UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(3)(2))
|X| Definitive Proxy Statement
|X| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss.240.14a-12
PARADIGM MEDICAL INDUSTRIES, INC.
(Name of Registrant as Specified In Its Charter)
-----------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the Appropriate box):
|X| No fee required.
|_| Fee computed on table below per Securities Exchange Act Rules 15a-6(i)(4)
and 0-11.*
|_| Fee paid previously with preliminary materials.
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pursuant to Securities Exchange Act Rule 0-11 (set forth the
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|_| Check box if any part of the fee is offset as provided by Exchange Act
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was paid previously. Identify the previous filing by registration
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1
PARADIGM MEDICAL INDUSTRIES, INC.
2355 South 1070 West
Salt Lake City, Utah 84119
July 11 2005
Dear Shareholder:
On behalf of the Board of Directors, it is my pleasure to invite you to
attend the Annual Meeting of Stockholders of Paradigm Medical Industries, Inc.
(the "Company") to be held on Friday, August 12, 2005, at 10:00 a.m., Mountain
Daylight Time, at 2355 South 1070 West, Salt Lake City, Utah 84119.
The formal notice of the Annual Meeting and the Proxy Statement have
been made a part of this invitation. Also enclosed is a copy of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2004.
The matters to be addressed at the meeting will include (i) the
election of four directors; (ii) the approval of the proposed amendment to the
Certificate of Incorporation to increase the number of authorized shares of
common stock from 80,000,000 shares to 250,000,000 shares; (iii) the approval of
the amendment to the 1995 Stock Option Plan to authorize an additional 1,300,000
shares of common stock to be made available for issuance under the plan; and
(iv) the ratification of the appointment of Chisholm, Bierwolf & Nilson as the
Company's registered public independent accountants for the fiscal year ending
December 31, 2005. I will also report on the Company's business activities and
answer any stockholder questions. The Board of Directors recommends that you
vote FOR election of the director nominees, FOR the amendment to the Certificate
of Incorporation to increase the number of authorized shares, FOR the amendment
to the 1995 Stock Option Plan to authorize additional shares for issuance
thereunder, and FOR ratification of appointment of the registered public
independent accountants. Please refer to the Proxy Statement for detailed
information on each of the proposals and the Annual Meeting.
Your vote is very important. We hope you will take a few minutes to
review the Proxy Statement and complete, sign, and return your Proxy Card in the
envelope provided, even if you plan to attend the meeting. Please note that
sending us your Proxy will not prevent you from voting in person at the meeting,
should you wish to do so.
Thank you for your support of Paradigm Medical Industries, Inc. We look
forward to seeing you at the Annual Meeting.
Sincerely yours,
/s/John Y. Yoon
John Y. Yoon
President and Chief Executive Officer
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 12, 2005
-------------------------
To our Shareholders:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the
"Annual Meeting") of Paradigm Medical Industries, Inc. (the "Company") will held
on Friday, August 12, 2005, beginning at 10:00 a.m. Mountain Daylight Time, at
the Company's corporate headquarters at 2355 South 1070 West, Salt Lake City,
Utah. At the Annual Meeting, shareholders will consider and act upon the
following matters:
1. To elect a Board of Directors consisting of four directors to
serve until the next annual meeting of shareholders and until
their respective successors are elected and qualified;
2. To approve the proposed amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of
common stock from 80,000,000 to 250,000,000 shares;
3. To amend the Company's 1995 Stock Option Plan to authorize an
additional 1,300,000 shares of common stock to be made available
for issuance under the plan;
4. To ratify the appointment of Chisholm, Bierwolf & Nilson as the
Company's registered public independent accountants for the fiscal
year ending December 31, 2005; and
5. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Also included is a single-page Proxy/Voting
Instruction Form and a postage prepaid return envelope. Only shareholders of
record at the close of business on July 1, 2005 are entitled to notice of, and
to vote at, the Annual Meeting or any adjournment thereof.
If you do not expect to attend the meeting in person, it is important
that your shares be represented. Please use the enclosed proxy card to vote on
the matters to be considered at the meeting, sign and date the proxy card and
mail it promptly in the enclosed envelope, which requires no postage if mailed
in the United States. You may revoke your proxy at any time before the meeting
by written notice to such effect, by submitting a subsequently dated proxy or by
attending the meeting and voting in person. If your shares are held in "street
name," you should instruct your broker how to vote in accordance with your
voting instruction form.
By order of the Board of Directors,
/s/Luis A. Mostacero
Luis A. Mostacero
Controller, Treasurer and Secretary
July 11, 2005
Salt Lake City, Utah
PARADIGM MEDICAL INDUSTRIES, INC.
2355 South 1070 West
Salt Lake City, Utah 84119
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed Proxy is solicited on behalf of the Board of Directors of
Paradigm Medical Industries, Inc., a Delaware corporation (the "Company") for
use at the Annual Meeting of Shareholders (the "Annual Meeting") to be held on
Friday, August 12, 2005, beginning at 10:00 a.m., local time (MST), or at any
adjournment(s) thereof. The purposes of the meeting are set forth herein and in
the accompanying Notice of Annual Meeting of Shareholders. The Annual Meeting
will be held at the Company's corporate headquarters at 2355 South 1070 West,
Salt Lake City, Utah. This Proxy Statement and accompanying materials are being
mailed on or about July 11, 2005. The Company will bear the cost of this
solicitation.
Record Date
Shareholders of record of the Company's Common Stock at the close of
business on July 1, 2005 are entitled to notice of and to vote at the meeting.
At the record date, 28,530,074 shares of the Company's Common Stock, $.001 par
value, 5,627 shares of the Series A Preferred Stock, 8,986 shares of Series B
Preferred Stock, no shares of Series C Convertible Preferred Stock, 5,000 shares
of Series D Convertible Preferred Stock, 1,000 shares of Series E Convertible
Preferred Stock, 4,598.75 shares of Series F Preferred Stock, and 1,726,560
shares of Series G Preferred Stock were issued and outstanding. Shareholders of
Series A, Series B, Series C, Series D, Series E, Series F and Series G
Preferred Stock are not entitled to vote at the Annual Meeting. Shareholders
holding at least one-third of the outstanding shares of Common Stock represented
in person or by proxy shall constitute a quorum for the transaction of business
at the Annual Meeting.
Revocability of Proxies
Shareholders may revoke any appointment of proxy given pursuant to this
solicitation by delivering the Company a written notice of revocation or a duly
executed proxy bearing a later date or by attending the meeting and voting in
person. An appointment of proxy is revoked upon the death or incapacity of the
shareholder if the Secretary or other officer of the Company authorized to
tabulate votes receives notice of such death or incapacity before the proxy
exercises its authority under the appointment.
Voting and Solicitation
Each shareholder will be entitled to one vote for each share of Common
Stock held at the record date. Assuming a quorum is present, a plurality of
votes cast by the shares entitled to vote in the election of directors will be
required to elect each director. Because the shares of Series A, Series B,
Series C, Series D, Series E, Series F and Series G Preferred Stock are non-
voting securities, the holders thereof will not be entitled to vote at the
Annual Meeting. To approve the granting of the stock options to the outside
directors of the Company, holders of a majority of the shares entitled to vote
at the Annual Meeting must vote in favor of the stock options. The principal
executive offices of the Company are located at 2355 South 1070 West, Salt Lake
City, Utah. In addition to the use of the mails, proxies may be solicited
personally, by telephone, or by facsimile, and the Company may reimburse
brokerage firms and other persons holding shares in the Company in their names
or those of their nominees for their reasonable expenses in forwarding
soliciting materials to the beneficial owners.
1
ELECTION OF DIRECTORS
Proposal 1
Nominees
The Company's Bylaws do not limit the number of persons serving on the
Company's Board of Directors, and it is contemplated that a board of three
directors will be elected at the Annual Meeting. The Board of Directors
recommends that the shareholders vote "FOR" the election of the four director
nominees listed below. Assuming a quorum is present, a plurality of votes cast
by the shares entitled to vote in the election of directors will be required to
elect each director. Unless otherwise instructed, the proxy holders will vote
the proxies received by them for management's four nominees named below, all of
whom are presently directors of the Company.
In the event that any management nominee is unable or declines to serve
as a director at the time of the Annual Meeting, the proxies will be voted for
any nominee who shall be designated by the present Board of Directors to fill
the vacancy. In the event that additional persons are nominated as directors,
the proxy holders intend to vote all proxies received by them in such a manner
as will ensure the election of as many of the nominees listed below as possible.
It is not expected that any nominee will be unable or will decline to serve as a
director. The term of office of each person elected as a director will continue
until the next annual meeting of shareholders and until such person's successor
has been elected and qualified. Officers are appointed by the Board of Directors
and serve at the discretion of the board.
The name and certain information regarding each nominee is set forth
below. See also "Certain Relationships and Related Transactions."
Name Age Director Since Position with the Company
---- --- -------------- -------------------------
Randall A. Mackey, Esq. 59 January 2000 Chairman of the Board
Dr. David M. Silver 63 January 2000 Director
Keith D. Ignotz 57 November 2000 Director
John C. Pingree 64` April 2004 Director
The following biographical information is furnished with respect to the
four director nominees:
Randall A. Mackey, Esq. has been the Company's 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 & Ostler
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 and as a member of the American Marketing Association of
the American Association of Diabetes Education.
2
John C. Pingree has been a director since April 2004. He has been the
Executive Director of the Semnani Foundation since August 2001, which funds
projects to assist women and children in developing countries. From July 1998 to
July 2001, Mr. Pingree was a Mission President for the Church of Jesus Christ of
Latter-day Saints, serving in Mexico City, Mexico. From 1977 to 1997, Mr.
Pingree was General Manager and Chief Executive Officer of Utah Transit
Authority. From 1970 to 1975, he was Director of Marketing for Memorex
Corporation. From 1967 to 1970, Mr. Pingree was Regional Manager, Sales Planning
at Xerox Corporation. He also currently serves as a member of the Utah State
Board of Education. Mr. Pingree received a B.A. degree in Economics from the
University of Utah and an M.B.A. degree from the Harvard Business School.
Board Meetings and Committees
The size of the Board of Directors of the Company for the coming year
is four members. Three of the directors, or a majority of the Board of
Directors, are independent directors. The independent directors have regularly
scheduled meetings at which only independent directors are present. The term of
office of each director is for a period of one year or until the election and
qualification of his successor. The Board of Directors held a total of five
meetings during the fiscal year ended December 31, 2004. No directors attended
fewer than 75% of all meetings of the Board of Directors during the 2004 fiscal
year.
Unless authority is withheld by your Proxy, it is intended that the
common stock represented by your Proxy will be voted for the respective nominees
listed above. If any nominee should not serve for any reason, the Proxy will be
voted for such person as shall be designated by the Board of Directors to
replace such nominee. The Board of Directors has no reason to expect that any
nominee will be unable to serve. There is no arrangement between any of the
nominees and any other person or persons pursuant to which he was or is to be
selected as a director.
There are three committees of the Board of Directors, which meet
periodically during the year: the Compensation Committee, the Audit Committee,
and the Nominating and Corporate Governance Committee.
The Compensation Committee is responsible for recommending to the Board
of Directors for approval the annual compensation of each executive officer of
the Company, developing policy in the areas of compensation and fringe benefits,
contribution under the 401(k) Retirement Savings Plan, granting of options under
the stock option plans, and creating other employee compensation plans. The
Compensation Committee consists of Messrs. Keith D. Ignotz, John C. Pingree and
Dr. David M. Silver (Chairman of the Committee). During 2004, the Compensation
Committee met on one occasion.
The Audit Committee directs the auditing activities of the Company's
internal auditors and registered public independent accounting firm and reviews
the services performed by the registered public independent accounting firm and
evaluates the Company's accounting practices and procedures and its system of
internal accounting controls. The Audit Committee consists of Messrs. Keith D.
Ignotz (Chairman of the Committee), John C. Pingree and Dr. David M. Silver.
During 2004, the Audit Committee met on one occasion. The Company's Board of
Directors has determined that Keith D. Ignotz and John C. Pingree, who currently
serve as directors of the Company as well as a member of the Company's audit
committee, are independent audit committee financial experts.
The Nominating and Corporate Governance Committee identifies
individuals qualified to become board members consistent with criteria approved
by the board, recommends to the board the persons to be nominated by the board
for election as directors at a meeting of stockholders, and develops and
recommends to the board a set of corporate governance principles. The Nominating
and Corporate Governance Committee consists of Messrs. Keith D. Ignotz, John C.
Pingree (Chairman of the Committee) and Dr. David M. Silver. The Nominating and
Corporate Governance Committee is composed solely of independent directors.
Director Nominating Process
The process for identifying and evaluating nominees for directors
include the following steps: (1) the Nominating and Corporate Governance
Committee, Chairman of the Board or other board members identify a need to fill
vacancies or add newly created directorships; (2) the Chairman of the Nominating
and Corporate Governance Committee initiates a search and seeks input from board
members and senior management and, if necessary, obtains advice from legal or
other advisors (but does not hire an outside search firm); (3) director
candidates, including any candidates properly proposed by stockholders in
accordance with the Company's bylaws, are identified and presented to the
3
Nominating and Corporate Governance Committee; (4) initial interviews with
candidates are conducted by the Chairman of the Nominating and Corporate
Governance Committee; (5) the Nominating and Corporate Governance Committee
meets to consider and approve final candidate(s) and conduct further interviews
as necessary; and (6) the Nominating and Corporate Governance Committee makes
recommendations to the board for inclusion in the slate of directors at the
annual meeting. The evaluation process will be the same whether the nominee is
recommended by a stockholder or by a member of the Board of Directors.
The Nominating and Corporate Governance Committee will consider
nominees proposed by stockholders. To recommend a perspective nominee for the
Nominating and Corporate Governance Committee's consideration, stockholders may
submit the candidate's name and qualifications to: Luis A. Mostacero,
Controller, Treasurer and Secretary, Paradigm Medical Industries, Inc., 2355
South 1070 East, Salt Lake City, Utah 84119. Recommendations from stockholders
for nominees must be received by Mr. Mostacero not later than the date set forth
under "Deadline for Receipt of Stockholder's Proposals for Annual Meeting to be
Held in July 2006" below.
The Nominating and Corporate Governance Committee operates pursuant to
a written charter. The full text of the charter is published on the Company's
website at www.paradigm-medical.com. Stockholders may also obtain a copy of the
charter without charge by writing to: Luis A. Mostacero, Controller, Paradigm
Medical Industries, Inc., 2355 South 1070 East, Salt Lake City, Utah 84119.
Meetings of Non-Management Directors
The Company's non-management directors regularly meet without
management participation. In addition, an executive session including only the
independent directors is held at least annually.
Stockholder Communications with the Board of Directors
Stockholders who wish to communicate with the Board of Directors or a
particular director may send a letter to Luis A. Mostacero, Controller,
Treasurer and Secretary, Paradigm Medical Industries, Inc., 2355 South 1070
East, Salt Lake City, Utah 84119. The mailing envelope must contain a clear
notation indicating that the enclosed letter is a "Stockholder-Board
Communication" or "Stockholder-Director Communication." All such letters must
identify the author as a stockholder and clearly state whether the intended
recipients are all members of the board or just certain specified individual
directors. The Company's Secretary will make copies of all such letters and
circulate them to the appropriate director or directors.
Executive Officers
The following sets forth certain information with respect to the
executive officers of the Company:
Name Age Title
---- --- -----
John Y. Yoon 41 President and Chief Executive Officer
Aziz A. Mohabbat 45 Vice President of Operations and Chief
Operating Officer
John Y. Yoon has served as the Company's President and Chief Executive
Officer since March 19, 2004. From June 2003 to March 19, 2004, Mr. Yoon served
as Senior Director of Marketing, Enterprise Voice Solutions Division of 3Com
Corporation. From 1997 to June 2003, he served as Senior Director of Product
Management and Director of Product Management of 3Com Corporation. During the
period from 1996 to 1997, Mr. Yoon was Director of Strategic Planning and
Product Development of US Robotics. During the period from 1993 to 1996, he
served as Manager of Marketing and Strategic Planning, Senior Director of
Product Management and Management of Product Development for Ericsson, Inc. From
1990 to 1993, Mr. Yoon was Manager of Public Service Marketing and Product Line
Manager Mobile Radios for Ericsson, Inc. During the period from 1986 to 1988, he
was Product Planner of Business and Industrial Trucking and Marketing Research
Analyst for General Electric Mobile Communications. Mr. Yoon received a B.A.
degree in Economics from Harvard College in 1985 and an M.B.A. degree from Duke
University in 1992.
Aziz A. Mohabbat has served as Chief Operating Officer of the Company
since March 23, 2004 and from August 2002 to March 2003, and as Vice President
of Operations since March 23, 2004 and from 2001 to March 2003. From 2000 to
2001, he served as Managing Director of the San Diego Division of the Company
and from 1999 to 2000 as its Regulatory Affairs and Quality Assurance Manager.
From March 2003 to March 2004, Mr. Mohabbat served as Division Manager of the
Medical Division of TUV Rheilland of North America, a medical products safety
and compliance services company. From 1997 to 1999, he served as Operations and
Regulatory Affairs and Quality Assurance Manager of Codan U.S., a subsidiary of
Codan GmbH, a manufacturer of disposable sterile and non-sterile medical
4
devices. Prior to 1989, Mr. Mohabbat held various management and bioengineering
positions in the medical laboratory and diagnostics field in the Eye Care Clinic
of the University Hospital-Eppendorf and the General Hospital of Barmbek in
Hamburg, Germany. Mr. Mohabbat received a B.S. degree in Medical Laboratory
Technology in 1986 from St. George Hospital College in Hamburg, Germany. He is a
member of the American Society for Quality Assurance.
Corporate Governance
Corporate Governance Guidelines. The Board of Directors has adopted the
Paradigm Medical Industries, Inc. Corporate Governance Guidelines. These
guidelines outline the functions of the board, director qualifications and
responsibilities, and various processes and procedures designed to insure
effective and responsive governance. The guidelines are reviewed from time to
time in response to regulatory requirements and best practices and are revised
accordingly. The full text of the guidelines is published on the Company's
website at www.paradigm-medical.com. A copy of the Corporate Governance
Guidelines may also be obtained at no charge by written request to the attention
of Luis A. Mostacero, Controller, Treasurer and Secretary, Paradigm Medical
Industries, Inc., 2355 South 1070 East, Salt Lake City, Utah 84119.
Code of Business Conduct. All of the Company's officers, employees and
directors are required to comply with the Company's Code of Business Conduct and
Ethics to help insure that the Company's business is conducted in accordance
with appropriate standards of ethical behavior. The Company's Code of Business
Conduct and Ethics covers all areas of professional conduct, including customer
relationships, conflicts of interest, insider trading, financial disclosures,
intellectual property and confidential information, as well as requiring
adherence to all laws and regulations applicable to the Company's business.
Employees are required to report any violations or suspected violations of the
Code. The Code includes an anti- retaliation statement. The full text of the
Code of Business Conduct and Ethics is published on the Company's website at
www.paradigm-medical.com. A copy of the Code of Business Conduct and Ethics may
also be obtained at no charge by written request to the attention of Luis A.
Mostacero, Controller, Treasurer and Secretary, Paradigm Medical Industries,
Inc., 2355 South 1070 East, Salt Lake City, Utah 84119.
5
Executive Compensation
The following table sets forth, for each of the last three fiscal
years, the compensation received by John Y. Yoon, President and Chief Executive
Officer of the Company, and other executive officers whose salary and bonus for
all services in all capacities exceed $100,000 for the fiscal years ended
December 31, 2004, 2003 and 2002.
