Argon, Nd:YAG and excimer lasers are primarily used for
one or two clinical applications each. In contrast to these conventional laser
systems, our PhotonTM laser cataract system is designed to be used for multiple
ophthalmic applications, including certain new applications that may be made
possible with our proprietary technology. Such new applications, however, must
be tested in clinical trials and be approved by the FDA.
Products
Our principal proprietary surgical products are systems for use by
ophthalmologists to perform surgical treatment procedures to remove cataracts.
We have complete ownership of each product with no technological licensing
limitations.
The SIStemTM: The SIStemTM is our state-of-the-art, entry-level
phacoemulsification system. The SIStemTM is designed to be a full-featured,
cost-effective, reliable phaco machine. The competitive feature package includes
automated priming and tuning, error detection, audible feedback, patented
fluidics system, pneumatic vitrectomy and bipolar electrosurgical coagulation.
With both reusable and single-use consumables, the SIStemTM is positioned for
the world's primary ultrasonic phaco markets, including the United States,
Europe and Asia. Fiscal years 2002 and 2001 sales of the SIStemTM represented
approximately 2% and 6% of total revenues, respectively.
Precisionist ThirtyThousandTM: The Precisionist ThirtyThousandTM is our
core phaco surgical technology. The PrecisionistTM was placed into production
and offered for sale in 1997. As a phaco cataract surgery system, we believe the
PrecisionistTM with its new fluidics panel is equal or superior to the present
competitive systems in the United States. The system features a graphic color
display and unique proprietary on-board computer and graphic user interface
linked to a soft-key membrane panel for flexible programmable operation. The
system provides real-time "on-the-fly" adjustment capabilities for each surgical
parameter during the surgical procedure for high-volume applications. In
addition, the PrecisionistTM provides one hundred pre-programmable surgery
set-ups, with a second level of sub-programmed custom modes within each major
surgical screen (i.e., ultrasound phaco and irrigation/aspiration modes). The
PrecisionistTM features our newly developed proprietary fluidics panel which is
completely non-invasive for improved sterility and to provide a surgical
environment in the eye that virtually eliminates fluidic surge and solves
chamber maintenance problems normally associated with phaco cataract surgery.
This new fluidics system provides greater control for the surgeon and allows the
safe operation at much higher vacuum settings by sampling changes in aspiration
100 times per second. Greater vacuum in phaco surgery means less use of
ultrasound or laser energy to fragment the cataract and less chance for
surrounding tissue damage. In addition to the full complement of surgical
modalities (e.g., irrigation, aspiration, bipolar coagulation and anterior
vitrectomy), system automation includes "dimensional" audio feedback of vacuum
levels and voice confirmation for major system functions, providing an intuitive
environment in which the advanced phaco surgeon can concentrate on the surgical
technique rather than the equipment. Sales of the PrecisionistTM were not
significant in the fiscal years 2002 or 2001.
31
Ocular Surgery WorkstationTM: The Ocular Surgery WorkstationTM comprises
the base system of the Precisionist ThirtyThousandTM and is the first system to
our knowledge, which uses the expansive capabilities of today's advanced
computer technology to offer seamless open architecture expandability of the
system hardware and software modules. The WorkstationTM utilizes an embedded
open architecture computer developed for us and controlled by a proprietary
software system developed by us that interfaces with all components of the
system. Ultrasound, fluidics (irrigation), aspiration, venting, coagulation and
anterior vitrectomy (pneumatic) are all included in the base model. Each
component is controlled as a peripheral module within this fully integrated
system. This approach allows for seamless expansion and refinement of the
WorkstationTM with the ability to add other hardware and software features.
Expansion such as our PhotonTM laser system and hardware for additional surgical
applications are easily implemented by means of a pre-existing expansion rack,
which resides in the base of the WorkstationTM. These expanded capabilities
could include, but would not be limited to laser systems, video surgical fiber
optic imaging, cutting and electrosurgery equipment. However, there is no
guarantee that the WorkstationTM will be accepted in the marketplace. If the FDA
approves the PhotonTM, we will refer to the WorkstationTM as the PhotonTM Ocular
Surgery WorkstationTM. To date, we have not commercially developed or offered
for sale any other added hardware or software features to its Workstation TM.
Because of the "going concern" status of the company, management has focused
efforts on those products and activities that will, in its opinion, achieve the
most resource efficient short-term cash flow to the company. As reflected in the
results for the quarter ended June 30, 2003, diagnostic products are currently
our major focus and the Photon(TM) and other extensive research and development
projects have been put on hold pending future evaluation when the financial
position of the company improves.
PhotonTM Laser System: The PhotonTM laser cataract system, which is still
subject to FDA approval, is designed to be installed as a seamless plug-in
upgrade or add-on to our PrecisionistTM Ocular Surgery WorkstationTM. The
plug-in platform concept is unique in the ophthalmic surgical market for systems
of this magnitude and presents a unique market opportunity for us. The main
elements of the laser system are the Nd:YAG laser module, PhotonTM laser
software package and interchangeable disposable hand-held fiber optic laser
cataract probe. The PhotonTM laser utilizes the on-board microprocessor computer
of the WorkstationTM to generate short pulse laser energy developed through the
patented LCPTM to targeted cataract tissue inside the eye, while simultaneously
irrigating the eye and aspirating the diseased cataract tissue from the eye. The
probe is smaller in diameter than conventional ultrasound phaco needles and
presents no damaging vibration or heat build-up in the eye. Our Phase I clinical
trials demonstrated that this probe could easily reduce the size of the cataract
incision from 3.0 mm to under 2.0 mm thereby reducing surgical trauma and
complementing current foldable intraocular implant technology.
The laser probe may also eliminate any possibility for burns around the
incision or at the cornea and may therefore be used with cataract surgery
techniques that utilize a more delicate clear cornea incision which can
eliminate sutures and be conducted with topical anesthesia. However, this system
may not effectively remove harder grade cataracts. Harder grade cataracts can be
removed using the already existing ultrasound capability of the PrecisionistTM.
Because of the "going concern" status of the company, management has focused
efforts on those products and activities that will, in its opinion, achieve the
most resource efficient short-term cash flow to the company. As reflected in the
results for the quarter ended June 30, 2003, diagnostic products are currently
our major focus and the Photon(TM) and other extensive research and development
projects have been put on hold pending future evaluation when the financial
position of the company improves.
At some point in the future, we may intend, subject to economic
feasibility and the availability of adequate funds, to refine the laser delivery
system and laser cataract surgical technique used on soft cataracts through
expanded research and clinical studies. Subject to the aforementioned
constraints, we intend to refine the fluidics management system by improving
chamber maintenance during surgical procedures and to develop techniques to
optimize time and improve invasive techniques through expanded research and
clinical studies. As for as we can determine, no integrated single laser
photofragmenting probe is presently available on the market that uses laser
energy directly, contained in an enclosed probe, to denature cataract tissue at
a precise location inside the eye while simultaneously irrigating and aspirating
the site.
Our laser system is based upon the concept that pulsed laser energy
produced with the micro-processor controlled Nd:YAG laser system provides
ophthalmic surgeons with a more precise and less traumatic alternative in
cataract surgery. Although conventional ultrasonic surgical systems have proven
effective and reliable in clinical use for many years, their use of high
frequency shock waves and vibration to fragment the cataract can make the
procedure difficult and can present risk of complication both during and after
surgery. In contrast, our laser system, which utilizes short centralized energy
bursts, should permit the delivery of the laser beam with less trauma to
adjacent tissue. Therefore, unlike ultrasonic systems, whose vibrations and
shock waves affect (and can damage) non-cataracts tissues within the eye, our
PhotonTM laser cataract system should only affect tissues it comes into direct
contact with.
In October of 2000, we received FDA approval for the PhotonTM
WorkstationTM to be used with a 532mm green laser which is effective for medical
procedures other than cataract removal, such as photocoagulation of retinal and
venous anomalies within or outside the eye, pigmented lesions around the orbital
socket, posterior or anterior procedures associated with glaucoma or diabetes
and general photocoagulation for various dermatological venous anomalies
including telangiectasia (surface veins), or commonly referred to as "spider
veins". The goal is to be able to integrate multiple laser wavelengths into one
system or workstation that can be used for multiple medical specialties. This
approval represents only one of the potential applications that could represent
substantial growth opportunities including additional sales of equipment,
instruments, accessories and disposables. The PhotonTM Ocular Surgery
WorkstationTM has not been commercially developed with any other added hardware
or software features. There is no guarantee that the ophthalmic surgery market
will accept the laser in this capacity or that the FDA will grant approval. See
the Regulation section below. Because of the "going concern" status of the
company, management has focused efforts on those products and activities that
will, in its opinion, achieve the most resource efficient short-term cash flow
to the company. As reflected in the results for the quarter ended June 30, 2003,
diagnostic products are currently our major focus and the Photon(TM) and other
extensive research and development projects have been put on hold pending future
evaluation when the financial position of the company improves.
32
Surgical Instruments and Disposables: In addition to the cataract surgery
equipment, our surgical systems utilize or will utilize accessory instruments
and disposables, some of which are proprietary to us. These include replacement
ultrasound tips, sleeves, tubing sets and fluidics packs, instrument drapes and
laser cataract probes. We intend to expand its disposable accessories as it
further penetrates the cataract surgery market and expands the treatment
applications for its WorkstationTM. These products contributed approximately 9%
and 3% of total revenues for 2002 and 2001, respectively.
Diagnostic Eye Care Products: Glaucoma is a second leading cause of adult
blindness in the world. Glaucoma is described as a partial or total loss of
visual field resulting from certain progressive disease or degeneration of the
retina, macula or nerve fiber bundle. The cause and mechanism of the glaucoma
pathology is not completely understood. Present detection methods focus on the
measurement of intraocular pressure in the eye, visual field and observation of
the optic nerve head to determine the possibility of pressure being exerted upon
the retina, and optic nerve fiber bundle, which can diminish visual field.
Recently, retinal blood circulation has been indicated as a key component in the
presence of glaucoma. Some companies produce color Doppler equipment in the
$80,000 price range intended to provide measurement of ocular blood flow
activity in order to diagnose and treat glaucoma at an earlier stage.
Blood Flow AnalyzerTM: In June 1997, we received FDA clearance to market
the Blood Flow AnalyzerTM for early detection and treatment management of
glaucoma and other retina related diseases. The device measures not only
intraocular pressure but also pulsatile ocular blood flow, the reduction of
which may cause nerve fiber bundle death through oxygen deprivation thus
resulting in visual field loss associated with glaucoma. Our Blood Flow
AnalyzerTM is a portable automated in-office system that presents an affordable
method for ocular blood flow testing for the ophthalmic and optometric
practitioner. This was our first diagnostic eye care device. The device is a
portable desktop system that utilizes a proprietary and patented pneumatic Air
Membrane Applanation ProbeTM or AMAP(TM), which can be attached to any model of
standard examination slit lamp, which is then placed on the cornea of the
patient's eye to measure the intraocular pressure within the eye. The device is
unique in that it reads a series of intraocular pressure pulses over a short
period of time (approximately five to ten seconds) and generates a waveform
profile, which can be correlated to blood flow volume within the eye. A
proprietary software algorithm developed by David M. Silver, Ph.D., at Johns
Hopkins University, calculates the blood flow volume. The device presents a
numerical intraocular pressure reading and blood flow analysis rating in a
concise printout, which is affixed to the patient history file. In addition, the
data generated by the device can be downloaded to a personal computer system for
advanced database development and management.
We market the Blood Flow AnalyzerTM as a stand-alone model packaged with a
custom built computer system. The Blood Flow AnalyzerTM utilizes a single-use
disposable cover for the Air Membrane Applanation ProbeTM, a corneal probe which
is shipped in sterile packages. The probe tip cover provides accurate readings
and acts as a prophylactic barrier for the patient. The device has been issued a
patent in the European Economic Community and the United States and has a patent
pending in Japan. The FDA cleared the Blood Flow AnalyzerTM for marketing in
June 1997 and we commenced selling the system in September 1997. In addition to
the Humphrey products, this diagnostic product allowed us to expand its market
to approximately 35,000 optometry practitioners in the United States in addition
to the approximately 18,000 ophthalmic practitioners who currently perform eye
surgeries and are candidates for our surgical systems.
In April 2001, we received authorization from the CPT Editorial Research
and Development Department of the American Medical Association to use a common
procedure terminology or CPT code number 92120 for our Blood Flow AnalyzerTM,
which provides for a reimbursement to doctors. However, certain payers have
elected not to reimburse doctors using the Blood Flow Analyzer(TM). We are
continuing our aggressive campaign to educate the payers about the Blood Flow
Analyzer(TM), its purposes and the significance of its performance in patient
care in order to achieve reimbursements to the doctors. In April 2001, we
received written authorization from the CPT Editorial Research and Development
Department of the American Medical Association to use a common procedure
terminology or CPT code number 92120 for our Blood Flow AnalyzerTM that provides
for a reimbursement to doctors. However, certain payers have elected not to
reimburse doctors using the Blood Flow Analyzer. The American Medical
Association letter recommending the use of CPT code number 92120 is dated April
25, 2001, and signed by Desiree Rozell of the CPT Editorial Research and
Development Department of the AMA. Currently, there is full reimbursement by
payors in 22 states and partial reimbursement in four other states.
33
The manufacturing activities for the Blood Flow AnalyzerTM have been moved
to the Salt Lake City facility from the outsourced plant located in England. The
revenues from sales of the Blood Flow AnalyzerTM represented approximately 9%
and 25% of total 2002 and 2001 revenues, respectively. On November 4, 2002, we
received FDA approval for use of the Blood Flow Analyzer(TM) for pulsatile
ocular blood flow, volume and pulsatility equivalence index. Also, we are
continuing its aggressive campaign to educate the payers about the Blood Flow
Analyzer(TM), its purposes and the significance of its performance in patient
care in order to achieve reimbursements to the providers.
DiconTM perimeters consist of the LD 400, the TKS 5000, the SSTTM,
FieldLinkTM, FieldViewTM and Advanced FieldView. Perimeters are used to
determine retinal sensitivity testing the visual pathway. Perimeters have become
a standard of care in the detection and monitoring of glaucoma worldwide.
Perimetry is reimbursable worldwide. The DiconTM perimeters feature patented
kinetic fixation and voice synthesis now in 27 different languages. Software
programs are sold to assist in the analysis of the test results. Sales of the
perimeters generated approximately 20% and 15% of the 2002 and 2001 total
revenues, respectively.
DiconTM corneal topographers include the CT 200TM and the CT 50. Corneal
topographers are used to determine the shape and integrity of the cornea, the
anterior surface of the eye. Clinical applications for corneal topographers
include refractive surgery that eliminates the need for eyeglasses and
optometric applications including contact lens fitting. Revenues from the
topographer were 7% and 12% of the total revenues for 2002 and 2001,
respectively. An enhanced version of the CT 200(TM), the CT 2000(TM), is
scheduled to be introduced during the fourth quarter of 2003.
Pachymetric Analyzer: The ultrasonic pachymeter is used for measurement of
corneal thickness. The Model P55 is positioned as a standard office pachymeter.
This device is targeted to the refractive surgery market and contributed
approximately 3% and 1% of the total revenues for 2002 and 2001, respectively.
Ultrasonic A-Scan: The Ultrasonic A-Scan has been removed from our line of
diagnostic products. The A-Scan is a prerequisite procedure reimbursed by
Medicare and is performed before every cataract surgery. Over 5,000 A-Scan
systems have been installed in the worldwide market, representing a substantial
market opportunity for software upgrades and extended warranty contract sales.
A-Scan sales were approximately 2% and 1% of the total revenues for 2002 and
2001, respectively.
Ultrasonic A/B Scan: The A/B Scan is used by retinal sub-specialists to
identify foreign bodies in the posterior chamber of the eye and to evaluate the
structural integrity of the retina. The A/B Scan is attractive to the general
ophthalmic community at large because of its lower price point. Sales from this
product were approximately 7% and 6% of the total revenues for 2002 and 2001,
respectively.
Ultrasonic Biomicroscope: The Ultrasonic Biomicroscope or UBM
biomicroscope was developed by Humphrey Systems in conjunction with the New York
Eye and Ear Infirmary in Manhattan and the University of Toronto. The UBM
biomicroscope and its intellectual property were included in the purchase from
Humphrey Systems and gives us the proprietary rights to this device. The UBM
biomicroscope creates a high-resolution computer image of the unseen parts of
the eye that is a "map" for the glaucoma surgeon. The UBM biomicroscope is an
"enabling technology" for the ophthalmologist, one that we have repositioned for
broader market sales penetration. Formerly sold only to glaucoma sub-specialty
practitioners, we reintroduced the UBM biomicroscope at a price-point targeted
for the average practitioners seeking to add glaucoma filtering surgical
procedures and income to their cataract surgical practice.
The UBM biomicroscope related surgical filtering procedures are fully
reimbursable by Medicare and insurance providers. This untapped new market
positions us with our proprietary UBM biomicroscope and to our knowledge, the
only commercially viable product of this type on the market, as a leader in the
rapidly expanding glaucoma imaging and treatment segment. In the fall of 2000 we
introduced the P45 which combines the UBM biomicroscope and the A/B Scan in one
instrument. We believe that by combining functions, the P45 will appeal to a
broader market. UBM biomicroscope sales were approximately 12% and 12% of the
total revenues for 2002 and 2001, respectively. The P45 contributed
approximately 12% and 8% of the total revenues for 2002 and 2001, respectively.
In July of 2000, we received ISO 9001 and EN 46001 certification using TUV
Essen as the notified body. Under ISO 9001 certification, our products are now
CE marked. The CE mark allows us to ship product for revenue into the European
Community. We successfully retained our certification in 2002.
34
Parts and Services: The parts and services revenue from the repair of
equipment sold accounted for approximately 11% and 8% of total revenues in 2002
and 2001, respectively.
Sales of other products represented 4% and 3% of total revenues in 2002
and 2001, respectively.
The following table identifies each product class, status of commercial
development, the percentage of sales contributed by that class, reimbursement
status, and status of applicable United States and foreign regulatory approvals:
Stage of
Commercial Reimbursement % 2002 Regulatory
Product Product Class Development Status Sales Approvals
P55 Pachymetric System, imaging, Complete Yes 3% FDA 510(K) K844299*
Analyzer pulsed echo ISO 9001: 1994, EN ISO 9001**
P20 Biometric Analyzer System, imaging, Complete Yes 2% DA 510(K) K844299*
pulsed echo ISO 9001: 1994, EN ISO 9001**
P37 A/B Scan Ocular Transducer, Complete Yes 7% FDA 510(K) K844299*
Diagnostic ultrasonic diagnostic ISO 9001: 1994, EN ISO 9001**
P40 UBM Ultrasound System, imaging, Complete Yes 12% FDA 510(K) K844299*
BioMicroscope pulsed echo ultrasonic ISO 9001: 1994, EN ISO 9001**
P45 UBM Plus System, imaging, Complete Yes 12% FDA 510(K) K844299*
pulsed echo ultrasonic ISO 9001: 1994, EN ISO 9001**
BFA Ocular Blood Flow Tonometer, manual Complete 9% FDA 510(K) K844299*
Analyzer(TM) Yes**** ISO 9001: 1994, EN ISO 9001**
CT 200 Corneal Topographer corneal Complete Yes 7% FDA 510(K) K844299*
Topography System AC-powered ISO 9001: 1994, EN ISO 9001**
LD 400 Full Field Perimeter, automatic Complete Yes 18% FDA 510(K) K844299*
Autoperimetry AC-powered ISO 9001: 1994, EN ISO 9001**
System
TKS 5000 Perimeter, Automatic Complete Yes 2% FDA 510(K) K844299*
AC-Powered ISO 9001: 1994, EN ISO 9001**
Precisionist Thirty Phacofragmentation Complete Yes 2% FDA 510(K) K844299*
Thousand ISO 9001: 1994, EN ISO 9001**
----------------------- ----------------------- ----------------- ----------------- ---------- ----------------------------------
35
SIStem Phacofragmentation Complete Yes 2% FDA 510(K) K844299*
ISO 9001: 1994, EN ISO 9001**
Photon(TM)Laser Phacoemulsification In-Process No - ISO 9001: 1994, EN ISO 9001*
IDE G940151***
--------------------------
* FDA 510(K) K844299 represents domestic approval by U.S. Food and Drug
Administration
** ISO 9001: 1994, EN ISO 9001 represents international approval
*** IDE G940151 represents approval for international distribution only
**** Represents full reimbursement in 22 states and partial reimbursement in
four other states.
We believe that the sources and availability of our raw materials and our
principal suppliers are adequate for our needs.
Marketing and Sales
Ophthalmologists are mainly office-based and perform their surgeries in
local hospitals or surgical centers that provide the necessary surgical
equipment and supplies. Ophthalmologists are generally involved in decisions
relating to the purchase of equipment and accessories for their independent
ambulatory surgical centers and for the hospitals with which they are
affiliated. This provides the opportunity for direct, targeted, personal
selling, responsive high quality customer service and short buying cycles to
achieve a product sale in the office or hospital. Hospitals also comprise a
significant market, as recent demand for ultrasonic surgery technology has put
pressure on the ophthalmologist, who in turn persuades the hospital to install
the latest technology system so that he can offer this procedure to his patients
and the community.
Industry analysts report that the United States ophthalmic surgical device
market has been characterized by slower growth in recent years. This has
apparently been caused by the potential reforms associated with the health care
industry. Further, hospitals have been inclined to keep their older phaco
machines longer than expected as they have been forced to mind budgets more
carefully and have become less willing to invest in capital equipment until more
information on health care reform becomes available. However, analysts predict
that the ophthalmic surgical device market will see renewed growth in the coming
years as the health care environment stabilizes and as the growing elderly
population produces an increased number of cataract surgeries. As a consequence
of these factors, the market should see a greater rate of replacement of older
machines that hospitals and surgeons have been postponing for longer than usual.
Current Market Acceptance and Potential: The principal purchasers of our
products have been ophthalmologists, optometrists and clinics in many countries
throughout the world. We believe that the market for our products is being
driven by: (i) the aging of the population, which is evidenced by the domestic
and international cataract surgery volume growth trend over the past ten years,
(The National Eye Institute reported in March 2002 that the number of blind or
visually impaired Americans is likely to double over the next 30 years.) (ii)
the entry by emerging countries (including China, Russia, and other countries in
Asia, Eastern Europe and Africa) into advanced technology medical care for their
populations, (iii) increased awareness worldwide of the benefits of the
minimally invasive phaco cataract procedure and (iv) the introduction of
technology improvements such as our laser system.
Marketing Organization: We market our products internationally through a
network of dealers and domestically through direct sales representatives,
independent sales representatives, and ophthalmic product distributors. As of
December 31, 2002, we had ten direct domestic sales representatives in the
United States and 65 foreign dealers. These sales representatives are assigned
exclusive territories and have entered into contracts with us that contain
performance quotas. Domestic sales channels have been expanded to include
independent sales representatives and distributors who began training on our
products in August 2003. We also plan to continue to market our products by
identifying customers through internal market research, trade shows and direct
marketing programs. We also utilize a Clinical Advisory Board comprised of
leading ophthalmic surgeons in the United States and Europe who speak at
conventions, train ophthalmologists and visit foreign doctors and dealers to
promote our products.
36
Product advertising is intended to be focused in the major industry trade
newspapers. Most of the ophthalmologists or optometrists in the United States
receive one or more of these magazines through professional subscription
programs. The media has shown strong interest in our technology and products, as
evidenced by several recent front-page articles in these publications.
Manufacturing and Raw Materials: Currently, we maintain a 29,088 square
foot facility in Salt Lake City. We transferred the manufacturing activities for
the Blood Flow AnalyzerTM to San Diego from Occular Blood Flow, Ltd. in England
during 2001. During the second quarter of 2002, we consolidated and closed the
San Diego operations into the Salt Lake City facility. The facility accommodates
our manufacturing, marketing and engineering capabilities. We manufacture under
systems of quality control and testing, which comply with the Quality System
Requirements established by the FDA, as well as similar guidelines established
by foreign governments, including the CE Mark and IS0-9001.
We subcontract the manufacturing of some of its ancillary instruments,
accessories and disposables through specified vendors in the United States.
These products are contracted in quantities and at costs consistent with our
financial purchasing capabilities and pricing needs. We manufacture certain
accessories and fluidics surgical tubing sets at our facility in Salt Lake City.
Product Service and Support: Service for our products is overseen from our
Salt Lake City location and is augmented by our international dealer network who
provide technical service and repair. Installation, on-site training and a
limited product warranty are included as the standard terms of sale. We provide
distributors with replacement parts at no charge during the warranty period.
International distributors are responsible for installation, repair and other
customer service to installed systems in their territory. All systems parts are
modular sub-components that are easily removed and replaced. We maintain
adequate parts inventory and provides overnight replacement parts shipments to
its dealers.
On July 11, 2002, we entered into a Major Account Facilitator Contract
with Peter Kristensen and F. Briton McConkie. Under the terms of the contract,
Messrs. Kristensen and McConkie agreed to serve as intermediators between us and
an international agent or customer that would result in an order for 150
Photon(TM) laser systems in Asia. The contract provides that upon execution, we
are to issue 100,000 shares of our common stock to Messrs. Kristensen and
McConkie to cover all expenses associated with the pursuit of the transaction,
and upon presentation of a verified order to us, we have agreed to issue an
additional 100,000 shares of common stock to Messrs. Kristensen and McConkie.
Upon completion, and delivery and receipt of payment in full from the
international agent or customer for the 150 Photon(TM) laser systems, Messrs.
Kristensen and McConkie would be issued an additional 480,000 shares of common
stock for serving as transaction facilitator. We have issued a total of 100,000
shares of our common stock to Messrs. Kristensen and McConkie pursuant to the
terms of the Contract.
Research and Development
Our primary market for our surgical products is the cataract surgery
market. However, we believe that our laser systems may potentially have broader
ophthalmic applications. Consequently, we believe that a strong research and
development capability is important for our future. In addition to our expanded
in-house research and development capabilities, we have enlisted several
recognized and respected consultants and other technical personnel to act in
technical and medical advisory capacities.
We believe our research and development capabilities provide us with the
ability to respond to regulatory developments, including new products, new
product features devised from its users and new applications for its products on
a timely and proprietary basis. We intend to continue investing in research and
development and to strengthen our ability to enhance existing products and
develop new products.