Summary Compensation Table
Annual Compensation Long Term Compensation
Awards Payouts
Other Securities
Annual Restricted Underlying Long-term All Other
Name and Compen- Stock Options/ Incentive Compensa-
Principal Position Year Salary($) Bonus($) sation($) Awards($) SARs(#) Payouts($) tion($)
------------------ ---- --------- -------- --------- --------- ------- ---------- ---------
John Y. Yoon 2004(1) $110,961(4) 0 $18,494(4) 0 1,000,000(5) 0 0
President and Chief
Executive Officer
Aziz A. Mohabbat 2004(1) $106,244 0 0 0 0 0 0
Vice President of 2003(2) $ 24,219 0 0 0 0 0 0
Operations and Chief 2002(3) $126,878 0 0 0 0 0 $9,634(7)
Operating Officer(6)
Jeffrey F. Poore 2004(1) $ 41,052 0 0 0 0 0 0
Former President and 2003(2) $136,015 0 0 0 1,000,000(8) 0 0
Chief Executive
Officer
David I. Cullumber, 2004(1) $ 15,894 0 $18,059(9) 0 0 0 0
Former Chief 2003(2) $ 22,312 0 $16,616(9) 0 150,000(10) 0 0
Operating Officer and
Chief Technical
Officer
Gregory C. Hill 2004(1) 0 0 0 0 0 0 0
Former Vice 2003(2) $ 34,000 0 0 0 0 0 0
President of Finance
and Chief Financial
Officer
Thomas F. Motter 2004(1) 0 0 0 0 0 0 0
Former Chairman of 2003(2) 0 0 0 0 0 0 0
the Board and Chief 2002(3) $187,483(11) 0 0 0 0 0 $19,750(12)(13)
Executive Officer
Mark R. Miehle 2004(1) 0 0 0 0 0 0 0
Former President and 2003(2) 0 0 0 0 0 0 0
Chief Operating 2002(3) $134,202 0 0 0 55,000(14) 0 $18,000(12)(15)
Officer
Heber C. Maughan 2004(1) 0 0 0 0 0 0 0
Former Vice 2003(2) $ 36,855 0 0 0 150,000(17) 0 0
President of Finance 2002(3) $114,416 0 0 0 0 0 0
and Chief Financial
Officer(16)
--------------------
(1) For the fiscal year ended December 31, 2004
(2) For the fiscal year ended December 31, 2003
(3) For the fiscal year ended December 31, 2002
6
(4) Of the salary payable to Mr. Yoon pursuant to his employment
agreement, $110,961 was paid to him during 2004 and the remaining
amount of $18,494 payable in 2004 was deferred until the Company's
board of directors has determined that its financial condition is
improved.
(5) On March 18, 2004, the Company's board of directors granted Mr.
Yoon options to purchase 1,000,000 shares of the Company's common
stock at an exercise price of $.13 per share.
(6) Mr. Mohabbat has served a Vice President of Operations and Chief
Operating Officer since March 22, 2004 and as Chief Operating
Officer from August 30, 2002 to March 2003. He was not an officer
in prior years.
(7) The amounts under "All Other Compensation" for 2004 consist of
payments to Mr. Mohabbat for accrued vacation days prior to his
resignation from the Company in March 2003.
(8) On March 19, 2003, the Company's board of directors granted Mr.
Poore options to purchase 1,000,000 shares of its common stock at
an exercise price of $.16 per share. These options were terminated
on March 18, 2003 when the Company's Board of Directors terminated
Mr. Poore's employment for cause as defined in the employment
agreement.
(9) The Company paid A-Mech Engineering, Inc. a total of $16,616 and
$18,059 for consulting services during 2003 and 2004,
respectively. From 1982 to March 2004, Mr. Cullumber served as
President of A-Mech Engineering, Inc.
(10) On November 6, 2003, the Company's board of directors granted Mr.
Cullumber options to purchase 150,000 shares of the Company's
common stock at an exercise price of $.21 per share. These options
were terminated on June 20, 2003, 90 days after Mr. Cullumber
resigned as the Company's Chief Operating Officer and Chief
Technical Officer.
(11) Although Mr. Motter resigned as Chairman and Chief Executive
Officer on August 30, 2002, he continued to receive his salary
under the terms of his employment agreement through December 16,
2002.
(12) The amounts under "All Other Compensation" for 2004, 2003 and 2002
include payments related to the operation of automobiles and/or
automobiles and insurance by the named executives.
(13) The amounts under "All Other Compensation" for 2002 include
payments related to the residential housing accommodations for the
Company's employees, living outside of Utah while they were
working at its corporate headquarters in Salt Lake City, leased
from Mr. Motter at $2,500 per month.
(14) On January 29, 2002, the Company's Board of Directors granted Mr.
Miehle options to purchase the 55,000 shares of the Company's
common stock at an exercise price of $2.75 per share. These
options were terminated on February 28, 2004, one year after
expiration of a six-month consulting agreement with the Company,
which expired on February 28, 2003.
(15) On September 3, 2002, the Company entered into a consulting
agreement with Mr. Miehle in which the Company was required to pay
him monthly consulting fees of $5,000 over a period of six months.
The Company paid Mr. Miehle a total of $15,000 for consulting
services during the months of September, October and November of
2002.
(16) Mr. Maughan served as Interim Chief Executive Officer from August
30, 2002 to March 19, 2003. He also served as Vice President of
Finance, Treasurer and Chief Financial Officer from October 1,
2001 until his resignation on May 31, 2003.
(17) On May 13, 2003, the Company's Board of Directors granted Mr.
Maughan options to purchase 150,000 shares of its common stock at
an exercise price of $.16 per share. These options were terminated
on August 29, 2003, 90 days after Mr. Maughan resigned as Vice
President of Finance and Chief Financial Officer.
Options
The following table sets forth information regarding stock options
granted during the fiscal year ended December 31, 2004, to each named executive
officer.
Option Grants in Last Fiscal Year
Individual Grants
Percentage of
Number of Total Options Exercise
Securities Granted to Price Expiration
Name Underlying Options Employees in Per Share Date
---- Granted (#) Fiscal Year(%) ($/Sh) ----------
------------------ -------------- ---------
John Y. Yoon.............. 1,000,000(1) 56.3% $.13 4/1/09
Aziz A. Mohabbat.......... 200,000(2) 11.3% $.12 4/1/09
(1) Options vest in 36 monthly installments of 27,778 shares,
beginning on April 30, 2004, until such shares are vested.
(2) Options vest in 36 monthly installments of 5,556 shares, beginning
on April 30, 2004, until such shares are vested.
7
The following table sets forth information regarding unexercised
options to acquire shares of the Company's common stock held as of December 31,
2004, by each named executive officer.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares at December 31, 2004(#) at December 31, 2004($)
Acquired Value
Name on Exercise Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
John Y. Yoon.......... 0 0 250,002 749,998 0 0
Aziz A. Mohabbat........ 0 0 50,004 149,996 0 0
Director Compensation
On April 19, 2004, John C. Pingree, a director of the Company, was
granted options to purchase 125,000 shares of its common stock at an exercise
price of $.12 per share. On September 30, 2004, Messrs. Randall A. Mackey, Dr.
David M. Silver and Keith D. Ignotz, directors of the Company, were each granted
options to purchase 125,000 shares of the Company's common stock at an exercise
price of $.13 per share. In addition, outside directors are also reimbursed for
their expenses in attending board and committee meetings. Directors are not
precluded from serving the Company 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, the Company's Board of Directors adopted a 401(k)
Retirement Savings Plan. Under the terms of the 401(k) plan, effective as of
November 1, 1996, the Company may make discretionary employer matching
contributions to its 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 the Company and satisfy other plan requirements are eligible to participate
in the plan.
1995 Stock Option Plan
The Company adopted a 1995 Stock Option Plan, for the officers,
employees, directors and consultants of its 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 its common stock. On February 16, 1996, options for
substantially all 300,000 shares were granted. On June 9, 1997, its 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, its 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, its 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, its 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, its
shareholders approved an amendment to the plan to increase the number of shares
of common stock reserved for issuance thereunder from 2,700,000 shares to
3,700,000 shares.
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
employees. Non-incentive stock options may be granted to any person, including,
but not limited to, its employees, independent agents, consultants as the
compensation committee believes has contributed, or will contribute, to the
Company's success. The compensation committee determines the exercise price of
options granted under the 1995 Stock Option Plan, provided that, in the case of
8
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 its 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 its 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 its 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
The Company entered into an employment agreement with Thomas F. Motter,
which commenced on January 1, 1998 and expired on December 31, 2002. The
employment agreement required Mr. Motter to devote substantially all of his
working time as the Company's Chairman and Chief Executive Officer, provided
that he may be terminated for "cause" (as provided in the agreements) and
prohibits him from competing with the Company for two years following the
termination of his employment agreement. The employment agreement provided for
the payment of an initial base salary of $135,000, effective as of January 1,
1998. The employment agreement also provided for salary increases and bonuses as
was 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 as Chairman and Chief Executive Officer
on August 30, 2002. He continued to receive his salary under the terms of the
employment agreement through December 16, 2002.
The Company entered into an employment agreement with Mark R. Miehle,
which commenced on June 5, 2000, and expired on June 4, 2003. The employment
agreement required Mr. Miehle to devote substantially all of his working time as
the Company's President and Chief Operating Officer, provided that he may be
terminated for "cause" (as provided in the agreement) and prohibited him from
competing with the Company for two years following the termination of his
employment agreement. The employment 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 the Company's common
stock at $6.00 per share, to be vested in equal annual amounts over a three year
period. The employment 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 the employment agreement with 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.
The Company entered into an employment agreement with Jeffrey F. Poore,
which commenced on March 19, 2003 and expires on March 19, 2006. The employment
agreement requires Mr. Poore to devote substantially all of his working time as
the Company's President and Chief Executive Officer, provided that he may be
terminated for "cause" (as provided in the agreement) and prohibits him from
competing with the Company for two years following the termination of his
employment agreement. The employment agreement provided for the payment of an
initial base salary of $175,000, effective as of March 19, 2003. The employment
agreement also provided for salary increases and bonuses as shall be determined
at the discretion of the Board of Directors. The employment agreement further
provided for the issuance of stock options to purchase 1,000,000 shares of the
Company's common stock at $.16 per share, of which options to purchase 800,000
shares of common stock was vested on March 19, 2003, options for an additional
100,000 shares of common stock was vested on March 19, 2004, and options for an
additional 100,000 shares of common stock was vested on March 19, 2005.
The Company entered into an employment agreement with John Y. Yoon,
which commenced on March 18, 2004 and expires on March 18, 2007. The employment
agreement requires Mr. Yoon to devote substantially all of his working time as
the Company's President and Chief Executive Officer, providing that he may be
terminated for "cause" (as provided in the agreement) and prohibits him from
competing with the Company for two years following the termination of his
employment agreement. The employment agreement provides for the payment of an
initial base salary of $175,000, effective as of April 1, 2004. The employment
agreement also provides for salary increases and bonuses as shall be determined
at the discretion of the Board of Directors. The employment agreement further
provides for the issuance of stock options to purchase 1,000,000 shares of the
Company's common stock at $.13 per share. The options vest in 36 equal monthly
installments of 27,778 shares, beginning on April 30, 2004 until such shares are
vested.
9
In the event of a change of control of the Company, then all
outstanding stock options granted to Mr. Yoon shall be immediately vested. A
change of control shall be deemed to have occurred if (i) a tender offer shall
be made and consummated for the ownership of more than 25% of the Company's
outstanding shares; (ii) the Company shall be merged or consolidated with
another corporation and, as a result, less than 25% of the outstanding common
shares of the surviving corporation shall be owned in the aggregate by the
Company's former shareholders, as the same shall have listed prior to such
merger or consolidation; (iii) the Company shall sell all or substantially all
of its assets to another corporation that is not a wholly-owned subsidiary or
affiliate; (iv) as a result of any contested election for the Board of
Directors, or any tender or exchange offer, merger of business combination or
sale of assets, the persons who were directors of the Company before such a
transaction shall cease to constitute a majority of the Board of Directors; or
(v) a person other than an officer or director of the Company shall acquire more
than 20% of the outstanding shares of common stock of the Company.
The Company entered into an employment agreement with Aziz A. Mohabbat
on October 5, 2004, which was effective as of April 1, 2004, and expires on
March 18, 2006. However, the term shall be extended an additional one year
period to March 18, 2007 in the event Mr. Mohabbat moves from San Diego,
California to Salt Lake City, Utah and becomes a resident of the state of Utah.
The employment agreement requires Mr. Mohabbat to devote substantially all of
his working time as the Company's Vice President of Operations and Chief
Operating Officer, provided that he may be terminated for "cause" (as provided
in the agreement) and prohibits him from competing with the Company for two
years following the termination of the employment agreement. The employment
agreement provides for the payment of an initial base salary of $144,500,
effective as of April 1, 2004. The employment agreement also provides for salary
increases and bonuses as shall be determined at the discretion of the Company's
Board of Directors. The employment agreement further provides for the issuance
of stock options to purchase 200,000 shares of the Company's common stock at
$.12 per share. These options vest in 36 equal monthly installments of 5,556
shares, beginning on April 30, 2004, until such shares are vested.
In the event of a change of control of the Company, then all
outstanding stock options granted to Mr. Mohabbat shall be immediately vested. A
change of control shall be deemed to have occurred if (i) a tender offer shall
be made and consummated for the ownership of more than 25% of the Company's
outstanding shares; (ii) the Company is merged or consolidated with another
corporation and, as a result, less than 25% of the outstanding common shares of
the surviving corporation shall be owned in the aggregate by the Company's
former shareholders, as the same shall have listed prior to such merger or
consolidation; (iii) the Company sells all or substantially all of its assets to
another corporation that is not a wholly- owned subsidiary or affiliate; (iv) as
a result of any contested election for the Company's Board of Directors, or any
tender or exchange offer, merger of business combination or sale of assets, the
persons who were the directors before such a transaction shall cease to
constitute a majority of the Company's Board of Directors; or (v) a person other
than an officer or director of the Company shall acquire more than 20% of the
outstanding shares of the Company's common stock.
Severance Agreement
On August 30, 2002, the Board of Directors terminated the employment
agreement with Mark R. Miehle who had been serving as its President and Chief
Operating Officer. Under the terms of the termination of Mr. Miehle's employment
agreement, the stock options issued to him on April 19, 2000 to purchase 150,000
shares of its common stock at $6.00 per share, on September 11, 2001 to purchase
110,000 shares of its common stock at $2.75 per share, and on January 28, 2002
to purchase 55,000 shares of its common stock at $2.75 per share were fully
vested as of the date of such termination and continue to be exercisable for a
period of one year following the termination of a consulting agreement, at which
time such options would expire.
The termination of the employment agreement also required the Company
to enter into a consulting agreement with Mr. Miehle. Under the terms of the
consulting agreement, Mr. Miehle was to provide consulting services to the
Company for a period of six months for a fee of $5,000 per month. The consulting
agreement was to be automatically renewed for an additional six months at a fee
of $3,000 per month unless the Company delivered written notice to Miehle at
least 30 days prior to the end of the initial six month term that the Company
would not renew the agreement. The Company paid Mr. Miehle a total of $15,000
under the consulting agreement for consulting services during the months of
September, October and November of 2002. The Company also provided written
notice to Mr. Miehle more than 30 days prior to the end of the initial six month
term of the consulting agreement of its intention not to renew the agreement.
Certain Relationships and Related Transactions
The information set forth herein describes certain transactions between
the Company 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 the Company than those that could be obtained from unaffiliated
parties.
10
Thomas F. Motter, the Company's former Chairman of the Board and Chief
Executive Officer, leased his former residence to the Company for $2,500 per
month. The primary use of the residential property was for housing
accommodations for its employees living outside of Utah while they were working
at its corporate headquarters in Salt Lake City. The Company paid $2,500 and
$14,000 in rent during 2003 and 2002, respectively. This agreement was
terminated on January 31, 2003.
The Company entered into a consulting agreement with Mark R. Miehle,
its 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. The Company did not renew the contract upon its expiration. The
Company paid $1,000 and $15,000 under this agreement during 2003 and 2002,
respectively, 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 &
Ostler, 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, 2004 and 2003, totaled $100,000 and $97,000,
respectively. As of December 31, 2004, the Company owed this firm $197,727,
which is included in accounts payable.
Report of the Audit Committee
The Company has an Audit Committee consisting of three non-management
directors, Randall A. Mackey, Keith D. Ignotz, and Dr. David M. Silver. Each
member of the audit committee is considered independent and qualified in
accordance with applicable independent director and audit committee listing
standards. The Company's Board of Directors has adopted a written charter for
the Audit Committee.
During the year 2004, the Audit Committee met one time. The Audit
Committee has met with management and discussed the Company's internal controls,
the quality of the Company's financial reporting, the results of internal and
external audit examinations, and the audited financial statements. In addition,
the Audit Committee has met with the Company's independent auditors, Tanner &
Co., and discussed all matters required to be discussed by the auditors with the
Audit Committee under Statement on Auditing Standards No. 61 (communication with
audit committees). The Audit Committee received and discussed with the auditors
their annual written report on their independence from the Company and its
management, which is made under Independence Standards Board Standard No. 1
(independence discussions with audit committees), and considered with the
auditors whether the provision of financial information systems design and
implementation and other non-audit services provided by them to the Company
during 2001 was compatible with the auditors' independence.
In performing these functions, the Audit Committee acts only in an
oversight capacity. In its oversight role, the Audit Committee relies on the
work and assurances of the Company's management, which is responsible for the
integrity of the Company's internal controls and its financial statements and
reports, and the Company's independent auditors, who are responsible for
performing an independent audit of the Company's financial statements in
accordance with generally accepted auditing standards and for issuing a report
on these financial statements.
Pursuant to the reviews and discussions described above, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2004, for filing with the Securities and Exchange
Commission.
Compliance with Section 16(a) of the Securities and Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who own more than 10% of any
class of the Company's Common Stock to file initial reports of ownership and
reports of changes of ownership of the Company's Common Stock. Such persons are
also required to furnish the Company with copies of all Section 16(a) reports
they file.
Based solely on its review of the copies of such reports received by it
with respect to fiscal 2004, or written representations from certain reporting
persons, the Company believes that all filing requirements applicable to its
directors, officers and greater than 10% beneficial owners were complied with,
except that Dr. David M. Silver, a director of the Company, through an
oversight, filed one late stock transaction report covering one transaction, and
John C. Pingree, a director of the Company, through an oversight, filed one late
stock transaction report covering four transactions. No other late filings
occurred during 2004.
11
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to
beneficial ownership of the Company's common stock as of March 31, 2005 for (i)
each executive officer (ii) each director, (iii) each person known to the
Company 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) 3,068,451 11.1%
502 South M Street
Tacoma Washington 98405
Dr. David M. Silver (3) 761,166 2.7%
Randall A. Mackey (3) 725,000 2.6%
Keith D. Ignotz (3) 454,560 1.6%
John Y. Yoon (3) 222,224 *
John C. Pingree (3) 231,500 *
Aziz A. Mohabbat (3) 44,448 *
-----------
Executive officers and directors
as a group (six persons) 2,438,898 8.8%
-----------------
*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) Based on the Company's shareholder records, Dr. McLeod owns 1,218,451
shares and is the Company's largest sole shareholder. Dr. McLeod's
beneficial ownership is believed to also include 400,000 shares held by
the Douglas A. MacLeod, M.D. Profit Sharing Trust, 200,000 shares held
by St. Mark's Eye Institute and 720,000 shares held by Milan Holdings,
Ltd., which the Company believes Dr. MacLeod to have sole or shared
voting and dispositive powers with regard to such shares. Dr. McLeod's
beneficial ownership further includes shares that may be acquired
currently or within 60 days after March 31, 2005 through the exercise
of warrants as follows: Dr. MacLeod, 200,000 shares; Douglas A.
MacLeod, M.D. Profit Sharing Trust; 100,000 shares; St. Mark's Eye
Institute, 50,000 shares; and Milan Holdings, Ltd., 180,000 shares.
(3) The amounts shown include shares that may be acquired currently, or
within 60 days after March 31, 2005 through the exercise of stock
options are follows: Dr. Silver, 725,000 shares; Mr. Mackey, 725,000
shares; Mr. Ignotz, 453,851 shares; Mr. Yoon, 222,224; Mr. Pingree,
125,000 shares; and Mr. Mohabbat, 44,448 shares.
APPROVAL OF INCREASE IN THE NUMBER OF AUTHORIZED SHARES
Proposal 2
The Certificate of Incorporation currently authorizes the issuance of
80,000,000 shares of common stock. As of the record date, 28,530,074 shares were
issued and outstanding. There have been 6,753 shares of common stock set aside
and reserved in the event that holders of shares of Series A preferred stock
elect to convert those shares into shares of common stock, 10,783 shares of
common stock set aside and reserved in the event that holders of shares of
Series B preferred stock elect to convert those shares into shares of Common
Stock, 8,750 shares of common stock set aside and reserved in the event that
holders of shares of Series D preferred stock elect to convert those shares into
shares of common stock, 80,000 shares of common stock set aside and reserved in
the event that holders of shares of Series E preferred stock elect to convert
those shares into shares of common stock, and 334,600 shares of common stock set
aside and reserved in the event that holders of shares of Series F preferred
stock elect to convert those shares into shares of common stock, and 1,726,560
shares of common stock set aside and reserved in the event holders of shares of
Series G preferred stock elect to convert those shares into shares of common
stock.
Between June 10, 1997 and May 31, 2005, the Company issued (i) stock
options that are currently outstanding to executive officers and employees to
purchase 1,821,000 shares of the Company's common stock at exercise prices
ranging from $.10 per share to $5.00 per share, and (ii) stock options that are
currently outstanding to directors to purchase 2,475,000 shares of the Company's
common stock at exercise prices from $.09 per share to $5.00 per share. In
addition, between June 10, 1997 and May 31, 2005, the Company issued warrants to
individuals and entities to purchase a total of 4,459,182 shares of the
Company's common stock at exercise prices ranging from $.15 per share to $8.125
per share.
12
On April 27, 2005, the Company completed financing involving the sale
of $2,500,000 in callable secured convertible notes. The callable secured
convertible notes are to be purchased in three traunches: the first traunch was
in the amount of $850,000, which the Company received upon the signing of the
definitive investment agreements on April 27, 2005; the second traunche in the
amount of $800,000 within five days after the filing of a registration statement
with the Securities and Exchange Commission; and the third traunche in the
amount of $850,000 within five days after the effectiveness of the registration
statement. The Company intends to use the proceeds from the financing for sales
and marketing, particularly for the manufacture and sale of the P60 UBM, a new
generation ultrasound biomicroscope; research and development, including the
development of a new generation Blood Flow Analyzer(TM); acquisition of capital
equipment and working capital.
Under the terms of the callable secured convertible notes, the unpaid
principal balance of notes, together with any accrued interest thereon, is due
and payable three years after the date of issuance. The unpaid principal balance
on the notes that were purchased on April 27, 2005 is due on April 27, 2008.
Interest is payable on the notes at 8% per annum, payable quarterly in cash,
with six months of interest payable up front. However, the interest rate resets
to zero percent for any month in which the stock price is greater than 125% of
the initial market price, or $.0945, for each trading date during that month.
The callable secured convertible notes are secured by the Company's
assets, including the Company's inventory, accounts receivable and intellectual
property. The notes are also convertible. The purchasers of the notes have the
right to convert their notes at any time into shares of the Company's common
stock. The conversion price of the notes is equal to the lesser of (i) $.09 and
(ii) the average of the lowest intra-day trading prices during the 20 trading
days immediately prior to the conversion date discounted by 40%. However, in no
event are the purchasers allowed to convert any portion of their notes in excess
of that portion of the notes upon conversion of which the sum of the number of
shares beneficially owned by the purchasers and the number of shares issuable
upon conversion of the portion of the notes with respect to which such
determination is being made, would result in beneficial ownership by the
purchasers of more than 4.99% of the Company's outstanding common shares.
As consideration to the purchasers of the callable secured convertible
notes, the Company is required to issue warrants to the purchasers to acquire an
aggregate of 16,534,392 shares of the Company's common stock at an exercise
price of $.20 per share. The warrants will have a five year term from the date
of issuance, with cashless exercise permitted in the event there is not an
effective registration statement registering the warrants. Under the terms of
the securities purchase agreement, the Company is required to have authorized,
and reserved for the purpose of issuance, a sufficient number of shares of its
common stock to provide for the full conversion or exercise of the outstanding
notes and warrants and the issuance of its common shares in connection therewith
(based on the conversion price of the notes and exercise price of the warrants
in effect from time to time) and as otherwise required by the notes. The
agreement specifies that 126,763,669 shares are required to be reserved for
issuance upon conversion of the notes and additional notes, and the exercise of
the warrants.
The Company has a call option under the terms of the callable secured
convertible notes. The call option provides the Company with the right to prepay
all of the outstanding notes at any time, provided there is no event of default
by the Company and the Company's stock is trading at or below $.09 per share. An
event of default includes the failure by the Company to pay the principal or
interest on the notes when due or to timely file a registration statement as
required by the Company or obtain effectiveness with the Securities and Exchange
Commission of the registration statement. Prepayment of the notes is to be made
in cash equal to either (i) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the notes; (ii) 130% of the outstanding principal and accrued interest for
prepayments occurring between 31 and 60 days following the issue date of the
notes; and (iii) 145% of the outstanding principal and accrued interest for
prepayments occurring after the 60th day following the issue date of the notes.
The Company also has a partial call option under the terms of the
callable secured convertible notes in any month in which the current price of
its common stock is below the initial market price of $.0756. Under the terms of
the partial call option, the Company has the right to pay the outstanding
principal amount of the notes plus one-month's interest for that month, which
will stay any conversions of the notes by the Purchasers for that month. The
principal amount of the notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36.
The Company is required to register the shares of its common stock
issuable upon the conversion of the callable secured convertible notes and the
exercise of the warrants. The registration statement must be filed with the
Securities and Exchange Commission within 60 days of the April 27, 2005 closing
date and the effectiveness of the registration is to be within 135 days of such
closing date. Penalties of 2% of the outstanding principal balance of the
callable secured convertible notes plus accrued interest are to be applied for
each month the registration is not effective within the required time. The
penalty may be paid in cash or stock at our option.
13
Under the terms of the financing, the Company has also agreed not,
without the prior written consent of a majority-in- interest of the investors,
to negotiate or contract with any party to obtain additional equity financing
(including debt financing with an equity component) that involves (i) the
issuance of common stock at a discount to the market price of the common stock
on the date of issuance (taking into account the value of any warrants or
options to acquire common stock in connection therewith), (ii) the issuance of
convertible securities that are convertible into an indeterminate number of
shares of common stock, or (iii) the issuance of warrants during the lockup
period beginning April 27, 2005 and ending on the later of (a) 270 days from
April 27, 2005, and (b) 180 days from the date the registration statement is
declared effective.
In addition, the Company has agreed not to conduct any equity financing
(including debt financing with an equity component) during the period beginning
April 27, 2005 and ending two years after the end of the above lockup period
unless it has first provided each investor an option to purchase its pro rata
share (based on the ratio of each investor's purchase under the terms of the
financing) of the securities being offered in any proposed equity financing.
Each investor must be provided written notice describing any proposed equity
financing at least 20 business days prior to the closing of such proposed equity
financing and the option must be extended to each investor during the 15 day
period following delivery of such notice.
Accordingly, as a result of the completion of the financing involving
the sale of $2,500,000 in callable secured convertible notes, the Company is
required, under the terms of the callable secured convertible notes and related
agreements, to have authorized and reserved for the purpose of issuance,
126,763,669 shares of the Company's common stock for the conversion of the notes
and additional notes, and the exercise of the warrants. Accordingly, the Board
of Directors has recommended it to be in the best interest of the Company and
its shareholders to amend Article III of the Company's Certificate of
Incorporation to increase the number of authorized shares of common stock of the
Company from 80,000,000 shares to 250,000,000 shares, and hereby solicits the
approval of the shareholders of the amendment. If the shareholders approve the
amendment, the Board of Directors currently intends to file an amendment to the
Company's Certificate of Incorporation reflecting the amendment with the
Secretary of State of the State of Delaware as soon as practicable following
such stockholder approval. If the amendment is not approved by the shareholders,
Article III of the existing Certificate of Incorporation will continue in
effect.
The objective of the increase in the authorized number of shares of
common stock is to ensure that the Company will have sufficient shares available
for future issuances of shares under the terms of the callable secured
convertible notes. The Board of Directors believes that it is prudent to
increase the authorized number of shares of common stock to the proposed levels
in order to provide a reserve of shares available for issuance upon conversion
of the notes and additional notes, and exercise of the warrants under the terms
of the notes and related agreements. All authorized but unissued shares of
common stock will be available for issuance from time to time for any proper
purpose approved by the Board of Directors.
The Company's shareholders do not currently have any preemptive or
similar rights to subscribe for or purchase any additional shares of common
stock that may be issued in the future, and therefore, future issuances of
common stock may, depending on the circumstances, have a diluted effect on the
earnings per share, voting power and other interests of the existing
shareholders.
Vote Required and Recommendation of the Board of Directors
The affirmative vote of the holders of a majority of the outstanding
shares of the Company's common stock entitled to vote at the Annual Meeting will
be required to approve the proposed amendment, assuming a quorum is present.
The Board of Directors recommends that shareholders vote "FOR" approval
of the amendment to the Certificate of Incorporation to increase the number of
authorized shares of common stock from 80,000,000 to 250,000,000 shares.
APPROVAL OF AMENDMENT TO THE 1995 STOCK OPTION PLAN
Proposal 3
The Board of Directors adopted on May 31, 2005, subject to the approval
by the stockholders, an amendment to the Company's 1995 Stock Option Plan. The
amendment increases from 3,700,000 to 5,000,000 the number of shares of the
Company's common stock available for issuance under the 1995 Stock Option Plan.
The Company has in the past used, and intends in the future to use, stock
14
options as incentive devices to motivate and compensate its salaried officers
and other key employees, and believes that equity incentives represented by
stock options enhances the Company's ability in attracting and retaining the
best possible persons for positions of significant responsibility by providing
its officers and other key employees with additional incentives to contribute to
the Company's success.
Management further believes that the availability of such equity
incentives has served, and will continue to serve, an important part in the
implementation of the Company's acquisition strategy. As of May 31, 2005,
options to purchase an aggregate of 85,300 shares of common stock have been
exercised under the 1995 plan; as of such date, options to purchase 1,826,000
shares of common stock were outstanding under the 1995 Stock Option Plan.
Accordingly, options to purchase only 1,788,700 shares of common stock remain
available for future grants under the 1995 Stock Option Plan as of such date.
The Board of Directors recommends that the shareholders vote "FOR"
approval of the amendment to the 1995 Stock Option Plan.
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Proposal 4
The independent public accounting firm of Chisholm, Bierwolf & Nilson
has been the Company's registered public independent accountants since fiscal
year 1998. The Audit Committee has recommended and the Board of Directors has
appointed Chisholm, Bierwolf & Nilson for purposes of auditing the consolidated
financial statements of the Company for the fiscal year ending December 31,
2005. It is anticipated that representatives of Chisholm, Bierwolf & Nilson will
be present at the Annual Meeting and will be provided an opportunity to make a
statement if they desire, and to be available to respond to appropriate
questions.
The Board of Directors recommends that shareholders vote "FOR"
ratification of the appointment of Chisholm, Bierwolf & Nilson as the Company's
registered public independent accountants for fiscal 2005.
AUDIT FEES, FINANCIAL INFORMATION SYSTEMS DESIGN
AND IMPLEMENTATION FEES, AND ALL OTHER FEES
Fees for the 2004 annual audit of the financial statements and related
quarterly review services prepared by Tanner LC, the Company's former
independent accountants, were approximately $35,000. Fees in 2004 related to the
review of registration statements and assistance in responding to SEC comments
by Tanner LC were approximately $16,000. Fees in 2004 for edgarization of
filings were approximately $10,000. Fees in 2004 for tax return preparation were
approximately $7,000. Other fees in 2004 for meetings and other consultation
were approximately $1,000.
Fees for the 2003 annual audit of the financial statements and related
quarterly review services performed by Tanner LC were approximately $51,000.
Fees in 2003 related to the review of registration statements and assistance in
responding to SEC comments by Tanner LC were approximately $14,000. Fees in 2003
for edgarization of filings were approximately $8,000. Fees in 2003 for tax
return preparation were approximately $10,000. Other fees in 2003 for meetings
and other consultation were approximately $3,000.
ADDITIONAL INFORMATION
The Company will provide without charge to any person from whom a Proxy
is solicited by the Board of Directors, upon the written request of such person,
a copy of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2004, excluding certain exhibits thereto, as filed with the
Securities and Exchange Commission. Written requests for such information should
be directed to Luis A. Mostacero, Controller, Treasurer and Secretary, Paradigm
Medical Industries, Inc., 2355 South 1070 West, Salt Lake City, Utah 84119.
OTHER MATTERS
As of the date of this Proxy Statement, the Company knows of no
business that will be presented for consideration at the Annual Meeting other
than the items referred to above. However, if any other matters are properly
brought before the meeting, it is the intention of the persons named as proxies
15
in the accompanying Proxy to vote the shares they represent on such business in
accordance with their best judgment. In order to assure the presence of the
necessary quorum and to vote on the matters to come before the Annual Meeting,
please indicate your choices on the enclosed Proxy and date, sign and return it
promptly in the postage prepaid envelope provided. The signing and delivery of a
Proxy by no means prevents one from attending the Annual Meeting.
By order of the Board of Directors,
/s/Luis A. Mostacero
Luis A. Mostacero
Controller, Treasurer and Secretary
July 11, 2005.
16
PROXY - PARADIGM MEDICAL INDUSTRIES, INC. - PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned common stockholder of Paradigm Medical Industries, Inc. (the
"Company") acknowledges receipt of the Notice of Annual Meeting of the
Shareholders to be held on Friday, August 12, 2005, at 2355 South 1070 West,
Salt Lake City, Utah, at 10:00 a.m. Mountain Daylight Time, and hereby appoints
Messrs. Randall A. Mackey and John Y. Yoon, or any of them, each with full power
of substitution, as attorneys and proxies to vote all the shares of the
undersigned at said Annual Meeting of Shareholders and at all adjournments or
postponements thereof, hereby ratify and confirm all that said attorneys and
proxies may do or cause to be done by virtue hereof. The above-named attorneys
and proxies are instructed to vote all of the undersigned's shares as follows:
1. To elect four directors to serve until the next Annual Meeting of
Shareholders and until their successors are elected and qualified;
[ ] FOR all nominees listed below (except as marked to the contrary
below)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below.
(INSTRUCTION: to withhold authority to vote for any individual nominee, strike a
line through that nominee's name in the list below.)
Keith D. Ignotz, Randall A. Mackey, John C. Pingree
and Dr. David M. Silver
2. To approve the proposed amendment to the Company's Certificate of
Authority to increase the number of authorized shares of common stock
from 80,000,000 to 200,000,000 shares:
[ ] FOR [ ] AGAINST
3. To amend the Company's 1995 Stock Option Plan to authorize an
additional 1,300,000 shares of common stock to be made available for
issuance under the plan:
[ ] FOR [ ] AGAINST
4. To ratify the appointment of Chisholm, Bierwolf & Nilson as the
Company's registered public independent accountants for the fiscal year
ending December 31, 2005;
[ ] FOR [ ] AGAINST
5. To transact such other business as may properly come before the meeting
or any adjournment thereof.
[ ] FOR [ ] AGAINST
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY THE
UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
THE NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2, 3, 4 and 5.
Dated , 2005
----------------------
-----------------------------------------
Signature of Stockholder
------------------------------------------
Signature of Stockholder
Please sign your name exactly as it appears on your share certificate.
If shares are held jointly, each holder should sign. Executors, trustees, and
other fiduciaries should so indicate when signing. Please sign, date, and return
this Proxy Card immediately.
NOTE: Securities dealers or other representatives please state the number of
shares voted by this Proxy.
17
2355 South 1070 West
Salt Lake City, Utah
Phone: (801) 977-8970
Fax: (801) 977-8973
July 11, 2005
Dear Shareholder:
I am pleased to report that the events of 2004 set the stage for a reenergized
Paradigm. In 2004 your Company installed a new management team and added a new
Board member. Following the reorganization, the Company launched a new flagship
ultrasound biomicroscope and other product line improvements. We resolved
numerous lawsuits, including most notably the class action lawsuits, and
initiated activity to secure funding for the continued success of the Company.
More specifically, on April 1, 2004, John Yoon replaced Jeffery Poore as
President and Chief Executive Officer. Also in April, Timothy Forstrom, then
acting Vice President of Sales, resigned and was replaced by Raymond Cannefax
and Aziz Mohabbat was added as Vice President of Operations and Chief Operating
Officer. David Cullumber who had served in the capacity of Vice President of
Engineering also resigned. No replacement was named; Mr. Yoon served in an
acting capacity until the financial condition of the Company improved and a
suitable candidate identified.
Through the spring of 2004, the Company reorganized manufacturing, service,
information technology and research and development to improve efficiencies and
increase productivity.
We were able to increase production by 24% with 10% less manpower and, in the
process, we consumed approximately $1 million in existing inventory. As a
result, in 2004 Paradigm was able to almost triple inventory turns to 1.84 from
0.72 in 2003.
Service and quality also improved in 2004 as measured by several key metrics. We
reduced returned material authorizations by 43%, reduced customer complaints by
23% and closed all service issues older than three weeks by the end of 2004.
We have reduced mean-time-to-repair for products from greater than four weeks to
less than two weeks. In fact, at the end of 2004, the actual mean-time-to-repair
was averaging seven working days. As a result, we were able to reduce days sales
outstanding from 136 days in 2003 to 96 days, with a plan to further reduce the
number of days in 2005.
In October 2004 Paradigm announced the P60, the next generation ultrasound
biomicroscope intended to provide unsurpassed ease-of-use combined with superior
image quality. The P60 with the older P40 and P45 product lines have provided a
backbone to Paradigm sales.
18
Also in October, we entered into discussions to settle the outstanding class
action lawsuits. The results of these discussions enabled the Company to reach
the ultimate settlement in 2005. This set the stage for discussions to secure
funding for the Company to ensure adequate continued development and sales and
marketing activities.
The strength of sales in the ultrasound biomicroscopes combined with the other
product lines and in greater efficiency of our operation enabled us to show for
the first time in the history of Paradigm a profit on the year.