Research, development and service expenses (which includes production and
manufacturing support and the service department expenses) decreased by
$128,000, or 4%, to $2,819,000 for the twelve months ended December 31, 2002,
from $2,947,000 for the same period in 2001. Pursuant to the asset purchase
agreement with Innovative Optics, Inc., we issued 477,000 shares of our common
stock, which was valued at $630,000 based upon the current market value of the
stock at the time of issue. This amount was recorded as in-process research and
development costs related to the blade cost reduction project. No such expense
was recorded in 2001. Consulting fees related to software development and
enhancements increased to $71,000 during 2002 from $0 for the same period in
2001. None of the costs of research and development activities during 2002 and
2001 was borne directly by customers.
37
During the period from December 1, 2000 to November 30, 2002, we entered
into a series of consulting agreements with Michael B. Limberg, M.D., in which
he agreed to evaluate new technologies and instruments for us. For his services
during that period, we issued Dr. Limberg a total of 48,000 shares of our common
stock and warrants to purchase 300,000 shares of common stock at exercise prices
ranging from $4.00 to $6.75 per share.
Competition
General. We are subject to competition in the cataract surgery and the
glaucoma diagnostic markets from two principal sources: (i) manufacturers of
competing ultrasound systems used when performing cataract treatments and (ii)
developers of technologies for ophthalmic diagnostic and surgical instruments
used for treatment. A few large companies that are well established in the
marketplace, have experienced management, are well financed and have well
recognized trade names and product lines dominate the surgical equipment
industry. We believe that the combined sales of five entities account for over
90% of the cataract surgery market. The remaining market is fragmented among
emerging smaller companies, some of which are foreign. The ophthalmic diagnostic
market has a similar composition.
Most major competitors either entered or expanded into the cataract or
glaucoma markets through the acquisition of smaller, entrepreneurial
high-technology manufacturing companies. Therefore, because existing competitors
or other entities desiring to enter the market could conceivably acquire current
entrepreneurial enterprises with small market activity, any and all competitors
must be considered to be formidable.
The Cataract Surgical System Industry. Presently, the major manufacturers
utilizing ultrasonic technology offer products currently in use. Those systems
rely on accessories including single-use cassette packs and other ancillary
surgical disposables such as saline solution, sutures and intraocular lenses for
their profits. The cassette packs are required for fluid and tissue collection
during the surgical procedure. The cassette packs are generally unique and
proprietary to their respective systems and represent a barrier to entry for
third-party, lower-cost after-market suppliers. While there is growing market
resistance in the United States and internationally to single-use cassettes, we
anticipate that manufacturers of ultrasound equipment will continue to develop
and enhance their present ultrasound products in order to protect their
investments in system and cassette technology and to protect their profits from
sales of these cassettes and accessories. Our Precisionist Thirty ThousandTM
ultrasonic phaco system has the ability to use either reusable or single-use
disposable components. The PhotonTM laser cataract system will utilize probes
and cassette packs designed for single-use and semi-disposable instruments
priced at a level consistent with the demands of health care cost containment.
This will allow the health care providers a substantial measure of cost
containment, while providing us with the quality control and income capability
of cassette sales.
The international market, with significantly lower medical budgets, has
not been able to justify the expense of using disposable components. Budgetary
constraints have limited current manufacturers from gaining a significant share
of the international ultrasound equipment market, and have provided a niche for
the emerging smaller companies discussed above.
Ultrasound Equipment Manufacturers. As a relatively recent entrant into
the cataract surgical equipment market with a newer equipment line, we are
establishing ourself and, as yet, do not hold a significant share of the market.
We currently recognize Bausch & Lomb, Alcon Laboratories, and Allergan Medical
Optics as our primary competitors in the ultrasound phaco cataract equipment
market.
Laser Equipment Manufacturers. There are several other companies
attempting to develop laser equipment for cataract surgery. These companies can
be differentiated by the laser wavelength employed for the cataract surgery.
Based on the information currently available to us; Er:YAG laser wavelength
appears to offer a less viable means of removing cataracts than the Nd:Yag
wavelength used by the PhotonTM. One competitor uses a Nd:YAG wavelength,
however the laser is used only to vibrate an ultrasonic needle. Thus the device
remains an ultrasonic system subject to same risk factors of phaco, thereby
eliminating the benefits of using a laser to remove the cataract. We also
believe that our product is sufficiently distinctive and, if properly marketed,
can capture a significant share of the cataract surgical device market. However,
there are substantial risks in undertaking a new venture in an established and
already highly competitive industry. In the short-term, we are seeking to
exploit these opportunities. Depending upon further developments, we may
ultimately exploit those opportunities through a merger with a stronger entity
already established or one that desires to enter the medical industry.
38
We believe that our ability to compete successfully will depend on our
capability to create and maintain advanced technology, develop proprietary
products, attract and retain scientific personnel, obtain patent or other
proprietary protection for our products and technologies, obtain required
regulatory approvals and manufacture, assemble and successfully market products
either alone or through third parties.
The Retinal Diagnostic Market. The Glaucoma Research Foundation suggests
that with the aging of the so-called baby boom generation, there will be an
increase of macular degeneration and glaucoma in the United States, the leading
causes of adult blindness worldwide. The National Eye Institute stated in 2002
that the number of visually impaired Americans is likely to double over the next
three decades. Their report estimated that 2.4 million people suffer some vision
impairment in this country. The damage caused by these diseases is irreversible.
The preconditions for the onset of macular degeneration or glaucoma are low
ocular blood flow and/or high intraocular pressure. Diagnostic screening is
important for individuals susceptible to these diseases. People in high risk
categories include: African Americans over 40 years of age, all persons over 60
years of age, persons with a family history of glaucoma or diabetes, and the
very nearsighted. The glaucoma Research Foundation recommends that these high
risk individuals be tested regularly for glaucoma. According to the U.S. Census
Bureau, in 1995 there were over 30 million adults 65 years of age and older and
8 million African Americans 45 years of age and older. The Glaucoma Research
Foundation reports that glaucoma currently accounts for more than 7 million
visits to physicians annually.
We are subject to intense competition in the ophthalmic diagnostic market
from well-financed, established companies with recognizable trade names and
product lines and new and developing technologies. The industry is dominated by
several large entities which we believe account for the majority of diagnostic
equipment sales. We continue to derive revenues from the sale of its ultrasound
diagnostic equipment and blood flow analyzer. The blood flow analyzer is
designed to detect glaucoma in an earlier stage than is presently possible. In
addition, the device performs tonometry and blood flow analysis. Other
ophthalmic diagnostic devices that do not detect glaucoma in the early stages of
the disease as does our analyzer retail at comparable prices. Thus, we believe
that we can compete in the diagnostic market place based upon the lower price
and improved diagnostic functions of the analyzer.
Intellectual Property Protection
Our cataract surgical products are proprietary in design, engineering and
performance. Our surgical ultrasonic products have not been patented to date
because the primary technology for ultrasonic tissue fragmentation, as available
to all competitors in the market, is mainly in the public domain.
We did acquire proprietary intellectual property in the transaction with
Humphrey Systems when we purchased the diagnostic ultrasonic product line in
1999. This technology uses ultrasound to create a high-resolution computer image
of the unseen parts of the eye that is a "map" for the practitioner. The
ultrasonic biomicroscope, one of the ultrasonic products we purchased, is
subject to a license agreement dated September 27, 1990, with Sunnybrook Health
Science Center. Under the terms of the license agreement, we have the exclusive
worldwide rights to manufacture and sell the ultrasonic biomicroscope, for which
we are required to pay a royalty of $150 for each licensed product sold. The
license agreement was automatically terminated by its terms on September 27,
2002, but we have a continuing obligation after such termination to continue to
pay royalties to Sunnybrook on any ultrasonic biomicroscopes that we sell.
The PhotonTM laser cataract probe is protected under a United States
patent issued to Daniel M. Eichenbaum, M.D. in 1987 and subsequently assigned to
Photomed International, Inc. and a Japanese patent issued to us in 1997 for the
utility and methods of laser ablation, aspiration and irrigation of tissue
through a hand-held probe of a unique design. The United States patent is due to
expire in September 2004.
We secured the exclusive worldwide rights to this patent shortly after its
issue, and to the international patents pending, from Photomed by means of a
license agreement dated July 7, 1993. The license agreement provides us with the
rights to manufacture, distribute and sell a laser system using the Photon(TM)
laser cataract probe and related components to customers on a world wide basis,
for which Photomed is to receive a 1% royalty on all net sales of such systems
and related components. Under the terms of the agreement, we have agreed to
actively be engaged in either research and development of a saleable product
utilizing the patent or in marketing and selling such a product.
39
The license agreement was amended on December 5, 1997 to allow Photomed
the right to conduct research, development and marketing utilizing the patent in
certain medical subspecialties other than ophthalmology for which we would
receive royalty payments equal to 1% of the proceeds from the net sales of
products utilizing the patent. The license agreement expires when the United
States patent rights expire in September 2004.
The Photon(TM) laser cataract probe is also protected under a United
States patent issued to us in 2002 for a laser surgical device for the removal
of intraocular tissue including a handpiece and a trap. The patent is due to
expire in August 2019. There are also two pending United States patents relating
to the Photon(TM) laser cataract probe.
The Blood Flow AnalyzerTM has been granted a patent in the United Kingdom
in 1998 and in the United States in 1999, and has a patent pending in Japan.
These patents relate to pneumatic pressure probes for use in measuring change in
intra-ocular pressure and in measuring pulsatile ocular blood flow. The United
States patent rights expire in January 2019 and the United Kingdom patent rights
expire in November 2015.
The DiconTM Perimeter and the DiconTM Corneal Topographer each have a U.S.
patent with a wide scope of claims. The United States patent for the Dicon(TM)
Perimeter was issued in 1991 and the patent rights expire in March 2010. The
United States patent for the Dicon(TM) Corneal Perimeter was issued in 2002 and
the patent rights expire in January 2018.
Our trademarks are important to our business. It is our policy to pursue
trademark registrations for its trademarks associated with its products as
appropriate. Also, we rely on common law trademark rights to protect its
unregistered trademarks, although common law trademark rights do not provide us
with the same level of protection as would U.S. federal registered trademarks.
Common law trademark rights only extend to the geographical area in which the
trademark is actually used while U.S. federal registration prohibits the use of
the trademark by any party anywhere in the United States.
We also rely on trade secret law to protect some aspects of our
intellectual property. All of our key employees, consultants and advisors are
required to enter into a confidentiality agreement with us. Most of our
third-party manufacturers and formulators are also bound by confidentiality
agreements with us.
Regulation
The FDA under the Food, Drug and Cosmetics Act regulates our surgical and
diagnostic systems as medical devices. As such, these devices require Premarket
clearance or approval by the FDA prior to their marketing and sale. Such
clearance or approval is premised on the production of evidence sufficient for
us to show reasonable assurance of safety and effectiveness regarding our
products. Pursuant to the Food, Drug and Cosmetics Act, the FDA regulates the
manufacture, distribution and production of medical devices in the United States
and the export of medical devices from the United States. Noncompliance with
applicable requirements can result in fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production, denial
of Premarket clearance or approval for devices. Recommendations by the FDA that
we not be allowed to enter into government contracts and criminal prosecution
may also be made.
Following the enactment of the Medical Device Amendments to the Food, Drug
and Cosmetics Act in May 1976, the FDA began classifying medical devices in
commercial distribution into one of three classes: Class I, II or III. This
classification is based on the controls that are perceived to be necessary to
reasonably ensure the safety and effectiveness of medical devices. Class I
devices are those devices, the safety and effectiveness of which can reasonably
be ensured through general controls, such as adequate labeling, advertising,
pre-marketing notification and adherence to the FDA's Quality System
Requirements regulations. Some Class I devices are exempt from some of the
general controls. Class II devices are those devices the safety and
effectiveness of which can reasonably be assured through the use of special
controls, such as performance standards, postmarket surveillance, patient
registries and FDA guidelines. Class III devices are devices that must receive
pre-marketing approval by the FDA to ensure their safety and effectiveness.
Generally, Class III devices are limited to life-sustaining, life-supporting or
implantable devices, or to new devices that have been found not to be
substantially equivalent to legally marketed devices.
40
There are two principal methods by which FDA approval may be obtained. One
method is to seek FDA approval through a pre-marketing notification filing under
Section 510(k) of the Food, Drug and Cosmetics Act. If a manufacturer or
distributor of a medical device can establish that a proposed device is
"substantially equivalent" to a legally marketed Class I or Class II medical
device or to a pre-1976 Class III medical device for which the FDA has not
called for a pre-marketing approval, the manufacturer or distributor may seek
FDA Section 510(k) pre-marketing clearance for the device by filing a Section
510(k) pre-marketing notification. The Section 510(k) notification and the claim
of substantial equivalence will likely have to be supported by various types of
data and materials, possibly including clinical testing results, obtained under
an Investigational Device Exemption granted by the FDA. The manufacturer or
distributor may not place the device into interstate commerce until an order is
issued by the FDA granting pre-marketing clearance for the device. There can be
no assurance that we will obtain Section 510(k) pre-marketing clearance for any
of the future devices for which we seek such clearance including the PhotonTM
laser system.
The FDA may determine that the device is "substantially equivalent" to
another legally marketed Class I, Class II or pre-1976 Class III device for
which the FDA has not called for a pre-marketing approval, and allow the
proposed device to be marketed in the United States. The FDA may determine,
however, that the proposed device is not substantially equivalent, or may
require further information, such as additional test data, before the FDA is
able to make a determination regarding substantial equivalence. A "not
substantially equivalent" determination or a request for additional information
could delay our market introduction of our products and could have a material
adverse effect on our business, operating results and financial condition.
The alternate method to seek approval is to obtain pre-marketing approval
from the FDA. If a manufacturer or distributor of a medical device cannot
establish that a proposed device is substantially equivalent to another legally
marketed device, whether or not the FDA has made a determination in response to
a Section 510(k) notification, the manufacturer or distributor will have to seek
pre-marketing approval for the proposed device. A pre-marketing approval
application would have to be submitted and be supported by extensive data,
including preclinical and clinical trial data to prove the safety and efficacy
of the device. If human clinical trials of a proposed device are required and
the device presents a significant risk, the manufacturer or the distributor of
the device will have to file an Investigational Device Exemption application
with the FDA prior to commencing human clinical trials. The Investigational
Device Exemption application must be supported by data, typically including the
results of animal and mechanical testing. If the Investigational Device
Exemption application is approved, human clinical trials may begin at a specific
number of investigational sites, and the approval letter could include the
number of patients approved by the FDA.
An Investigational Device Exemption clinical trial can be divided into
several parts or phases. Sometimes, a company will conduct a feasibility study
(Phase I) to confirm that a device functions according to its design and
operating parameters. This is a usual clinical trial site. If the Phase I
results are promising, the applicant may, with the FDA's permission, expand the
number of clinical trial sites and the number of patients to be treated to
assure reasonable stability of clinical results. Phase II studies are performed
to confirm predictability of results and the absence of adverse reactions. The
applicant may, upon receipt of the FDA's authorization, subsequently expand the
study to a third phase with a larger number of clinical trial sites and a
greater number of patients. This involves longer patient follow-up times and the
collection of more patient data. Product claims, labeling and core data for the
pre-marketing approval are derived primarily from this portion of the clinical
trial. The applicant may also, upon receipt of the FDA's permission, consolidate
one or more of such portions of the study. Sponsors of clinical trials are
permitted to sell those devices distributed in the course of the study, provided
such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. Although both approval methods may require
clinical testing of the device in question under an approved Investigational
Device Exemption, the pre-marketing approval procedure is more complex and time
consuming.
Upon receipt of the pre-marketing approval application, the FDA makes a
threshold determination whether the application is sufficiently complete to
permit a substantive review. If the FDA determines that the pre-marketing
approval is sufficiently complete to permit a substantive review, the FDA will
"file" the application. Once the submission is filed, the FDA has by regulation
90 days to review it; however, the review time is often extended significantly
by the FDA asking for more information or clarification of information already
provided in the submission. During the review period, an advisory committee may
also evaluate the application and provide recommendations to the FDA as to
whether the device should be approved. In addition, the FDA will inspect the
manufacturing facility to ensure compliance with the FDA's Quality System
Requirements prior to approval of a pre-marketing application. While the FDA has
responded to pre-marketing approval applications within the allotted time
period, pre-marketing approval reviews generally take approximately 12 to 18
months or more from the date of filing to approval. The pre-marketing approval
process is lengthy and expensive, and there can be no assurance that such
approval will be obtained for any of our products determined to be subject to
such requirements. A number of devices for which other companies have sought
pre-marketing approval have never been approved for marketing.
41
Any products manufactured or distributed by us pursuant to a premarket
clearance notification or pre-marketing approval are or will be subject to
pervasive and continuing regulation by the FDA. The Food, Drug and Cosmetics Act
also requires that our products be manufactured in registered establishments and
in accordance with Quality System Requirements regulations. Labeling,
advertising and promotional activities are subject to scrutiny by the FDA and,
in certain instances, by the Federal Trade Commission. The export of medical
devices is also subject to regulation in certain instances. In addition, the use
of our products may be regulated by various state agencies. All lasers
manufactured for us are subject to the Radiation Control for Health and Safety
Act administered by the Center for Devices and Radiological Health of the FDA.
The law requires laser manufacturers to file new product and annual reports and
to maintain quality control, product testing and sales records, to incorporate
certain design and operating features in lasers sold to end users pursuant to
specific performance standards, and to comply with labeling and certification
requirements. Various warning labels must be affixed to the laser, depending on
the class of the product, as established by the performance standards.
Although we believe that we currently comply and will continue to comply
with all applicable regulations regarding the manufacture and sale of medical
devices, such regulations are always subject to change and depend heavily on
administrative interpretations. There can be no assurance that future changes in
review guidelines, regulations or administrative interpretations by the FDA or
other regulatory bodies, with possible retroactive effect, will not materially
adversely affect us. In addition to the foregoing, we are subject to numerous
federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of potentially hazardous substances. There can be no
assurance that we will not be required to incur significant costs to comply with
such laws and regulations and that such compliance will not have a material
adverse effect upon our ability to conduct business.
We and the manufacturers of our products may be inspected on a routine
basis by both the FDA and individual states for compliance with current Quality
System Requirements regulations and other requirements.
Congress has considered several comprehensive federal health care programs
designed to broaden coverage and reduce the costs of existing government and
private insurance programs. These programs have been the subject of criticism
within Congress and the health care industry, and many alternative programs and
features of programs have been proposed and discussed. Therefore, we cannot
predict the content of any federal health care program, if any is passed by
Congress, or its effect on us and our business. Some measures that have been
suggested as possible elements of a new program, such as government price
ceilings on non-reimbursable procedures and spending limitations on hospitals
and other healthcare providers for new equipment, could have an adverse effect
on our business, operating results or financial condition. Uncertainty
concerning the features of any health care program considered by the Congress,
its adoption by the Congress and the effect of the program on our business could
result in volatility of the market price of our common stock.
Furthermore, the introduction of our products in foreign countries may
require us to obtain foreign regulatory clearances. We believe that only a
limited number of foreign countries have extensive regulatory requirements,
including France, Germany, Korea, China and Japan. The time involved for
regulatory approval in foreign countries varies and can take a number of years.
A number of European and other economically advanced countries, including Italy,
Norway, Spain and Sweden, have not developed regulatory agencies for intensive
supervision of such devices. Instead, they generally have been willing to accept
the approval of the FDA. Therefore, a pre-marketing approval, Section 510(k) or
approved Investigational Device Exemption from the FDA is tantamount to approval
in those countries. These countries and most developing countries have simply
deferred direct discretion to licensed practicing surgeons to determine the
nature of devices that they will use in medical procedures. Our two ultrasound
systems, the PhotonTM laser cataract system we are developing and the ocular
blood flow analyzer are all devices, which require FDA approval. Therefore, a
significant aspect of the acceptance of the devices in the market is the our
effectiveness in obtaining the necessary approvals. Having an approved
Investigational Device Exemption allows us to export a product to qualified
investigational sites.
Regulatory Status of Products
All of our products, with the exception of the PhotonTM, are approved for
sale in the U.S. by the FDA under a 510(k). All of our products have been
accepted for import into CE countries and various non-CE countries.
42
We acquired permission from the FDA to export the PhotonTM Laser Cataract
System outside the United States under an open Investigational Device Exemption
granted by the FDA in September 1994. Although the PhotonTM laser cataract
system is uniquely configured in an original and proprietary manner, the laser
system, a Nd:YAG laser, is not proprietary to the device or us and is widely
used in the medical industry and other industries as well. Of particular
significance is the fact that this particular component has received previous
market clearance from the FDA for other ophthalmic and medical applications.
Also of significance is our belief that the surgical treatment method used with
the PhotonTM laser is similar to the current ultrasound cataract treatment
employed by ophthalmologists.
We submitted a Premarket Notification 510(k) application to the FDA for
the PhotonTM laser cataract system in September 1993. The FDA requested clinical
support data for claims made in the 510(k), and in October 1994 we submitted an
Investigational Device Exemption application to provide for a "modest clinical
study" in order to collect the data required by the FDA for clearance of the
PhotonTM laser cataract system. The FDA granted this Investigational Device
Exemption in May 1995 for a Phase I Feasibility Study. We began human clinical
trials in April 1996 and completed the Phase I study in November 1997. We
started Phase II trials in September 1998 and completed numerous cases of
treatment group and control group patients which were included in our submission
to the FDA.
We received a warning letter dated August 30, 2000, from the Office of
Compliance, Center for Devices and Radiological Health of the Food and Drug
Administration relating to certain deficiencies in the human clinical trials for
our PhotonTM Laser Cataract System. The warning letter concerns the conditions
found by the FDA during several audits at our clinical sites. The FDA's comments
were isolated to the administrative procedures of compiling data from the
clinical sites. We responded to the warning letter in a submission dated
September 27, 2000. In the submission we took corrective action that included
submitting a revised clinical protocol and case report forms and procedures for
the collection and control of data. In a subsequent letter dated November 2,
2000 to us, the FDA granted conditional approval provided that we correct
certain deficiencies. After providing several additional submissions to the FDA,
we received a letter dated February 13, 2001 from the FDA stating that the
deficiencies had been corrected and the clinical trials could continue.
Subsequent to the warning letter, we received approval to continue our
clinical trials, the results of which were included in our supplemental
submission to the FDA in October 2001 for the existing (510)(k) predicate device
application for the PhotonTM laser system. In December 2001, we received a
preliminary review from the FDA regarding the supplemental submission. As a
result of that preliminary review, we submitted additional clinical information
to the FDA on February 6, 2002. The application is receiving ongoing review by
the FDA. On May 7, 2002, we received a letter from the FDA requesting further
clinical information. We have generated additional clinical information in
response to the letter and are uncertain if we will make a submission to the FDA
with the additional clinical information. Because of the "going concern" status
of the company, management has focused efforts on those products and activities
that will, in its opinion, achieve the most resource efficient short-term cash
flow to the company. Our diagnostic products are currently our major focus and
the Photon(TM) and other extensive research and development prospects have been
put on hold pending future evaluation when our financial position improves.
Facilities
Our executive offices are currently located at 2355 South 1070 West, Salt
Lake City, Utah. This facility consists of approximately 29,088 square feet of
leased office space under a three-year lease that was to expire on March 1, 2003
with an additional three-year renewal option. These facilities are leased from
Eden Roc, a California partnership, at a base monthly rate of $21,163 plus a
$3,342 monthly common area maintenance fee. In January 2003, we renegotiated a
three-year lease with Eden Roc at a monthly rate of $12,500 plus a $2,500 common
area maintenance fee for the year 2003, with rate increases to $12,875 for 2004
and to $13,261 for 2005. Pursuant to the lease, we pay all real estate and
personal property taxes and the insurance costs on the premises.
We believe that these facilities are adequate and satisfy its needs for
the foreseeable future.
Employees
As of August 31, 2002, we had 29 full-time employees. This number does not
include our manufacturer's representatives who are independent contractors
rather than our employees. We also utilizes several consultants and advisors.
There can be no assurance that we will be successful in recruiting or retaining
key personnel. None of our employees are a member of a labor union and we have
never experienced any business interruption as a result of any labor disputes.
43
In December 2001, we initiated the first phase of a corporate downsizing
program to reduce our operating expenses. We implemented the second phase of our
downsizing program in the second quarter of 2002, by closing and transferring
our manufacturing from our site in San Diego, California to Salt Lake City,
resulting in further reductions in operating expenses. As a result of the
downsizing program and some resignations, the number of our employees has been
reduced by 77% from 112 to 26 employees. The estimated cost savings from the
downsizing program will be in excess of $2,000,000 annually. The costs of
downsizing have included one-time expenses of approximately $43,000 for moving
and travel. In addition, we incurred additional one-time expenses of
approximately $18,000 for housing accommodations for key employees working in
Salt Lake City. We realized a net cost savings from downsizing of approximately
$2,394,000 during the twelve month period ended December 31, 2002.
Legal Proceedings
An action was brought against us in March 2000 by George Wiseman, a former
employee, in the Third District Court of Salt Lake County, State of Utah. The
complaint alleges that we owe Mr. Wiseman 6,370 shares of our common stock plus
costs, attorney's fees and a wage penalty (equal to 1,960 additional shares of
our common stock) pursuant to Utah law. The action is based upon an extension of
a written employment agreement. We believe the complaint is without merit and
intend to vigorously defend against the action.
An action was brought against us in September 2000 by PhotoMed
International, Inc. and Daniel M. Eichenbaum in the Third District Court of Salt
Lake County, State of Utah. The action involves an amount of royalties that are
allegedly due and owing to PhotoMed International, Inc. and Dr. Eichenbaum with
respect to the sale of certain equipment plus attorney's fees. Discovery has
taken place and we have paid royalties of $14,736 to bring all payments up to
date through June 30, 2001. We have been working with PhotoMed International and
Dr. Eichenbaum to ensure that the calculations have been correctly made on the
royalties paid as well as the proper method of calculation for the future. It is
anticipated that once the parties can agree on the correct calculations on the
royalties, the legal action will be dismissed. The issue in dispute concerning
the method of calculating royalties is whether royalties should be paid on
returned equipment. Since July 1, 2001, only one Photon(TM) laser system has
been sold and no systems returned. Thus the amount of royalties due, according
to our calculations, is $600. We intend to make payment of this amount to
PhotoMed International, Inc. and Dr. Eichenbaum and, as a result, to have the
legal action dismissed.
On May 14, 2003, a complaint was filed in the United States District
Court, District of Utah, captioned Richard Meyer, individually and on behalf of
all others similarly suited v. Paradigm Medical Industries, Inc., Thomas Motter,
Mark Miehle and John Hemmer, Case No. 2:03 CV00448TC. The complaint also
indicates that it is a "Class Action Complaint for Violations of Federal
Securities Law and Plaintiffs Demand a Trial by Jury." We are in the process of
reviewing the complaint, which appears to be focused on alleged false and
misleading statements pertaining to the Blood Flow Analyzer(TM) and concerning a
purchase order from Valdespino Associates Enterprises and Westland Corp.