With this behind the Company, Paradigm is ready to work toward achieving the
goals of operational profitability and positive cash flow. Our efficient
operation, renewed service capability and new products will help us achieve
these objectives. The last year has been a challenge to our management team and
to our Company but we are hopeful the changes we have implemented will continue
lead to significant growth and profitability and enable us to deliver
shareholder value.
Since December 31, 2004, we have had some positive events. The Company was able
to secure $2.5 million in funding through a convertible debenture with The NIR
Group. The P60 received CE Mark approval and FDA approval and we began shipping
the P60 worldwide. In addition, we hired a Vice President of Engineering,
Fredrick Geiger. Finally, we added several independent sales representatives
based on the strength of our product roadmap and potential P60 sales during the
remainder of 2005.
We will continue to strive for improvement and efficiency as we work through
2005. We are exceedingly optimistic about the Company's future prospects and
appreciate your continuing loyalty and support.
Sincerely,
/s/John Y. Yoon
John Y. Yoon
President and CEO
Corporate Office: 2355 South 1070 West Salt Lake City, Utah, 84119
- www.paradigm-medical.com
19
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 0-28498
Paradigm Medical Industries, Inc.
(Name of small business issuer in its charter)
DELAWARE 87-0459536
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2355 South 1070 West, Salt Lake City, Utah 84119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 977-8970
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Class A Warrant to Purchase One Share of Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Registrant's revenues for the fiscal year ended December 31, 2004 were
$3,062,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of the last business day of registrant's most recently completed
first fiscal quarter was $2,499,000 based on the closing price on that date on
the OTC Bulletin Board.
As of March 31, 2005, Registrant had outstanding 27,764,868,shares of common
stock, 5,627 shares of Series A preferred stock, 8,986 shares of Series B
preferred stock, no shares of Series C preferred stock and 5,000 shares of
Series D preferred stock, 1,000 shares of Series E preferred stock, 4,598.75
shares of Series F preferred stock, and 1,726,560 shares of Series G preferred
stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Additional documents set forth in Part IV hereof are incorporated by reference.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
PART I
Item 1. Description of Business
General
The Company develops, manufactures, sources, markets and sells
ophthalmic surgical and diagnostic instrumentation and related accessories,
including disposable products. The Company's surgical equipment is designed for
minimally invasive cataract treatment. The Company markets two cataract surgery
systems with related accessories and disposable products. The Company's cataract
removal system, the Photon(TM) 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 fiscal
year ended December 31, 2003, diagnostic products are currently the Company's
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. Due to the lack of FDA approval and the lack
of current evidence to support recoverability, the Company has recorded an
inventory reserve to offset the majority of the inventory associated with the
Photon(TM). In addition, most inventory associated with the Precisionist Thirty
Thousand(TM) has been reserved for due to the estimated lack of recoverability.
The Company's focus is not on any specific diagnostic product or products, but
rather on its entire group of diagnostic products. The Photon(TM) can be sold in
markets outside of the United States. Both the Photon(TM) and the Precisionist
ThirtyThousand(TM) are manufactured as an Ocular Surgery Workstation(TM). The
Company is considering marketing the Photon(TM) and other lasers for use in eye
care.
The Company's diagnostic products include a pachymeter, a P55
pachymetric analyzer, a P37 Ultrasonic A/B Scan, a P40 UBM Ultrasound
Biomicroscope, a perimeter, a corneal topographer and the Blood flow
Analyzer(TM). The diagnostic ultrasonic products including the P55 pachymetric
analyzer, the P37 Ultrasonic A/B Scan and the P40 UBM Ultrasound Biomicroscope
were acquired from Humphrey Systems, a division of Carl Zeiss in 1998. The
Company developed and offered for sale in the fall of 2000 the P45, which
combines the P37 Ultrasonic A/B Scan and the UBM biomicroscope in one machine.
The perimeter and the corneal topographer were added when the Company acquired
the outstanding shares of the stock of Vismed, Inc. d/b/a/ Dicon(TM) in June
2000. The Company purchased Ocular Blood Flow, Ltd. in June 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 monitoring of glaucoma. The Company is currently developing
additional applications for all of its diagnostic products.
A cataract is a condition that 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, the Company received FDA clearance to market the Blood
Flow Analyzer(TM) 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. The Company's Blood Flow Analyzer(TM) 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, the
Company purchased Occular Blood Flow, Ltd., the manufacturer of the Blood Flow
Analyzer(TM). The terms and conditions of the sale were $100,000 in cash and
100,000 shares of common stock. In April 2001, the Company received
authorization to use a common procedure terminology or CPT code from the
American Medical Association for procedures performed with the Blood Flow
Analyzer(TM) , for reimbursement purposes for doctors using the device. However,
certain payers have elected not to reimburse doctors using the Blood Flow
Analyzer(TM).
On July 23, 1998, the Company 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
2
was less than $375,000, after payment of commissions, transfer taxes and other
expenses relating to the sale of such shares, the Company 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 its common stock, the Company 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 the Company 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 the Company's cataract surgical
equipment and the Company's ocular Blood Flow Analyzer(TM). The Ultrasonic
Biometer calculates the prescription for the intraocular lens to be implanted
during cataract surgery. The P55 pachymetric measures corneal thickness for the
new refractive surgical applications that eliminate the need for eyeglasses and
for optometric applications including contact lens fitting. The P37 Ultrasonic
A/B Scan combines the Ultrasonic Biometer and ultrasound imaging for advanced
diagnostic testing throughout the eye and is a viable tool for retinal
specialists. The P40 UBM Ultrasound Biomicroscope utilizes microscopic digital
ultrasound resolution for detection of tumors and improved glaucoma management.
The Company introduced the P45 in the fall of 2000, which combines the P37
Ultrasonic A/B Scan, and the Ultrasonic Biometer in one machine.
On October 21, 1999, the Company purchased Mentor's surgical product
line, consisting of the Phaco SIStem(TM), the Odyssey(TM) and the
Surg-E-Trol(TM). This acquisition was an attempt to round out the Company's
cataract surgery product line by adding entry-level, moderately priced cataract
surgery products. The transaction was paid for with $1.5 million worth of the
Company's common stock. Due to the lack of sales volume of these products, they
were determined to be obsolete and a reserve was established to offset all
inventory associated with these products. During the fourth quarter of 2003, the
Company sold all inventory rights associated with the SIStem(TM) and Odyssey(TM)
for $125,000.
On June 5, 2000, the Company purchased Vismed Inc. d/b/a Dicon(TM)
under a pooling of interest accounting treatment. The purchase included the
Dicon(TM) perimeter product line consisting of the LD 400, the TKS 5000, the
SST(TM), FieldLink(TM), FieldView(TM) and Advanced FieldView and the corneal
topographer product line, the CT 200(TM), 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, the Company 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 its 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. The Company acquired
from Innovative Optics raw materials, work in process and finished goods
inventories. Additionally, the Company acquired the furniture and equipment used
in the manufacturing process of the microkeratome console and the inspection and
packaging of the disposable blades.
The Company was unsuccessful in supplying the disposable blades. The
Company discontinued the marketing and sales efforts of this product during the
third quarter of 2002. On April 1, 2002, the Company 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, the Company issued him a total of 43,684 shares of its
common stock, representing payment of $100,000 in stock for his services. All
assets acquired from Innovative Optics, including remaining inventory with a
book value of $160,000 and equipment and intangible assets with a book value of
$2,082,000, were written off during 2002.
On September 19, 2002, the Company completed a transaction with
International Bio-Immune Systems, Inc., a Delaware corporation , in which the
Company 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 at
$2.50 per share for a period of two years, through the exchange and issuance of
736,945 shares of its common stock, the lending of 300,000 shares of its common
stock to the company and the payment of certain of its expenses through the
issuance of an aggregate of 94,000 shares of its common stock to the company and
its counsel. During 2004, the Company sold all 2,663,254 shares of International
Bio-Immune Systems stock for net proceeds of $505,000.
International Bio-Immune Systems, Inc. may sell the 300,000 shares of
the Company's common stock loaned by the Company and the proceeds therefrom
shall be deemed a loan from the Company 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 did
not sell the shares by September 19, 2004, it was required to return the shares,
or any amount which has not been sold, to the Company. International Bio-Immune
Systems currently controls the voting decisions regarding these shares. The
President and Chief Executive Officer of International Bio-Immune Systems is
Leslie F. Stern, who exercises sole voting and investment powers regarding the
shares.
3
On December 3, 2003, the Company executed a purchase agreement with
American Optisurgical, Inc. for the sale of the Mentor surgical products line,
consisting of the Phaco SlStem(TM) and the Odyssey(TM). The assets sold in the
transaction included patents, trademarks, software codes and programs, supplies,
work in process, finished goods, and molds related to the equipment. The
purchase price paid to the Company by American Optisurgical for the assets was
$125,000. The purchase agreement also contained a noncompete provision in which
the Company agreed for a period of three years from the closing date not to own,
manage, operate or control any business that competes with cataract removal
equipment substantially the same as the proprietary technology of the Phaco
SlStem(TM) and the Odyssey(TM).
On September 28, 2004, the Company entered into an Investment Banking
Agreement with Alpha Advisory Services, Inc. Under the terms of the agreement,
Alpha Advisory Services is to use its best efforts to provide the following
services to the Company: (i) review of and make recommendations regarding the
Company's business plan and promotional materials; (ii) identify and contact
potential investors in the United States and Europe for potential investment in
the Company's securities; (iii) organize meetings with potential investors and
participate in such meetings; and (iv) assist the Company in future financings,
mergers, acquisitions and potential buyouts.
The term of the agreement was for a period of three months, which was
to be automatically renewed for successive one-year terms. Following the initial
three month period, either party may terminate the agreement upon 15 days
written notice to the other party. In consideration for the services to be
performed under the agreement, Alpha Advisory Services is to receive a fee of
$3,000 per month, plus reasonable travel and other expenses, and warrants to
purchase 25,000 shares of the Company's common stock at $.15 per share. The
warrants are exerciseable, on a cashless basis, over a two year period from the
date of issuance.
Background
Corporate History: The Company's business originated with Paradigm
Medical, Inc., a California corporation formed in October 1989. Paradigm
Medical, Inc. developed its present ophthalmic business and was operated by its
founders Thomas F. Motter and Robert W. Millar. In May 1993, Paradigm Medical,
Inc. merged with Paradigm Medical Industries, Inc. At the time of the merger,
the Company was 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 Medical, Inc. 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, the
Company caused a 1-for-7.96 reverse stock split of its shares of common stock.
The Company then acquired all of the issued and outstanding shares of common
stock of Paradigm Medical, Inc. using shares of its own common stock as
consideration. As part of the merger, the Company changed its name from French
Bar Industries, Inc. to Paradigm Medical Industries, Inc. and the management of
Paradigm Medical, Inc. assumed control of the company. In April 1994, the
Company caused a 1-for-5 reverse stock split of its shares of common stock. In
February 1996, the Company re-domesticated to Delaware pursuant to a
reorganization.
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 or low pressure in the
eye), loss of nerve fibers resulting in loss of vision, 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.
4
Surgical use of ultrasonics 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.
Lasers are widely accepted in the ophthalmic community for treatment of
certain eye disorders and are popular for surgical applications because of their
relatively noninvasive 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, the Company's Photon(TM) laser cataract system is designed to be used
for multiple ophthalmic applications, including certain new applications that
may be made possible with its proprietary technology. Such new applications,
however, must be tested in clinical trials and be approved by the FDA.
Products
The Company's principal proprietary surgical products are systems for
use by ophthalmologists to perform surgical treatment procedures to remove
cataracts. The Company has complete ownership of each product with no
technological licensing limitations.
Precisionist ThirtyThousand(TM): The Precisionist ThirtyThousand(TM) is
the Company's core phaco surgical technology. The Precisionist(TM) was placed
into production and offered for sale in 1997. As a phaco cataract surgery
system, the Company believes the Precisionist(TM) with its new fluidics panel is
equal or superior to the present competitive systems in the United States.
However, due to the lack of recent sales, the majority of the Company's
inventory associated with the Precisionist Thirty Thousand(TM) has been
estimated to be obsolete and therefore a reserve for such inventory has been
recorded. 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 Precisionist(TM)
provides one hundred pre-programmable surgery setups, with a second level of
subprogrammed custom modes within each major surgical screen (i.e., ultrasound
phaco and irrigation/aspiration modes).
The Precisionist(TM) also features the Company's newly developed
proprietary fluidics panel which is completely noninvasive 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 Precisionist(TM) and related accessories were 0% of total revenues
in both the fiscal years 2004 and 2003, respectively.
5
Ocular Surgery Workstation(TM): The Ocular Surgery Workstation(TM)
comprises the base system of the Precisionist ThirtyThousand(TM) and is the
first system to the Company's 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 Workstation(TM)
utilizes an embedded open architecture computer developed for the Company and
controlled by a proprietary software system developed by the Company 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 Workstation(TM) with the ability to add other hardware and
software features. Expansion such as the Company's Photon(TM) laser system and
hardware for additional surgical applications are easily implemented by means of
a preexisting expansion rack, which resides in the base of the Workstation(TM).
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 Workstation(TM) will be
accepted in the marketplace. If the FDA approves the Photon(TM), the Company
will refer to the Workstation(TM) as the Photon(TM) Ocular Surgery
Workstation(TM). To date, the Company has not commercially developed or offered
for sale any other added hardware or software features to its Workstation(TM).
Photon(TM) Laser System: The Photon(TM) 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 the Company's Precisionist(TM) Ocular Surgery
Workstation(TM). The plug-in platform concept is unique in the ophthalmic
surgical market for systems of this magnitude and presents a unique market
opportunity for the Company. The main elements of the laser system are the
Nd:YAG laser module, Photon(TM) laser software package and interchangeable
disposable hand held fiber optic laser cataract probe. The Photon(TM) laser
utilizes the on board microprocessor computer of the Workstation(TM) to generate
short pulse laser energy developed through the patented LCP(TM) 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. The Company's 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
Precisionist(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 fiscal year ended December 31,
2003, diagnostic products are currently the Company's major focus and the
Photon(TM) and other extensive research and development projects have been put
on hold pending future evaluation when the Company's financial position
improves. Due to the uncertainty surrounding the timetable for obtaining FDA
approval and the lack of significant revenue from the other surgical products,
the Company has recorded an inventory reserve against the majority of the
inventory associated with the Photon(TM) and Precisionist Thirty Thousand (TM).
The Company's focus is not on any specific diagnostic product or products, but
rather on its entire group of diagnostic products.
At some point in the future, the Company 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, the Company intends 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 far as the Company 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.
The Company's laser system is based upon the concept that pulsed laser
energy produced with the microprocessor 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, the Company's 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, the Company's Photon(TM) laser cataract system should only affect
tissues with which it comes into direct contact.
6
In October of 2000, the Company received FDA approval for the
Photon(TM) Workstation(TM) 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 Photon(TM) Ocular Surgery Workstation(TM) 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. Regulatory approval would require
completion of pending Photon(TM) clinical trials and resubmission of a 510(k)
predicate device application to the FDR. 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 fiscal year ended
December 31, 2003, diagnostic products consisting mainly of the P40 UBM
Ultrasound Biomicroscope, perimeter, CT 50 Corneal Topographer, and Blood Flow
Analyzer(TM) are currently the Company's 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
Company's focus is not on any specific diagnostic product or products, but
rather on the entire group of diagnostic products.
The SIStem(TM) and the Odyssey(TM): The SIStem(TM) and the Odyssey(TM)
have been the Company's entry-level phacoemulsification systems. The SIStem(TM)
and the Odyssey(TM) were designed to be a full featured, cost-effective,
reliable phaco machines; however, due to the lack of sales in 2002, the products
were determined to be obsolete. Sales of the SIStem(TM), the Odyssey(TM) and
related accessories represented approximately 4% and 0% of the total revenues
for fiscal years 2004 and 2003, respectively. On December 3, 2003, the Company
completed the sale of the SIStem(TM) and the Odyssey(TM), including patents,
trademarks, software codes and programs, supplies, work in process, finished
goods and molds, to American Optisurgical, Inc.
Surgical Instruments and Disposables: In addition to the cataract
surgery equipment, the Company's 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. The Company intends to
expand its disposable accessories as it further penetrates the cataract surgery
market and expands the treatment applications for its Workstation(TM). These
products contributed approximately 0% of total revenues for both 2004 and 2003,
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 Analyzer(TM): In June 1997, the Company received FDA
clearance to market the Blood Flow Analyzer(TM) 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. The Company's
Blood Flow Analyzer(TM) 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 its first diagnostic eye care device. The
device is a portable desktop system that utilizes a proprietary and patented
pneumatic Air Membrane Applanation Probe(TM) 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.
The Company markets the Blood Flow Analyzer(TM) as a stand-alone model
packaged with a custom built computer system. The Blood Flow Analyzer(TM)
utilizes a single use disposable cover for the Air Membrane Applanation
Probe(TM), 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 Analyzer(TM) for marketing in June 1997 and the Company commenced
7
selling the system in September 1997. In addition to the Humphrey products, this
diagnostic product allowed the Company 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 the Company's surgical systems.
In April 2001, the Company received written authorization from the CPT
Editorial Research and Development Department of the American Medical
Association to use common procedure terminology or CPT code number 92120 for its
Blood Flow Analyzer(TM), for reimbursement purposes for doctors using the
device. However, certain payers have elected not to reimburse doctors using the
Blood Flow Analyzer(TM). The Company is 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 doctors. Currently, there is reimbursement by insurance
payors to doctors using the Blood Flow Analyzer(TM) in 22 states and partial
reimbursement in four other states. The amount of reimbursement to doctors using
the Blood Flow Analyzer(TM) generally ranges from $56.00 to $76.00 per patient,
depending upon the insurance payor. Insurance payors providing reimbursement for
the Blood Flow Analyzer(TM) have the discretion to increase or reduce the amount
of reimbursement. The Company is endeavoring to obtain reimbursement by
insurance payors in other states where there is currently no reimbursement being
made.
The manufacturing activities for the Blood Flow Analyzer(TM) have been
moved to the Salt Lake City facility from the outsourced plant located in
England. On October 21, 2002, the Company received FDA approval on its 510(k)
application for additional indications of use for the Blood Flow Analyzer(TM).
The additional indications include pulsatile ocular blood flow and pulsatile
ocular blood volume. These are diagnostic measurements that assess the
hemodynamic and vascular health of the eye. Also, the Company is continuing its
aggressive campaign to educate the insurance 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 using its Blood Flow
Analyzer(TM). Sales of the Blood Flow Analyzer(TM) and related accessories
accounted for approximately 19% and 16% of total sales for the fiscal years
ended December 31, 2004 and 2003, respectively.
Dicon(TM) Perimeters: Dicon(TM) perimeters consist of the LD 400, the
TKS 5000, the SST(TM), FieldLink(TM), FieldView(TM) 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 Dicon(TM)
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 and related accessories generated
approximately 27% of the total revenues for both 2004 and 2003, respectively.
Dicon(TM) Corneal Topographers: Dicon(TM) corneal topographers include
the CT 200(TM) 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 and related accessories were 6% and 9% of
the total revenues for 2004 and 2003, respectively. An enhanced version of the
CT 200(TM) was introduced during the fourth quarter of 2003. The Company is
completing the development of upgrades to the CT 200(TM) and the CT 50 Corneal
Topographer, which will be operating upon completion of the upgrades with
Windows XP software rather than the former Windows 95 operating systems. The
Company is also revising its upgrade to offer the CT 200(TM) with Windows 2000
software rather than the Windows XP software that the Company announced in
August 2003.