More specifically, the complaint alleges that we falsely stated in our
Securities and Exchange Commission filings and press releases that we had
received authorization to use an insurance reimbursement CPT code from the CPT
Code Research and Development Division of the American Medical Association in
connection with the Blood Flow Analyzer(TM), adding that the CPT code provides
for a reimbursement to doctors of $57.00 per patient for use of the Blood Flow
Analyzer(TM). The complaint also alleges that on July 11, 2002, we issued a
press release falsely announcing that we had received a purchase order from
Valdespino Associates Enterprises and Westland Corp. for 200 sets of our entire
portfolio of products, with $70 million in systems to be delivered over a
two-year period, then another $34 million of orders to be completed in the third
year.
On June 2, 2003, a complaint was filed in the same United States District
Court captioned Michael Marrone v. Paradigm Medical Industries, Inc., Thomas
Motter, Mark Miehle and John Hemmer, Case No. 2:03 CV00513 PGC. On or about June
11, 2003, a complaint was filed in the same United States District Court
captioned Milian v. Paradigm Medical Industries, Inc., Thomas Motter, Mark
Miehle and John Hemmer, Case No. 2:03 CV00617PGC. Both seek class action status.
Those cases are similar in nature to the Meyer case and are also under review.
It is likely all of these cases will be consolidated into a single action. We
intend to vigorously defend and protect our interests in the said cases.
44
An action was filed on June 20, 2003, in the Third Judicial District
Court, Salt Lake County, State of Utah (Civil No. 030914195) by CitiCorp Vendor
Finance, Inc., formerly known as Copelco Capital, Inc. The complaint claims that
$49,626 plus interest is due for the leasing of two copy machines that were
delivered to our Salt Lake City facilities on or about April of 2000. The action
also seeks an award of attorney's fees and costs incurred in the collection. We
dispute the amounts allegedly owed, asserting that the equipment we returned to
the leasing company did not work properly. A responsive pleading has not yet
been filed.
An action was filed in June, 2003 in the Third Judicial District Court,
Salt Lake County, State of Utah (Civil No. 030914719) by Franklin Funding, Inc.
in which it alleges that we had entered into a lease agreement for the lease of
certain equipment for which payment is due. It is claimed that there is due and
owing approximately $89,988 after accruing late fees, interest, repossession
costs, collection costs and attorneys' fees. We intend to conduct a review of
the situation so as to appropriately defend our interests in light of the nature
of the transaction and the potential of others being in a liability situation. A
responsive pleading has not yet been filed.
On July 10, 2002, an action was filed in the United States District Court,
District of Utah, by Innovative Optics, Inc. ("Innovative") and Barton Dietrich
Investments, L.P. Defendants include the company, and Thomas Motter, Mark Miehle
and John Hemmer, former officers of the company. The complaint claims that
Innovative and Barton entered into an asset purchase agreement with us on
January 31, 2002, in which we agreed to purchase all the assets of Innovative in
consideration for the issuance of 1,310,000 shares of our common stock to
Innovative. The complaint also claims that we allegedly made false and
misleading statements pertaining to the Blood Flow Analyzer(TM) and concerning a
purchase order from Valdespino Associates Enterprises and Westland Corp. The
purposes of these statements, according to the complaint, was to induce
Innovative to sell its assets and purchase the shares of our common stock at
artificially inflated prices while simultaneously deceiving Innovative and
Barton into believing that our shares were worth more than they actually were.
The complaint further claims that 491,250 of the shares to be issued to
Innovative in the asset purchase transaction were not issued on a timely basis
and we also did not file a registration statement with the Securities and
Exchange Commission within five months of the closing date of the asset purchase
transaction. As a result, the complaint alleges that the value of the shares of
our common stock issued to Innovative in the transaction declined. None of the
defendants have yet been served in the action. We believe the complaint is
without merit and intend to vigorously defend and protect our interests in the
action.
On August 3, 2003, a complaint was filed against us by Corinne Powell, a
former employee, in the Third Judicial District Court, Salt Lake County, State
of Utah (Civil No. 030918364). Defendants consist of the company and Randall A.
Mackey, Dr. David M. Silver and Keith D. Ignotz, directors of the company. The
complaint alleges that at the time we laid off Ms. Powell on March 25, 2003, she
was owed $2,030 for business expenses, $11,063 for accrued vacation days,
$12,818 for unpaid commissions, the fair market value of 50,000 stock options
exercisable at $5.00 per share that she claims she was prevented from
exercising, attorney's fees and a continuing wage penalty under Utah law. We
dispute the amounts allegedly owed and intend to vigorously defend and protect
our interests in the action.
We are not a party to any other material legal proceedings outside the
ordinary course of its business or to any other legal proceedings which, if
adversely determined, would have a material adverse effect on our financial
condition or results of operations.
MANAGEMENT
Directors and Executive Officers
As of August 31, 2003, our executive officers and directors, their ages
and their positions are set forth below:
Name Age Position
Jeffrey F. Poore 55 President and Chief Executive Officer
Gregory C. Hill 54 Vice President of Finance, Treasurer, and Chief Financial Officer
Randall A. Mackey, Esq. 57 Chairman of the Board, Secretary and Director
David M. Silver, PhD. 61 Director
Keith D. Ignotz 54 Director
The directors are elected for one-year terms that expire at the next
annual meeting of shareholders. Executive officers are elected annually by the
Board of Directors to hold office until the first meeting of the Board following
the next annual meeting of shareholders and until their successors have been
elected and qualified.
46
Jeffrey F. Poore, D.D.S. has served as our President and Chief Executive
Officer since March 24, 2003. Dr. Poore served as Court Appointed Receiver and
Custodian of a $50 million a year company from 2000 to 2003. From 1998 to 2000,
Dr. Poore served as Chief Executive Officer for Outsource Group, a high-tech
company that produces medical practice management software. From 1996 to 1998,
he served as Chairman, Chief Executive Officer and acting President of
Healthchair Group, Inc., a manufacturer of medical and dental equipment. From
1994 to 1996, Dr. Poore served as President and Chief Executive Officer of
Comphealth, one of the nation's largest health care professional staffing
organizations. From 1985 to 1992, Dr. Poore served as Associate Regional Vice
President of FHP of Utah, Inc. He earned a B.A. degree in Economics from Brigham
Young University in 1971, and a D.D.S. degree from Loyola Medical Center in
1976. Dr. Poore also served as a director of Interwest Home Medical from 1995
until its acquisition by Praxair in June 2001
Gregory C. Hill has served as our Vice President of Finance, Treasurer and
Chief Financial Officer since June 3, 2003. From 2001 through June 2003, Mr.
Hill was an independent financial consultant. From 1999 to 2001, Mr. Hill served
as Senior Vice President, Chief Financial Officer and Treasurer of Lineo, Inc.,
a software company specializing in embedded systems. From 1997 to 1999, he was
employed by Sensorium Software, Inc., where he served as Chief Financial
Officer. From 1995 to 1997, Mr. Hill was Treasurer of Quark, Inc., a desktop
publishing software company. Mr. Hill also served as Vice President and
Treasurer of Tyco Toys, Inc. from 1993 to 1995, where he directed the worldwide
treasury of Tyco Toys. Mr. Hill received a B.S. degree from the Massachusetts
Institute of Technology (M.I.T.) in 1973 and an M.B.A. degree from the Harvard
Business School in 1976.
Randall A. Mackey, Esq. has been our Chairman of the Board since August 20,
2002, and a director since January 2000. He had served as a director of the
company from November 1995 to September 1998. Mr. Mackey has been President of
the Salt Lake City law firm of Mackey Price & Thompson since 1992, and a
shareholder and director of the firm and its predecessor firms since 1989. Mr.
Mackey received a B.S. degree in Economics from the University of Utah in 1968,
an M.B.A. degree from the Harvard Business School in 1970, a J.D. degree from
Columbia Law School in 1975 and a B.C.L. degree from Oxford University in 1977.
Mr. Mackey has also served as Chairman of the Board from June 2001 to May 2003,
and as a director from 1998 to May 2003 of Cimetrix, Incorporated, a software
development company. Mr. Mackey has additionally served as Chairman of the Board
from July 2000 to July 2003 and as a trustee from 1993 to July 2003 of Salt Lake
Community College.
David M. Silver, Ph.D. has been a director since January 2000. He had
served as a director of the company from November 1995 to September 1998. Dr.
Silver is a Principal Senior Scientist in the Milton S. Eisenhower Research and
Technology Development Center at the Johns Hopkins University Applied Physics
Laboratory, where he has been employed since 1970. He served as the J. H.
Fitzgerald Dunning Professor of Ophthalmology in the Johns Hopkins Wilmer Eye
Institute in Baltimore during 1998-99. He received a B.S. degree from Illinois
Institute of Technology, an M.A. degree from Johns Hopkins University and a
Ph.D. degree from Iowa State University before holding a postdoctoral fellowship
at Harvard University and a visiting scientist position at the University of
Paris.
Keith D. Ignotz has been a director since November 2000. He has been
President and Chief Operating Officer of SpectRx, Inc., a medical technology
company that he founded in 1992, which develops, manufactures and markets
alternatives to traditional blood-based medical tests. From 1986 to 1992, Mr.
Ignotz was Senior Vice President of Allergan Humphrey, Inc., a medical
electronics company. From 1985 to 1986, he was President of Humphrey Instruments
Limited-SKB, a medical electronics company, and from 1980 to 1985, Mr. Ignotz
was President of Humphrey Instruments GmbH, also a medical electronics company.
Mr. Ignotz also served on the Board of Directors of Vismed, Inc., d/b/a Dicon
from 1992 to June 2000. Mr. Ignotz received a B.A. degree in Sociology and
Political Science from San Jose University and an M.B.A. degree from Pepperdine
University. Mr. Ignotz has served as a trustee of Pennsylvania College of
Optometry since 1990, as a director for FluoRx, Inc. since 1997, and as a member
of the American Marketing Association of the American Association of Diabetes
Education.
Appointment of New Vice President of Sales and Marketing
On February 28, 2003, Raymond P.C. Cannefax was appointed as our Vice
President of Sales and Marketing.
47
Board Meetings and Committees
The Board of Directors held a total of seven meetings during the fiscal
year ended December 31, 2002. No director attended fewer than 75% of all
meetings of the Board of Directors during the 2002 fiscal year. The Audit
Committee of the Board of Directors consists of directors Dr. David M. Silver,
Randall A. Mackey and Keith D. Ignotz. The Audit Committee met twice during the
fiscal year. The Audit Committee is primarily responsible for reviewing the
services performed by our independent public accountants and internal audit
department and evaluating our accounting principles and our system of internal
accounting controls. The Compensation Committee of the Board of Directors
consists of directors Dr. David M. Silver, Randall A. Mackey and Keith D.
Ignotz. The Compensation Committee met two times during the fiscal year. The
Compensation Committee is primarily responsible for reviewing compensation of
executive officers and overseeing the granting of stock options.
Executive Compensation
The following table sets forth, for each of the last three fiscal years,
the compensation received by Thomas F. Motter, former Chairman of the Board, and
Chief Executive Officer and other executive officers whose salary and bonus for
all services in all capacities exceed $100,000 for the fiscal years ended
December 31, 2002, 2001 and 2000.
Summary Compensation Table
---------------------- ---------- ------------------------------------------ ------------------------------------------ ------------
Annual Compensation Long Term Compensation
---------------------- ---------- ------------------------------------------ ------------------------------------------ ------------
---------------------- ---------- ------------ --------------- ------------- ----------------------------- ------------ ------------
Awards Payouts
---------------------- ---------- ------------ --------------- ------------- ----------------------------- ------------ ------------
---------------------- ---------- ------------ --------------- ------------- ------------- --------------- ------------ ------------
Other Securities
Annual Restricted Underlying Long-term All Other
Name and Compensa- Stock Options/ Incentive Compensa-
Principal Position Year Salary$ Bonus($) tion($)(6) Awards($) SARs(#) Payouts($) tion($)
------------------ ---- ------- -------- ---------- --------- ------- ---------- -------
---------------------- ---------- ------------ --------------- ------------- ------------- --------------- ------------ ------------
---------------------- ---------- ------------ --------------- ------------- ------------- --------------- ------------ ------------
Thomas F. Motter 2002(1) $187,483 0 0 0 0 0 $ 19,750(4)(5)
Former Chairman of 2001(2) $200,000 $ 22,380(6) 0 0 925,000(8) 0 $ 6,000(4)
the Board and Chief 2000(3) $178,357 $ 486,113(7) 0 0 0 $ 28,792(4)(5)
Executive Officer 0
---------------------- ---------- ------------ --------------- ------------- ------------- --------------- ------------ ------------
---------------------- ---------- ------------ --------------- ------------- ------------- --------------- ------------ ------------
Mark R. Miehle 2002(1) $134,202 0 0 0 55,000(9) 0 $ 3,000(4)
Former President and 2001(2) $150,000 0 0 0 110,000(10) 0 $ 6,000(4)
Chief Operating 2000(3) $235,201 $ 194,000(9) 0 0 150,000(11) 0 $ 6,000(4)
Officer
---------------------- ---------- ------------ --------------- ------------- ------------- --------------- ------------ ------------
---------------------- ---------- ------------ --------------- ------------- ------------- --------------- ------------ ------------
Aziz A. Mohabbat 2002(1) $126,878 0 0 0 0 0 0
Former Vice
President of
Operations(12)
---------------------- ---------- ------------ --------------- ------------- ------------- --------------- ------------ ------------
---------------------- ---------- ------------ --------------- ------------- ------------- --------------- ------------ ------------
Heber C. Maughan 2002(1) $114,416 0 0 0 0 0 0
Former Chief 2001(2) $ 27,500 0 0 0 30,000(14) 0 0
Financial
Officer(13)
---------------------- ---------- ------------ --------------- ------------- ------------- --------------- ------------ ------------
(1) For the fiscal year ended December 31, 2002
(2) For the fiscal year ended December 31, 2001
48
(3) For the fiscal year ended December 31, 2000
(4) The amounts under "All Other Compensation" for 2002, 2001 and 2000 include
payments related to the operation of automobiles and/or automobiles and
insurance by the named executives.
(5) The amounts under "All Other Compensation" for 2002 and 2000 include
payments related to the residential housing accommodations for our
employees, living outside of Utah while they were working at our corporate
headquarters in Salt Lake City, leased from Mr. Motter at $2,500 per
month.
(6) We awarded Mr. Motter a cash bonus in June 2001.
(7) On January 21, 2000, our board of directors approved a bonus to Mr. Motter
in the form of 38,889 shares of our common stock. The bonus was valued at
$486,113 on the basis of the closing bid price of our common stock of
$12.50 per share on January 21, 2000, the date our board approved the
bonus.
(8) On September 11, 2001, we granted Mr. Motter options to purchase 925,000
shares of our common stock at an exercise price of $2.75 per share.
(9) On January 29, 2002, our board of directors granted Mr. Miehle options to
purchase the 55,000 shares of our common stock at an exercise price of
$2.75 per share.
(10) On September 11, 2001, our board of directors granted Mr. Miehle options
to purchase 110,000 shares of our common stock at an exercise price of
$2.75 per share.
(11) On June 5, 2000, our board of directors issued Mr. Miehle 28,500 shares of
our common stock as a initial bonus as part of his employment agreement.
The market price on the date of grant was $6.8125 per share, and
compensation expense in the amount of $194,000 was recognized. Mr. Miehle
was also granted options to purchase 150,000 shares of our common stock at
an exercise price of $6.00 per share.
(12) Mr. Mohabbat was named as Interim Chief Operating Officer on August 30,
2002. He was not an officer in prior years. (13) Mr. Maughan was named as
Interim Chief Executive Officer on August 30, 2002. (14) On October 1,
2001, our board of directors granted options to Mr. Maughan to purchase
30,000 shares of our common stock at an
exercise price of $2.75 per share.
Options
The following table sets forth information regarding stock options granted
during the fiscal year ended December 31, 2002, to each named executive officer.
Option Grants in Last Fiscal Year
------------------------------------------ -----------------------------------------------------------------------------------------
Individual Grants
------------------------------------------ -----------------------------------------------------------------------------------------
------------------------------------------ ------------------- --------------------- -------------- ---------------- ---------------
Percentage of
Total
Number of Options
Securities Granted to Exercise
Underlying Employees in Price
Options Fiscal Per Share Expiration
Name Granted (#) Year(%) ($/Sh) Date
---- ----------- ------- ------ ----
------------------------------------------ ------------------- --------------------- -------------- ---------------- ---------------
------------------------------------------ ------------------- --------------------- -------------- ---------------- ---------------
Thomas F. Motter...................... 0 -- -- --
------------------------------------------ ------------------- --------------------- -------------- ---------------- ---------------
------------------------------------------ ------------------- --------------------- -------------- ---------------- ---------------
Mark R. Miehle........................ 55,000(1) 78.6% $2.75 1/29/09
------------------------------------------ ------------------- --------------------- -------------- ---------------- ---------------
------------------------------------------ ------------------- --------------------- -------------- ---------------- ---------------
Aziz A. Mohabbat...................... 0 -- -- --
------------------------------------------ ------------------- --------------------- -------------- ---------------- ---------------
------------------------------------------ ------------------- --------------------- -------------- ---------------- ---------------
Heber C. Maughan...................... 0 -- -- --
------------------------------------------ ------------------- --------------------- -------------- ---------------- ---------------
(1) Options vest in four equal annual installments beginning on January 29,
2003.
The following table sets forth information regarding unexercised options
to acquire shares of our common stock held as of December 31, 2002, by each
named executive officer.
49
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
------------------------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 2002(#) at December 31, 2002($)
----------------------- ----------------------
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Shares Acquired Value
Name on Exercise Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Thomas F. Motter.......... 0 0 843,690 187,500 0 0
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Miehle............ 0 0 152,233 187,500 0 0
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Aziz A. Mohabbat.......... 0 0 17,500 42,500 0 0
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Heber C. Maughan............ 0 0 7,500 22,500 0 0
------------------------------------------------------------------------------------------------------------------------------------
Director Compensation
On September 11, 2001, Messrs. Randall A. Mackey, Dr. David M. Silver and
Keith D. Ignotz, directors of our company, were each granted options to purchase
125,000 shares of our common stock at an exercise price of $2.75 per share. On
September 11, 2001, Messrs. Mackey and Silver were each granted options to
purchase 200,000 shares of our common stock at an exercise price of $2.75 per
share in consideration for past services as our directors from November 1995 to
September 1998 and since January 2000. In addition, outside directors are also
reimbursed for their expenses in attending board and committee meetings.
Directors are not precluded from serving us in any other capacity and receiving
compensation therefore. The options were not issued at a discount to the then
market price.
Employee 401(k) Plan
In October 1996, our board of directors adopted a 401(k) Retirement
Savings Plan. Under the terms of the 401(k) plan, effective as of November 1,
1996, we may make discretionary employer matching contributions to our employees
who choose to participate in the plan. The plan allows the board to determine
the amount of the contribution at the beginning of each year. The Board adopted
a contribution formula specifying that such discretionary employer matching
contributions would equal 100% of the participating employee's contribution to
the plan up to a maximum discretionary employee contribution of 3% of a
participating employee's compensation, as defined by the plan. All persons who
have completed at least six months' service with us and satisfy other plan
requirements are eligible to participate in the plan.
1995 Stock Option Plan
We adopted a 1995 Stock Option Plan, for the officers, employees,
directors and consultants of our company on November 7, 1995. The plan
authorized the granting of stock options to purchase an aggregate of not more
than 300,000 shares of our common stock. On February 16, 1996, options for
substantially all 300,000 shares were granted. On June 9, 1997, our shareholders
approved an amendment to the plan to increase the number of shares of common
stock reserved for issuance thereunder from 300,000 shares to 600,000 shares. On
September 3, 1998, our shareholders approved an amendment to the plan to
increase the number of shares of common stock reserved for issuance thereunder
from 600,000 shares to 1,200,000 shares. On November 29, 2000, our shareholders
approved an amendment to the plan to increase the number of shares of common
stock reserved for issuance thereunder from 1,200,000 shares to 1,700,000
shares. On September 11, 2001, our shareholders approved an amendment to the
1995 plan to increase the number of shares of common stock reserved for issuance
thereunder from 1,700,000 shares to 2,700,000 shares. On June 13, 2003, our
shareholders approved an amendment to the plan to increase the member of shares
of common stock reserved for issuance thereunder from 2,700,000 shares to
3,700,000 shares.
50
The compensation committee administers the 1995 Stock Option Plan. In
general, the compensation committee will select the person to whom options will
be granted and will determine, subject to the terms of the plan, the number,
exercise, and other provisions of such options. Options granted under the plan
will become exercisable at such times as may be determined by the compensation
committee. Options granted under the plan may be either incentive stock options,
as such term is defined in the Internal Revenue Code, or non-incentive stock
options. Incentive stock options may only be granted to persons who are our
employees. Non-incentive stock options may be granted to any person, including,
but not limited to, our employees, independent agents, consultants as the
compensation committee believes has contributed, or will contribute, to our
success as the compensation committee believes has contributed, or will
contribute, to our success. The compensation committee determines the exercise
price of options granted under the 1995 Stock Option Plan, provided that, in the
case of incentive stock options, such price is not less than 100% (110% in the
case of incentive stock options granted to holders of 10% of voting power of our
stock) of the fair market value (as defined in the plan) of the common stock on
the date of grant. The aggregate fair market value (determined at the time of
option grant) of stock with respect to which incentive stock options become
exercisable for the first time in any year cannot exceed $100,000.
The term of each option shall not be more than ten years (five years in
the case of incentive stock options granted to holders of 10% of the voting
power of our stock) from the date of grant. The Board of Directors has a right
to amend, suspend or terminate the 1995 Stock Option Plan at any time; provided,
however, that unless ratified by our shareholders, no amendment or change in the
plan will be effective that would increase the total number of shares that may
be issued under the plan, materially increase the benefits accruing to persons
granted under the plan or materially modify the requirements as to eligibility
and participation in the plan. No amendment, supervision or termination of the
plan shall, without the consent of an employee to whom an option shall
heretofore have been granted, affect the rights of such employee under such
option.
Employment Agreements
We entered into an employment agreement with Thomas F. Motter, which
commenced on January 1, 1998 and expires on December 31, 2002. The
agreement requires Mr. Motter to devote substantially all of his working
time to us, provided that he may be terminated for "cause" (as provided
in the agreements) and prohibits him from competing with us for two years
following the termination of his employment agreement. The agreement
provides for the payment of an initial base salary of $135,000, effective
as of January 1, 1998. The agreement also provides for salary increases
and bonuses as shall be determined at the discretion of the board of
directors. Effective as of October 1, 1999, the Board of Directors
approved an increase in Mr. Motter's annual base salary to $160,000, and
effective as of July 1, 2000, the board approved an increase in his
annual base salary to $200,000, which remained in effect during 2002. Mr.
Motter resigned on August 30, 2002. He continued to receive his salary
per terms of the agreement through December 16, 2002.
We entered into an employment agreement with Mark R. Miehle, which
commenced on June 5, 2000, and was to expire on June 4, 2003. The agreement
required Mr. Miehle to devote substantially all of his working time to us,
provided that he may be terminated for "cause" (as provided in the agreement)
and prohibited him from competing with us for two years following the
termination of his employment agreement. The agreement provided for the payment
of an initial annual base salary of $150,000, effective as of June 5, 2000, and
the issuance of stock options to purchase 150,000 shares of our common stock at
$6.00 per share, to be vested in equal annual amounts over a three year period.
The agreement also provided for salary increases and bonuses as to be determined
at the discretion of the Board of Directors. The stated annual compensation
remained in effect through December 31, 2001 and into 2002. The board of
directors terminated Mr. Miehle on August 30, 2002. He entered into a six month
consulting agreement, which expired on February 28, 2003, for $5,000 per month.
Mr. Miehle was paid $15,000 in 2002 under the terms of the consulting agreement.
We entered into an employment agreement with Jeffrey F. Poore, which
commenced on March 19, 2003 and expires on March 19, 2006. The agreement
requires Mr. Poore to devote substantially all of his working time to us,
provided that he may be terminated for "cause" (as provided in the agreements)
and prohibits him from competing with us for two years following the termination
of his employment agreement. The agreement provides for the payment of an
initial base salary of $175,000, effective as of March 19, 2003. The agreement
also provides for salary increases and bonuses as shall be determined at the
discretion of the board of directors. The agreement further provides for the
issuance of stock options to purchase 1,000,000 shares of our common stock at
$.16 per share, of which options to purchase 800,000 shares of common stock
shall vest on March 19, 2003, options for an additional 100,000 shares of common
stock shall vest on March 19, 2004, and options for an additional 100,000 shares
of common stock shall vest on March 19, 2005.
Limitation of Liability and Indemnification
51
We reincorporated in Delaware in February 1996, in part, to take
advantage of certain provisions in Delaware's corporate law relating to
limitations on liability of corporate officers and directors. We believe that
the reincorporation into Delaware, the provisions of its Certificate of
Incorporation and Bylaws and the separate indemnification agreements outlined
below are necessary to attract and retain qualified persons as directors and
officers. Our Certificate of Incorporation limits the liability of directors to
the maximum extent permitted by Delaware law. This provision is intended to
allow our directors the benefit of Delaware General Corporation Law that
provides that directors of Delaware corporations may be relieved of monetary
liabilities for breach of their fiduciary duties as directors, except under
certain circumstances, including breach of their duty of loyalty, acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, unlawful payments of dividends or unlawful stock repurchases
or redemptions or any transaction from which the director derived an improper
personal benefit. Our Bylaws provide that we shall indemnify our officers and
directors to the fullest extent provided by Delaware law. Our Bylaws authorize
the use of indemnification agreements and we have entered into such agreements
with each of our directors and executive officers.
There is pending litigation against Thomas F. Motter, Mark R. Miehle and
John W. Hemmer, former officers of the company, to whom we have indemnification
obligations. The pending litigation consists of class action complaints for
alleged violations of the federal securities laws filed in the United States
District Court, District of Utah, captioned Richard Meyer, individually and on
behalf of others similarly situated v. Paradigm Medical Industries, Inc., Thomas
Motter, Mark Miehle and John Hemmer, Case No. 2:03 CV00448TC, Michael Marrone v.
Paradigm Medical Industries, Inc., Thomas Motter, Mark Miehle, and John Hemmer,
Case No. 2:03 CV00513PGC, and Milian v. Paradigm Medical Industries, Inc.,
Thomas Motter, Mark Miehle and John Hemmer, Case No. 2:03 CV00617PGC. There is
also pending litigation against Messrs. Motter, Miehle and Hemmer in an action
filed in the United States District Court, District of Utah by Innovative
Optics, Inc. Except for these litigation matters, there is no pending litigation
or proceedings involving a director, officer, employee or other agent of our
company as to which indemnification is being sought, nor are we aware of any
threatened litigation that may result in claims for indemnification by any
director, officer, employee or other agent.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers, directors and persons who own more than 10% of any class of
our common stock to file initial reports of ownership and reports of changes of
ownership of common stock. Such persons are also required to furnish us with all
Section 16(a) reports they file. Based solely on our review of the copies of
such reports received by us with respect to fiscal 2002, or written
representations from certain reporting persons, we believe that all filing
requirements applicable to its directors, officers and greater than 10%
beneficial owners were complied with.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of August 31, 2003 for (i) each
executive officer (ii) each director, (iii) each person known to us to be the
beneficial owner of more than 5% of the outstanding shares, and (iv) all
directors and officers as a group.
Percent of
Name and Address(1) Number of Shares Ownership
Douglas A. MacLeod, M.D. (2) 2,538,451 10.1%
502 South M Street
Tacoma Washington 98405
Jeffrey F. Poore(3) 800,000 3.2
Dr. David M. Silver(4) 616,166 2.5
Randall A. Mackey(4) 600,000 2.4
Keith D. Ignotz(5) 329,560 *
Gregory C. Hill -- *
Thomas F. Motter -- *
Mark R. Miehle -- *
John W. Hemmer 8,863 *
Aziz A. Mohabbat -- *
Executive officers and directors
as a group (nine persons) 2,354,589 9.4%
-----------------
*Less than 1%.
(1) Unless otherwise indicated, the address of each listed stockholder is c/o
Paradigm Medical Industries, Inc., 2355 South 1070 West, Salt Lake City,
Utah, 84119.
(2) Includes the stock held by Douglas A. MacLeod, M.D. Profit Sharing Trust,
St. Mark's Eye Institute and Milan Holdings, Ltd. (3) Includes options to
purchase 800,000 shares of Common Stock granted to Dr. Poore that are
currently exercisable or will
become exercisable within 60 days of June 30, 2003.
(4) Includes options to purchase 600,000 shares of Common Stock granted to
each of Dr. Silver and Mr. Mackey that are currently exercisable or will
become exercisable within 60 days of June 30, 2003.
(5) Includes options to purchase 328,851 shares of Common Stock granted to Mr.
Ignotz that are currently exercisable or will become exercisable within 60
days of June 30, 2003.
52
CERTAIN TRANSACTIONS
The information set forth herein describes certain transactions between
us and certain affiliated parties. Future transactions, if any, will be approved
by a majority of the disinterested members and will be on terms no less
favorable to us than those that could be obtained from unaffiliated parties.
Thomas F. Motter, our former Chairman of the Board and Chief Executive
Officer, leased his former residence to us for $2,500 per month. The primary use
of the residential property was for housing accommodations for our employees
living outside of Utah while they were working at our corporate headquarters in
Salt Lake City. We paid $14,000 in rent during 2002. This agreement was
terminated on January 31, 2003.
We entered into a consulting agreement with Mark R. Miehle, the our
former president and chief operating officer for a period of six months
commencing on September 3, 2002. The agreement was renewable for additional six
month terms. We did not renew the contract upon its expiration. We paid $15,000
under this agreement during 2002 and had an accrual of $5,000 as of December 31,
2002.
Randall A. Mackey, a director since January 21, 2000, and from September
1995 to September 3, 1998 and chairman of the board since August 30, 2002, is
President and a shareholder of the law firm of Mackey Price & Thompson, which
rendered legal services in connection with various corporate matters. Legal fees
and expenses paid to Mackey Price & Thompson for the fiscal years ended December
31, 2002 and 2001, totaled $167,000 and $159,000, respectively. As of December
31, 2002, we owed this firm $47,000, which is included in accounts payable.
SELLING SECURITYHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of August 31, 2003, by each of the holders of
Series G convertible preferred stock, or selling Series G preferred
shareholders, assuming each of the selling Series G preferred shareholders elect
to exercise his or her conversion rights to convert the Series G preferred
shares into shares of common stock, at a conversion rate equal to one share of
common stock for each share of Series G preferred stock, the number of shares to
be sold by each selling Series G preferred shareholder and the percentage of
each selling Series G preferred shareholder after the sale of common stock
included in this prospectus.
Shareholders Shares Beneficially Owned Number of Shares
Prior to Offering Shares Being Beneficially Owned
Offered After Offering
--------------------------------- --------------------------------
Number Percent Number Percent
Crescent International, Inc.(1) 1,393,325 5.3% 1,393,325 0 *
OTAPE Investments LLC(2) 588,235 2.3% 588,235 0 *
------------ ------- ---------
TOTAL 1,981,560 1,981,560
------------ ---------
-------------------
*Less than 1%.
(1) The investment advisor of Crescent International, Inc. is Greenlight
(Switzerland) S.A., which exercises sole voting and investment powers,
and Mel Craw and Maxi Brezzi are the managers of Greenlight (Switzerland)
S.A.
(2) The chief executive officer of OTAPE Investments LLC is Ira M. Leventhal,
who exercises sole voting and investment powers.
53
The following table sets forth information regarding the beneficial
ownership of our common stock as of August 31, 2003, by each of the shareholders
of common stock for resale, or selling shareholders, pursuant to registration
rights granted to such selling shareholders, the number of shares to be sold by
each selling shareholder and the percentage of each selling shareholder after
the sale of the shares included in this prospectus.
Shareholders Shares Beneficially Owned Number of Shares
Prior to Offering Shares Being Beneficially Owned
Offered After Offering
--------------------------------- --------------------------------
Number Percent Number Percent
Les Anderton Retirement Plan One 20,000 * 20,000 0 *
Byron B. Barkley 50,000 * 50,000 0 *
Byron B. Barkley IRA 50,000 * 50,000 0 *
M. Dale Burningham 13,333 * 13,333 0 *
John Charles Casebeer, M.D. 300,000 1.2% 300,000 0 *
Lane Clissold 20,000 * 20,000 0 *
Lyle W. Davis 50,000 * 50,000 0 *
Paul N. Davis 56,000 * 56,000 0 *
Gemcard Portfolios Ltd.(1) 53,000 * 53,000 0 *
Steven H. Ingle and Susan Ingle 45,000 * 45,000 0 *
Revocable Trust(2)
JJR Investments, LLC(3) 146,666 * 146,666 0 *
Denton Harris 270,000 1.1% 270,000 0 *
Ruby Ream 26,600 * 26,600 0 *
Carolyn D. Stewart and Denise
Stewart McDonough, Joint 30,000 * 30,000 0 *
Tenants
Wilco(4) 71,193 * 71,193 0 *
Wilson-Davis & Co., Inc. 28,000 * 28,000 0 *
------ -- ------ -- --
401(k) Profit Sharing Plan(5)
TOTAL 1,229,792 1,229,792 0
------------- --------------- -----------------
* Less than 1%.
(1) The director of Gemcard Portfolios, Ltd. is Michael Riegels, who exercises
sole voting and investment powers.
(2) The trustees of the Steven H. Ingle and Susan Ingle Revocable Trust are
Steven H. Ingle and Susan Ingle, who exercise shared voting and investment
powers.
(3) The manager of JJR Investments, LLC is James J. Robinson, who exercises
sole voting and investment powers.
(4) The managing partner of Wilco, a Utah general partnership, is Paul N.
Davis, who exercises sole voting and investment powers.
(5) The trustee of Wilson-Davis & Co., Inc. 401(k) Profit Sharing Plan is Paul
N. Davis and Lyle W. Davis, who exercise shared voting and investment
powers.
54
The following table sets forth information regarding the beneficial
ownership of our common stock as of August 31, 2003, by each of the holders of
warrants, or selling securityholders, assuming each of the selling
securityholders elects to exercise the warrants held by such selling
securityholder to purchase shares of common stock at an exercise price of $.50
per share, the number of shares of common stock to be sold by each selling
securityholder, and the percentage of each selling securityholder after the sale
of common stock included in this prospectus.
Optionholders Shares Beneficially Owned Number of Shares
Prior to Offering Shares Being Beneficially Owned
Offered After Offering
--------------------------------- --------------------------------
Number Percent Number Percent
Crescent International, Inc. 1,610,179 6.0% 294,118 1,393,325 5.3%
OTAPE Investment, LLC(2) 735,295 2.8% 88,235 588,235 2.3%
--------- ----- ------- --------- ----
TOTAL 2,345,464 382,353 1,981,560
--------- ------- ---------
-------------------
*Less than 1%.
(1) The investment advisor of Crescent International, Inc. is Greenlight
(Switzerland) S.A., which exercises sole voting and investment powers,
and Mel Craw and Maxi Brezzi are the managers of Greenlight (Switzerland)
S.A.
(2) The chief executive officer of OTAPE Investments LLC is Ira M. Leventhal,
who exercises sole voting and investment powers.
The following table sets forth information regarding the beneficial
ownership of our common stock as of August 31, 2003, by each of the holders of
warrants, or selling securityholders, assuming each of the selling
securityholders elects to exercise the warrants held by such selling
securityholder to purchase shares of common stock at an exercise of $.75 per
share, the number of shares of common stock to be sold by each selling
securityholder, and the percentage of each selling securityholder after the sale
of common stock included in this prospectus.
Optionholders Shares Beneficially Owned Number of Shares
Prior to Offering Shares Being Beneficially Owned
Offered After Offering
--------------------------------- -------------------------------
Number Percent Number Percent
Les Anderton Retirement Plan One 30,000 * 10,000 20,000 *
John H. Banzhaf 4,412 * 4,412 0 *
Byron B. Barkley 75,000 * 25,000 50,000 *
Byron B. Barkley IRA 75,000 * 25,000 50,000 *
M. Dale Burningham 20,333 * 6,667 13,333 *
Lane Clissold 30,000 * 10,000 20,000 *
Lyle W. Davis 75,000 * 25,000 50,000 *
Paul N. Davis 84,000 * 28,000 56,000 *
Gemcard Portfolios Ltd.(1) 79,500 * 26,500 53,000 *
Steven H. Ingle and Susan Ingle
Revocable Trust(2) 67,500 * 22,500 45,000 *
JJR Investments, LLC(3) 200,000 * 66,667 133,333 *
Denton Harris 405,000 1.8% 135,000 270,000 1.1%
Frank G. Mauro 79,412 * 79,412 0 *
Ruby Ream 39,900 * 13,300 26,600 *
Delbert D. Reichardt 4,412 * 4,412 0 *
Carolyn D. Stewart and Denise
Stewart McDonough, Joint 45,000 * 15,000 30,000 *
Tenants
Wilson-Davis & Co., Inc.
401(k) Profit Sharing Plan(4) 42,000 * 14,000 28,000 *
--------- -- ------- -------- --
TOTAL 1,356,135 510,869 933,501
--------- ------- -------
--------------
* Less than 1%.
(1) The president of Gemcard Portfolios, Ltd. is Michael Reigels, who
exercises sole voting and investment powers.
(2) The trustees of the Steven H. Ingle and Susan Ingle Revocable Trust are
Steven H. Ingle and Susan Ingle who exercise shared voting and investment
powers
(3) The manager of JJR Investments, LLC is James J. Robinson, who exercises
sole voting and investment powers. (4) The trustees of Wilson-Davis &
Co., Inc. 401(k) Profit Sharing Plan are Paul N. Davis and Lyle W. Davis,
who exercise shared
voting and investment powers.
55
The following table sets forth information regarding the beneficial
ownership of our common stock as of August 31, 2003, by the holder of warrants,
or selling securityholder, assuming the selling securityholder elects to
exercise the warrants held by such selling securityholder to purchase shares of
common stock at an exercise price of $.16 per share, the number of shares of
common stock to be sold by the selling securityholder, and the percentage of the
selling securityholder after the sale of common stock included in this
prospectus.
Warrantholder Shares Beneficially Owned Number of Shares
Prior to Offering Shares Being Beneficially Owned
Offered After Offering
--------------------------------- --------------------------------
Number Percent Number Percent
Timothy R. Forstrom 200,000 * 200,000 0 *
-------- -------- ----
-------------------
*Less than 1%.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 80,000,000 shares of common
stock, $.001 par value per share, of which 25,128,536 shares were issued and
outstanding as of August 31, 2003, and 5,000,000 shares of undesignated
preferred stock, $.001 par value per share. We have created seven classes of
preferred stock, designated as Series A preferred stock, Series B preferred
stock, Series C convertible preferred stock, Series D convertible preferred
stock, Series E convertible preferred stock, Series F convertible preferred
stock and Series G convertible preferred stock. The following is a summary of
the material terms and provisions of our capital stock and related securities.
Because it is a summary, it does not include all of the information that is
included in our certificate of incorporation. The text of our certificate of
incorporation, which is attached as an exhibit to this registration statement,
is incorporated into this section by reference.
Common Stock
Voting Rights. The holders of our common stock will have one vote per
share and are not entitled to vote cumulatively for the election of directors.
Generally, all matters to be voted on by stockholders must be approved by a
majority or, in the case of election of directors, by plurality of the votes
cast at a meeting at which a quorum is present and voting together as single
class, subject to any voting rights granted to the holders of any then
outstanding preferred stock.
Dividends. Holders of common stock are entitled to receive any dividends
declared by our board of directors, subject to the preferential rights of any
preferred stock then outstanding. Dividends consisting of shares of common stock
may be paid to holders of shares of common stock.
Other Rights. Upon our liquidation, dissolution or winding up, the
holders of common stock are entitled preferential to share ratably in any assets
available for distribution to holders of shares of common stock. No holders of
shares are subject to redemption or have preemptive rights to purchase
additional shares of common stock.
Preferred Stock
56
Our certificate of incorporation provides that 5,000,000 shares of
preferred stock may be issued from time to time in one or more series. Our board
of directors is authorized to fix the voting rights, if any, designations,
powers, preferences, qualifications, limitations and restrictions, applicable to
the shares of each series. Our board of directors may, without stockholder
approval, issue preferred stock with voting and other rights that could
adversely affect the voting power and other rights of the holders of the common
stock and could have anti-takeover effects, including preferred stock or rights
to acquire preferred stock in connection with implementing a stockholder rights
plan. The ability of our board of directors to issue preferred stock without
stockholder approval could have the effect of delaying, deferring or preventing
a change of control with respect to our company or the removal of existing
management. As of August 30, 2003, we have created and issued shares of seven
classes of preferred stock.
Series A, B, C, D, E, F and Series G Preferred Stock.
The Board of Directors has authorized the issuance of 500,000 shares of
Series A Preferred Stock, 500,000 shares of Series B Preferred Stock, 30,000
shares of Series C Preferred Stock, 1,140,000 shares of Series D Preferred
Stock, 50,000 shares of Series E Preferred Stock and 50,000 shares of Series F
Preferred Stock. Each of the shares of preferred stock are convertible into
shares of common stock at a different conversion price. As of August 31, 2003,
there were issued and outstanding 5,627 shares of Series A Preferred Stock
convertible into 6,753 shares of our common stock; 8,986 shares of Series B
Preferred Stock convertible into 10,783 shares of our common stock; no shares of
Series C Preferred Stock; no shares of Series D Preferred Stock; 1,500 shares of
Series E Preferred Stock convertible into 80,000 shares of common stock;
5,623.75 shares of Series F Preferred Stock convertible into 299,933 shares of
our common stock; and 1,764,706 shares of Series G Preferred Stock convertible
into 1,764,706 shares of our common stock The voting rights, dividends,
conversion rights, redemption rights, and liquidation rights of the Series A,
Series B, Series C, Series D, Series E, Series F and Series G Preferred Stock
are more fully described below. Series A Preferred Stock
Voting Rights. Except as provided by applicable law, the Series A
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series A preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series A preferred stock is entitled to non-cumulative
preferred dividends at $.24 per share per annum payable, at our option, in cash
from surplus earnings.
Conversion. At any time the Series A preferred stockholder may convert
each share of Series A preferred stock into 1.2 shares of our common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock.
Other Rights. Upon our liquidation, dissolution, or sale of substantially
all of our assets, the Series A preferred stockholders are entitled to
distributions equal to $1.00 per share, plus accrued and unpaid dividends. The
shares of Series A preferred stock are subject to redemption but have no
preemptive rights to purchase additional shares of Series A preferred stock or
our common stock.
Series B Preferred Stock
Voting Rights. Except as provided by applicable law, the Series B
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series B preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series B preferred stock is entitled to non-cumulative
preferred dividends at $.24 per share per annum payable, at our option, in cash
from surplus earnings.
Conversion. At any time the Series B preferred stockholder may convert
each share of Series B preferred stock into 1.2 shares of our common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock.
57
Other Rights. Upon our liquidation, dissolution, or sale of substantially
all of our assets, the Series B preferred stockholders are entitled to
distributions equal to $4.00 per share, plus accrued and unpaid dividends. The
Series B preferred stockholders are entitled to preferential distributions over
all other classes of capital stock, other than Series A preferred stock. The
shares of Series B preferred stock are subject to redemption but have no
preemptive rights to purchase additional shares of Series B preferred stock or
our common stock.
Series C Preferred Stock
Voting Rights. Except as provided by applicable law, the Series C
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series C preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series C preferred stock is entitled to 12% non-cumulative
preferred dividends payable, at our option, in common stock or cash from surplus
earnings.
Conversion. At any time the Series C preferred stockholder may convert
each share of Series C preferred stock into 57.14 shares of common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock. Any shares of Series C
preferred stock outstanding after January 1, 2002, are automatically converted
into our shares to common stock at the conversion price then in effect.
Other Rights. Upon our liquidation, dissolution or sale of substantially
all of our assets, the Series C preferred stockholders are entitled to
distributions equal to the greater of (i) the amount of distributions such
shares would have received had such holders converted the Series C preferred
stock into common stock immediately prior to liquidation, or (ii) the stated
value of $100.00 per share, plus declared but unpaid dividends. The Series C
preferred stockholders are entitled to preferential distributions over all other
classes of capital stock, other than Series A and Series B preferred stock. No
shares of Series C preferred stock are subject to redemption or have preemptive
rights to purchase additional shares of Series C preferred stock or our common
stock.
Series D Preferred Stock
Voting Rights. Except as provided by applicable law, the Series D
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series D preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series D preferred stock is entitled to 8% non-cumulative
preferred dividends payable, at our option, in common stock or cash from surplus
earnings.
Conversion. At any time the Series D preferred stockholder may convert
each share of Series D preferred stock into 1.22 shares of common stock, subject
to adjustment for stock splits, stock dividends, recapitalizations and similar
transactions involving our common stock. Any shares of Series D preferred stock
outstanding after January 1, 2002, are automatically converted into our shares
of common stock at the conversion price then in effect.
Other Rights. Upon our liquidation, dissolution or sale of substantially
all of our assets, the Series D preferred stockholders are entitled to
distributions equal to the greater of (i) the amount of distributions such
shares would have received had such holders converted the Series D preferred
stock into common stock immediately prior to liquidation, or (ii) the stated
value of $1.75 per share, plus declared but unpaid dividends. The Series D
preferred stockholders are entitled to preferential distributions over all other
classes of capital stock, other than Series A, Series B and Series C preferred
stock. No shares of Series D preferred stock are subject to redemption or have
preemptive rights to purchase additional shares of Series D preferred stock or
our common stock.
58
Series E Preferred Stock
Voting Rights. Except as provided by applicable law, the Series E
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series E preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series E preferred stock is entitled to 8% non-cumulative
preferred dividends payable, at our option, in common stock or cash from surplus
earnings.
Conversion. At any time the Series E preferred stockholder may convert
each share of Series E preferred stock into 57.33 shares of common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock. Any shares of Series E
preferred stock outstanding are automatically converted into shares of our
common stock (i) after January 1, 2005, or (ii) after a registration statement
registering our common shares issuable upon conversion has been effective for a
least 30 days and the average closing price of our common stock for the 20-day
period is at least $3.50 per share.
Other Rights. Upon our liquidation, dissolution or sale of substantially
all of our assets, the Series E preferred stockholders are entitled to
distributions equal to the greater of (i) the amount of distributions such
shares would have received had such holders converted the Series E preferred
stock into common stock immediately prior to liquidation, or (ii) the stated
value of $100.00 per share, plus declared but unpaid dividends. The Series E
preferred stockholders are entitled to preferential distributions over all other
classes of capital stock, other than Series A, Series B, Series C and Series D
preferred stock. No shares of Series E preferred stock are subject to redemption
or have preemptive rights to purchase additional shares of Series E preferred
stock or our common stock.
Series F Preferred Stock
Voting Rights. Except as provided by applicable law, the Series F
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series F preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series F preferred stock is entitled to 8% non-cumulative
preferred dividends payable, at our option, in common stock or cash from surplus
earnings.
Conversion. At any time the Series F preferred stockholder may convert
each share of Series F preferred stock into 57.33 shares of common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock. Any shares of Series F
preferred stock outstanding are automatically converted into shares of our
common stock (i) after January 1, 2005, or (ii) after a registration statement
registering our common shares issuable upon conversion has been effective for a
least 30 days and the average closing price of our common stock for the 20-day
period is at least $3.50 per share.
Other Rights. Upon our liquidation, dissolution or sale of substantially
all of our assets, the Series F preferred stockholders are entitled to the
greater of (i) the amount of distributions such shares would have received had
such holders converted the Series F preferred stock into common stock
immediately prior to liquidation, or (ii) the stated value of $1.00 per share,
plus declared but unpaid dividends. The Series F preferred stockholders are
entitled to preferential distributions over all other classes of capital stock,
other than Series A, Series B, Series C, Series D and Series E preferred stock.
No shares of Series F preferred stock are subject to redemption or have
preemptive rights to purchase additional shares of Series F preferred stock or
our common stock.
Series G Preferred Stock
Voting Rights. Except as provided by applicable law, the Series G
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series G preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series G preferred stock is entitled to 8% non-cumulative
preferred dividends payable, at our option, in common stock or cash from surplus
earnings.
59
Conversion. At any time the Series G preferred stockholder may convert
each share of Series G preferred stock into one share of common stock, subject
to adjustment for stock splits, stock dividends, recapitalizations and similar
transactions involving our common stock. Any shares of Series G preferred stock
outstanding are automatically converted into shares of our common stock (i)
after August 1, 2005, or (ii) after a registration statement registering our
common shares issuable upon conversion has been effective for a least 30 days
and the average closing price of our common stock for the 20-day period is at
least $.50 per share.
Other Rights. Upon our liquidation, dissolution or sale of substantially
all of our assets, the Series G preferred stockholders are entitled to the
greater of (i) the amount of distributions such shares would have received had
such holders converted the Series G preferred stock into common stock
immediately prior to liquidation, or (ii) the stated value of $.25 per share,
plus declared but unpaid dividends. The Series G preferred stockholders are
entitled to preferential distributions over all other classes of capital stock,
other than Series A, Series B, Series C, Series D, Series E and Series F
preferred stock. No shares of Series G preferred stock are subject to redemption
or have preemptive rights to purchase additional shares of Series G preferred
stock or our common stock.
Warrants
Between June 10, 1997 and April 30, 2003, we issued warrants to
individuals and entities to purchase shares of our common stock at exercise
prices ranging from $.16 per share to $8.125 per share. The warrants all contain
provisions that protect the holders against dilution by adjustment of the
exercise price per share and the number of shares issuable upon exercise thereof
upon the occurrence of certain events, including stock splits, stock dividends,
mergers, and the sale of substantially all of our assets. We are not required to
issue fractional shares of common stock, and in lieu thereof we will make a cash
payment based upon the current market value of such fractional shares. A holder
of these warrants will not possess any rights as a shareholder unless and until
the holder exercises the warrants.
The warrants that are currently issued and have not been exercised, and
the exercise price and expiration date of such warrants are as follows:
o Class A Warrants to purchase 1,000,000 shares of common stock at
an exercise price of $7.50 per share, exercisable through January
10, 2004.
o Warrants issued to Series E preferred stockholders to purchase
241,095 shares of common stock at an exercise price of $4.00 per
share, exercisable through May 23, 2006.
o Warrants issued to Series F preferred stockholders to purchase
251,114 shares of common stock at an exercise price of $4.00 per
share, exercisable through August 20, 2006.
o Warrants issued to Kenneth Jerome & Company, Inc. to purchase 200,000
shares of common stock at exercise prices ranging from $7.50 to
$8.125 per share, exercisable through January 10, 2004.
o Warrants issued to KSH Investment Group to purchase 280,400 shares of
common stock at exercise prices ranging from $2.38 to $2.69 per
share, exercisable through March 1, 2004.
o Warrants issued to Cyndel & Company, Inc. to purchase 475,000 shares
of common stock at exercise prices ranging from $3.00 to $4.00 per
share, exercisable during the period of August 10, 2005 and February
7, 2006.
o Warrants issued to Dr. Michael B. Lindberg to purchase 300,000 shares
of common stock at exercise prices ranging from $4.00 to $6.75 per
share, exercisable during the period of from December 1, 2008 through
June 1, 2011.
o Warrants issued to R.F. Lafferty & Co., Inc. to purchase 100,000
shares of common stock at an exercise price ranging from of $4.00
per share, exercisable through October 15, 2004.
o Warrants issued to John W. Hemmer to purchase 75,000 shares of
common stock at an exercise price of $7.50 per share, exercisable
through January 24, 2005.
60
o Warrants issued to Helen Kohn and Ronit Sucoff to purchase 50,000
shares each of common stock at an exercise price of $4.00 per share,
exercisable through February 7, 2006.
o Warrants issued to Barrry Kaplan Associates to purchase 100,000
shares of common stock at an exercise price of $3.00 per share,
exercisable through May 15, 2004.
o Warrants issued to Rodman & Renshaw to purchase 35,000 shares of
common stock at an exercise price of $2.00 per share, exercisable
through May 13, 2006.
o Warrants issued to Paul L. Archanbeau, M.D., John H. Banzhaf, Daniel
S. Lipson, Douglas A. MacLeod, M.D., Douglas A. MacLeod, M.D. Profit
Sharing Trust, St. Mark's Eye Institute, Milan Holdings, Inc., Frank
G. Mauro, and Delbert G. Reichardt to purchase an aggregate of
788,750 shares of common stock at an exercise price of $.25 per
share, exercisable through September 6, 2005.
o Warrants issued to Timothy R. Forstrom to purchase 200,000 shares
of common stock at an exercise price of $.16 per share, exercisable
through April 30, 2006.