P55 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% of the total revenues for both 2004 and 2003,
respectively.
P20 A-Scan Biometric Ultrasonic Analyzer: The A-Scan has been removed
from the Company's 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 0% and 2% of the total
revenues for 2004 and 2003, respectively.
P37 A/B Scan Ocular Ultrasound Diagnostic: The A/B Scan is used by
retinal subspecialists 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 8% and 4% of the total
revenues for 2004 and 2003, respectively.
P40 and P45 UBM Ultrasound Biomicroscopes: Humphrey Systems developed
the P40 UBM Ultrasound Biomicroscope in conjunction with the New York Eye and
Ear Infirmary in Manhattan and the University of Toronto. The P40 biomicroscope
and its intellectual property were included in the purchase from Humphrey
Systems and gives the Company the proprietary rights to this device. The P40
biomicroscope creates a high resolution computer image of the unseen parts of
the eye that is a "map" for the glaucoma surgeon. The P40 biomicroscope is an
"enabling technology" for the ophthalmologist, one that the Company has
repositioned for broader market sales penetration. Formerly sold only to
glaucoma subspecialty practitioners, the Company reintroduced the P40
biomicroscope at a price point targeted for the average practitioners seeking to
add glaucoma filtering surgical procedures and income to their cataract surgical
practice.
8
The P40 biomicroscope related surgical filtering procedures are fully
reimbursable by Medicare and insurance providers. This untapped new market
positions the Company with its proprietary P40 biomicroscope and, to its
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, the Company introduced the P45 UBM Ultrasonic Biomicroscope, which
combines the P40 biomicroscope and the P37 A/B Scan Ocular Ultrasound Diagnostic
in one instrument. The Company believes that by combining functions, the P45
will appeal to a broader market. The P40 biomicroscope and related accessories
sales were approximately 12% and 7% of the total revenues for 2004 and 2003,
respectively. The P45 biomicroscope and related accessories sales contributed
approximately 16% and 13% of the total revenues for 2004 and 2003, respectively.
On October 25, 2004, the Company entered into a Manufacturing and
Distribution Agreement with E-Technologies, Inc., a Iowa based developer of
software and related technology for technical applications. Under the terms of
the agreement, E-Technologies granted to the Company the exclusive right to
manufacture, market, sell and distribute an ultrasound biomicroscope. Upon
execution of the agreement, the Company paid $30,000 to E-Technologies for
engineering costs associated with the development of the biomicroscope. Once the
bioimicroscope receives FDA approval, the Company agrees to pay E-Technologies
an additional fee of $45,000.
In consideration for the exclusive right to manufacture and distribute
the biomicroscope, the Company agrees to pay E-Technologies the sum of $5,000
for each of the first 25 biomicroscopes sold by the Company. Thereafter, the
Company agrees to pay E-Technologies the sum of $4,000 for each biomicroscope
sold. As an additional condition, the Company agrees to sell 25 biomicroscopes
during the first 12 months after the biomicroscope receives FDA approval. The
agreement is effective for a term of two years. After the expiration of the two
year period, the agreement is to automatically renew for additional one year
periods, unless either party elects to terminate the agreement upon at least 30
days prior written notice to the other party before the end of any term of the
agreement.
In July of 2000, the Company received ISO 9001 and EN 46001
certification using TUV Essen as the notified body. Under ISO 9001certification,
its products are now CE marked. The CE mark allows the Company to ship product
for revenue into the European Community. The Company successfully retained its
certification in 2002.
Parts and Services: The parts and service revenue from the repair and
service of equipment sold accounted for approximately 8% of total revenues in
both 2004 and 2003, respectively.
Sales of other products represented approximately 1% of total revenues
in both 2004 and 2003, respectively.
9
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:
Commercial Reimbursement % 2003 %2004 Regulatory
Product (1) Product Class Development Status Sales Sales Approvals
P55 Pachymetric System, Imaging, Pulsed Complete Yes 3% 3% FDA 510(K) K844299*
Analyzer Echo Diagnostic ISO 9001: 1994, EN ISO
9001**
P20 A-Scan System, Imaging, Pulsed Discontinued Yes 2% 0% FDA 510(K) K844299*
Biometric Ultrasound Echo Diagnostic ISO 9001: 1994,
Analyzer EN ISO 9001**
P37 A/B Scan Ocular Transducer, Ultrasound Complete Yes 4% 8% FDA 510(K) K844299*
Ultrasound Diagnostic ISO 9001: 1994,
Diagnostic EN ISO 9001**
P40 UBM System, Imaging, Pulsed Complete Yes 7% 12% FDA 510(K) K844299*
Ultrasound Echo Ultrasound ISO 9001: 1994,
BioMicroscope Diagnostic EN ISO 9001**
P45 UBM System, Imaging, Pulsed Complete Yes 13% 16% FDA 510(K) K844299*
Ultrasound Echo Ultrasound ISO 9001: 1994,
Biomicroscope, Diagnostic EN ISO 9001**
Workstation Plus
BFA Ocular Blood Tonometer, Manual Complete Yes**** 16% 19% FDA 510(K) K844299*
Flow Analyzer(TM) and Diagnostic ISO 9001: 1994,
Disposables EN ISO 9001**
CT 200 Corneal Topographer Corneal Complete Yes 9% 6% FDA 510(K) K844299*
Topography System AC-Powered ISO 9001: 1994,
Diagnostic EN ISO 9001**
LD 400 Perimeter, Automatic Complete Yes 24% 24% FDA 510(K) K844299*
Autoperimetry AC-Powered ISO 9001: 1994,
System Diagnostic EN ISO 9001**
TKS 5000 Perimeter, Automatic Complete Yes 3% 3% FDA 510(K) K844299*
Autoperimetry AC-Powered, Diagnostic ISO 9001: 1994,
System EN ISO 9001**
Precisionist Thirty Phacofragmentation Complete Yes 0% 0% FDA 510(K) K844299*
Thousand(TM), Ocular ISO 9001: 1994,
Surgery Workstation EN ISO 9001**
with Surgical
Equipment and
Disposables
SIStem(TM) and Phacofragmentation Sold Yes 11% 0% FDA 510(K) K844299*
Odyssey(TM)(2)
Photon(TM) Laser, Phacoemulsification In-Process (4) No 0% 0% IDE G940151
Ocular Surgery BFA tips ISO 9001: 1994,
Workstation with EN ISO 9001
Surgical Equipment
and Disposables(3)
Parts and Services Perimeter, BFA, Complete Yes 8% 9% FDA 510(K) K844299*
Tonometer, Topographer, ISO 9001: 1994,
Ultrasound Workstations, EN ISO 9001**
Systems, Imaging
10
-----------------------------
(1) Except for the Photon(TM) Ocular Surgery Workstation, which can only be
sold in countries outside the United States, these products can be sold
in the United States and in foreign countries including but not limited
to Argentina, Australia, Bangladesh, Borneo, Brazil, Canada, China,
Czechoslovakia, Egypt, France, Germany, Greece, Hong Kong, India,
Israel, Italy, Japan, Jordan, Korea, Malaysia, Mexico, New Zealand,
Pakistan, Peru, Poland, Puerto Rico, Russia, Saudi Arabia, Spain, Sri
Lanka, Taiwan, Thailand, Turkey, United Kingdom, and United Arab
Emirates.
(2) Due to the lack of recent sales volume, the inventory associated with
the Precisionist Thirty Thousand (TM), the SIStem(TM) and the
Odyssey(TM) has been deemed obsolete and a reserve has been recorded to
offset such inventory.
(3) Due to the lack of recent evidence to support the recoverability of
inventory associated with the Photon(TM), the Company has recorded a
reserve to offset the majority of such inventory on hand.
(4) The Photon(TM) is in-process and not complete because the Company has
not completed the clinical trials in order to obtain FDA regulatory
approval.
* 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.
As detailed in the table above, except for the Photon(TM) Laser Ocular
Surgery Workstation, which requires additional development and regulatory
approvals, the Company's current products are developed and available for sale
in footnote (1) of the table. The Company's possible future efforts to finalize
development of the Photon(TM) and obtain the necessary regulatory approvals
would depend on its economic evaluations and adequate funding. If these efforts
were undertaken but proved to be unsuccessful, the impact would include the
costs associated with these efforts and the anticipated future revenues which
the Company would not receive as expected. The Company anticipates that a
majority of the estimated costs for Research and Development will be used for
the enhancement and upgrading of its current products approved for sale. The
Company is unable to provide an estimate of the details of possible liquidity
needs and expected source of funds for possible future efforts to finalize
development of the Photon(TM) and obtain the necessary regulatory approvals
since this estimate would depend on a possible comprehensive economic
evaluation.
Any possible future efforts to complete development of the Photon(TM)
and obtain the necessary regulatory approvals would depend on the Company's
economic evaluations and adequate funding. If these efforts were undertaken but
proved to be unsuccessful, the impact would include the costs associated with
these efforts and the anticipated future revenues that the Company would not
receive as expected. The Company anticipates that a majority of the estimated
costs for research and development will be used for the enhancement and
upgrading of its current products being offered for sale. The Company is unable
to provide a detailed estimate of possible liquidity needs and expected sources
of funds for possible future efforts to complete development of the Photon(TM)
and obtain the necessary regulatory approvals since this estimate would depend
on a comprehensive economic evaluation.
The Company currently purchases components and parts used in its
products from a limited number of key suppliers. The Company's reliance on its
principal suppliers could result in delays associated with redesigning a product
due to an inability to obtain an adequate supply of required components and
parts, and reduced control over pricing, quality and timely delivery. The loss
of any of these principal suppliers or the inability of a supplier to meet
performance and quality specifications, requested quantities or delivery
schedules could cause the Company's revenues to decline. In addition, any
interruption or discontinuance in the supply of components or parts could have
an adverse effect on the Company's business, results of operation and financial
condition. The Company's principal suppliers include Capistrano Labs, US
Ultrasound and Anello.
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
11
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
the Company's products have been ophthalmologists, optometrists and clinics in
many countries throughout the world. The Company believes that the market for
its 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 the Company's laser system.
Marketing Organization: The Company markets its products
internationally through a network of dealers and domestically through direct
sales representatives, independent sales representatives, and ophthalmic product
distributors. As of December 31, 2003, the Company had five 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 the Company that contain performance quotas. Domestic sales
channels have been expanded to include independent sales representatives and
distributors who began training with its products in August 2003. The Company
also plans to continue to market its products by identifying customers through
internal market research, trade shows and direct marketing programs. The Company
also utilizes 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 its products.
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 the Company's technology and
products, as evidenced by several recent front-page articles in these
publications.
Manufacturing and Raw Materials: Currently, the Company maintains a
23,238 square foot facility in Salt Lake City. The Company transferred the
manufacturing activities for the Blood Flow Analyzer(TM) to San Diego from
Ocular Blood Flow, Ltd. in England during 2001. During the second quarter of
2002, the Company consolidated and closed the San Diego operations into the Salt
Lake City facility. The facility accommodates its manufacturing, marketing and
engineering capabilities. The Company manufactures under systems of quality
control and testing, which complies 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.
The Company subcontracts 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
its financial purchasing capabilities and pricing needs. The Company
manufactures certain accessories and fluidics surgical tubing sets at its
facility in Salt Lake City.
Product Service and Support: Service for the Company's products is
overseen from its Salt Lake City location and is augmented by its international
dealer network, which provides technical service and repair. Installation,
on-site training and a limited product warranty are included as the standard
terms of sale. The Company provides 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. The Company maintains adequate parts inventory and
provides overnight replacement parts shipments to its dealers.
On July 11, 2002, the Company 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 the Company 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, the Company is to issue 100,000 shares of its 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 the
Company, the Company has 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. The Company has issued a total of 100,000 shares of its common
stock to Messrs. Kristensen and McConkie pursuant to the terms of the contract.
Messrs. Kristensen and McConkie have retained Ralph Thompson of Novus
Technologies, a Utah based firm, to assist in the marketing and sales of the
Company's Photon(TM) laser system in Asia. Mr. Thompson, who lived in China for
over 10 years, represents U.S. businesses doing business in China. He currently
makes trips to China on a regular basis on behalf of the businesses he
represents. Although Mr. Thompson continues to represent the Company in the sale
of its Photon(TM) laser system in Asia, he has not been successful to date in
selling its Photon(TM) laser system to any customers in China or other Asian
countries.
12
Research and Development
The Company's primary market for its surgical products is the cataract
surgery market. However, the Company believes that its laser systems may
potentially have broader ophthalmic applications. Consequently, the Company
believes that a strong research and development capability is important for its
future. In addition to its expanded in-house research and development
capabilities, the Company has enlisted several recognized and respected
consultants and other technical personnel to act in technical and medical
advisory capacities.
The Company believes its research and development capabilities provide
it 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. The Company intends to continue
investing in research and development and to strengthen its 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
$264,000, or 26%, to $768,000 for the twelve months ended December 31, 2004,
from $1,033,000 for the same period in 2003. None of the costs of research and
development activities during 2004 and 2003 was borne directly by customers.
From December 1, 2000 to November 30, 2002, the Company entered into a
series of consulting agreements with Michael B. Limberg, M.D., in which he
agreed to evaluate new technologies and instruments for the Company. For his
services during that period, the Company issued Dr. Limberg a total of 48,000
shares of its common stock and warrants to purchase 300,000 shares of common
stock at exercise prices ranging from $4.00 to $6.75 per share.
During the period in which Thomas F. Motter served as the Company's
Chairman and Chief Executive Officer, he formed a clinical advisory board and
met from time to time with the board. Jeffrey F. Poore, who served as the
Company's President and Chief Executive Officer from March 2003 to March 2004,
decided not to utilize the clinical advisory board. Instead, he consulted with
former members of the advisory board on an informal basis. The Company currently
has no agreements with any former members of the clinical advisory board and
none of these former members hold or own any rights to its products or
technologies.
Competition
General. The Company is 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. The Company believes 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. 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 aftermarket suppliers. While there is growing market
resistance in the United States and internationally to single use cassettes, it
is anticipated 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. The Company's Precisionist Thirty
Thousand(TM) ultrasonic phaco system has the ability to use either reusable or
single use disposable components. The Photon(TM) 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 the Company 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
13
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, the Company
is establishing itself and, as yet, does not hold a significant share of the
market. The Company currently recognizes Bausch & Lomb, Alcon Laboratories, and
Allergan Medical Optics as its 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 Photon(TM). 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 the same risk factors of phaco, thereby
eliminating the benefits of using a laser to remove the cataract. The Company
also believes that its 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, the
Company is seeking to exploit these opportunities. Depending upon further
developments, the Company may ultimately exploit those opportunities through a
merger with a stronger entity already established or one that desires to enter
the medical industry.
The Company believes that its ability to compete successfully will
depend on its capability to create and maintain advanced technology, develop
proprietary products, attract and retain scientific personnel, obtain patent or
other proprietary protection for its 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 visual 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.
The Company is 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 the Company believes accounts for
the majority of diagnostic equipment sales. The Company continues 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 the Company's analyzer
retail at comparable prices. Thus, the Company believes that it can compete in
the diagnostic market place based upon the lower price and improved diagnostic
functions of the analyzer.
Intellectual Property Protection
The Company's cataract surgical products are proprietary in design,
engineering and performance. Its 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.
The Company acquired proprietary intellectual property in the
transaction with Humphrey Systems when the Company 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 P40 UBM Ultrasound Biomicroscope, one of the
ultrasonic products the Company purchased, is subject to a license agreement
dated September 27, 1990, with Sunnybrook Health Science Center. Under the terms
of the license agreement, the Company has the exclusive worldwide rights to
manufacture and sell the UBM biomicroscope, for which the Company is 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, at which time the
Company had a royalty free worldwide license to use and sell the P40 UBM
Ultrasound Biomicroscope. However, the Company has a continuing obligation after
such termination to continue to use and sell the biomicroscope only in the field
of ophthalmology.
14
The Photon(TM) 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 the Company 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.
The Company 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
provided the Company 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 worldwide basis, for which PhotoMed is to receive a 1% royalty on
all net sales of such systems and related components sold worldwide.
Under the license agreement PhotoMed is entitled to all royalty
payments from net sales at the time of billing to the purchaser or within 30
days of the date of shipment, whichever occurs first. The Company is required
each quarter to prepare a summary of sales and the royalties to which PhotoMed
is entitled to be paid. The sales summary must list the number of surgical
systems and disposable units sold in each country, the dollar value of gross and
net sales, the amount of the royalty to which PhotoMed is entitled, and any
other information requested by PhotoMed from time to time. Under the terms of
the agreement, the Company has agreed to be actively engaged in either research
and development of a salable product utilizing the patent or in marketing and
selling such a product.
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 the Company
would receive royalty payments equal to 1% of the proceeds from the net sales of
products utilizing the patent. The license agreement expired when the United
States patent rights expired in September 2004, but the license agreement could
be automatically extended or renewed for any term of extension or renewal
awarded for the patent rights. In addition, the Company has the right to
terminate the license agreement at any time after July 7, 2003 upon 90 days
prior written notice to PhotoMed.
PhotoMed and Dr. Eichenbaum brought legal action against the Company on
September 11, 2000 involving an amount of royalties that were allegedly due and
owing to them from the sale of equipment by the Company. The Company has paid
$14,736 to bring all royalty payments up to date through June 30, 2001. The
Company has been working with PhotoMed and Dr. Eichenbaum to ensure that the
royalty calculations have been correctly made. It is anticipated that once the
parties agree on the correct royalty calculations, the legal action will be
dismissed. However, if the partes are unable to agree on a method for
calculating royalties, there is a risk that PhotoMed and Dr. Eichenbaum might
amend the complaint to request termination of the license agreement and, if
successful, the Company would lose its rights to manufacture or sell the
Photon(TM) laser system.
The Photon(TM) laser cataract probe is also protected under a United
States patent issued to the Company 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 Analyzer(TM) was 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
intraocular 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 Dicon(TM) Perimeter and the Dicon(TM) 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.
The Company's trademarks are important to its business. It is its
policy to pursue trademark registrations for its trademarks associated with its
products as appropriate. Also, the Company relies on common law trademark rights
to protect its unregistered trademarks, although common law trademark rights do
not provide the Company 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.
The Company also relies on trade secret law to protect some aspects of
its intellectual property. All of its key employees, consultants and advisors
are required to enter into a confidentiality agreement with us. Most of its
third-party manufacturers and formulators are also bound by confidentiality
agreements with the Company.
Regulation
The FDA under the Food, Drug and Cosmetics Act regulates the Company's
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 the Company to show reasonable assurance of safety and
15
effectiveness regarding its 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 the Company not be allowed to enter into
government contracts in order to avoid 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,
premarketing 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 premarketing 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.
There are two principal methods by which FDA approval may be obtained.
One method is to seek FDA approval through a premarketing 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) premarketing clearance for the device by filing a Section
510(k) premarketing 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 premarketing clearance for the device. There can be
no assurance that the Company will obtain Section 510(k) premarketing clearance
for any of the future devices for which the Company seeks such clearance
including the Photon(TM) 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 premarketing 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
the Company's market introduction of its products and could have a material
adverse effect on its business, operating results and financial condition.
The alternate method to seek approval is to obtain premarketing
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 premarketing approval for the proposed device. A premarketing
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
premarketing 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 premarketing approval procedure is more complex and time
consuming.