Certain Provisions of Certificate of Incorporation. Our Certificate of
Incorporation provides that to the fullest extent permitted by Delaware law, our
directors shall not be liable to us and our stockholders. The Certificate of
Incorporation also contains provisions entitling the officers and directors to
indemnification by us to the fullest extent permitted by the Delaware General
Corporation Law.
Indemnification Agreements. We have entered into indemnification
agreements with our officers and directors. Such indemnification agreements
provide that we will indemnify its officers and directors against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
arising out of threatened, pending or completed legal action against any officer
or director to the fullest extent permitted by the Delaware General Corporate
Law.
Transfer and Warrant Agent. Our transfer agent and registrar for our
common stock and the Warrant Agent for the Class A warrants is Continental Stock
Transfer & Trust Company, New York, New York.
PLAN OF DISTRIBUTION
We are offering the shares on a "best efforts"basis directly through our
officers and directors, who will not receive any commissions or other
remuneration of any kind for selling shares in this offering, other than
reimbursement of offering expenses incurred by them. This offering will commence
promptly after the effectiveness of the registration statement of which this
prospectus is a part. This offering will be made on a continuous basis for a
period of 90 days, unless extended by us in our sole discretion, for up to an
additional 90 days. This offering may be terminated by us earlier if we sell all
of the shares being offered or we decide to cease selling efforts.
This offering is a self underwritten offering, which means that it does
not involve the participation of an underwriter to market, distribute or sell
the shares offered under this prospectus. We may sell shares from time to time
in one or more transactions directly by us or, alternatively, we may offer the
shares through brokers or sale agents, who may receive compensation in the form
of commissions or fees. We may enter into agreements with sales agents to assist
us in identifying and contacting potential investors. Under these agreements, we
may agree to pay these sales agents fees based on a percentage (not exceeding
10%) of the aggregate purchase price of shares sold by us to the investors
identified and contacted by these sales agents. We may also agree in some cases
to reimburse these sales agents for out-of-pocket expenses incurred in
connection with their engagement. Any broker, dealer or sales agent that
participates in the distribution of shares may be deemed to be an underwriter,
and any profits on the sale of the shares by any such broker, dealer or sales
agent and any commissions and fees received by any such broker, dealer or sales
agents may be deemed to be underwriting compensation under the Securities Act of
1933.
61
The shares may not be offered or sold in certain jurisdictions unless
they are registered or otherwise comply with the applicable securities laws of
such jurisdictions by exemption, qualification or otherwise. We intend to sell
the shares only in the states in which this offering has been qualified or an
exemption from the registration requirements is available, and purchases of
shares may be made only in those states. To comply with the securities laws of
certain jurisdictions, as applicable, the shares may be required to be offered
and sold only through registered or licensed brokers or dealers. If such
registered or licensed brokers or dealers are engaged, the total commission and
fees paid to such brokers and dealers in connection with the sale of shares will
not exceed 10% of the selling price of the shares.
In connection with their selling efforts in the offering, our officers
and directors will not register as broker-dealers pursuant to Section 15 of the
Securities Exchange Act of 1934, but rather will rely upon the "safe harbor"
provisions of Rule 3a4-1 under the Exchange Act. Generally speaking, Rule 3a4-1
provides an exemption from the broker-dealer registration requirements of the
Exchange Act for persons associated with an issuer that participate in an
offering of the issuer's securities. The conditions to obtaining this exemption
include the following:
o None of the selling persons are subject to a statutory
disqualification, as that term is defined in Section 3(a)(39) of the
Exchange Act, at the time of participation;
o None of the selling persons are compensated in connection with his or
her participation by the payment of commissions or other remuneration
based either directly or indirectly on transactions in securities;
o None of the selling persons are, at the time of participation, an
associated person of a broker or dealer, and o All of the selling
persons meet the conditions of paragraph (a)(4)(ii) of Rule 3a4-1 of
the Exchange Act, in that they(A) primarily perform or are intending
primarily to perform at the end of the offering, substantial duties
for or on behalf of the issuer otherwise than in connection with
transactions in securities, and (B) are not a broker or dealer, or an
associated person of a broker or dealer, within the preceding 12
months, and (C) do not participate in selling an offering of
securities for any issuer more than once every 12 months other than
in reliance on this rule.
Our officers and directors may have assistants who may provide
ministerial help, but their activities will be restricted to the following: o
Preparing written communications and delivering such communications through the
mails or other means that does not
involve oral solicitation of potential purchasers, provided that such
written communications have been approved by us. o Responding to inquiries of
potential purchasers in communications initiated by potential purchasers,
provided that the
content of such communications is limited to information contained in
our registration statement; or o Performing ministerial and clerical work in
effecting any transaction.
We have not established a minimum amount of proceeds that we must receive
in the offering before any proceeds may be accepted. We cannot assure you that
all or any of the shares offered under this prospectus will be sold. No one has
committed to purchase any of the shares offered. We reserve the right to
withdraw, cancel or modify this offer and to accept or reject any subscription
in whole or in part, for any reason or for no reason. Subscriptions will be
accepted or rejected promptly. All monies from rejected subscriptions will be
returned immediately by us to the subscriber, without interest or deductions.
Any accepted subscriptions will be made on a rolling basis. Once accepted, the
funds will be deposited into an account maintained by us and considered our
general assets. Subscription funds will not be placed into escrow, trust or any
other similar arrangement. There are no investor protections for the return of
subscription funds once accepted. Certificates for shares purchased will be
issued and distributed by our transfer agent within 10 business days after a
subscription is accepted and "good funds" are received in our account.
Certificates will be sent to the address supplied in the investor subscription
agreement by certified mail.
Our officers, directors, existing stockholders and affiliates may
purchase shares in this offering and there is no limit to the number of shares
they may purchase.
Our shares are covered by Section 15(g) of the Securities Exchange Act of
1934 and Rules 15g-1 through 15g-6 promulgated thereunder. These rules impose
additional sales practice requirements on broker-dealers who sell out securities
to persons other than established customers and accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouses).
62
Rule 15g-1 exempts a number of specific transactions from the scope of
the penny stock rules. Rule 15g-2 declares unlawful broker/dealer transactions
in penny stocks unless the broker-dealer has first provided to the customer a
standardized disclosure document. Rule 15g-3 provides that it is unlawful for a
broker-dealer to engage in a penny stock transaction unless the broker-dealer
first discloses and subsequently confirms to the customer current quotation
prices or similar market information concerning the penny stock in question.
Rule 15g-4 prohibits broker-dealers from completing penny stock transactions for
a customer unless the broker-dealer first discloses to the customer the amount
of compensation or other remuneration received as a result of the penny stock
transaction. Rule 15g-5 requires that a broker-dealer executing a penny stock
transaction, other than one exempt under Rule 15g-1, disclose to its customer,
at the time of or prior to the transaction, information about the sales person's
compensation. Rule 15g-6 requires broker-dealers selling penny stocks to provide
their customers with monthly account statements. The application of the penny
stock rules may affect your ability to resell your shares.
EXPERTS
Our consolidated financial statements for years ended December 31, 2002
and 2003 and for each of the three years included in this prospectus have been
audited by Tanner & Co., independent auditors, as stated in their report
appearing herein. We have included our consolidated financial statements in this
prospectus in reliance on such report given upon their authority as experts in
auditing and accounting.
LEGAL MATTERS
The validity of the shares of common stock in this offering will be
passed upon for us by Mackey Price & Thompson, Salt Lake City, Utah. Randall A.
Mackey, the President, a director and a shareholder of the law firm of Mackey
Price & Thompson is our Chairman of the Board and Secretary.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, or SEC, a
registration statement on Form SB-2 (including the exhibits and schedules
thereto) under the Securities Act of 1933 and the rules and regulations
promulgated thereunder, for the registration of the common stock offered hereby.
This prospectus is part of the registration statement. This prospectus does not
contain all the information included in the registration statement because we
have omitted certain parts of the registration statement as permitted by the SEC
rules and regulations. For further information about us and our common stock,
you should refer to the registration statement. Statements contained in this
prospectus as to any contract, agreement or other document referred to are not
necessarily complete. Where the contract or other document is an exhibit to the
registration statement, each statement is qualified by the provisions of that
exhibit.
You can inspect and copy the registration statement and the exhibits and
schedules thereto at the public reference facility maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices at 233 Broadway, New York, New York 10279, and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You may call the SEC at 1-800-732-0330 for
further information about the operation of the public reference rooms. Copies of
all or any portion of the registration statement can be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, the registration statement is publicly available
through the SEC's site on the Internet's World Wide Web, located at
http://www.sec.gov.
We also file annual, quarterly and current reports, proxy statements and
other information with the SEC. You can also request copies of these documents,
for a copying fee, by writing to the SEC. Our SEC filings are also available to
the public from the SEC's website at http://www.sec.gov. We furnish to our
stockholders annual reports containing audited financial statements for each
fiscal year.
63
Financial Statements
Balance Sheet (unaudited) - June 30, 2003 ...................... 3
Statements of Operations (unaudited) for the six months
ended June 30, 2003 and June 30, 2002 ........................... 4
Statements of Cash Flows (unaudited) for the six months
ended June 30, 2003 and June 30, 2002............................ 5
Notes to Financial Statements (unaudited).................. ..... 6
2
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30,
2003
---------------
(Unaudited)
ASSETS
Current Assets
Cash & Cash Equivalents $ 584,000
Receivables, Net 512,000
Inventory 1,968,000
Prepaid Expenses 62,000
---------------
Total Current Assets 3,126,000
Intangibles, Net 686,000
Property and Equipment, Net 307,000
Deposits and Other Assets, Net 56,000
---------------
Total Assets 4,175,000
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade Accounts Payable 898,000
Accrued Expenses 2,033,000
Current Portion of Long-term Debt 18,000
---------------
Total Current Liabilities 2,949,000
Long-term Debt 80,000
---------------
Total Liabilities 3,029,000
---------------
Stockholders' Equity:
Preferred Stock, Authorized:
5,000,000 Shares, $.001 par value
Series A
Authorized: 500,000 shares; issued and
outstanding: 5,627 shares at June 30, 2003 -
Series B
Authorized: 500,000 shares; issued and
outstanding: 8,986 shares at June 30, 2003 -
Series C
Authorized: 30,000 shares; issued and
outstanding: zero shares at June 30, 2003 -
Series D
Authorized: 1,140,000 shares; issued and
outstanding: 5,000 shares at June 30, 2003 -
Series E
Authorized: 50,000; issued and
outstanding: 1,500 at June 30, 2003 -
Series F
Authorized: 50,000; issued and
outstanding: 5,622 at June 30, 2003 -
Common Stock, Authorized:
80,000,000 Shares, $.001 par value; issued and
outstanding: 24,855,906 at June 30, 2003 25,000
Additional paid-in-capital 57,413,000
Stock subscription receivable (294,000)
Accumulated Deficit (55,998,000)
---------------
Total Stockholders' Equity 1,146,000
---------------
Total Liabilities and Stockholders' Equity $ 4,175,000
===============
See accompanying notes to financial statements
3
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
June 30,
2003 2002
(Unaudited) (Unaudited)
Sales $ 1,372,000 $ 2,816,000
Cost of Sales 881,000 1,622,000
------------- -------------
Gross Profit 491,000 1,194,000
------------- -------------
Operating Expenses:
Marketing and Selling 552,000 1,762,000
General and Administrative 1,536,000 1,998,000
Research, development and service 574,000 1,364,000
Impairment of assets 159,000 -
------------- -------------
Total Operating Expenses 2,821,000 5,124,000
------------- -------------
Operating Income (Loss) (2,330,000) (3,930,000)
Other Income and (Expense):
Interest Income 3,000 5,000
Interest Expense (13,000) (19,000)
------------- -------------
Total Other Income and
(Expense) (10,000) (14,000)
------------- -------------
Net loss before provision
for income taxes (2,340,000) (3,944,000)
Income taxes - -
------------- -------------
Net Loss $ (2,340,000) $ (3,944,000)
============= =============
Net Loss Per Common Share - Basic
and Diluted $ (.10) $ (.24)
============= =============
Weighted Average Outstanding
Shares - Basic and Diluted 22,985,000 16,221,000
============= =============
See accompanying notes to financial statements
4
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2003 2002
(Unaudited) (Unaudited)
Cash Flows from Operating Activities:
Net Loss $ (2,340,000) $ (3,944,000)
Adjustment to Reconcile Net Loss to Net
Cash Used In Operating Activities:
Depreciation and Amortization 214,000 264,000
Issuance of Common Stock and Warrants
for Services 35,000 48,000
Issuance of Common Stock for Settlement
of Potential Litigation 190,000 -
Increase in Inventory Reserve 382,000 -
Provision for (Recovery Of) Losses
on Receivables 83,000 (125,000)
Impairment of Intangible and Other Assets 159,000 -
(Increase) Decrease from Changes in:
Trade Accounts Receivable 350,000 1,368,000
Inventories 299,000 451,000
Prepaid Expenses 19,000 (58,000)
Increase (Decrease) from Changes in:
Trade Accounts Payable (10,000) 34,000
Accrued Expenses and Deposits 619,000 94,000
------------- -------------
Net Cash Used in Operating Activities - (1,868,000)
------------- -------------
Cash Flow from Investing Activities:
Purchase of Property and Equipment (1) (134,000)
Net Cash Paid in Acquisition - (100,000)
------------- -------------
Net Cash Used in Investing Activities (1) (234,000)
------------- -------------
Cash Flows from Financing Activities:
Principal Payments on Notes Payable (26,000) (42,000)
Net proceeds from sale of common stock 417,000 -
------------- -------------
Net Cash Provided (Used) by
Financing Activities 391,000 (42,000)
------------- -------------
Net Increase (Decrease) in Cash and Cash
Equivalents 390,000 (2,144,000)
Cash and Cash Equivalents at Beginning of Period 194,000 2,702,000
------------- -------------
Cash and Cash Equivalents at End of Period $ 584,000 $ 558,000
============= =============
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest $ 13,000 $ 19,000
============= =============
Cash Paid for Income Taxes $ - $ -
============= =============
See accompanying notes to financial statements
5
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Significant Accounting Policies:
--------------------------------
In the opinion of management, the accompanying financial statements
contain all adjustments (consisting only of normal recurring items) necessary to
present fairly the financial position of Paradigm Medical Industries, Inc. (the
Company) as of June 30, 2003 and the results of its operations for the six
months ended June 30, 2003 and 2002, and its cash flows for the six months ended
June 30, 2003 and 2002. The results of operations for the periods presented are
not necessarily indicative of the results to be expected for the full year
period.
Liquidity and Going Concern
---------------------------
Due to the declining sales, significant recurring losses and cash used
to fund operating activities, the auditors' report for the year ended December
31, 2002 included an explanatory paragraph that expressed substantial doubt
about our ability to continue as a going concern. The Company has taken
significant steps to reduce costs and increase operating efficiencies. In
addition, the Company is attempting to obtain additional funding through the
sale of its common stock. Traditionally the Company has relied on financing from
the sale of its common and preferred stock to fund operations. If the Company is
unable to obtain such financing in the near future it may be required to reduce
or cease its operations.
Reclassifications
-----------------
Certain amounts in the financial statements for the six months ended
June 30, 2002 have been reclassified to conform with the presentation of the
current period financial statements.
Net loss Per Share
------------------
Net loss per common share is computed on the weighted average number of
common and common equivalent shares outstanding during each period. Common stock
equivalents consist of convertible preferred stock, common stock options and
warrants. Common equivalent shares are excluded from the computation when their
effect is anti-dilutive. Other common stock equivalents consisting of options
and warrants to purchase 6,502,361 and 6,426,319 shares of common stock and
preferred stock convertible into 402,138 and 2,564,838 shares of common stock at
June 30, 2003 and 2002, respectively, have not been included in loss years
because they are anti-dilutive.
Equity Line of Credit
---------------------
The Company sold approximately 696,000 shares of common stock for
approximately $84,000 during the six months ended June 30, 2003 under the
$20,000,000 equity line of credit with Triton West Group, Inc.
Preferred Stock Conversions:
----------------------------
Under the Company's Articles of Incorporation, holders of the Company's
Class A and Class B Preferred Stock have the right to convert such stock into
shares of the Company's common stock at the rate of 1.2 shares of common stock
for each share of preferred stock. During the six months ended June 30, 2003, no
shares of Series A Preferred Stock and no shares of Series B Preferred Stock
were converted to the Company's Common Stock.
Holders of Series D Preferred have the right to convert such stock into
shares of the Company's common stock at the rate of 1 share of common stock for
each share of preferred stock. During the six months ended June 30, 2003, no
shares of Series D Preferred Stock were converted to the Company's Common stock.
6
Holders of Series E Preferred have the right to convert such stock into
shares of the Company's common stock at the rate of 53.3 shares of common stock
for each share of preferred stock. During the six months ended June 30, 2003, no
shares of Series E Preferred Stock were converted to the Company's Common stock.
Holders of Series F Preferred have the right to convert such stock into
shares of the Company's common stock at the rate of 53.3 shares of common stock
for each share of preferred stock. During the six months ended June 30, 2003,
650 shares of Series F Preferred Stock were converted to shares of the Company's
Common stock.
Warrants:
---------
The fair value of warrants granted as described herein is estimated at
the date of grant using the Black-Scholes option pricing model. The exercise
price per share is reflective of the then current market value of the stock. No
grant exercise price was established at a discount to market. All warrants are
fully vested, exercisable and nonforfeitable as of the grant date. The Company
granted 623,000 warrants to purchase the Company's common stock during the
period ended June 30, 2003. 423,000 of the warrants were issued in connection
with a private placement of the Company's common stock and 200,000 warrants were
issued for consulting services. The 200,000 warrants issued for consulting
services were valued at $35,000 using the Black-Scholes option pricing model.
During the period ended June 30, 2002, the purchase agreement between the
Company and Innovative Optics included warrants to purchase 250,000 shares of
the Company's common stock at $5.00 per share, exercisable over a period of
three years from the closing date. The Company valued the warrants at
approximately $295,000, which amount was included in the purchase price.
Stock - Based Compensation
--------------------------
For stock options and warrants granted to employees, the Company
employs the footnote disclosure provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123
encourages entities to adopt a fair-value based method of accounting for stock
options or similar equity instruments. However, it also allows an entity to
continue measuring compensation cost for stock-based compensation using the
intrinsic-value method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The
Company has elected to continue to apply the provisions of APB 25 and provide
pro forma footnote disclosures required by SFAS No. 123. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant.
Stock options and warrants granted to non-employees for services are
accounted for in accordance with SFAS 123 which requires expense recognition
based on the fair value of the options/warrants granted. The Company calculates
the fair value of options and warrants granted by use of the Black-Scholes
pricing model. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
to stock-based employee compensation.
7
Six Months Ended June 30,
2003 2002
-----------------------------
Net loss - as reported $ (2,340,000) $ (3,944,000)
Deduct: total stock-based employee
compensation determined under fair value
based method for all awards, net of
related tax effects (311,000) -
-----------------------------
Net loss - pro forma $ (2,651,000) $ (3,944,000)
-----------------------------
Earnings per share:
Basic and diluted - as reported $ (.10) $ (.24)
Basic and diluted - pro forma $ (.12) $ (.24)
The fair value of each option grant was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions:
Six Months Ended June 30,
2003 2002
-----------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 113% - 117% -
Risk-free interest rate 4% -
Expected life of options 3-5 years -
The weighted average fair value of options granted to employees during
six months ended June 30, 2003 was $.25.
Related Party Transactions:
---------------------------
Payments for legal services to the firm of which the chairman of the
board of directors is a partner were approximately $24,000 and $67,000 for the
three months ended June 30, 2003 and 2002, respectively.
8
Supplemental Cash Flow Information
----------------------------------
During the six months ended June 30, 2003, the Company granted 200,000
options for consulting services, which were recorded as an expense of $35,000,
which is recorded as an increase to general and administrative expense and
additional paid-in capital.
During the six months ended June 30, 2003, the Company issued 1,262,000
shares of common stock, valued at $190,000 based on the trading price on the
date of issuance, as settlement of potential litigation. This amount is included
in general and administrative expenses.
Accrued Expenses
----------------
Accrued expenses consist of the following at June 30, 2003:
Accrued consulting and litigation reserve $ 691,000
Warranty and return allowance 688,000
Accrued royalties 208,000
Deferred revenue 182,000
Customer deposits 140,000
Accrued payroll and employee benefits 124,000
-----------
$ 2,033,000
===========
9
PARADIGM MEDICAL INDUSTRIES, INC.
Index to Financial Statements
--------------------------------------------------------------------------------
Page
----
Report of Tanner + Co. F-2
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-7
--------------------------------------------------------------------------------
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Paradigm Medical Industries, Inc.
We have audited the balance sheet of Paradigm Medical Industries, Inc. (the
Company) as of December 31, 2002, and the related statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 2002 and
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Paradigm Medical Industries,
Inc. as of December 31, 2002, and the results of its operations and its cash
flows for the years ended December 31, 2002 and 2001, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2, the Company
has incurred significant losses, and has been unable to generate positive cash
flows from operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
TANNER + CO.
Salt Lake City, Utah
March 11, 2003
F-2
PARADIGM MEDICAL INDUSTRIES, INC.
Balance Sheet
December 31,
---------------------------------------------------------------------------------------
Assets
------
Current assets:
Cash $ 194,000
Receivables, net 944,000
Inventories, net 2,649,000
Prepaid and other current assets 81,000
-----------------
Total current assets 3,868,000
Intangibles, net 910,000
Property and equipment, net 495,000
Other assets 16,000
-----------------
Total $ 5,289,000
-----------------
---------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 904,000
Accrued liabilities 1,414,000
Current portion of capital lease obligations 44,000
-----------------
Total current liabilities 2,362,000
-----------------
Capital lease obligations, net of current portion 80,000
-----------------
Commitments and contingencies -
Stockholders' equity:
Preferred stock $.001 par value, 5,000,000 shares authorized,
27,385 shares issued and outstanding (aggregate liquidation
preference of $6,726,000) -
Common stock, $.001 par value, 40,000,000 shares authorized,
21,954,238 shares issued and outstanding 22,000
Additional paid-in capital 56,775,000
Stock subscription receivable (294,000)
Accumulated deficit (53,656,000)
-----------------
Total stockholders' equity 2,847,000
-----------------
Total liabilities and stockholders' equity $ 5,289,000
-----------------
---------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-3
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Operations
Years Ended December 31,
-------------------------------------------------------------------------------------------------------------
2002 2001
---------------------------------------
Sales $ 5,368,000 $ 7,919,000
Cost of sales 4,210,000 4,370,000
---------------------------------------
Gross profit 1,158,000 3,549,000
---------------------------------------
Operating expenses:
General and administrative 3,702,000 5,125,000
Marketing and selling 2,795,000 4,762,000
Research, development and service 2,819,000 2,947,000
Impairment of assets 2,961,000 -
---------------------------------------
Operating loss (11,119,000) (9,285,000)
Other income (expense):
Interest income 10,000 48,000
Interest expense (46,000) (41,000)
Other income (expense) - (865,000)
---------------------------------------
Total other income (expense) (36,000) (858,000)
---------------------------------------
Loss before provision for income taxes (11,155,000) (10,143,000)
Provision for income taxes - -
---------------------------------------
Net loss $ (11,155,000) $ (10,143,000)
---------------------------------------
Beneficial conversion feature on
Series E preferred stock - (2,587,000)
Deemed dividend from Series E
preferred detachable warrants - (314,000)
---------------------------------------
Net loss applicable to common shareholders $ (11,155,000) $ (13,044,000)
---------------------------------------
Loss per common share - basic and diluted $ (0.63) $ (0.98)
---------------------------------------
Weighted average common shares - basic and diluted 17,736,000 13,245,000
---------------------------------------
-------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-4
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Stockholders' Equity
Years Ended December 31, 2002 and 2001
------------------------------------------------------------------------------------------------------------------------------------
Preferred Common Stock Additional Treasury Stock Stock
Stock ------------------- Paid-in ---------------- Subscription Accumulated
(see note 10) Shares Amount Capital Shares Amount Receivable Deficit
-------------------------------------------------------------------------------------------
Balance, January 1, 2001 $ - 12,611,189 $ 13,000 $ 41,157,000 - $ - $ (8,000) $ (32,358,000)
Issuance of Series E preferred stock
for cash - - - 4,607,000 - - - -
Issuance of Series F preferred stock
for cash - - - 4,358,000 - - - -
Conversion of preferred stock - 1,758,617 2,000 (2,000) - - - -
Issuance of common stock for:
Cash - 328,725 - 673,000 - - - -
Settlement of litigation - 350,000 - 812,000 - - - -
Services - 24,000 - 48,000 - - - -
Compensation - - - - - - 8,000 -
Issuance of stock options and warrants
for services - - - 503,000 - - - -
Net loss - - - - - - - (10,143,000)
-------------------------------------------------------------------------------------------
Balance, December 31, 2001 - 15,072,531 15,000 52,156,000 - - - (42,501,000)
Conversion of preferred stock - 3,132,356 3,000 (3,000) - - - -
Issuance of common stock for:
Cash - 1,262,000 2,000 560,000 - - - -
Settlement of litigation - 75,000 - 34,000 - - - -
Services - 167,684 - 183,000 - - - -
Assets - 1,467,358 2,000 2,626,000 - - - -
In process research and development - 477,309 - 630,000 - - - -
Subscription receivable - 300,000 - 294,000 - - (294,000) -
Issuance of stock warrants in
acquisition - - - 295,000 - - - -
Net loss - - - - - - - (11,155,000)
-------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ - 21,954,238 $ 22,000 $ 56,775,000 - $ - $ (294,000) $ (53,656,000)
-------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-5
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Cash Flows
Years Ended December 31,
---------------------------------------------------------------------------------------------------------------
2002 2001
-----------------------------------
Cash flows from operating activities:
Net loss $ (11,155,000) $ (10,143,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 624,000 671,000
Issuance of common stock for compensation - 8,000
Issuance of common stock for services 183,000 48,000
Issuance of common stock for in process research and development 630,000
Issuance of stock option/warrant for services - 503,000
Common stock issued for litigation settlement 34,000 812,000
Recovery of bad debt expense (23,000) -
Provision for losses on inventory 1,755,000 -
Impairment of intangibles and other assets 2,961,000 -
(Gain) loss on disposal of assets - 23,000
(Increase) decrease in:
Receivables 1,473,000 (787,000)
Inventories 952,000 (684,000)
Prepaid and other assets 255,000 (152,000)
Increase (decrease) in:
Accounts payable (313,000) 530,000
Accrued liabilities (158,000) 372,000
-----------------------------------
Net cash used in operating activities (2,782,000) (8,799,000)
-----------------------------------
Cash flows from investing activities:
Purchase of property and equipment (28,000) (220,000)
Increase in intangibles (103,000) (26,000)
Proceeds from the disposal of assets 2,000 -
Net cash paid in acquisition (100,000) -
-----------------------------------
Net cash used in investing activities (229,000) (246,000)
-----------------------------------
Cash flows from financing activities:
Proceeds from issuance of Series E preferred stock - 4,607,000
Proceeds from issuance of Series F preferred stock - 4,358,000
Principal payments on capital lease obligations (59,000) (85,000)
Proceeds from the issuance of common stock, including
exercise of common stock warrants and options 562,000 673,000
-----------------------------------
Net cash provided by financing activities 503,000 9,553,000
-----------------------------------
Net change in cash (2,508,000) 508,000
Cash, beginning of year 2,702,000 2,194,000
-----------------------------------
Cash, end of year $ 194,000 $ 2,702,000
-----------------------------------
---------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-6
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
December 31, 2002 and 2001
--------------------------------------------------------------------------------
1. Organization Organization
and Significant Paradigm Medical Industries, Inc. (the Company) is a
Accounting Delaware Corporation incorporated in October 1989. The
Policies Company is engaged in the design, development,
manufacture, and sale of high technology surgical and
diagnostic eye care products. Its surgical equipment is
designed to perform minimally invasive cataract surgery
and is comprised of surgical devices and related
instruments and accessories, including disposable
products. Its diagnostic products include a pachymeter,
an A-Scan, an A/B Scan, a biomicroscope, a perimeter, a
corneal topographer, and a blood flow analyzer.