16
Upon receipt of the premarketing 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 premarketing
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 premarketing application. While the FDA has
responded to premarketing approval applications within the allotted time period,
premarketing approval reviews generally take approximately 12 to 18 months or
more from the date of filing to approval. The premarketing approval process is
lengthy and expensive, and there can be no assurance that such approval will be
obtained for any of the Company's products determined to be subject to such
requirements. A number of devices for which other companies have sought
premarketing approval have never been approved for marketing.
Any products manufactured or distributed by the Company 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 the Company's 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 the Company's products may be regulated by
various state agencies. All lasers manufactured for the Company 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 the Company believes that it currently complies 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 the Company. In addition to the
foregoing, the Company is 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 the Company 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 the Company's
ability to conduct business.
The Company and the manufacturers of its 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,
the Company cannot predict the content of any federal health care program, if
any is passed by Congress, or its effect on the Company and its 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 its 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 the Company's business could result in volatility of the market price
of its common stock.
Furthermore, the introduction of the Company's products in foreign
countries may require it to obtain foreign regulatory clearances. The Company
believes 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 premarketing
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. The Company's two ultrasound systems, the Photon(TM) laser
cataract system it is 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 Company's effectiveness in
obtaining the necessary approvals. Having an approved Investigational Device
Exemption allows the Company to export a product to qualified investigational
sites.
17
Regulatory Status of Products
All of the Company's products, with the exception of the Photon(TM),
are approved for sale in the U.S. by the FDA under a 510(k). All of its products
have been accepted for import into CE countries and various non-CE countries.
The Company acquired permission from the FDA to export the Photon(TM)
Laser Cataract System outside the United States under an open Investigational
Device Exemption granted by the FDA in September 1994. Although the Photon(TM)
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
the Company 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 the Company's belief that the surgical
treatment method used with the Photon(TM) laser is similar to the current
ultrasound cataract treatment employed by ophthalmologists.
The Company submitted a Premarket Notification 510(k) application to
the FDA for the Photon(TM) laser cataract system in September 1993. The FDA
requested clinical support data for claims made in the 510(k), and in October
1994 the Company 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 Photon(TM) laser cataract system. The FDA granted
this Investigational Device Exemption in May 1995 for a Phase I Feasibility
Study. The Company began human clinical trials in April 1996 and completed the
Phase I study in November 1997. The Company started Phase II trials in September
1998 and completed numerous cases of treatment group and control group patients,
which were included in its submission to the FDA.
The Company 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 its Photon(TM) Laser Cataract System. The warning letter concerned
the conditions found by the FDA during several audits at its clinical sites. The
FDA's comments were isolated to the administrative procedures of compiling data
from the clinical sites. The Company responded to the warning letter in a
submission dated September 27, 2000. In the submission the Company 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 the Company correct certain deficiencies. After providing
several additional submissions to the FDA, the Company 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, the Company received approval to
continue its clinical trials, the results of which were included in its
supplemental submission to the FDA in October 2001 for the existing (510)(k)
predicate device application for the Photon(TM) laser system. In December 2001,
the Company received a preliminary review from the FDA regarding the
supplemental submission. As a result of that preliminary review, the Company
submitted additional clinical information to the FDA on February 6, 2002. The
application is receiving ongoing review by the FDA. On May 7, 2002, the Company
received a letter from the FDA requesting further clinical information. The
Company has generated additional clinical information in response to the letter
and is uncertain if the Company 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. Its diagnostic products are currently its major focus and the
Photon(TM) and other extensive research and development prospects have been put
on hold pending future evaluation until the Company's financial position
improves. Its focus is not on any specific diagnostic product or products, but
rather on its entire group of diagnostic products.
Employees
As of March 31, 2005, the Company had 27 full-time employees. This
number does not include its manufacturer's representatives who are independent
contractors rather than its employees. The Company also utilizes several
consultants and advisors. There can be no assurance that the Company will be
successful in recruiting or retaining key personnel. None of its employees are a
member of a labor union and the Company has never experienced any business
interruption as a result of any labor disputes.
In December 2001 the Company initiated the first phase of a corporate
downsizing program to reduce its operating expenses. The Company implemented the
second phase of its downsizing program in the second quarter of 2002, by closing
and transferring its manufacturing from its 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 its
employees has been reduced by 72% from 112 to 31 employees. The estimated cost
savings from the downsizing program will be in excess of $2,000,000 annually.
The costs of downsizing have included onetime expenses of approximately $43,000
for moving and travel. In addition, the Company incurred additional onetime
expenses of approximately $18,000 for housing accommodations for key employees
working in Salt Lake City. The Company realized a net cost savings from
downsizing of approximately $2,394,000 during the twelve months ended December
31, 2002.
18
Item 2. Description of Property
The Company's executive offices are currently located at 2355 South
1070 West, Salt Lake City, Utah. This facility consists of approximately 23,238
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, the
Company renegotiated a three-year lease with Eden Roc at a monthly rate of
$9,295 plus a $1,859 common area maintenance fee for the year 2003, with rate
increases to $9,574 for 2004 and to $9,861for 2005. Pursuant to the lease, the
Company pays all real estate and personal property taxes and the insurance costs
on the premises.
The Company believes that these facilities are adequate and satisfy its
needs for the foreseeable future.
Item 3. Legal Proceedings
An action was brought against the Company in March 2000 by George
Wiseman, a former employee, in the Third District Court of Salt Lake County,
State of Utah. The complaint alleged that the Company owed 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 its common stock) pursuant to Utah law. The action
is based upon an extension of a written employment agreement. The Company
disputed the amount allegedly owed and intends to vigorously defend against the
action.
An action was brought against the Company on September 11, 2000 by
PhotoMed International, Inc. and Daniel M. Eichenbaum, M.D. in the Third
District Court of Salt Lake County, State of Utah. The action involves an amount
of royalties that were allegedly due and owing to PhotoMed International, Inc.
and Dr. Eichenbaum under a license agreement dated July 7, 1993, with respect to
the sale of certain equipment, plus costs and attorneys' fees. Certain discovery
took place and the Company has paid royalties of $15,717, which the Company
believes brings all payments current as of the date of last payment on January
7, 2005. The Company has been working with PhotoMed 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. An 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. However, if the parties are
unable to agree on a method for calculating royalties, there is a risk that
PhotoMed and Dr. Eichenbaum might amend their complaint to request termination
of the license agreement and, if successful, the Company would lose its right to
manufacture and sell the Photon(TM) laser system.
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
indicated that it is a "Class Action Complaint for Violations of Federal
Securities Law and Plaintiffs Demand a Trial by Jury." The Company has retained
legal counsel to review 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
Financial Corporation.
More specifically, the complaint alleged that the Company falsely
stated in its Securities and Exchange Commission filings and press releases that
it had received authorization to use an insurance reimbursement CPT code from
the CPT Code Research and Development Division of the American Medical
Association for reimbursement to doctors 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). According to the
complaint, the CPT code was critical. Without a reimbursement code, physicians
would not purchase the Blood Flow Analyzer(TM) because they could not receive
compensation for performance of medical procedures using the medical device. The
complaint further contends that the Company never received the CPT code from the
American Medical Association at any time. Nevertheless, it is alleged that the
Company continued to misrepresent in its SEC filings and press releases that it
had received the CPT code. It is also alleged that the Company has never made a
full, corrective disclosure with respect to this alleged misstatement.
The complaint also alleged that on July 11, 2002, the Company issued a
press release falsely announcing that it had received a purchase order from
Valdespino Associates Enterprises and Westland Financial Corporation for 200
sets of its entire portfolio of products, with $70 million in systems to be
delivered over a two-year period, then another $35 million of orders to be
completed in the third year. The complaint further alleged that the Company had
never received a true purchase order for its products. As a result of these
alleged misstatements, the complaint contends that the price of the Company's
shares of common stock was artificially inflated during the period from April
25, 2001 through May 14, 2003, and the persons who purchased or retained the
Company's common shares during that period suffered substantial damages. The
complaint requests judgment for unspecified damages, together with interest and
attorney's fees.
19
The Company disputes having issued false and misleading statements
concerning the Blood Flow Analyzer(TM) and a purchase order from Westland
Financial Corporation and Valdespino Associates Enterprises. On April 25, 2001,
the Company issued a press release that stated it had received authorization to
use common procedure terminology or CPT code number 92120 for the Blood Flow
Analyzer(TM). This press release was based on a letter the Company received from
the CPT Editorial Research and Development Department of the American Medical
Association stating that CPT code number 92120 was the appropriate common
procedure terminology or CPT code number for doctors to use when reporting
certain procedures performed with the Blood Flow Analyzer(TM).
Currently, there is reimbursement by insurance payors to doctors using
the Blood Flow Analyzer(TM) in 22 states and partial reimbursement in four other
states. The amount of reimbursement to doctors using the Blood Flow Analyzer(TM)
generally ranges from $56.00 to $76.00 per patient, depending upon the insurance
payor. Insurance payors providing reimbursement for the Blood Flow Analyzer(TM)
have the discretion to increase or reduce the amount of reimbursement. The
Company is endeavoring to obtain reimbursement by insurance payors in other
states where there is currently no reimbursement being made. The Company
believes it has continued to correctly represent in its Securities and Exchange
Commission filings that the CPT Editorial Research and Development Department of
the American Medical Association has informed the Company that CPT code number
92120 is the appropriate code for doctors to use when reporting certain
procedures performed with the Blood Flow Analyzer(TM).
On July 11, 2002, the Company issued a press release that stated it
received a purchase order from Valdespino Associates Enterprises and Westland
Financial Corporation for 200 complete sets of the Company's entire product
portfolio of diagnostic and surgical equipment for Mexican ophthalmic
practitioners, to be followed by a second order of 100 sets of equipment. The
press release was based on a purchase order dated July 10, 2002 that the Company
entered into with Westland Financial Corporation for the sale of 200 complete
sets of the Company's surgical and diagnostic equipment to Mexican ophthalmic
practitioners. The press release also stated that the initial order was for $70
million of the Company's equipment to be filled over a two-year period followed
by the second order of $35 million in equipment to be completed in the third
year. The press release further stated that delivery would be made in traunches
of 25 complete sets of the Company's equipment, beginning in 30 days from the
date of the purchase order.
On September 13, 2002, the board of directors issued a press release
updating the status of its product sales to the Mexican ophthalmic
practitioners. In that press release the board stated that the Company had been
in discussions for the prior nine months with Westland Financial Corporation,
aimed at supplying its medical device products to the Mexican market. In the
past, the Company had a business relationship with Westland Financial. Upon
investigation, the board of directors had determined that the purchase order
referenced in the July 11, 2002 press release was not of such a nature as to be
enforceable for the purpose of sales or revenue recognition. In addition, the
Company had not sent any shipment of medical products to Mexican ophthalmic
practitioners nor received payment for those products pursuant to those
discussions. The September 13, 2002 press release also stated that discussions
were continuing with Westland Financial Corporation regarding sales and
marketing activities for the Company's medical device products in Mexico, but
the Company could not, at the time, predict or provide any assurance that any
transactions would result.
On June 2, 2003, a complaint was filed in the 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 July 11,
2003, a complaint was filed in the same United States District Court, captioned
Lidia Milian v. Paradigm Medical Industries, Inc., Thomas Motter, Mark Miehle
and John Hemmer, Case No. 2:03 CV00617PGC. Both complaints seek class action
status. These cases are substantially similar in nature to the Meyer case,
including the contention that as a result of allegedly false statements
regarding the Blood Flow Analyzer(TM) and the purchase order from Westland
Financial Corporation and Valdespino Associates Enterprises, the price of the
Company's common stock was artificially inflated and the persons who purchased
the Company's common shares during the class period suffered substantial
damages. In a press release dated July 11, 2003, captioned "Milberg Weiss
announces the filing of a class action suit against Paradigm Medical Industries,
Inc. on behalf of investors," the law firm of Milberg Weiss Bershad Hynen &
Levach LLP, which represented purchasers of the Company's securities in the
class action suit filed on July 11, 2003, stated that the Company alleged
misrepresentations caused the market price of the stock to be artificially
inflated during the class period. As a result, it is alleged that investors
suffered millions of dollars in damages from the Company's alleged
misstatements.
The cases requested judgment for unspecified damages, together with
interest and attorney's fees. These cases have now been consolidated with the
Meyer case into a single action, captioned In re: Paradigm Medical Industries
Securities Litigation, Case No. 03-CV-448TC. The law firm of Milberg Weiss
Bershad & Schulman LLP is representing purchasers of the Company's securities in
the consolidated class action. On June 28, 2004, a consolidated amended class
action complaint was filed on behalf of purchasers of the Company's securities.
The consolidated complaint is similar to the three class action complaints and
alleges that the Company made false representations regarding the CPT code for
the Blood Flow Analyzer(TM), but it includes additional allegations that the
Company failed to disclose in a timely manner that doctors were being denied
reimbursement for procedures performed with the Blood Flow Analyzer(TM). The
consolidated complaint also alleges that the Company made false statements
regarding the purchase order from Westland Financial Corporation and Valdespino
Associates Enterprises. The Company believes the consolidated complaint is
without merit and intends to vigorously defend and protect its interests in the
case.
20
The Company was issued a Directors and Officers Liability and Company
Reimbursement Policy by United States Fire Insurance Company for the period from
July 10, 2002 to July 10, 2003 that contains a $5,000,000 limit of liability,
which is excess of a $250,000 retention. The officers and directors named in the
consolidated cases have requested coverage under the policy. U.S. Fire is
currently investigating whether it may have a right to deny coverage for the
consolidated cases based upon policy terms, conditions and exclusions or to
rescind the policy based upon misrepresentations contained in its application
for insurance.
The Company has paid $30,000 to U.S. Fire toward satisfaction of the
$250,000 retention that is applicable to the consolidated cases. The Company has
advised U.S. Fire that it cannot pay the $250,000 retention due to its current
financial circumstances. As a consequence, on January 8, 2004, the Company
entered into a non-waiver agreement with U.S. Fire in which U.S. Fire agreed to
fund and advance the Company's retention obligation in consideration for which
the Company has agreed to reimburse U.S. Fire the sum of $5,000 a month, for a
period of six months, with the first of such payments due on February 15, 2004.
Thereafter, commencing on August 15, 2004, the Company is currently required to
reimburse U.S. Fire the sum of $10,000 per month until the entire amount of
$250,000 has been reimbursed to U.S. Fire. The Company has made payments to U.S.
Fire in the aggregate amount of $30,000 of which its last payment of $10,000 was
made on October 11, 2004. These payments were for the $5,000 monthly payments
due during the six month period from February 15 to July 15, 2004, leaving a
remaining retention obligation to U.S. Fire of $220,000.
In the event U.S. Fire determines that the Company or the former
officers and directors named in the consolidated cases are not entitled to
coverage under the policy, or that it is entitled to rescind the policy, or
should the Company be declared in default under the non-waiver agreement on
account of its failure to make the monthly payments owed to U.S. Fire for
funding the Company's retention obligation, then the Company agrees to pay U.S.
Fire, on demand, the full amount of all costs advanced by U.S. Fire, except for
those amounts that the Company may have reimbursed to U.S. Fire pursuant to the
monthly payments due under the non-waiver agreement. Moreover, if U.S. Fire
denies coverage for the consolidated cases under the policy, the Company would
owe its litigation counsel in the class action lawsuits, for any legal fees not
paid by U.S. Fire. However, U.S. Fire has currently agreed to pay the legal fees
relating to the class action lawsuits.
The Company will be in default under the non-waiver agreement if it
fails to make any payment due to U.S. Fire thereunder when such payment is due,
or institute proceedings to be adjudicated as bankrupt or insolvent. U.S. Fire's
obligation to advance defense costs under the agreement will terminate in the
event that the $5,000,000 policy limit of liability is exhausted. If U.S. Fire
denies coverage for the consolidated cases under the policy and the Company is
not successful in defending and protecting its interests in the cases, resulting
in a judgment against the Company for substantial damages, the Company would not
be able to pay such liability and, as a result, would be forced to seek
bankruptcy protection.
On July 10, 2003, an action was filed in the United States District
Court, District of Utah, by Innovative Optics, Inc. and Barton Dietrich
Investments, L.P. Defendants include the Company, 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 the Company
on January 31, 2002, in which the Company agreed to purchase all the assets of
Innovative in consideration for the issuance of 1,310,000 shares of the
Company's common stock to Innovative. The complaint claims the Company breached
the asset purchase agreement. The complaint also claims that the Company
allegedly made false and misleading statements pertaining to the Blood Flow
Analyzer(TM) and concerning a purchase order from Valdespino Associates
Enterprises and Westland Financial Corporation. The purpose of these statements,
according to the complaint, was to induce Innovative to sell its assets and
purchase the shares of the Company's common stock at artificially inflated
prices while simultaneously deceiving Innovative and Barton into believing that
the Company's shares were worth more than they actually were. The complaint
contends that had Innovative and Barton known the truth they would not have sold
Innovative to the Company, would not have purchased the Company's stock for the
assets of Innovative, or would not have purchased the stock at the inflated
prices that were paid. The complaint further contends that as a result of the
allegedly false statements, Innovative and Barton suffered substantial damages
in an amount to be proven at trial.
The complaint also claims that 491,250 of the shares issued to
Innovative in the asset purchase transaction were not issued on a timely basis
and the Company 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 alleged that the value of the
shares of the Company's common stock issued to Innovative in the transaction
declined, and Innovative and Barton suffered damages in an amount to be proven
at trial. The Company filed an answer to the complaint and also filed
counterclaims against Innovative and Barton for breach of contract. The Company
believes the complaint is without merit and intends to vigorously defend and
protect its interests in the action. If the Company is not successful in
defending and protecting its interests in this action, resulting in a judgment
against the Company for substantial damages, and U.S. Fire denies coverage in
the litigation under the Directors and Officers Liability and Company
Reimbursement Policy, the Company would not be able to pay such liability and,
as a result, would be forced to seek bankruptcy protection.
21
On October 14, 2003, an action was filed in the Third Judicial District
Court, Salt Lake County, State of Utah, captioned Albert Kinzinger, Jr.,
individually and on behalf of all others similarly situated vs. Paradigm Medical
Industries, Inc., Thomas Motter, Mark Miehle, Randall A. Mackey, and John
Hemmer, Case No. 030922608. The complaint also indicates that it was a "Class
Action Complaint for Violations of Utah Securities Laws and Plaintiffs Demand a
Trial by Jury." The Company has retained legal counsel to review the complaint,
which appears to be focused on alleged false or misleading statements pertaining
to the Blood Flow Analyzer(TM). More specifically, the complaint alleged that
the Company falsely stated in Securities and Exchange Commission filings and
press releases that it 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 the Blood Flow Analyzer(TM).
The purpose of these statements, according to the complaint, was to
induce investors to purchase shares of the Company's Series E preferred stock in
a private placement transaction at artificially inflated prices. The complaint
contends that as a result of these statements, the investors that purchased
shares of its Series E preferred stock in the private offering suffered
substantial damages to be proven at trial. The complaint also alleged that the
Company sold Series E preferred shares without registering the sale of such
shares or obtaining an exemption from registration. The complaint requests
rescission, compensatory damages and treble damages, including interest and
attorneys' fees. The Company filed an answer to the complaint. The Company
believes the complaint is without merit and intends to vigorously defend its
interests in the action. If the Company is not successful in defending and
protecting its interests in the action, resulting in a judgment against it for
substantial damages, and U.S. Fire denies coverage in the litigation under the
Directors and Officers Liability and Company Reimbursement Policy, the Company
would not be able to pay such liability and, as a result, would be forced to
seek bankruptcy protection.