Cash Equivalents
For purposes of the statement of cash flows, cash
includes all cash and investments with original
maturities to the Company of three months or less.
The Company maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such
account and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
Inventories
Inventories are stated at the lower of cost or market,
cost is determined using the weighted average method.
Property and Equipment
Property and equipment are recorded at cost, less
accumulated depreciation. Depreciation on property and
equipment is determined using the straight-line method
over the estimated useful lives of the assets or terms
of the lease. Expenditures for maintenance and repairs
are expensed when incurred and betterments are
capitalized. Gains and losses on sale of property and
equipment are reflected in operations.
--------------------------------------------------------------------------------
F-7
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Intangible Assets
and Significant As of December 31, 2002, intangible assets consisted of
Accounting goodwill related to the purchase of Ocular Blood Flow,
Policies Ltd., product rights, capitalized payments to
Continued manufacturers for engineering and design services and
patent costs.
Effective January 1, 2002, the Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets." The
adoption of SFAS No. 142 required an initial impairment
assessment involving a comparison of the fair value of
goodwill and other intangible assets to current carrying
values. As of January 1, 2002, the initial impairment
assessment did not result in any impairment charge.
Intangible assets determined to have indefinite useful
lives are not amortized. The Company tests such
intangible assets with indefinite useful lives for
impairment annually or more frequently if events or
circumstances indicate that an asset might be impaired.
Intangible assets determined to have definite lives are
amortized on a straight-line basis over their useful
lives. Product rights are being amortized over five
years, capitalized engineering and design costs are
fully amortized as of December 31, 2002, and patents are
being amortized over the life of the patents which is
ten years. We review such intangible assets with
definite lives for impairment to ensure they are
appropriately valued if conditions exist that may
indicate the carrying value may not be recoverable. Such
conditions may include an economic downturn in a
geographic market or a change in the assessment of
future operations. Goodwill is not amortized. We perform
tests for impairment of goodwill annually or more
frequently if events or circumstances indicate it might
be impaired. Such tests include comparing the fair value
of a reporting unit with its carrying value, including
goodwill.
Impairment assessments are performed using a variety of
methodologies, including cash flow analysis, estimates
of sales proceeds and independent appraisals. Where
applicable, an appropriate discount rate is used, based
on the Company's cost of capital rate or
location-specific economic factors.
--------------------------------------------------------------------------------
F-8
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Evaluation of Other Long-Lived Assets
and Significant The Company evaluates the carrying value of the
Accounting unamortized balances of other long-lived assets to
Policies determine whether any impairment of these assets has
Continued occurred or whether any revision to the related
amortization periods should be made. This evaluation is
based on management's projections of the undiscounted
future cash flows associated with each asset. If
management's evaluation were to indicate that the
carrying values of these assets were impaired, such
impairment would be recognized by a write down of the
applicable asset.
Income Taxes
Deferred income taxes are provided in amounts sufficient
to give effect to temporary differences between
financial and tax reporting, principally related to
depreciation, impairment of intangible assets, stock
compensation expense, and accrued liabilities.
Stock - Based Compensation
For stock options and warrants granted to employees the
Company employs the footnote disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation. SFAS No.
123 encourages entities to adopt a fair-value based
method of accounting for stock options or similar equity
instruments. However, it also allows an entity to
continue measuring compensation cost for stock-based
compensation using the intrinsic-value method of
accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). The Company has elected to continue
to apply the provisions of APB 25 and provide pro forma
footnote disclosures required by SFAS No. 123. No
stock-based employee compensation cost is reflected in
net income, as all options granted under those plans had
an exercise price equal to or greater than the market
value of the underlying common stock on the date of
grant.
--------------------------------------------------------------------------------
F-9
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Stock - Based Compensation - Continued
and Significant Stock options and warrants granted to non-employees for
Accounting services are accounted for in accordance with SFAS 123
Policies which requires expense recognition based on the fair
Continued value of the options/warrants granted. The Company
calculates the fair value of options and warrants
granted by use of the Black-Scholes pricing model.
The following table illustrates the effect on net income
and earnings per share if the company had applied the
fair value recognition provisions of FASB Statement No.
123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation.
Years Ended December 31,
---------------------------------
2002 2001
---------------------------------
Net loss - as reported $ (11,155,000) $ (10,143,000)
Deduct: total stock-based employee
compensation determined under fair value
based method for all awards, net of
related tax effects (618,000) (1,432,000)
---------------------------------
Net loss - pro forma $ (11,773,000) $ (11,575,000)
---------------------------------
Earnings per share:
Basic and diluted - as reported $ (.63) $ (.77)
Basic and diluted - pro forma $ (.66) $ (.87)
The fair value of each option grant is estimated at the
date of grant using the Black-Scholes option pricing
model with the following assumptions:
December 31,
----------------------------------------
2002 2001
----------------------------------------
Expected dividend yield $ - $ -
Expected stock price
volatility 102%-103% 106%-107%
Risk-free interest rate 4% 4-5%
Expected life of options 2-7 years 3-5 years
The weighted average fair value of options granted
during 2002 and 2001 are $1.25 and $1.71,
respectively.
--------------------------------------------------------------------------------
F-10
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Earnings Per Share
and Significant The computation of basic earnings per common share is
Accounting based on the weighted average number of shares
Policies outstanding during each year.
Continued
The computation of diluted earnings per common share is
based on the weighted average number of shares
outstanding during the year plus the common stock
equivalents, which would arise from the exercise of
stock options and warrants outstanding using the
treasury stock method and the average market price per
share during the year. Options and warrants to purchase
5,151,557 and 6,221,798 shares of common stock at prices
ranging from $2.00 to $12.98 per share were outstanding
at December 31, 2002 and 2001, respectively, but were
not included in the diluted earnings per share
calculation because the effect would have been
antidilutive.
Revenue Recognition
Revenues for sales of products that require specific
installation and acceptance by the customer are
recognized upon such installation and acceptance by the
customer. Revenues for sales of other surgical systems,
ultrasound diagnostic devices, and disposable products
are recognized when the product is shipped. A signed
purchase agreement and a deposit or payment in full from
customers is required before a product leaves the
premises. Title passes at time of shipment (F.O.B.
shipping point).
Research and Development
Costs incurred in connection with research and
development activities are expensed as incurred. These
costs consist of direct and indirect costs associated
with specific projects as well as fees paid to various
entities that perform certain research on behalf of the
Company.
Concentration of Risk
The market for opthalmic lasers is subject to rapid
technological change, including advances in laser and
other technologies and the potential development of
alternative surgical techniques or new pharmaceutical
products. Development by others of new or improved
products, processes or technologies may make products
developed by the Company obsolete or less competitive.
--------------------------------------------------------------------------------
F-11
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Concentration of Risk - Continued
and Significant The Company's high technology product line requires the
Accounting Company to deal with suppliers and subcontractors
Policies supplying highly specialized parts, operating highly
Continued sophisticated and narrow tolerance equipment and
performing highly technical calculations and tasks.
Although there are a limited number of suppliers and
manufacturers that meet the standards required of a
regulated medical device, management believes that other
suppliers and manufacturers could provide similar
components and services.
The nature of the Company's business exposes it to risk
from product liability claims. The Company maintains
product liability insurance providing coverage up to $2
million per claim with an aggregate policy limit of $2
million. Any losses that the Company may suffer from any
product liability litigation could have a material
adverse effect on the Company.
A significant portion of the Company's product sales is
in foreign countries. The economic and political
instability of some foreign countries may affect the
ability of medical personnel to purchase the Company's
products and the ability of the customers to pay for the
procedures for which the Company's products are used.
Such circumstances could cause a possible loss of sales,
which would affect operating results adversely.
During the years ended December 31, 2002 and 2001, no
single customer represented more than 10 percent of
total net sales.
Accounts receivable are due from medical distributors,
surgery centers, hospitals, optometrists and
ophthalmologists located throughout the U.S. and a
number of foreign countries. The receivables are
generally due within thirty days for domestic customers
with extended terms offered for some international
customers. The Company maintains an allowance for
estimated potentially uncollectible amounts.
--------------------------------------------------------------------------------
F-12
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Warranty
and Significant The Company provides product warranties on the sale of
Accounting certain products that generally extend for one year from
Policies the date of sale. The Company maintains a reserve for
Continued estimated warranty costs based on historical experience
and management's best estimates.
Use of Estimates in the Preparation of Financial
Statements
The preparation of financial statements in conformity
with accounting principles generally accepted in the
United States of America requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 2001 financial statements have
been reclassified to conform to the presentation of the
current year financial statements.
2. Going The accompanying financial statements have been prepared
Concern on a going concern basis, which contemplates the
realization of assets and the satisfaction of
liabilities in the normal course of business.
Historically, the Company has not demonstrated the
ability to generate sufficient cash flows from
operations to satisfy their liabilities and sustain
operations and the Company has incurred significant
losses. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
--------------------------------------------------------------------------------
F-13
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
2. Going The Company's continuation as a going concern is
Concern dependent on its ability to generate sufficient income
Continued and cash flow to meet its obligations on a timely basis
and/or obtain additional financing as may be required.
The Company is actively seeking options to obtain
additional capital and financing. The Company currently
has a private equity line of credit agreement with
Triton West Group, Inc., (Triton), which allows the
Company to sell $20 million of common stock over a three
year period beginning December 2000 to Triton by
tendering put notices to purchase shares subject to
certain NASDAQ trading restrictions. The company sold
approximately 329,000 shares of common stock for
approximately $673,000 during 2001 (see note 7). No
shares of common stock were sold under the Triton equity
line of credit during 2002. Management is uncertain that
the combination of existing working capital and the
private equity line of credit will be sufficient to
assure continuation of the Company's operations through
December 31, 2003. In the past, the Company has relied
heavily upon sales of its common and preferred stock to
fund operations. There can be no assurance that such
equity financing will be available on terms acceptable
to the Company in the future. If the Company is unable
to obtain such financing or secure debt financing, it
may be unable to continue development of its products
and may be required to substantially curtail operations.
3. Acquisitions Innovative Optics, Inc.
On January 31, 2002, the Company completed the purchase
of certain assets of Innovative Optics, Inc.
("Innovative Optics"), pursuant to the terms of the
Asset Purchase Agreement (the "Agreement") which the
Company entered into on January 31, 2002 with Innovative
Optics and Barton Dietrich Investments, L.P., the
majority shareholder of Innovative Optics. Innovative
Optics is a Georgia domiciled corporation which
manufactures and sells the Innovatome(TM), a software
driven microkeratome that provides ophthalmic surgeons a
means of cutting a corneal flap in refractive surgery,
and microkeratome blades.
--------------------------------------------------------------------------------
F-14
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
3. Acquisitions As consideration for the purchase of certain assets of
Continued Innovative Optics, the Company paid $100,000 and issued
an aggregate of 1,272,825 shares of its common stock,
and warrants to purchase 250,000 shares of the Company's
common stock at $5.00 per share, exercisable over a
period of three years from the closing date. The Company
filed a registration statement with the Securities and
Exchange Commission to register the shares of common
stock for resale that Innovative Optics received as
purchase consideration and the shares that Innovative
Optics will receive upon the exercise of the warrants.
The assets purchased included but were not imited to
patents, inventory, work in process and finished goods
relating to the Innovatome(TM), a microkeratome, and
microkeratome blades. Of the 1,272,825 shares of the
Company's common stock issued to Innovative Optics at
closing, one-half the number of these shares, or 636,412
shares, were placed in an escrow account maintained at
the law firm of Mackey Price & Thompson (the "Disbursing
Agent") pursuant to the terms of an Escrow Agreement.
In connection with this acquisition, the Company
recorded the following:
Inventory $ 225,000
Property, plant and equipment 35,000
Intangibles:
Patents, rights, trade name 530,000
Goodwill 1,419,000
Equity:
Common stock issued (1,814,000)
Warrants issued (295,000)
-------------------
Net cash paid $ 100,000
-------------------
The Company was required to use its best efforts to
implement, within 90 days of the closing, Phase I of a
Blade Price Reduction Program as prepared by a
consultant. Immediately after such 90 day period, the
Disbursing Agent was to distribute three-fourths of the
shares held in escrow, or 477,309 shares, to Innovative
Optics, unless the Company had certified that it had
implemented Phase I of the Blade Price Reduction
Program.
--------------------------------------------------------------------------------
F-15
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
3. Acquisitions Despite best efforts, the Company was unable to
Continued manufacture microkeratome blades at a targeted materials
cost per blade. If the Company certified that
implementation of Phase I of the Blade Price Reduction
Program resulted in materials cost that exceeded the
target cost per blade and such certification was not
disputed by Innovative Optics, the number of escrow
shares disbursed to Innovative Optics was to be reduced
by 300 shares for every cent that the materials cost per
blade exceeded the target cost. The Company was not
successful in achieving the blade price reduction.
Innovative Optics requested that the total number of
shares associated with Phase I be issued to them stating
that the Company did not use its best efforts to achieve
the target cost and that proper notification was not
delivered to them. In August 2002, the Company issued
477,309 shares of common stock, which were held in
escrow to Innovative Optics.
The shares were valued at $630,000, based upon the
market price per share at the date of issue. The
transaction amount was recorded as in process research
and development costs and charged to expense.
The Company was also required to use its best efforts to
implement, within six months after closing, Phase II of
the Blade Price Reduction Program. Immediately after
such six month period, the Disbursing Agent was to
disburse the remaining shares in escrow to Innovative
Optics unless the Company certified that it had
implemented Phase II of the Blade Price Reduction
Program and, despite best efforts, was unable to
manufacture the microkeratome blades at a second
targeted materials cost or less per blade. If Paradigm
certified that implementation of Phase II of the Blade
Price Reduction Program resulted in a materials cost
that exceeded the second target cost per blade and such
certification was not disputed by Innovative Optics, the
number of escrow shares disbursed to Innovative Optics
was to be reduced by 300 shares for every cent that the
materials cost per blade exceeded the second target
cost. If Innovative Optics disputes the Company's
certification, the dispute will be resolved by
arbitration by submitting the matter for resolution to
the accounting firm of KPMG LLP. The Company did not
implement Phase II of the Blade Price Reduction Project
due to the lack of success experienced in Phase I. Also,
the Company has not issued the remaining shares, which
remain in escrow.
--------------------------------------------------------------------------------
F-16
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
3. Acquisitions The Company determined that it could not manufacture the
Continued blades to support its customer base at an economical
cost. There are no blades in inventory at this time. The
Company has attempted to sell the product and related
intangibles, but has not been successful in such
efforts. Accordingly, due to the lack of projected
future cash flows, during 2002 the Company recorded an
impairment expense of $2,082,000 for the remaining book
value of property and equipment and intangible assets
purchased from Innovative Optics.
International Bioimmune Systems, Inc.
During 2002, the Company acquired 2,663,254, or 19.9%,
of the outstanding shares of International Bioimmune
Systems, Inc. (IBS) and warrants to purchase 1,200,000
shares of common stock of IBS at $2.50 per share for a
period of two years, through the exchange and issuance
of 736,945 shares of Paradigm common stock, the lending
of 300,000 shares of Paradigm common stock to IBS, and
the payment of certain expenses of IBS through the
issuance of an aggregate of 94,000 shares of Paradigm
common stock to IBS and its counsel.
The issuance of 736,945 and 94,000 shares were valued
based on the market price of Paradigm's common stock on
the date of the transaction and resulted in an
investment in IBS of $814,000, which combined with a
cash investment of $65,000 made in 2000, resulted in a
total investment of $879,000. The 300,000 shares were
also valued at the market price on the date of issuance
and were recorded as a stock subscription receivable of
$294,000 because such shares will either be paid for or
returned in the future.
Due to the uncertainty of future cash flows and the fact
that the products have not been approved by the FDA, the
Company determined that the likelihood of recovery of
its investment was remote and recorded an impairment
expense for the investment of $879,000.
--------------------------------------------------------------------------------
F-17
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
4. Detail of
Certain
Balance
Sheet
Accounts
Receivables:
Trade receivables $ 1,286,000
Other 5,000
Allowance for doubtful accounts (347,000)
-----------------
$ 944,000
-----------------
Inventories:
Finished goods $ 1,937,000
Raw materials 2,838,000
Reserve for obsolescence (2,126,000)
-----------------
$ 2,649,000
-----------------
Accrued liabilities:
Warranty and return allowance $ 586,000
Customer deposits 88,000
Payroll and employee benefits 175,000
Royalties 182,000
Consulting and other 155,000
Deferred revenue 228,000
-----------------
$ 1,414,000
-----------------
5. Intangible Intangible assets consist of the following at December
Assets 31, 2002:
Goodwill $ 799,000
Product and technology rights 769,000
Engineering and design costs 482,000
Patents 173,000
------------------
2,223,000
Accumulated amortization (1,313,000)
------------------
Net intangible assets $ 910,000
------------------
Amortization expense for the years ended December 31,
2002 and 2001 was $248,000 and $341,000, respectively.
--------------------------------------------------------------------------------
F-18
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
5. Intangible The following table reflects a comparison of net loss
Assets and net loss per share for each of the two years ended
Continued December 31, adjusted to give effect to the adoption of
SFAS 142:
2002 2001
----------------------------------
Reported net loss applicable to common
shareholders $ (11,155,000) $ (13,044,000)
Add-back goodwill amortization,
net of taxes - 80,000
----------------------------------
Adjusted net loss applicable to common
Shareholders $ (11,155,000) $ (12,964,000)
----------------------------------
Reported loss per share-basic and
diluted $ (.63) $ (.98)
Add-back goodwill amortization - -
----------------------------------
Adjusted loss per share-basic and
diluted $ (.63) $ (.98)
----------------------------------
The changes in the carrying amount of goodwill during
the year ended December 31, 2002 are as follows:
Balance as of December 31, 2001 $ 803,000
Goodwill acquired during the year 2,047,000
Adjustments to goodwill (2,051,000)
--------------
Balance as of December 31, 2002 $ 799,000
--------------
6. Property and Property and equipment consists of the following:
Equipment
Office equipment $ 750,000
Computer equipment 657,000
Automobile 52,000
Furniture and fixtures 264,000
Leasehold improvements 166,000
--------------
1,889,000
Accumulated depreciation
and amortization (1,394,000)
---------------
$ 495,000
---------------
--------------------------------------------------------------------------------
F-19
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. Equity Line The Company currently has a private equity line of
of Credit credit agreement with Triton West Group, Inc., (Triton),
which allows the Company to sell $20 million of common
stock over a three year period beginning in December
2000 to Triton by tendering put notices to purchase
shares. The put notices may be tendered by the Company
at the Company's discretion, subject to certain NASDAQ
trading restrictions. Upon the put notice Triton is
obligated to purchase shares at 88% of the lowest
closing bid price on the trading day immediately
following a five day period commencing two days prior to
put notice and ending two days after such put notice
date. The total amount per put is determined based on
the stock closing bid price and the 30 trading day
volume, with a maximum put amount of $2 million.
The Company sold approximately 329,000 shares of common
stock for approximately $673,000 during 2001 under the
equity line of credit with Triton West Group, Inc. in
five different transactions dating from February 16,
2001 to June 21, 2001. There were no sales of common
stock through this agreement during 2002.
8. Lease During the years ended December 31, 2002 and 2001, the
Obligations Company leased certain equipment under noncancellable
capital leases. These leases provide the Company the
option to purchase the leased assets at the end of the
initial lease term. Assets under capital leases included
in fixed assets and are as follows:
Computer and other equipment $ 291,000
Less accumulated amortization (121,000)
------------------
$ 170,000
------------------
Amortization expense on assets under capital leases
during the years ended December 31, 2002 and 2001 was
$46,000 and $54,000, respectively.
--------------------------------------------------------------------------------
F-20
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Lease Capital lease obligations have imputed interest rates of
Obligations approximately 15% to 22%. The leases are secured by
Continued equipment. Future minimum payments on the capital lease
obligations are as follows:
2003 $ 61,000
2004 45,000
2005 38,000
2006 14,000
-----------------
158,000
Less amount representing interest (34,000)
-----------------
Present value of future minimum lease payments 124,000
Less current portion (44,000)
-----------------
Long-term portion $ 80,000
-----------------
The Company leases office and warehouse space under an
operating lease agreement. Future minimum rental
payments under the noncancellable operating lease as of
December 31, 2002 are approximately as follows:
Year Ending December 31, Amount
----------------------- ------------------
2003 $ 42,000
2004 6,000
------------------
Total future minimum rental payments $ 48,000
------------------
In January 2003, the lease for the Company's office and
warehouse space was renewed. This renewal will result in
additional minimum lease payments of $121,000 in 2003,
$155,000 in 2004, and $159,000 in 2005.
Rent expense related to noncancelable operating leases
was approximately $437,000 and $435,000 for the years
ended December 31, 2002 and 2001, respectively.
--------------------------------------------------------------------------------
F-21
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Income The provision for income taxes is different than amounts
Taxes which would be provided by applying the statutory
federal income tax rate to loss before provision for
income taxes for the following reasons:
Years Ended
December 31,
-----------------------------------
2002 2001
-----------------------------------
Federal income tax benefit at
statutory rate $ 4,127,000 $ 3,753,000
Expiration of research and
development tax credit
carryforwards (25,000) (181,000)
Amortization of goodwill - (30,000)
Other (32,000) (28,000)
Change in valuation allowance (4,070,000) (3,514,000)
-----------------------------------
$ - $ -
-----------------------------------
Deferred tax assets (liabilities) are comprised of the
following:
Net operating loss carryforward $ 15,282,000
Depreciation, amortization, and impairment 783,000
Allowance and reserves 1,159,000
Impairment of investment in IBS 325,000
Research and development tax credit
carryforwards 34,000
-----------------
17,583,000
Valuation allowance (17,583,000)
-----------------
$ -
-----------------
A valuation allowance has been established for the net
deferred tax asset due to the uncertainty of the
Company's ability to realize such asset.
--------------------------------------------------------------------------------
F-22
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Income At December 31, 2002, the Company had net operating loss
Taxes carryforwards of approximately $41,000,000 and research
Continued and development tax credit carryforwards of
approximately $34,000. These carryforwards are available
to offset future taxable income and expire in 2003
through 2020. The utilization of the net operating loss
carryforwards is dependent upon the tax laws in effect
at the time the net operating loss carryforwards can be
utilized. The Tax Reform Act of 1986 significantly
limits the annual amount that can be utilized for
certain of these carryforwards as a result of the change
in ownership.
10. Capital The Company has established a series of preferred stock
Stock with a total of 5,000,000 authorized shares and a par
value of $.001, and one series of common stock with a
par value of $.001 and a total of 40,000,000 authorized
shares.
Series A Preferred Stock
On September 1, 1993, the Company established a series
of non-voting preferred shares designated as the 6%
Series A Preferred Stock, consisting of 500,000 shares
with $.001 par value. The Series A Preferred Stock has
the following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of twenty-four cents ($.24)
per share per annum, payable in cash only from
surplus earnings of the Company or in additional
shares of Series A Preferred Stock. The dividends
are non-cumulative and therefore deficiencies in
dividend payments from one year are not carried
forward to the next year.
2. Upon the liquidation of the Company, the holders
of the Series A Preferred Stock are entitled to
receive, prior to any distribution of any assets
or surplus funds to the holders of shares of
common stock or any other stock, an amount equal
to $1.00 per share, plus any accrued and unpaid
dividends related to the fiscal year in which such
liquidation occurs. Total liquidation preference
at December 31, 2002 was $6,000.
--------------------------------------------------------------------------------
F-23
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Capital Series A Preferred Stock - Continued
Stock 3. The shares are convertible at the option of the
Continued holder at any time into common shares, based on an
initial conversion rate of one share of Series A
Preferred Stock for 1.2 common shares.
4. The holders of the shares have no voting rights.
5. The Company may, at its option, redeem all of the
then outstanding shares of the Series A Preferred
Stock at a price of $4.50 per share, plus accrued
and unpaid dividends related to the fiscal year in
which such redemption occurs.
Series B Preferred Stock
On May 9, 1994, the Company established a series of
non-voting preferred shares designated as 12% Series B
Preferred Stock, consisting of 500,000 shares with $.001
par value. The Series B Preferred Stock has the
following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of forty-eight cents ($.48)
per share per annum, payable in cash only from
surplus earnings of the Company or in additional
shares of Series B Preferred Stock. The dividends
are non-cumulative and therefore deficiencies in
dividend payments from one year are not carried
forward to the next year.
2. Upon the liquidation of the Company, the holders
of the Series B Preferred Stock are entitled to
receive, prior to any distribution of any assets
or surplus funds to the holders of shares of
common stock or any other stock, an amount equal
to $4.00 per share, plus any accrued and unpaid
dividends related to the fiscal year in which such
liquidation occurs. Such right, however, is
subordinate to the rights of the holders of Series
A Preferred Stock to receive a distribution of
$1.00 per share plus accrued and unpaid dividends.
Total liquidation preference at December 31, 2002
was $36,000.