On January 26, 2005, the Company completed a written settlement
agreement to settle the lawsuit that Innovative Optics, Inc. and Barton Dietrich
Investments, L.P. brought against the Company and its former executive officers.
Under the terms of the settlement, U.S. Fire agreed to pay Innovative Optics,
Inc. and Barton Dietrich Investments, L.P. the sum of $367,500 in cash. Payment
of this amount is contingent, however, upon the courts in the federal and state
class action lawsuits granting final approval of the settlements reached in
those respective actions, and such orders becoming final and not appealable.
On February 23, 2005, the Company executed written settlement
agreements to settle the federal and state court class action lawsuits that were
filed against the Company and its former executive officers. Under the terms of
settlement of the federal court class action lawsuit, U.S. Fire agreed to pay
the sum of $1,507,500 in cash to the class members that purchased the Company's
securities during the period between April 17, 2002 and November 4, 2002. Under
the terms of settlement of the state court class action lawsuit, U.S. Fire
agreed to pay the sum of $625,000 in cash to the class members that purchased
shares of Series E Convertible preferred stock on or about July 11, 2001.
As a condition to the settlement agreements to settle the federal and
state court class action lawsuits, the courts in such lawsuits must have entered
orders granting final approval of the settlements reached in those respective
actions, and such orders must have become final and not appealable. On March 3,
2005, the federal court entered an order granting preliminary approval of the
settlement in the federal court class action lawsuit and providing for notice to
be sent to potential class members. On April 18, 2005, a hearing was held in the
state court and the court entered a minute entry granting preliminary approval
of the settlement in the state court class action lawsuit.
As a further condition to the settlement agreements to settle the
federal and state court class action lawsuits, both settlement agreements
provided that U.S. Fire must not have exercised its option to terminate the
settlement agreements. U.S. Fire has the option to terminate the settlement
agreements if the cumulative dollar value of the claims held by individuals or
entities that "opt out" of the federal and state class action lawsuits exceeds
$250,000. If such "opt outs" exceed $250,000, however, plaintiffs in the federal
and state court class action lawsuits will have five days to cure by reducing
the amount of "opt outs" to less than $250,000.
If U.S. Fire exercises its option to terminate the settlement
agreements, then all parties to the settlement agreements will be restored to
their respective positions in the various actions as of the date of the
settlement agreements. In addition, the terms and provisions of the settlement
agreements will have no further force and effect on the various parties and will
be deemed null and void in their entirety.
Under the terms of the settlement agreements regarding the federal and
state court class action lawsuits and the lawsuit that Innovative Optics, Inc.
and Barton Dietrich Investors, L.P. brought against the Company and its former
executive officers, U.S. Fire has agreed to pay a total of $2,500,000 in cash to
the classes in the class action lawsuits and to Innovative Optics, Inc. and
Barton Dietrich Investments, L.P. in settlement of these lawsuits. Under the
terms of settlement, Paradigm Medical is to pay U.S. Fire the sum of $220,000
representing the remaining amount owing under the $250,000 retention obligation
in the insurance policy, and to execute a policy release in favor of U.S. Fire
as to coverage under the insurance policy.
22
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 three copy machines that were
delivered to the Company's 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. The Company disputes the amounts allegedly owed, asserting that two
of the machines were returned to the leasing company because they did not work
properly. A responsive pleading has been filed. The Company was engaged in
settlement discussions with CitiCorp until counsel for CitiCorp withdrew from
the case. New counsel for CitiCorp has been appointed and it is anticipated that
settlement discussions will resume.
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 alleged that the Company 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. On August 28, 2003,
the Company agreed to a settlement of the case with Franklin Funding by agreeing
to make 24 monthly payments of $2,300 to Franklin Funding, with the first
monthly payment due on August 29, 2003. As of March 31, 2005, the Company has
made 19 monthly payments of $2,300 each to Franklin Funding.
The Company received demand letters dated July 18, 2003, September 26,
2003 and November 10, 2003 from counsel for Douglas A. MacLeod, M.D., a
shareholder of the company. In the July 18, 2003 letter, Dr. MacLeod demanded
that he and certain entities with which he is involved or controls, namely the
Douglas A. MacLeod, M.D. Profit Sharing Trust, St. Marks' Eye Institute and
Milan Holdings, Ltd., be issued a total of 2,296,667 shares of the Company's
common stock and warrants to purchase 1,192,500 shares of its common stock at an
exercise price of $.25 per share. Dr. MacLeod claims that these common shares
and warrants are owing to him and the related entities under the terms of a
mutual release dated January 16, 2003, which he and the related entities entered
into with the Company. Dr. MacLeod renewed his request for these additional
common shares and warrants in the September 26, 2003 and November 10, 2003
demand letters. The Company believes that Dr. MacLeod's claims and assertions
are without merit and that neither he nor the related entities are entitled to
any additional shares of its common stock or any additional warrants under the
terms of the mutual release. The Company intends to vigorously defend against
any legal action that Dr. MacLeod may bring.
On August 3, 2003, a complaint was filed against the Company 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 the Company 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. On March 29, 2005, the Company agreed to a settlement with Ms. Powell
of her claims for unpaid business expenses, accrued vacation days, and unpaid
commissions by agreeing to pay her $13,000. The Company has not yet made payment
to Ms. Powell for the agreed upon settlement amount.
On September 10, 2003, an action was filed against the Company by Larry
Hicks in the Third Judicial District Court, Salt Lake County, State of Utah,
(Civil No. 030922220), for payments due under a consulting agreement with the
Company. The complaint claimed that monthly payments of $3,083 were due for the
months of October 2002 to October 2003 under a consulting agreement and, if the
agreement is terminated, for the sum of $110,000 minus whatever the Company had
paid Mr. Hicks prior to such termination, plus costs, attorney's fees and a wage
penalty pursuant to Utah law. The Company has filed an answer in which it denies
any liability to Mr. Hicks. Formal discovery in the matter has commenced. The
Company disputes the amount allegedly owed and intends to vigorously defend
against such action.
On November 7, 2003, a complaint was filed against the Company by Todd
Smith, a former employee, in the Third Judicial District Court, Salt Lake
County, State of Utah (Civil No. 030924951 CN). Defendants consist of the
Company and Randall Mackey, a director of the Company. The complaint alleges
that while an employee of the Company, Mr. Smith was granted stock options to
purchase 16,800 shares of common stock exercisable at $5.00 per share. Mr. Smith
claims unpaid wages in the amount of the fair market value of the stock options
he claims he was prevented from exercising, attorney's fees, and a continuing
wage penalty under Utah law. The Company believes the claims are without merit
and intends to vigorously defend against such action.
On May 25, 2004, an action was brought against the Company by Jeffrey
F. Poore, former President and Chief Executive Officer of the Company, in the
Third Judicial District Court of Salt Lake County, State of Utah (Civil No.
040910875). The complaint alleges that the Company unlawfully terminated the
written employment agreement between Mr. Poore and the Company. As a result, Mr.
Poore demanded judgment against the Company for $350,000, represented his annual
salary for the two remaining years under the employment agreement, for money
judgment based on the value of his benefits for the two remaining years under
the employment agreement, including profit sharing plans, 401(k) and cafeteria
plans, health, hospitalization, dental, disability and other insurance plans
canceled by the Company, and for money judgment equal to the value of the stock
options granted to him under the employment agreement. The Company disputes the
amounts allegedly owed in the complaint and believes that there was a sufficient
basis to terminate Mr. Poore's employment for cause under the terms of the
employment agreement. Accordingly, the Company intends to vigorously defend
against the action.
23
On August 9, 2004, a third party complaint was brought against the
Company by Wakefield Eye Center and Dr. Kenneth C. Westfield (collectively
"Westfield"). The original action was brought by American Express Business
Finance Corporation against Westfield on May 27, 2004 in the District Court,
Clark County, State of Nevada (Civil No. A486307, Dept. No. XXI) concerning the
financing of the purchase of a Blood Flow Analyzer(TM) involving Westfield Eye
Center. The transaction took place during the latter half of 2001. Westfield
took the position that if there is liability of Westfield to American Express
this liability is ultimately the Company's and the other third party defendants.
The amount being sought against Westfield by American Express in the original
action includes the sum of $29,765.83, together with interest and attorney's
fees. Westfield's alleged claims against the Company include fraud, breach of
contract, promissory estoppel, declaratory relief, negligence, negligent
supervision, damages for injuries resulting from actions of employee/contractor,
wilful and wanton misconduct, conspiracy, and breach of fiduciary duty as well
as costs and attorney's fees. Westfield also seeks punitive damages. The Company
has filed an answer to the third party complaint in which the Company denies
liability. Formal discovery in the matter involving the Company has commenced.
The case has been referred to arbitration. The Company intends to vigorously
defend the action.
On March 31, 2005, an action was filed against the Company by Joseph W.
Spadafora in the United States District Court, District of Utah (Civil No.
2:05CV00278 TS). The complaint alleged that Dr. Spadafora was a clinical
investigator in the study for the FDA involving the Company's Photon(TM) laser
system where he performed numerous surgeries using the Photon(TM). Dr. Spadafora
contends that in meetings with Company personnel he suggested ways in which the
handpiece on the Photon(TM) could be improved. Dr. Spadafora further contends
that on August 5, 1999, the Company filed a patent application for an improved
handpiece with the United States Patent and Trademark Office but he was not
named as one of the inventors or a coinventor on the patent application.
On September 24, 2004, the Company was issued a patent entitled, "Laser
Surgical Handpiece with Photon Trap." Because the Company did not list Dr.
Spadafora as one of the inventors or a coinventor on the patent, Dr. Spadafora
requested in his complaint that a court order be entered declaring that he is
the inventor or coinventor of the patent and, as a result, is entitled to all or
part of the royalties and profits that the Company earned or will earn from the
sale of any product incorporating or using the improved handpiece, plus interest
and attorney's fees. The Company disputes the claims made by Dr. Spadafora and
intends to vigorously defend against such action.
The Company is 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 its
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders during
the quarter ended December 31, 2004.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's 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. The Company has created seven 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.
The Company's 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, its common stock and Class A warrants were listed on the
Nasdaq SmallCap Market. Since June 25, 2003, its common stock and Class A
warrants have traded on the OTC Bulletin Board. As of April 26, 2005, the
closing sale prices of the common stock and Class A warrants were $.07 per share
and $.01 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 from January 1, 2000 to June 25, 2003 and by the OTC Bulletin Board since
June 25, 2003.
24
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
Fourth Quarter ................................ .24 .15 .10 .02
2004
First Quarter ................................. .21 .15 .05 .02
Second Quarter................................. .16 .07 .05 .03
Third Quarter.................................. .12 .09 .03 .02
Fourth Quarter................................. .12 .08 .02 .02
2005
First Quarter ................................. .10 .08 .02 .01
Second Quarter (through April 26, 2005)........ .09 .07 .01 .01
The Company's 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 March 31, 2004, 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, one record holder 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.
The Company has never paid any cash dividends on its common stock and
does not anticipate paying any cash dividends on its common stock in the
foreseeable future. The Company must pay cash dividends to holders of its 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 its common stock. Dividends paid in
cash pursuant to outstanding shares of its Series A, Series B, Series C, Series
D, Series E, Series F and Series G preferred stock are only payable from its
surplus earnings, and are noncumulative and therefore, no deficiencies in
dividend payments from one year will be carried forward to the next.
The Company currently intends to retain future earnings, if any, to
fund the development and growth of its proposed business and operations. Any
payment of cash dividends in the future on the common stock will be dependent
upon its 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 its board of directors deems
relevant. The Company issued 6,764 shares of its Series A preferred and 6,017
shares of its 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.
Item 6. Management's Discussion and Analysis or Plan of Operation
This report contains forward-looking statements and information
relating to the Company that is based on beliefs of management as well as
assumptions made by, and information currently available to management. These
statements reflect its current view respecting future events and are subject to
risks, uncertainties and assumptions, including the risks and uncertainties
noted throughout the document. Although the Company has 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.
25
Critical Accounting Policies
Revenue Recognition. The Company recognizes revenue in compliance with
Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements (SAB
101), as revised by Staff Accounting Bulletin No. 104, Revenue Recognition (SAB
104). SAB 101 and SAB 104 detail four criteria that must exist before revenue is
recognized:
1. Persuasive evidence of an arrangement exists. Prior to shipment of
product, the Company required a signed purchase order and, depending upon the
customer, a down payment toward the final invoiced price or full payment in
advance with certain international product distributors.
2. Delivery and performance have occurred. Unless the purchase order
requires specific installation or customer acceptance, the Company recognizes
revenue when the product ships. If the purchase order requires specific
installation or customer acceptance, the Company recognizes revenue when such
installation or acceptance has occurred. Title to the product passes to its
customer upon shipment. This revenue recognition policy does not differ among
its various different product lines. The Company guarantees the functionality of
its product. If its product does not function as marketed when received by the
customer, the Company either makes the necessary repairs on site or has the
product shipped to the Company for the repair work. Once the product has been
repaired and retested for functionality, it is re- shipped to the customer. The
Company provides 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. The Company maintains a
reserve for estimated warranty costs based on its 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. The Company
does not accept customer orders, and therefore does not recognize revenue, until
the sales price is fixed.
4. Collectibility is reasonably assured. With limited exceptions, the
Company requires down payments on product prior to shipment. In some cases the
Company requires payment in full prior to shipment. The Company also performs
credit checks on new customers and ongoing credit checks on existing customers.
The Company maintains an allowance for doubtful accounts receivable based on
historical experience and management's current expectations.
Recoverability of Inventory. Since its inception, the Company has
purchased several complete lines of inventory. In some circumstances the Company
has been able to utilize certain items acquired and others remain unused. On a
quarterly basis, the Company attempts 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 not to be
recoverable and a reserve is established for that item. In addition, if the
Company identifies products that have become obsolete due to product upgrades or
enhancements, a reserve is established for such products. The Company intends 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.
Recoverability of Goodwill and Other Intangible Assets. The Company's
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,
the Company's determination of the fair value of the reporting unit has been
based on the estimated future cash flows of that reporting unit.
Allowance for Doubtful Accounts. The Company records an allowance for
doubtful accounts to offset estimated uncollectible accounts receivable. Bad
debt expense associated with the increases in the allowance for doubtful
accounts is recorded as part of general and administrative expense. The
Company's accounting policy generally is to record an allowance for receivables
over 90 days past due unless there is significant evidence to support that the
receivable is collectible.
General
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains forward-looking statements, which
involve risks and uncertainty. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors discussed in this section. The Company's fiscal year
is from January 1 through December 31.
The Company is engaged in the design, development, manufacture and sale
of high technology diagnostic and surgical eye care products. Given the "going
26
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. As seen in the results for the twelve months ended
December 31, 2004, 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 the Company's financial position
improves. The Company does not focus on a specific diagnostic product or
products but, instead, on this entire diagnostic product group.
During the year ended December 31, 2004, the Company recorded a
reduction in the warranty accrual of approximately $308,000. This reduction was
a result of a comprehensive analysis by management regarding historical warranty
costs. Historically, the Company has recorded a monthly warranty expense and
related increase to the warranty accrual. However, in recent periods the usage
of the warranty accrual has continued to decline. After reviewing the recent
historical data, management determined that the warranty accrual should be
reduced by approximately $308,000. Management will continue to closely monitor
the warranty accrual usage to ensure that the proper amount has been accrued.
During the twelve months ended December 31, 2003, management made
certain adjustments to the financial statements, including a decrease in the
reserve for obsolete or estimated non-recoverable inventory of $484,000,
consisting of an increase in the reserve of $403,000, offset by a decrease of
$887,000 due to the sale of the SIStem(TM) and the Odyssey(TM) product lines,
which were fully reserved. The Company also recorded a net increase in the
allowance for doubtful accounts receivable of $123,000, impairment of
intangibles of $150,000, and increases in accruals to settle outstanding
disputes in the amount of $443,000.
The Company's ultrasound diagnostic products include a P55 pachymetric
analyzer, a P37 Ultrasound A/B Scan, a P40 Ultrasound BioMicroscope and a P45
Plus UBM Ultrasound BioMicroscope, the technology for which was acquired from
Humphrey Systems in 1998. The Company introduced the P45 Plus in the fall of
2000, which combines the A/B Scan, and the biomicroscope into one instrument. In
addition, the Company markets its Blood Flow Analyzer(TM) acquired in the
purchase of Ocular Blood Flow Ltd. in June 2000. Other diagnostic products are
the Dicon(TM) LD400 Auto Perimeter and the Dicon (TM) CT200e Corneal
Topographer, which were acquired in the acquisition of Vismed d/b/a Dicon in
June 2000. The Company purchased the inventory, design and production rights of
the SIStem(TM) , the Odyssey and the Surgetrol from Mentor Corporation in
October 1999, which was designed to perform minimally invasive cataract surgery.
In November 1999, the Company entered into a Mutual Release and Settlement
Agreement with the manufacturer of the Precisionist ThirtyThousand(TM), in which
the Company purchased the raw materials and finished goods inventory to bring
the manufacturing of this product in-house. During the fourth quarter of 2003,
the Company sold all inventory and rights associated with the SIStem(TM) and
Odyssey(TM) for $125,000. This transaction resulted in sales of $125,000 with no
cost of sales because a reserve for obsolete inventory had been recorded on all
SIStem(TM) and Odyssey(TM) inventory.
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 fiscal year ended December 31, 2004, diagnostic
products are currently the Company's 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. Due to the lack
of current evidence to support recoverability, the Company has recorded an
inventory reserve to offset the inventory associated with the Precisionist
Thirty Thousand(TM) and the Photon(TM) as well as certain other inventory items
that are estimated to be non-recoverable due to the lack of significant turnover
of such items in recent periods.
The Company has shown improvement in its manufacturing efficiencies, as
well as the timeliness and the quality of the Company's services to its
customers. For example, a great deal of the improvement is attributable to
reforms in operations, which enabled dramatically improved availability of
product and decreased lead times. Additional reorganization of services enabled
substantially reduced wait times and reserve requirements. Specifically, during
2004, the Company was able to record an increase in income of approximately
$300,000 from a reduction in warranty reserves. This reduction was a result of a
comprehensive analysis by management regarding historical warranty costs.
Historically, the Company has recorded a monthly warranty expense and related
increase to the warranty accrual; however, in recent periods the usage of the
warranty accrual has continued to decline. After reviewing the recent historical
data, the Company determined that the warranty accrual should be reduced by
approximately $300,000. The Company will continue to closely monitor the
warranty accrual usage to ensure that the proper amount has been accrued.
27
Activities for the twelve months ended December 31, 2004 and 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, Jeffrey F. Poore. Mr. Poore was subsequently replaced by John Y. Yoon
as President and Chief Executive Officer on March 18, 2004. 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. Mr. Hill resigned
as vice president of finance and chief financial officer on December 5, 2003.
On March 18, 2004, the Company named a new President and Chief
Executive Officer, John Y. Yoon. On March 23, 2004, the Company named as new
Vice President of Operations and Chief Operating Officer, Aziz A. Mohabbat.
On May 7, 2002, the Company received a letter from the FDA requesting
further clinical information regarding the Photon(TM). The Company is in the
process of generating the additional clinical information in response to the
letter. The Company cannot market or sell the Photon(TM) in the United States
until FDA approval is granted. On November 4, 2002, the Company 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, the
Company is continuing its efforts to educate the payors of Medicare claims
throughout the country 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. These efforts should lead to a more positive
effect on sales.