--------------------------------------------------------------------------------
F-24
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Capital Series B Preferred Stock - Continued
Stock 3. The shares are convertible at the option of the
Continued holder at any time into common shares, based on an
initial conversion rate of one share of Series B
Preferred Stock for 1.2 common shares.
4. The holders of the shares have no voting rights.
5. The Company may, at its option, redeem all of the
then outstanding share of the Series B Preferred
Stock at a price of $4.50 per share, plus accrued
and unpaid dividends related to the fiscal year in
which such redemption occurs.
Series C Preferred Stock
In January 1998, the Company authorized the issuance of
a total of 30,000 shares of Series C Preferred Stock,
$.001 par value, $100 stated value. The Series C
Preferred Stock have the following rights and
privileges:
1. The holders of the shares are entitled to
dividends at the rate of 12% per share per annum
of the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in
dividend payments from one year are not carried
forward to the next year.
2. Upon the liquidation of the Company, the holders
of the Series C Preferred Stock are entitled to
receive an amount per share equal to the greater
of (a) the amount they would have received if they
had converted the shares into shares of Common
Stock immediately prior to such liquidation plus
declared but unpaid dividends; or (b) the stated
value, subject to adjustment.
3. Each share is convertible, at the option of the
holder at any time until January 1, 2002, into
approximately 57.14 shares of common stock at an
initial conversion price, subject to adjustments
for stock splits, stock dividends and certain
combination or recapitalization of the common
stock, equal to $1.75 per share of common stock.
4. The holders of the shares have no voting rights.
--------------------------------------------------------------------------------
F-25
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Capital Series D Preferred Stock
Stock In January 1999, the Company's Board of Directors
Continued authorized the issuance of a total of 1,140,000 shares
of Series D Preferred Stock $.001 par value, $1.75
stated value. The Series D Preferred Stock has the
following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of 10% per share per annum
of the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in
dividend payments from one year are not carried
forward to the next year.
2. Upon the liquidation of the Company, the holders
of the Series D Preferred Stock are entitled to
receive an amount per share equal to the greater
of (a) the amount they would have received had
they converted the shares into Common Stock
immediately prior to such liquidation plus all
declared but unpaid dividends; or (b) the stated
value, subject to adjustment. Total liquidation
preference at December 31, 2002 was $3,000.
3. Each share is convertible, at the option of the
holder at any time until January 1, 2002, into one
share of Common Stock at an initial conversion
price, subject to adjustment. The Series D
Preferred Stock shall be converted into one share
of the Common Stock subject to adjustment (a) on
January 1, 2002 or (b) upon 30 days written notice
by the Company to the holders of the Shares, at
any time after (i) the 30-day anniversary of the
registration statement on which the shares of
Common Stock issuable upon conversion of the
Series D Preferred Stock were registered and (ii)
the average closing price of the Common Stock for
the 20-day period immediately prior to the date on
which notice of redemption is given by the Company
to the holders of the Series D Preferred Stock is
at least $3.50 per share. The Company in 1999
recorded $872,000 as a beneficial conversion
feature related to the differences in the
conversion price of the preferred stock to common
stock.
4. The holders of the shares have no voting rights.
--------------------------------------------------------------------------------
F-26
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Capital Series E Preferred Stock
Stock In May 2001, the Company authorized the issuance of a
Continued total of 50,000 shares of Series E Preferred Stock $.001
par value, $100 stated value. The Series E Preferred
Stock has the following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of 8% per share per annum of
the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in
dividend payments from one year are not carried
forward to the next year.
2. Upon the liquidation of the Company, the holders
of the Series E Preferred Stock are entitled to
receive an amount per share equal to the greater
of (a) the amount they would have received had
they converted the shares into Common Stock
immediately prior to such liquidation plus all
declared but unpaid dividends; or (b) the stated
value, subject to adjustment. Total liquidation
preference at December 31, 2002 was $150,000.
3. Each share is convertible, at the option of the
holder at any time until January 1, 2005, into
approximately 53.33 shares of Common Stock at an
initial conversion price, subject to adjustment
for stock splits, stock dividends and certain
combination or recapitalization of the common
stock, equal to $1.875 per share of common stock.
The Series E Preferred Stock shall be converted
into Common Stock subject to adjustment (a) on
January 1, 2005 or (b) upon 30 days written notice
by the Company to the holders of the Shares, at
any time after (i) the 30-day anniversary of the
registration statement on which the shares of
Common Stock issuable upon conversion of the
Series E Preferred Stock were registered and (ii)
the average closing price of the Common Stock for
the 20-day period immediately prior to the date on
which notice of redemption is given by the Company
to the holders of the Series E Preferred Stock is
at least $3.50 per share. The Company in 2001
recorded $1,482,000 as a beneficial conversion
feature related to the differences in the
conversion price of the preferred stock to common
stock.
--------------------------------------------------------------------------------
F-27
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Capital Series E Preferred Stock - Continued
Stock 4. The holders of the shares have no voting rights.
Continued
5. The holders of the shares also were issued
warrants to purchase shares of common stock equal
to 1,000 warrants for every 200 shares purchased
at an exercise price of $4.00 per share. Each
warrant is exercisable until May 23, 2006.
Series F Preferred Stock
In August 2001, the Company authorized the issuance of a
total of 50,000 shares of Series F Preferred Stock $.001
par value, $100 stated value. The Series F Preferred
Stock has the following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of 8% per share per annum of
the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in
dividend payments from one year are not carried
forward to the next year.
2. Upon the liquidation of the Company, the holders
of the Series F Preferred Stock are entitled to
receive an amount per share equal to the greater
of (a) the amount they would have received had
they converted the shares into Common Stock
immediately prior to such liquidation plus all
declared but unpaid dividends; or (b) the stated
value, subject to adjustment. Total liquidation
preference at December 31, 2002 was $627,000.
--------------------------------------------------------------------------------
F-28
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Capital Series F Preferred Stock - Continued
Stock 3. Each share is convertible, at the option of the
Continued holder at any time until January 1, 2005, into
approximately 53.33 shares of Common Stock at an
initial conversion price, subject to adjustment
for stock splits, stock dividends and certain
combination or recapitalization of the common
stock, equal to $1.875 per share of common stock.
The Series F Preferred Stock shall be converted
into Common Stock subject to adjustment (a) on
January 1, 2005 or (b) upon 30 days written notice
by the Company to the holders of the Shares, at
any time after (i) the 30-day anniversary of the
registration statement on which the shares of
Common Stock issuable upon conversion of the
Series F Preferred Stock were registered and (ii)
the average closing price of the Common Stock for
the 20-day period immediately prior to the date on
which notice of redemption is given by the Company
to the holders of the Series F Preferred Stock is
at least $3.50 per share. The Company in 2001
recorded $1,105,000 as a beneficial conversion
feature related to the differences in the
conversion price of the preferred stock to common
stock.
4. The holders of the shares have no voting rights.
--------------------------------------------------------------------------------
F-29
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Capital The following table summarizes preferred stock activity
Stock during the years ended December 31, 2002 and 2001:
Continued
Series A Series B Series C Series D Series E Series F
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------------------------------------
Balance at January 1,
2001 5,957 $ - 8,986 $ - - $ - 52,500 $ - - $ - - $ -
Issuance of Series E
preferred stock for cash - - - - - - - - 46,219 - - -
Issuance of Series F
preferred stock for cash - - - - - - - - - - 52,472 -
Conversion of preferred
stock (210) - (6,250) - - - (42,500) - (26,919) - (5,113) -
----------------------------------------------------------------------------------------------------------
Balance at December 31,
2001 5,747 - 8,986 - - - 10,000 - 19,300 - 47,359 -
Conversion of preferred
stock (120) - - - - - (5,000) - (17,800) - (41,087) -
----------------------------------------------------------------------------------------------------------
Balance at December 31,
2002 5,627 $ - 8,986 $ - - $ - 5,000 $ - 1,500 $ - 6,272 $ -
----------------------------------------------------------------------------------------------------------
Authorized 500,000 - 500,000 - 30,000 - 1,140,000 - 50,000 - 50,000 -
----------------------------------------------------------------------------------------------------------
Liquidation preference - $6,000 36,000 $ - $9,000 $150,000 $627,200
----------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
F-30
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
11. Stock Option The Company has a Stock Option Plan (the Option Plan),
Plan and which reserves shares of the Company's authorized but
Warrants unissued common stock for the granting of stock options.
Amendments to the Option Plan increased the number of
shares of common stock reserved for issuance thereunder
to an aggregate of 2,700,000 shares.
The Option Plan provides for the grant of incentive
stock options and non-qualified stock options to
employees and directors of the Company. Incentive stock
options may be granted only to employees. The Option
Plan is administered by the Board of Directors or a
Compensation Committee, which determines the terms of
options granted including the exercise price, the number
of shares subject to the option, and the exercisability
of the option.
During 2002, in connection with the Innovative Optics
acquisition (see note 3), the Company granted warrants
to purchase 250,000 shares of common stock at an
exercise price of $5.00 per share. These warrants were
nonforfeitable, vested and fully exercisable at the time
of grant. The exercise prices of these options were not
issued at a discount to the then market price of the
common stock. The options and warrants were valued
according to the Black-Scholes pricing model. As a
result of these warrants, the Company included
approximately $295,000 in the purchase price relating to
the acquisition of the assets from Innovative Optics,
Inc.
In addition, the Company granted the following options
and warrants to non-employees during the year ended
December 31, 2001:
o Warrants to purchase 100,000 shares of common
stock at an exercise price of $4.00 per share,
warrants to purchase 35,000 shares of common stock
at an exercise price of $2.00 per share, and
warrants to purchase 100,000 shares of common
stock at $3.00 per share in return for consulting
services. As a result of these warrants granted
the Company recorded approximately $342,000 of
general and administrative expense based on a
Black-Scholes valuation.
--------------------------------------------------------------------------------
F-31
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
11. Stock Option o Warrants to purchase 50,000 shares of common stock
Plan and at an exercise price of $4.00 that vested in
Warrants November 2001 were issued to a consultant as an
Continued extension of the consulting agreement. The Company
recognized $133,000 of general and administrative
expense in connection with these warrants based on
a Black-Scholes valuation.
o In connection with the Series E Preferred Stock
offering, the Company issued warrants to purchase
in aggregate 231,095 shares of common stock at an
exercise price of $4.00 per share.
A schedule of the options and warrants is as follows:
Exercise
Number of Price Per
----------------------------
Options Warrants Share
-----------------------------------------------
Outstanding at
January 1, 2001 1,613,254 1,798,927 $ 2.30 - 12.98
Granted 2,820,000 516,095 2.00 - 4.00
Exercised - - -
Expired (236,626) - 4.87 - 5.00
Forfeited (289,852) - 2.75 - 5.00
-----------------------------------------------
Outstanding at
December 31, 2001 3,906,776 2,315,022 2.00 - 12.98
Granted 70,000 250,000 2.00 - 5.00
Exercised - - -
Expired (115,479) - 5.00
Forfeited (1,374,762) - 2.31 - 6.00
-----------------------------------------------
Outstanding at
December 31, 2002 2,486,535 2,565,022 $ 2.00 - 12.98
-----------------------------------------------
--------------------------------------------------------------------------------
F-32
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
11. Stock Option The following table summarizes information about stock
Plan and options and warrants outstanding at December 31, 2002:
Warrants
Continued
Outstanding Exercisable
------------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
---------------------------------------------------- -----------------------
$ 2.00 - 5.00 3,438,649 4.12 $ 3.16 3,091,098 $ 3.68
6.00 - 8.13 1,587,025 .73 6.07 1,512,025 7.27
12.98 25,883 N/A 12.98 25,883 12.98
---------------------------------------------------- -----------------------
$ 2.30 -12.98 5,051,557 3.05 $ 4.34 4,629,006 $ 4.90
---------------------------------------------------- -----------------------
12. Related Party Thomas F. Motter, former Chairman of the Board and Chief
Transactions Executive Officer of the Company, leased his former
residence to the Company for $2,500 per month. The
primary use of the residential property was for housing
accommodations for the Company's employees living
outside of Utah while they were working at the Company's
corporate headquarters in Salt Lake City. The Company
obtained an appraisal from an independent appraiser,
which has concluded that the monthly rate of $2,500
represents the fair market rate for leasing the
residential property. The Company paid $14,000 in rent
during 2002. This agreement was terminated on January
31, 2003.
The Company entered into a consulting agreement with a
former executive officer of the Company for a period of
six months commencing in September 2002. The agreement
was renewable for additional six-month terms. The
Company did not renew the contract upon its expiration.
The Company paid $15,000 under this agreement during
2002 and had an accrual of $5,000 as of December 31,
2002.
--------------------------------------------------------------------------------
F-33
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
12. Related Party A law firm, of which the chairman of the board of
Transactions directors of the Company is a shareholder, has rendered
Continued legal services to the Company. The Company paid this
firm $175,000 and $159,000, for the years ended December
31, 2002 and 2001, respectively. As of December 31,
2002, the Company owed this firm $50,000, which is
included in accounts payable.
13. Supplemental o During the year ended December 31, 2002 the Company
Cash Flow acquired certain assets of Innovative Optics, Inc.
Information in a purchase transaction (see note 3). The
transaction required the payment of $100,000 and a
potential issuance of 1,272,000 shares of common
stock. In connection with this acquisition, the
Company recorded the following:
Inventory $ 225,000
Property, and equipment 35,000
Intangibles:
Patents, rights, trade name 530,000
Goodwill 1,419,000
Equity:
Common stock issued (1,814,000)
Warrants issued (295,000)
-----------------
Net cash paid $ 100,000
-----------------
--------------------------------------------------------------------------------
F-34
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
13. Supplemental o During 2002, the Company acquired 2,663,254, or
Cash Flow 19.9%, of the outstanding shares of International
Information Bioimmune Systems, Inc. (IBS) and warrants to
Continued purchase 1,200,000 shares of common stock of IBS
at $2.50 per share for a period of two years,
through the exchange and issuance of 736,945
shares of Paradigm common stock, the lending of
300,000 shares of Paradigm common stock to IBS,
and the payment of certain expenses of IBS through
the issuance of an aggregate of 94,000 shares of
Paradigm common stock to IBS and its counsel.
o During the year ended December 31, 2001, the
Company acquired $235,000 of property and
equipment in exchange for capital lease
agreements.
Actual amounts paid for interest and income taxes are as
follows:
Years Ended
December 31,
-----------------------------------
2002 2001
-----------------------------------
Interest $ 46,000 $ 41,000
-----------------------------------
Income taxes $ - $ -
-----------------------------------
--------------------------------------------------------------------------------
F-35
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
14. Export Sales Total sales include export sales by major geographic
area as follows:
Years Ended
December 31,
-----------------------------------
Geographic Area 2002 2001
-----------------------------------
Far East $ 1,171,000 $ 1,416,000
South America 308,000 301,000
Middle East 337,000 287,000
Europe 505,000 1,323,000
Canada 121,000 200,000
Mexico 61,000 31,000
-----------------------------------
$ 2,503,000 $ 3,558,000
-----------------------------------
15. Savings Plan In November 1996, the Company established a 401(k)
Retirement Savings Plan for the Company's officers and
employees. The Plan provisions include eligibility after
six months of service, a three year vesting provision
and 100% matching contribution by the Company up to 3%
of a participant's compensation. During the years ended
December 31, 2002 and 2001, the Company contributed
approximately $59,000 and $68,000 to the Plan,
respectively.
16. Commitments Consulting Agreements
and During the year ended December 31, 1999 the Company
Contingencies entered a consulting agreement with a former officer of
the Company, which expires in 2004 and requires annual
payments of $25,000 through 2003 and a payment of
$12,500 in 2004.
During the year ended December 31, 2000, in connection
with the acquisition of OBF, the Company entered a
consulting agreement with the former owner of OBF, which
requires monthly payments of $6,000 through June 2003.
--------------------------------------------------------------------------------
F-36
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation
and An action was brought against the Company in March 2000
Contingencies by George Wiseman, a former employee, in the Third
Continued District Court of Salt Lake County, State of Utah. The
complaint alleges that the Company owes Mr. Wiseman
6,370 shares of its common stock plus costs, attorney's
fees and a wage penalty (equal to 1,960 additional
shares of Paradigm common stock) pursuant to Utah law.
The Company believes the complaint is without merit and
intends to vigorously defend against the action.
An action was brought against the Company in September
2000 by PhotoMed International, Inc. and Daniel M.
Eichenbaum in the Third District Court of Salt Lake
County, State of Utah. The action involves an amount of
royalties that are allegedly due and owing to PhotoMed
International, Inc. and Dr. Eichenbaum with respect to
the sales of certain equipment plus attorney's fees.
Discovery has taken place and the Company has paid
royalties of $15,000 to bring all required payments up
to date through June 30, 2001. However, the legal action
has not been dismissed as a result of the payments. The
Company is in the process of working with Photomed
International and Dr. Eichenbaum to ensure that the
calculations have been correctly made on the royalties
paid as well as the proper method of calculation for the
future. It is anticipated that once the parties can
agree on the correct calculations on the royalties, the
legal action will be dismissed. The Company believes
that any additional royalty payment that may be required
as settlement of the action will not have a material
impact on the financial statements.
An Action has been brought against the Company by
Merrill Corporation that alleges that the Company owes
the plaintiff approximately $20,000 together with
interest thereon at the rate of 10% per annum from
August 30, 1999, plus costs and attorney's fee. The
complaint alleges a breach of contract relative to
printing services. The Company has filed an answer to
the complaint and discovery is proceeding. The Company
believes that the complaint against the Company is
without merit and intends to vigorously defend against
the action.
--------------------------------------------------------------------------------
F-37
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and The Company received demand letters dated September 14,
Contingencies 2000 and October 17, 2000 from Mentor Corporation
Continued ("Mentor") claiming that the Company failed to register
485,751 shares of common stock issued to Mentor under
the Asset Purchase Agreement dated October 15, 1999,
among the Company, Mentor, Mentor Ophthalmics, Inc. and
Mentor Medical, Inc. The Asset Purchase Agreement
related to the Company's purchase of Mentor's
phacoemulsification product line in consideration for
the issuance by the Company to Mentor of 485,751 shares
of its common stock, valued at the sum of $1,500,000 at
the time of closing.
On July 2, 2001, the Company entered into a settlement
agreement with Mentor Corporation in which the Company
agreed to pay 350,000 shares of common stock to the
Mentor Corporation in exchange for release of all claims
against the Company in connection with the registration
of certain shares of the Company's common stock
previously issued. This settlement resulted in a
litigation settlement expense of $812,000 based on the
market price of the Company's common stock on the date
of settlement.
The Company received a demand letter dated December 9,
2002 from counsel for Dan Blacklock, dba Danlin Corp.
The letter demands payment in the amount of $65,000 for
manufacturing and supplying parts for our microkeratome
blades. The Company's records show that it received
approximately $35,000 in parts from the Danlin Corp.,
but that the additional amounts that the Danlin Corp
claims are owed, were from parts that were received but
rejected because they had never been ordered.
The Company received demand letters dated September 29,
2002 and December 10, 2002 from counsel for CitiCorp,
Vendor Finance, Inc. and its successor-in-interest, The
Copy Man dba TCM Business. The letters demand payment of
$50,000 plus interest for the leasing of two copy
machines that were delivered to the Salt Lake City
facilities on or about April of 2000. The majority of
the amounts alleged to be owed are from the remaining
payments on the leases. The Company disputes the amounts
allegedly owed, asserting that the copy machines, which
were returned to the leasing company, did not work
properly.
--------------------------------------------------------------------------------
F-38
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and The Company received a demand letter dated December 30,
Contingencies 2002 from counsel for Thomas F. Motter, former Chairman
Continued and Chief Executive Officer. Mr. Motter claims in the
letter that he was entitled to certain stock options
that had not been issued to him in a timely manner. By
the time the options were actually issued to him,
however, they had expired. Mr. Motter contends that if
the options had been issued in a timely manner, he would
have exercised them in a manner that would have given
him a substantial benefit. Mr. Motter requests
restitution for the loss of the financial opportunity.
Mr. Motter also claims that he was defrauded by the
Company by not being given an extended employment
agreement when he terminated the change of control
agreement that he had entered into with the Company.
Mr. Motter is further claiming payment for accrued
vacation time during the 13 years he had been employed,
asserting that he only had a total of four weeks of
vacation during that period. Finally, Mr. Motter is
threatening a shareholder derivative action against the
Company because of the board of directors' alleged
failure to conduct an investigation into conversations
that took place in a chat room on Yahoo. Mr. Motter
asserts that certain individuals participating in the
conversations were officers or directors of the Company
whose interests were in conflict with the interests of
the shareholders. The Company believes that Mr. Motter's
claims and assertions are without merit and intend to
vigorously defend against any legal action that Mr.
Motter may bring against the Company.
The Company received a demand letter dated January 6,
2003 from counsel for Westcore STIPG, LLC, the landlord
with regard to the lease on the former facilities in San
Diego, California. The letter demands payment of $11,000
plus interest, attorney's fees and costs for the repairs
and restoration work on the San Diego facilities, after
a deduction of a $6,000 security deposit. The Company
rejects these claims, contending that the security
deposit was adequate to pay for any repairs or
restoration expenses on the premises.
An action was brought by Dr. John Charles Casebeer
against the Company in the Montana Second Judicial
District Court, Silver Bow County, state of Montana. The
complaint alleges that Dr. Casebeer entered into a
personal services contract with the Company memorialized
by a letter dated April 20, 2002, with it being alleged
that Dr. Casebeer fully performed his obligations. Dr.
Casebeer asserts that he is entitled to $43,750 per
quarter for consultant time and as an incentive to be
granted each quarter $5,000 in options issued at the
fair market value. An additional purported incentive was
$50,000 in shares of stock being issued at the time a
formalized contract was to be signed by the parties. In
the letter it is provided that at its election, the
Company may pay the consideration in the form of stock
or cash and that stock would be issued within 30 days of
the close of the quarter. Prior to the litigation, the
Company issued 43,684 shares to Dr. Casebeer. The
referenced letter provides that termination may be made
by either party upon giving 90 days written notice.
Notice was given by the Company in early November 2002.
The Company recently filed its answer in defense of the
action. Issues include whether or not Dr. Casebeer fully
performed as asserted.
The Company may become or is subject to other
investigations, claims or lawsuits ensuing out of
conduct of its business, including those related to
environmental safety and health, product liability,
commercial transactions etc. The Company is currently
not aware of any other such items, which it believes
could have a material adverse effect on the financial
statements.
--------------------------------------------------------------------------------
F-39
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Royalty Agreements
and The Company has a royalty agreement with the president
Contingencies of OBF. The agreement provides for the payment of 10%
Continued royalty of the net sales related to the Blood Flow
Analyzer. The agreement terminates in 2020. The Company
did not make any royalty payments during 2002 under this
agreement and $147,000 were accrued at the end of the
year.
The Company has an amended exclusive patent license
agreement with a company which owns the patent for the
laser-probe used on the Photon machine. The agreement
provides for the payment of a 1% royalty on all sales
proceeds related directly or indirectly, to the Photon
machine. The agreement terminates on July 7, 2003.
Through December 31, 2002, no significant royalties have
been paid under this agreement.
The Company has an agreement with a Canadian corporation
that provides for the payment of royalties related to
the sales of UBM (Ultrasonic Bio-Microscopy). The
agreement outlines payments of 150 Canadian Dollars for
each licensed product sold for a period of 12 years that
ends in September of 2002. At December 31, 2002, the
Company had accrued approximately $7,000 in royalties.
The Company has a royalty agreement with another company
that developed a promotional CD for the Company. Through
the promotion of the CD, the Company hopes to increase
sales in the Autoperimiter and assist doctors currently
using the unit with the interpretation of visual fields.
The royalty base with be 50% each until the Company's
share equals the production costs related to development
of the disk. Thereafter, the developer will receive 70%
and the Company will receive 30% of the royalty base.
Royalties paid during the year relating to this
agreement were not significant.
17. Fair Value The Company's financial instruments consist of cash,
of Financial receivables, payables, and notes payable. The carrying
Instruments amount of cash, receivables and payables approximates
fair value because of the short-term nature of these
items. The carrying amount of the notes payable
approximates fair value as the individual borrowings
bear interest at market interest rates.
--------------------------------------------------------------------------------
F-40
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
18. Recent Recent Accounting Pronouncements
Accounting In June 2001, the FASB issued Statement of Financial
Pronounce- Accounting Standards No. 143, "Accounting for Asset
ments Retirement Obligations". This Statement addresses
financial accounting and reporting for obligations
associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This
Statement is effective for financial statements issued
for fiscal years beginning after June 15, 2002. This
Statement addresses financial accounting and reporting
for the disposal of long-lived assets. The Company is
currently assessing the impact of this statement.
In April 2002, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This
statement requires the classification of gains or losses
from the extinguishments of debt to meet the criteria of
Accounting Principles Board Opinion No. 30 before they
can be classified as extraordinary in the income
statement. As a result, companies that use debt
extinguishment as part of their risk management cannot
classify the gain or loss from that extinguishment as
extraordinary. The statement also requires
sale-leaseback accounting for certain lease
modifications that have economic effects similar to
sale-leaseback transactions. The Company does not expect
Adoption of SFAS No. 145 did have a material impact on
financial position or future operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities."
This standard, which is effective for exit or disposal
activities initiated after December 31, 2002, provides
new guidance on the recognition, measurement and
reporting of costs associated with these activities. The
standard requires companies to recognize costs
associated with exit or disposal activities when they
are incurred rather than at the date the company commits
to an exit or disposal plan. The adoption of SFAS No.
146 by the Company is not expected to have a material
impact on the Company's financial position or future
operations.
--------------------------------------------------------------------------------
F-41
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
18. Recent Recent Accounting Pronouncements - Continued
Accounting In December 2002, the FASB issued SFAS No. 148
Pronounce- "Accounting for Stock-Based Compensation--Transition and
ments Disclosure--an amendment of FASB Statement No. 123,"
Continued which is effective for all fiscal years ending after
December 15, 2002. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair
value based method of accounting for stock-based
employee compensation under SFAS No. 123 from the
intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25. SFAS 148
also changes the disclosure requirements of SFAS 123,
requiring a more prominent disclosure of the pro-forma
effect of the fair value based method of accounting for
stock-based compensation. The adoption of SFAS No. 148
by the Company did not have a material impact on the
Company's financial position or future operations.
In January 2003, the Financial Accounting Standards
Board (FASB) issued Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN No. 46), which
addresses consolidation by business enterprises of
variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities
in which equity investors do not have the
characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated
financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The
Company does not expect to identify any variable
interest entities that must be consolidated. In the
event a variable interest entity is identified, the
Company does not expect the requirements of FIN No. 46
to have a material impact on its financial condition or
results of operations.
--------------------------------------------------------------------------------
F-42
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
18. Recent Recent Accounting Pronouncements - Continued
Accounting In November 2002, the FASB issued Interpretation No. 45,
Pronounce- Guarantor's Accounting and Disclosure Requirements for
ments Guarantees, Including Indirect Guarantees of
Continued Indebtedness of Others (FIN No. 45). FIN No. 45 requires
certain guarantees to be recorded at fair value, which
is different from current practice to record a liability
only when a loss is probable and reasonably estimable,
as those terms are defined in FASB Statement No. 5,
Accounting for Contingencies. FIN No. 45 also requires
the Company to make significant new disclosures about
guarantees. The disclosure requirements of FIN No. 45
are effective for the Company in the first quarter of
fiscal year 2003. FIN No. 45's initial recognition and
initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after
December 31, 2002. The Company's previous accounting for
guarantees issued prior to the date of the initial
application of FIN No. 45 will not be revised or
restated to reflect the provisions of FIN No 45. The
Company does not expect the adoption of FIN No. 45 to
have a material impact on its consolidated financial
position, results of operations or cash flows.
--------------------------------------------------------------------------------
F-43
No dealer, salesperson or other person is 12,304,574 Shares of Common Stock
authorized to give any information or to
represent anything not contained in this
prospectus. This prospectus is an offer to
sell only the shares offered hereby, but PARADIGM MEDICAL INDUSTRIES, INC.
only under circumstances and in _________________
jurisdictions where it is lawful to do so PROSPECTUS
The information contained in this prosptus -----------------
is current only as of its date.
--------------------- October __, 2003
TABLE OF CONTENTS
Page
Prospectus Summary.....................................
Risk Factors .........................................
Use of Proceeds........................................
Dividend Policy........................................
Capitalization.........................................
Market for Common
Equity and
Related Shareholder Matters.........................
Selected Financial Data................................
Management's Discussion and Analysis
of Plan of Operation................................
Business ..............................................
Management ............................................
Security Ownership of Certain
Beneficial Owners and Management ...................
Certain Transactions...................................
Selling Securityholders.................................
Description of Securities..............................
Plan of Distribution...................................
Experts................................................
Legal Matters..........................................
Where You Can Find More Information....................
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any person who is,
or is threatened to be made, a party to any threatened, pending or completed
legal action, suit or proceedings, whether civil, criminal, administrative or
investigative (other than action by or in the right of such corporation), by
reason of the fact that such person was an officer or director of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the corporation's best interests, and, for criminal
proceedings, had no reasonable cause to believe his or her conduct was illegal.
A Delaware corporation may indemnify officers and directors in an action by or
in the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation in the performance of his
or her duty. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses which such officer or director
actually and reasonably incurred.
In accordance with the Delaware Law, the Certificate of Incorporation of
the Company contains a provision to limit the personal liability of the
directors of the Company for violations of their fiduciary duty. This provision
eliminates each director's liability to the Registrant or its stockholders for
monetary damages except (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit. The effect of this provision is to eliminate the personal liability of
directors for monetary damages for actions involving a breach of their fiduciary
duty of care, including any such actions involving gross negligence.
The Company may not indemnify an individual unless authorized and a
determination is made in the specific case that indemnification of the
individual is permissible in the circumstances because his or her conduct was in
good faith, he or she reasonably believed that his or her conduct was in, or not
opposed to, the Company's best interests and, in the case of any criminal
proceeding, he or she had no reasonable cause to believe his or her conduct was
unlawful. The Company may not advance expenses to an individual to whom the
Company may ultimately be responsible for indemnification unless authorized in
the specific case after the individual furnishes the following to the Company: a
written affirmation of his or her good faith belief that his or her conduct was
in good faith, that he or she reasonably believed that his or her conduct was
in, or not opposed to, the Company's best interests and, in the case of any
criminal proceeding, he or she had no reasonable cause to believe his or her
conduct was unlawful and (2) the individual furnishes to the Company a written
undertaking, executed personally or on his or her behalf, to repay the advance
if it is ultimately determined that he or she did not meet the standard of
conduct referenced in part (1) of this sentence. In addition to the individual
furnishing the aforementioned written affirmation and undertaking, in order for
the Company to advance expenses, a determination must also be made that the
facts then- known to those making the determination would not preclude
indemnification.
All determinations relative to indemnification must be made as follows:
(1) by the Board of Directors of the Company by a majority vote of those present
at a meeting at which a quorum is present, and only those directors not parties
to the proceeding shall be counted in satisfying the quorum requirement; or (2)
if a quorum cannot be obtained as contemplated in part (1) of this sentence, by
a majority vote of a committee of the Board of Directors designated by the Board
of Directors of the Company, which committee shall consist of two or more
directors not parties to the proceeding, except that directors who are parties
to the proceeding may participate in the designation of directors for the
committee; or (3) by special legal counsel selected by the Board of Directors or
its committee in the manner prescribed in part (1) or part (2) of this sentence
(however, if a quorum of the Board of Directors cannot be obtained under part
(1) of this sentence and a committee cannot be designated under part (2) of this
sentence, then a special legal counsel shall be selected by a majority vote of
the full board of directors, in which selection directors who are parties to the
proceeding may participate); or (4) by the shareholders, by a majority of the
votes entitled to be cast by holders of qualified shares present in person or by
proxy at a meeting.
II-2
The Company has also entered into Indemnification Agreements with its
executive officers and directors. These Indemnification Agreements are
substantially similar in effect to the Bylaws and the provisions of our
Certificate of Incorporation relative to providing indemnification to the
maximum extent and in the manner permitted by the Delaware General Corporation
Law. Additionally, such Indemnification Agreements contractually bind the
Company with respect to indemnification and contain certain exceptions to
indemnification, but do not limit the indemnification available pursuant to our
Bylaws, our Certificate of Incorporation or the Delaware General Corporation
Law.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the expenses payable by the Company in
connection with the issuance and distribution of the securities being registered
(all amounts except the Securities and Exchange Commission filing fee are
estimated):
-------------------------------------------------------------------------------- -----------------
Filing fee -- Securities and Exchange Commission.................... $ 368
-------------------------------------------------------------------------------- -----------------
-------------------------------------------------------------------------------- -----------------
Printing and engraving expenses..................................... 5,000
-------------------------------------------------------------------------------- -----------------
-------------------------------------------------------------------------------- -----------------
Legal fees and disbursements........................................ 45,000
-------------------------------------------------------------------------------- -----------------
-------------------------------------------------------------------------------- -----------------
Accounting fees and disbursements................................... 15,000
-------------------------------------------------------------------------------- -----------------
-------------------------------------------------------------------------------- -----------------
Blue Sky fees and expenses (including legal fees)................... 5,000
-------------------------------------------------------------------------------- -----------------
-------------------------------------------------------------------------------- -----------------
Transfer agent and registrar fees and expenses........................ 1,500
-------------------------------------------------------------------------------- -----------------
-------------------------------------------------------------------------------- -----------------
Miscellaneous.......................................................
3,132
-------------------------------------------------------------------------------- -----------------
-------------------------------------------------------------------------------- -----------------
Total expenses...................................................... $75,000
-------------------------------------------------------------------------------- -----------------
Item 26. Recent Sales of Unregistered Securities
The following information is furnished with regard to all issuances of
unregistered shares of our common stock during the past three years. These
shares were issued, unless otherwise indicated, without registration in reliance
upon the exemption provided by Section 4(2) of the Securities Act of 1933, as
amended or, in the case of the exercise of warrants, the shares were registered
pursuant to a registration statement in effect at the time of the warrant
exercise.
I. Common Stock
On July 14, 2000, the Company issued 75,758 shares of common stock to
Triton West Group, Inc., an accredited investor, as defined in Section 2(15) of
the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a cash
investment in the amount of $300,000, or a purchase price of $3.96 per share.
These shares were issued without registration in reliance upon Section 4(2) of
the Securities Act of 1933 and Rule 506 of Regulation D thereunder.
On July 20, 2000, the Company issued 12,350 shares of common stock to
John W. Hemmer for a cash investment in the amount of $61,750 pursuant to the
exercise of warrants at an exercise price of $5.00 per share.
On July 24, 2000, the Company issued 300 shares of common stock to
Gabriel Plaut for a cash investment in the amount of $807 pursuant to the
exercise of warrants at an exercise price of $2.69 per share.
On August 30, 2000, the Company sold a total of 500,000 shares of common
stock to 34 accredited investors, as defined in section 2 (15) of the Securities
Act of 1933 and Rule 501 of Regulation D thereunder, through a private placement
under Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D
thereunder at a price of $3.625 per share. The Company received $1,812,500 in
cash as a result of the private placement transaction and paid $133,125 in
commissions and expenses.
On August 31, 2000, the Company issued 85,175 shares of common stock to
Triton West Group, Inc., an accredited investor, as defined in Section 2(15) of
the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a cash
investment in the amount of $308,759, or at a purchase price of $3.625 per
share. These shares were issued without registration in reliance upon Section
4(2) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder.
II-3
On September 6, 2000, the Company issued 5,384 shares of common stock to
Randall A. Mackey for services as a director of the Company from July 10, 1996
to September 3, 1998.
On September 6, 2000, the Company issued 200,000 shares of common stock
to two accredited investors, as defined in Section 2(15) of the Securities Act
of 1933 and Rule 501 of Regulation D thereunder, through a private placement
under Section 4(2) under the Securities Act of 1933 and Rule 506 of Regulation D
thereunder at a price of $3.625 per share. The Company received $725,000 in cash
as a result of the private placement transaction and paid $65,250 in commissions
and expenses.
On September 9, 2000, the Company issued 19,000 shares of common stock to
the Estate of Albert J. Barbara for a cash investment in the amount of $57,000
pursuant to the exercise of warrants at an exercise price of $3.00 per share.
On September 25, 2000, the Company issued 1,115 shares of common stock to
Christopher Brothers pursuant to the cashless exercise of warrants.
On October 18, 2000, the Company issued 83,000 shares of common stock to
Triton West Group, Inc., an accredited investor, as defined in Section 2(15) of
the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a cash
investment in the amount of $260,205, or at a purchase price of $3.14 per share.
These shares were issued without registration in reliance upon Section 4(2) of
the Securities Act of 1933 and Rule 506 of Regulation D thereunder.
On November 28, 2000, the Company issued 1,870 shares of common stock to
Michael P. Fenten pursuant to the cashless exercise of warrants.
On February 20, 2001, the Company issued 150,000 shares of common stock
to Triton West Group, Inc., an accredited investor as defined in Section 2(15)
of the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a
cash investment in the amount of $300,000, or at a purchase price of $2.00 per
share. These shares were issued without registration in reliance upon Section
4(2) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder.
On March 14, 2001, the Company issued 49,716 shares of common stock to
Triton West Group, Inc., an accredited investor as defined in Section 2(15) of
the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a cash
investment in the amount of $87,500, or at a purchase price of $1.76 per share.
These shares were issued without registration in reliance upon Section 4(2) of
the Securities Act of 1933 and Rules 506 of Regulation D thereunder.
On May 22, 2001, the Company issued 40,440 shares of common stock to
Triton West Group, Inc., an accredited investor as defined in Section 2(15) of
the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a cash
investment in the amount of $100,000, or at a purchase price of $2.47 per share.
These shares were issued without registration in reliance upon Section 4(2) of
the Securities Act of 1933 and Rules 506 of Regulation D thereunder.
On May 30, 2001, the Company issued 37,381 shares of Common stock to
Triton West Group, Inc., an accredited investor as defined in Section 2(15) of
the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a cash
investment in the amount of $100,000, or at a purchase price of $1.95 per share.
These shares were issued without registration in reliance upon Section 4(2) of
the Securities Act of 1933 and Rules 506 of Regulation D thereunder.
On June 26, 2001, the Company issued 51,188 shares of common stock to
Triton West Group, Inc., an accredited investor as defined in Section 2(15) of
the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a cash
investment in the amount of $100,000, or at a purchase price of $1.95 per share.
These shares were issued without registration in reliance upon Section 4(2) of
the Securities Act of 1933 and Rules 506 of Regulation D thereunder.
On August 22, 2001, the Company issued 350,000 shares of common stock to
Mentor Corporation pursuant to a settlement agreement dated July 2, 2001
regarding the settlement of a dispute between the Company and Mentor
Corporation. The dispute involved whether the 485,751 shares of the Company's
common stock issued to Mentor Corporation pursuant to an asset purchase
transaction were required to have been registered in the Company's registration
statement declared effective on January 5, 2000.
II-4
On January 31, 2002, the Company issued 1,272,825 shares of common stock
to Innovative Optics, Inc. as consideration pursuant to the completion of a
transaction involving the purchase of all of the assets of Innovative Optics,
Inc.
On January 31, 2002, the Company issued 50,000 shares of common stock to
Dr. Scott S. Bair as consideration pursuant to the completion of a transaction
involving the purchase of all the assets of Innovative Optics, Inc.
On June 19, 2002, the Company issued 17,007 shares of common stock to
John Charles Casebeer, M.D. for services rendered to the Company under a
consulting agreement. The shares represent the payment of $50,000 in common
stock in consideration for assisting the Company to develop and promote its
Innovatome(TM) microkeratome during the period from April 1, 2002 to June 30,
2002.
On July 9, 2002, the Company issued 35,000 shares of common stock to
Michael W. Stelzer pursuant to the Severance Agreement and General Release,
which the Company entered into with Mr. Stelzer on January 21, 2000.
On July 29, 2002, the Company issued 26,677 shares of common stock to
John Charles Casebeer, M.D. for services rendered to the Company under a
consulting agreement. The shares represent the payment of $50,000 in common
stock in consideration for assisting the Company to develop and promote the
Innovatome(TM) microkeratome during the period from July 1, 2002 to September
30, 2002.
On July 30, 2002, the Company issued 50,000 shares of common stock to
each of Peter Kristensen and F. Briton McConkie for services rendered to the
Company under a Major Account Facilitator Contract in which Messrs. McConkie and
Kristensen served as intermediaries between the Company and an international
agent in an effort to sell 150 Photon(TM) laser systems in Asia.
On August 2, 2002, the Company issued 48,000 shares of common stock to
Michael B. Lindberg, M.D. for services rendered under a consulting agreement.
The shares issued to Dr. Lindberg represent the payment for assisting the
Company in evaluating new technologies and instruments during the period from
December 1, 2000 to November 30, 2002.
On September 26, 2002, the Company issued a total of 736,945 shares of
its on stock to 34 shareholders of International Bio-Immune Systems, Inc. or IBS
in connection with a transaction with IBS to acquire 19.9% of the outstanding
shares of IBS common stock through the exchange and issuance of the 736,945
shares of its common stock for 2,663,254 shares of common stock of IBS. In
addition, as part of the transaction, the Company lent 300,000 shares of its
common stock to IBS and, as consideration for the payment of certain expenses of
IBS in the transaction, issued 44,000 shares of its common stock to IBS and
50,000 shares of its common stock to Joseph S. Anile, II. These shares were
issued without registration in reliance upon Section 4(2) of the Securities Act
of 1933 and Rule 506 of Regulation D thereunder.
On September 30, 2002, the Company issued 40,000 shares of common stock
to Michael W. Stelzer pursuant to a Severance Agreement and General Release,
which the Company entered into with Mr. Stelzer on September 27, 2002.
On January 22, 2003, the Company issued a total of 2,524,000 shares of
common stock to six accredited investors, as defined in Section 2(15) of the
Securities Act of 1933 and Rule 501 of Regulation D thereunder, through a
private placement under Section 4(2) of the Securities Act of 1933 and Rule 506
of Regulation D thereunder at a price of $.25 per share. The Company received a
total of $631,000 in cash in the private placement transaction and paid $69,410
in commissions and expenses. In addition, the Company issued warrants to
purchase 157,750 shares of common stock at an exercise price of $.25 per share
for commissions and expenses. The accredited investors also received warrants to
purchase a total of 631,000 shares of common stock at an exercise price of $.25
per share.
On March 26, 2003, the Company issued 695,991 shares of common stock to
Triton West Group, Inc., an accredited investor, as defined in Section 2(15) of
the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a cash
investment in the amount of $85,746, or at a purchase price of $.12 per share.
These shares were issued without registration in reliance upon Section 4(2) of
the Securities Act of 1933 and Rule 506 of Regulation D thereunder.
On June 13, 2003, the Company issued 50,000 shares of common stock to
Frank G. Mauro for a cash investment of $12,500 pursuant to the exercise of
warrants at an exercise price of $.25 per share.
II-5
On June 13, 2003, the Company issued 7,888 shares of common stock to
Delbert G. Reichardt for a cash investment in the amount of $1,972 pursuant to
the exercise of warrants at an exercise price of $.25 per share.
On June 13, 2003, the Company issued 7,887 shares of common stock to John
H. Banzhaf for a cash investment in the amount of $1,971.25 pursuant to the
exercise of warrants at an exercise price of $.25 per share.
On June 26, 2003, the Company issued 51,000 shares of common stock to
Paul L. Archambeau, M.D. for a cash investment in the amount of $12,750 pursuant
to the exercise of warrants at an exercise price of $.25 per share.
On June 30, 2003, the Company completed the sale of 845,266 shares of
common stock to 14 accredited investors, as defined in Section 2(15) of the
Securities Act of 1933 and Rule 501 of Regulation D thereunder, through a
private placement under Section 4(2) of the Securities Act of 1933 and Rule 506
of Regulation D thereunder at a price of $.375 per shares. The Company received
a total of $316,975 in cash in the private placement transaction and issued
84,526 shares of common stock in commissions and expenses. The accredited
investors also received warrants to purchase 422,634 shares of common stock at
an exercise price of $.75 per share.
II. Series E Preferred Stock
During the period from May 31, 2001 to August 20, 2001, the Company sold
a total of 46,219 shares of Series E convertible preferred Stock to 44
accredited investors, as defined in Section 2(15) of the Securities Act of 1933
and Rule 501 of Regulation D thereunder, through a private placement under
Regulation D promulgated under the Securities Act of 1933 at a price of $100.00
per share. The Company received $4,621,900 in cash as a result of the private
placement transaction and paid $369,752 in commissions and expenses. The Series
E convertible preferred stock is convertible into shares of common stock at a
conversion price of $1.875 per share of common stock. The accredited investors
also received warrants to purchase a total of 231,095 shares of common stock at
an exercise price of $4.00 per share. These shares were issued without
registration in reliance upon Section 4(2) of the Securities Act of 1933 and
Rule 506 of Regulation D promulgated thereunder.
III. Series F Preferred
During the period from August 20, 2002 to November 21, 2001, the Company
sold a total of 48,597.20 shares of Series F convertible preferred stock to 58
accredited investors, as defined in Section 2(15) of the Securities Act of 1933
and Rule 501 of Regulation D thereunder, through a private placement under
Regulation D promulgated under the Securities Act of 1933 at a price of $100.00
per share. The Company received $4,859,720 in cash as a result of the private
placement transaction and paid $388,788 in commissions and expenses. The Series
F convertible preferred stock is convertible into shares of common stock at a
conversion price equal to $1.875 per share of common stock. The accredited
investors also received warrants to purchase a total of 242,986 shares of common
stock at an exercise price of $4.00 per share. These shares were issued without
registration in reliance upon Section 4(2) of the Securities Act of 1933 and
Rule 506 of Regulation D promulgated thereunder. IV. Series G Preferred
During the period from August 24, 2003 to September 15, 2003, the Company
sold a total of 1,764,706 shares of Series G convertible preferred stock to two
accredited investors, as defined in Section 2(15) of the Securities Act of 1933
and Rule 501 of Regulation D thereunder, through a private placement under
Regulation D promulgated under the Securities Act of 1933 at a price of $.17 per
share. The Company received $300,000 in cash as a result of the private
placement transaction and paid $30,000 in commissions and expenses. In addition,
the Company issued warrants to purchase 88,235 shares of common stock at an
exercise price of $.50 per share for commissions and expenses. The Series G
convertible preferred stock is convertible into shares of common stock at a
conversion price equal to $.17 per share of common stock. The accredited
investors also received warrants to purchase a total of 441,177 shares of common
stock at an exercise price of $.50 per share. These shares were issued without
registration in reliance upon Section 4(2) of the Securities Act of 1933 and
Rule 506 of Regulation D promulgated thereunder.
II-6
Item 27. Exhibits
(a) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-B or are incorporated by reference to previous filings.
Exhibit
No. Document Description
2.1 Amended Agreement and Plan of Merger between Paradigm Medical
Industries, Inc., a California corporation and Paradigm
Medical Industries, Inc., a Delaware corporation(1)
3.1 Certificate of Incorporation(1)
3.2 Amended Certificate of Incorporation(11)
3.3 Bylaws(1)
4.1 Warrant Agency Agreement with Continental Stock Transfer & Trust
Company(3)
4.2 Specimen Common Stock Certificate (2)
4.3 Specimen Class A Warrant Certificate(2)
4.4 Form of Class A Warrant Agreement(2)
4.5 Underwriter's Warrant with Kenneth Jerome & Co., Inc.(3)
4.6 Warrant to Purchase Common Stock with Note Holders re bridge
financing (1)
4.7 Warrant to Purchase Common Stock with Mackey Price & Williams (1)
4.8 Specimen Series C Convertible Preferred Stock Certificate(4)
4.9 Certificate of the Designations, Powers, Preferences and
Rights of the Series Convertible Preferred Stock(4)
4.10 Specimen Series D Convertible Preferred Stock Certificate (6)
4.11 Certificate of the Designations, Powers, Preferences and
Rights of the Series D Convertible Preferred Stock (6)
4.12 Warrant to Purchase Common Stock with Cyndel & Co. (6)
4.13 Warrant Agreement with KSH Investment Group, Inc. (6)
4.14 Warrant to Purchase Common Stock with R.F. Lafferty & Co., Inc.(6)
4.15 Warrant to Purchase Common Stock with Dr. Michael B. Limberg (6)
4.16 Warrant to Purchase Common Stock with John W. Hemmer (7)
4.17 Stock Purchase Warrant with Triton West Group, Inc.(9)
4.18 Warrant to Purchase Common Stock with KSH Investment
Group, Inc.(9)
4.19 Warrants to Purchase Common Stock with Consulting for Strategic
Growth, Ltd.(9)
5.1 Opinion of Mackey Price & Williams
10.1 Exclusive Patent License Agreement with PhotoMed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 Lease with Eden Roc (4)
10.4 1995 Stock Option Plan and forms of Stock Option Grant
Agreement(1)
10.5 Employment Agreement with Thomas F. Motter (5)
10.6 Employment Agreement with Mark R. Miehle (8)
10.7 Employment Agreement with John W. Hemmer (8)
10.8 Private Equity Line of Credit Agreement with Triton West Group,
Inc. (8)
10.9 Agreement with KSH Investment Group, Inc. (8)
10.10 Renewed Consulting Agreement with Dr. Michael B. Limberg (9)
10.11 Asset Purchase Agreement with Innovative Optics, Inc. and Barton
Dietrich Investments, L.P.(10)
10.12 Escrow Agreement with Innovative Optics, Inc., Barton Dietrich
Investments, L.P. and Mackey Price & Williams(10)
10.13 Assignment and Assumption Agreement with Innovative Optics,
Inc.(10)
10.14 General Assignment and Bill of Sale with Innovative Optics,
Inc.(10)
10.15 Non-Competition and Confidentiality Agreement with Mario F.
Barton(10)
10.16 Termination of Employment Agreement with Mark R. Miehle(12)
10.17 Consulting Agreement with Mark R. Miehle(12)
10.18 Employment Agreement with Jeffrey F. Poore (13)
II-7
23.1 Consent of Mackey Price & Williams
23.2 Consent of Tanner & Co.
-----------------
(1) Incorporated by reference from Registration Statement on
Form SB-2, as filed on March 19, 1996.
(2) Incorporated by reference from Amendment No. 1 to Registration
Statement on Form SB-2, as filed on May 14, 1996.
(3) Incorporated by reference from Amendment No. 2 to Registration
Statement on Form SB-2, as filed on June 13, 1996.
(4) Incorporated by reference from Annual Report on Form 10-KSB, as
filed on April 16, 1998.
(5) Incorporated by reference from Quarter Report on Form 10-QSB, as
filed on November 12, 1998.
(6) Incorporated by reference from Registration Statement on Form
SB-2, as filed on April 29, 1999.
(7) Incorporated by reference from Report on Form 10-QSB, as filed on
August 16, 2000.
(8) Incorporated by reference from Report on Form 10-QSB, as filed on
March 15, 2001.
(9) Incorporated by reference from Report on Form 10-QSB, as filed on
August 14, 2001.
(10) Incorporated by reference from Current Report on Form 8-K, as
filed on March 5, 2002.
(11) Incorporated by reference from Amendment No. 1 to Registration
Statement on Form S-3, as filed on March 20, 2002.
(12) Incorporated by reference from Report on Form 10-QSB, as filed on
November 18, 2002.
(13) Incorporated by reference from Registration Statement on Form
SB-2, as filed on July 7, 2003.
(b) Reports on Form 8-K
Current Report on Form 8-K, as filed on April 29, 2003.
Item 28. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post -effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(iii) To include any additional or changed material
information on the plan of distribution.
(2) That, for determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
II-8
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
preceding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The undersigned registrant also undertakes that:
(1) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1), or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, treat each post-effective amendment that contains a form of prospectus as a
new registration statement for the securities offered in the registration
statement, and the offering of the securities at that time as the initial bona
fide offering of those securities.
II-9
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, in Salt Lake City,
State of Utah, this 30th day of September 2003.
PARADIGM MEDICAL INDUSTRIES, INC.
By:/s/ Jeffrey F.Poore
---------------------
Jeffrey F. Poore
Its: President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ Jeffrey F. Poore President and Chief Executive Officer September 30, 2003
---------------------
Jeffrey F. Poore (Principal Executive Officer)
/s/ Randall A. Mackey Chairman of the Board and Secretary September 30, 2003
----------------------
Randall A. Mackey
/s/ David M. Silver Director September 30, 2003
---------------------
David M. Silver
/s/ Keith D. Ignotz Director September 30, 2003
---------------------
Keith D. Ignotz
/s/ Gregory C. Hill Vice President of Finance, Treasurer September 30, 2003
---------------------
Gregory C. Hill and Chief Financial Officer (Principal
Financial and Accounting Officer)
*By: s/s Jeffrey F. Poore
---------------------
Jeffrey F. Poore as
Attorney-in-Fact
G:\sb2A1-829m.pmi.wpd