In April 2001, the Company 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
its Blood Flow Analyzer(TM), for reimbursement purposes for doctors using the
device. However, certain insurance payors have elected not to reimburse doctors
using the Blood Flow Analyzer(TM). The Company believes 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 insurance payors were presented
with reimbursement requests under this code, and the Company believes these
reasons were the basis for the initiation of nonpayment.
The impact of this nonpayment by certain payors on the Company's future
operations is a lower volume of sales, particularly in those states where
reimbursement is not yet approved or is delayed. Currently, there is
reimbursement by insurance payors in 22 states and partial reimbursement in four
other states. As insurance payors have the prerogative whether to provide
reimbursement to doctors using the Blood Flow Analyzer(TM), the Company is
continuing to work with insurance payors in states where there is no
reimbursement to doctors using the CPT code to demonstrate the value of the
instrument. However, some insurance payors are currently not providing
reimbursement to doctors where a regional or state administrator of Medicare has
elected not to provide Medicare coverage for the Blood Flow Analyzer(TM). The
Company is continuing to work with the regional and state administrators of
Medicare who have denied Medicare coverage for the Blood Flow Analyzer(TM) to
demonstrate the value of the instrument.
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
the Company's international sales. The U.S. recessionary economic trend has
impacted its domestic sales. Additionally, the Company restructured its sales
organization and sales channels by decreasing its direct sales force who are
full-time employees from 10 direct sales employees on January 1, 2003, to five
direct sales employees on December 31, 2004. The dependent sales force was
reduced because the Company does not have sufficient revenues to justify the
larger direct sales force. One of the challenges for fiscal 2005 will be the
judicious reconstruction of the sales force in anticipation of increased sales.
The Company intends to increase its efforts to sell its diagnostic
products through independent sales representatives and ophthalmic equipment
distributors, which are paid commissions only for their sales. As of December
31, 2004, the Company had two independent sales representatives and two
ophthalmic equipment distributors in the United States and 26 ophthalmic and
medical product distributors outside the United States. The Company hopes to
benefit from these recently hired sales representatives and distributors in the
United States as they gain familiarity, through training, of the Company's
diagnostic products. Due to concerns over the budget and the effectiveness of
trade shows, the Company exhibited at only two trade shows during 2004. The
Company monitors trade show attendance to determine the extent to which it will
exhibit at future trade shows.
28
On September 19, 2002, the Company completed a transaction with
International Bio-Immune Systems, Inc., a privately held biotechnology based,
cancer diagnostic and immunotherapy company, in which the Company acquired
2,663,254 of its shares, or 19.9% of its outstanding shares, and warrants to
purchase 1,200,000 shares of common stock of International Bio-Immune Systems at
$2.50 per share for a period of two years, through the exchange and issuance of
736,945 shares of the Company's common stock, the lending of 300,000 shares of
the Company's common stock to the company, and the payment of certain of its
expenses through the issuance of an aggregate of 94,000 shares of common stock
to International Bio-Immune Systems and its counsel. On August 3, 2004, the
Company sold its investment in International Bio-Immune Systems for net proceeds
of $505,000 pursuant to a stock purchase and sale agreement with William Ungar,
a current director and shareholder of International Bio-Immune Systems. The
securities sold to Mr. Ungar consisted of 2,663,254 common shares of
International Bio-Immune Systems and warrants to purchase 1,200,000 common
shares of International Bio-Immune Systems at $2.50 per share. Because, for book
purposes, the Company's investment in International Bio-Immune Systems had been
reduced to $0, the full amount of the $505,000 received from the sale of the
International Bio-Immune Systems common shares and warrants was reported as a
gain in 2004.
Results of Operations
Fiscal Year Ended December 31, 2004 Compared to Fiscal Year Ended
December 31, 2003
Net sales increased by $3,000, or 0.1%, to $3,062,000 for the twelve
months ended December 31, 2004, from $3,059,000 for the comparable period in
2003. Sales of the Company's diagnostic products and related accessories
increased by $296,000, or 19%, to $2,780,000, or 91% of revenues, during the
twelve months ended December 31, 2004 compared with $2,484,000, or 81% of total
revenues, for the comparable period of 2003.
In 2004, sales of the Company's P40 and P45 UBM Ultrasound
Biomicroscopes and related accessories were $855,000, or 28% of total revenues,
compared to $615,000, or 20% of total revenues, in the same period of 2003.
Sales from the Blood Flow Analyzer(TM) and related accessories increased by
$175,000 to $674,000, or 22% of total revenues, during the year ended December
31, 2004 compared with $499,000, or 13% of total revenues, in the same period of
2003.
During 2004, sales from P37 A/B Scan Ocular Ultrasound Diagnostic
increased to $257,000, or 8% of total revenue, slightly up from the $133,000, or
4% of total revenues, in the same period last year. Sales of the LD 400 and TKS
5000 Autoperimeters and the CT 200 Corneal Topographer and related accessories
were slightly lower, with total revenue of $1,022,000, or 33% of total revenues,
in 2004 compared with $1,100,000, or 36% of total revenues, during the same
period of 2003.
Sales of surgical products are at a standstill pending FDA approval of
the Photon(TM) laser system. In the twelve month period ended December 31 2004,
the Company realized a loss of $3,000 in the surgical line consisting of the
Precissionist Thirty Thousand (TM) and the Photon(TM) laser system. This
compared to $94,000 in sales for the comparable period of 2003, which was mainly
from the sale of the SIStem(TM) and Odyssey(TM) product lines.
There were a number of material reasons that contributed to flat sales
during the twelve months ended December 31, 2004, compared to the period of
2003. Along with generally weak economic conditions in the United States, the
Company initiated aggressive cost cutting efforts and was able to successfully
reduce operating expenses. One of the negative consequences of such aggressive
cost cutting was a slow down in the upgrade programs for the Company's product
lines. The Company's objective is to focus its sales efforts on the products
with the highest potential for sales and strong margins.
During 2004, the Company hired three sales representatives and replaced
one bringing the total to four domestic and one international sales
representative and one independent representative. International sales were
impacted by weakness in the economies of the large industrial countries and by
the residual impact of the situation in the Middle East, which had a negative
impact on sales to the Middle East, Pakistan, India and other countries in that
region.
Gross profit for the twelve months ended December 31, 2004 increased to
60% of total revenues, compared to 32% of total revenues for the same period in
2003. The increase was mainly due to an increase in the inventory reserve of
$403,000 in the twelve months ending December 31, 2003. The $403,000 increase in
29
inventory reserve in 2003 resulted in an increase to cost of sales. There was no
increase or decrease to cost of sales as a result of a change to the reserve for
obsolete inventory in 2004. The other major contributing factor to the improved
margins was greater operational efficiencies and more timely production planning
and scheduling.
On a quarterly basis, the Company attempts 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 not to be
recoverable and a reserve is established for that item. In addition, if the
Company identifies products that have become obsolete due to product upgrades or
enhancements, a reserve is established for such products. Such analysis resulted
in a material increase in the reserve for obsolete or estimated non-recoverable
inventory in 2003. There can be no assurance that the Company will not identify
further obsolete inventory due to significant declines in sales of certain
products or technological advances of products in the future. The Company
intends to make efforts to sell many of 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. The Company does
not expect the sales of these items to be significant in the future.
During 2003, the Company sold all inventory, rights, and technology
related to the SIStem(TM) and Odyssey(TM) product lines for $125,000. All of the
inventory sold in this transaction had previously been fully reserved.
Therefore, upon the sale, the Company reduced inventory by $887,000 for the
original book value of the inventory, reduced the reserve for $887,000, and
recorded revenue for the cash received of $125,000.
Marketing and selling expenses decreased by $119,000, or 13%, to
$801,000 for the twelve months ended December 31, 2004, from $920,000 for the
comparable period in 2003. This reduction was due primarily to more effective
use of marketing programs. During this period three additional full-time
salespersons were added, a print advertising campaign initiated, and plans were
made to support a major trade show in the fourth quarter of 2004. At the same
time, the use of consultant services declined considerably enabling an overall
savings.
General and administrative expenses decreased by $1,572,000, or 64%, to
$874,000 for the twelve months ended December 31, 2004, from $2,446,000 for the
same period in 2003. The favorable reduction in general and administrative
expense in 2004 also reflected the ongoing results of the Company's new budget
management and cost reduction programs. In addition, during the period ended
December 31, 2004, the Company recorded a reduction in the warranty accrual of
approximately $308,000. This reduction was a result of a comprehensive analysis
by management regarding historical warranty costs. Historically, the Company has
recorded a monthly warranty expense and related increase to the warranty
accrual. However, in recent periods the usage of the warranty accrual has
continued to decline. After reviewing the recent historical data, management
determined that the warranty accrual should be reduced by approximately
$308,000. Management will continue to closely monitor the warranty accrual usage
to ensure that the proper amount has been accrued. The general and
administrative expenses during the twelve months ended December 30, 2003 also
included $443,000 in accruals to settle outstanding disputes.
In addition, during 2004 the Company collected approximately $87,000 in
receivables that were previously allowed in the allowance for doubtful accounts.
During 2003, the Company increased the allowance for doubtful accounts by
$123,000. General and administrative expense for the twelve months ended
December 31, 2003 also included $259,000 for 1,562,000 shares of common stock
issued to settle potential litigation. The Company issued 1,262,000 common
shares to six investors due to a dispute arising from a private offering that
was completed on January 22, 2003. The Company agreed to issue the shares to the
investors in the offering at $.25 per share rather than $.50 per share, the
original offering price (or an additional 1,262,000 shares) to resolve a dispute
with the investors concerning certain statements made by a former officer in
connection with the sale of said shares. The additional 300,000 shares were
issued to settle an outstanding dispute with a consultant regarding services
performed by such consultant.
Research and development expenses decreased by $265,000, or 26%, to
$768,000 for the twelve months ended December 31, 2004, from $1,033,000 for the
same period in 2003. Expenses associated with the development of new products
during 2004 decreased compared to 2003, as a result of the Company's efforts to
reduce costs and focus on products that are fully developed with the highest
potential for sales and high margins.
30
There was no impairment of assets for the twelve months ended December
31, 2004, compared to $150,000 in 2003. The impairment expense for 2003 was due
to a reduction in the value of certain intangible assets based on their then
current estimated fair value.
Due to our ongoing cash flow difficulties, most of the Company's
vendors and suppliers were contacted during 2003 and 2004 with attempts to
negotiate reduced payments and settlement of outstanding accounts payable. While
some vendors refused to negotiate and demanded payment in full, some vendors
were willing to settle for a reduced amount. The accounts payable forgiven by
vendors and suppliers resulted in a gain of $206,000 and $436,000 during the
years ended December 31, 2004 and 2003, respectively.
Other income mainly consisted of a gain recorded from the sale of the
Company's investment in International Bio- Immune Systems, Inc. In July 2004,
the Company sold its investment in International Bio-Immune Systems, Inc. for
net proceeds of $505,000 cash. Because, for book purposes, the Company's
investment in International Bio-Immune Systems had previously been reduced to
$0, the full amount of $505,000 was recorded as a gain in 2004.
Liquidity and Capital Resources
The Company used $477,000 cash in operating activities for the twelve
months ended December 31, 2004, compared to $707,000 for the twelve months ended
December 31, 2003. The reduction in cash used by operating activities for the
twelve months ended December 31, 2004 was primarily attributable to a
significant reduction in net loss and decreases in accounts receivable and
inventory, partially offset by a decrease in accrued liabilities. The Company's
efforts to substantially reduce costs and manage current assets and current
liabilities continued to minimize cash used for operating activities. Net cash
used in financing activities was $56,000 for the twelve months ended December
31, 2004, versus cash provided of $647,000 in the same period in 2003. During
the twelve months ended December 31, 2004, the Company did not sell any shares
of common or preferred stock. In the past, the Company has relied heavily upon
sales of the Company's common and preferred stock to fund operations. There can
be no assurance that such equity funding will be available on terms acceptable
to the Company in the future.
The Company will continue to seek funding to meet its working capital
requirements through collaborative arrangements and strategic alliances,
additional public offerings and private placements of the Company's securities;
and bank borrowings. In July 2004, the Company sold its investment in
International Bio-Immune Systems, Inc. for net proceeds of $505,000 in cash. The
Company is uncertain whether or not the combination of the cash received from
the sale of International Bio-Immune Systems, Inc. stock and the benefits from
sales of its products will be sufficient to assure its operations through
December 31, 2005. The Company will continue to seek funding through the sale of
common and preferred stock.
As of December 31, 2004, the Company had net operating loss
carryforwards (NOLs) of approximately $48 million. These loss carryforwards are
available to offset future taxable income, if any, and have begun to expire in
2001 and extend for twenty years. The Company's ability to use net operating
loss carryforwards (NOLs) 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 NOLs 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 change of ownership.
As of December 31, 2004, the Company had accounts payable of $752,000,
a significant portion of which was over 90 days past due. The Company has
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, including but not limited to
judgments rendered against the Company in a court of law, a group of creditors
could force the Company into bankruptcy due to its inability to pay the
liabilities arising out of such judgments at that time. In addition to the
accounts payable noted above, the Company also has non- cancelable capital lease
obligations and operating lease obligations that require the payment of
approximately $194,000 in 2005, and $14,000 in 2006.
31
The Company has taken numerous steps to reduce costs and increase
operating efficiencies. These steps consist of the following:
1. The Company closed its San Diego facility. In so doing, numerous
manufacturing, accounting and management responsibilities were consolidated. In
addition, such closure resulted in significant headcount reductions as well as
savings in rent and other overhead costs.
2. The Company has significantly reduced the use of consultants, which
has resulted in a large decrease to these expenses.
3. The Company has reduced its direct sales force to five
representatives, which has resulted in less payroll, travel and other selling
expenses.
Because the Company has significantly fewer sales representatives, its
ability to generate sales has been reduced.
The Company has 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 14% of total outstanding receivables as of
December 31, 2004 and 40% as of December 31, 2003. The allowance for doubtful
accounts has decreased from $470,000 at December 31, 2003 to $101,000 at
December 31, 2004. The decrease in the allowance for doubtful accounts was the
result of the collection of approximately $87,000 of receivables that was
previously allowed as part of the allowance for doubtful accounts and the write
off of $282,000 of receivables against the allowance. 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. The Company has addressed its credit procedures and
collection efforts and have instituted changes that require more payments at the
time of sale through letters of credit and not on a credit term basis.
The Company intends to continue its efforts to reduce the allowance for
doubtful accounts as a percentage of accounts receivable. The Company has
ongoing efforts to collect a significant portion of the sales price in advance
of the sale or in a timely manner after delivery. During the twelve months ended
December 31, 2004, the Company had a net recovery of receivables previously
allowed for of $87,000, and during the twelve months ended December 31, 2003,
the Company added a net of $123,000 to the allowance for doubtful accounts. The
Company believes that by requiring a large portion of payment prior to shipment,
it has greatly improved the collectibility of its receivables.
The Company carried an allowance for obsolete or estimated
non-recoverable inventory of $1,418,000 at December 31, 2004 and $1,642,000 at
December 31, 2003, or approximately 66% and 62% of total inventory,
respectively. This inventory reserve was decreased by $224,000 during the twelve
months ended December 31, 2004 due to direct write-off of inventory against the
reserve. Therefore, this decrease in the reserve did not impact costs of sales.
The Company's 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, the Company has acquired
substantial inventory, some of which the eventual use and recoverability was
uncertain. In addition, the Company has a significant amount of inventory
relating to the 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, the Company attempts 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 not to be
recoverable and a reserve is established for that item. In addition, if the
Company identifies products that have become obsolete due to product upgrades or
enhancements, a reserve is established for such products. The Company intends 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. During the fourth quarter
of 2003, the Company sold all inventory and rights associated with the Phaco
SIStem(TM) and Odyssey(TM) for $125,000. Because the full amount of inventory
related to the SIStem(TM) and Odyssey(TM) had been fully reserved, no cost of
sales were recorded in connection with this sale, thus resulting in gross profit
equal to the sales price of $125,000. The Company does not expect the sales of
these items, if any, to be significant in the future.
32
At this time, the Company's Photon(TM) Laser Ocular Surgery Workstation
requires regulatory FDA approval in order to be sold in the United States. Any
possible future efforts to complete the clinical trials on the Photon(TM) in
order to file for FDA approval would depend on the Company obtaining adequate
funding. The Company estimates that the funds needed to complete the clinical
trials in order to obtain the necessary regulatory approval on the Photon(TM) to
be approximately $225,000.
Effect of Inflation and Foreign Currency Exchange
The Company has not realized a reduction in the selling price of its
products as a result of domestic inflation. Nor has it 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 December 2003, the FASB issued Interpretation No. 46 ("FIN 46R")
(revised December 2003), Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 ("ARB 51"), which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity through means other than voting rights and, accordingly,
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (FIN
46), which was issued in January 2003. Before concluding that it is appropriate
to apply ARB 51 voting interest consolidation model to an entity, an enterprise
must first determine that the entity is not a variable interest entity (VIE). As
of the effective date of FIN 46R, an enterprise must evaluate its involvement
with all entities or legal structures created before February 1, 2003, to
determine whether consolidation requirements of FIN 46R apply to those entities.
There is no grandfathering of existing entities. Public companies must apply
either FIN 46 or FIN 46R immediately to entities created after January 31, 2003
and no later than the end of the first reporting period that ends after December
15, 2004. The adoption of FIN 46 had no effect on the Company's consolidated
financial position, results of operations or cash flows.
In November 2004, the FASB issued SFAS 151 "Inventory Costs--an
amendment of ARB No. 43." This statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "[u]nder
some circumstances, items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs may be so abnormal as to require treatment
as current period charges. . . ." This statement requires that those items be
recognized as current period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this statement shall be
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company does not believe adoption of SFAS 151 will have any impact
on the Company's consolidated financial statements.
In December 2004, FASB issued SFAS 153 "Exchanges of Nonmonetary
Assets--an amendment of APB Opinion No. 29." The guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that opinion, however, included certain
exceptions to that principle. This statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The Company does not believe adoption of SFAS 153 will have any
impact on the Company's consolidated financial statements.
In December 2004, the FASB issued FASB Statement No. 123 (revised
2004), "Share Based Payment." Statement 123(R) addresses the accounting for
share based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the grant date fair value of
33
stock options and other equity based compensation issued to employees in the
income statement. The revised statement generally requires that an entity
account for those transactions using the fair value based method, and eliminates
the intrinsic value method of accounting in APB Opinion No. 25, "Accounting for
Stock Issued to Employees", which was permitted under Statement 123, as
originally issued. The revised statement requires entities to disclose
information about the nature of the share based payment transactions and the
effects of those transactions on the financial statements.
Statement 123(R) is effective for public companies that do not file as
small business issuers as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. For public companies that file
as small business issuers, Statement 123(R) is effective as of the beginning of
the first interim or annual reporting period that begins after December 15, 2005
(i.e., first quarter 2006 for the Company). All public companies must use either
the modified prospective or the modified retrospective transition method. Early
adoption of this statement for interim or annual periods for which financial
statements or interim reports have not been issued is encouraged. The Company
believes that the adoption of this pronouncement may have a material impact on
the Company's financial statements.
Item 7. Financial Statements
PARADIGM MEDICAL INDUSTRIES, INC.
Financial Statements
December 31, 2004 and 2003
34
PARADIGM MEDICAL INDUSTRIES, INC.
Index to Financial Statements
--------------------------------------------------------------------------------
Page
----
Report of Chisholm, Bierwolf & Nilson F-2
Report of Tanner LC F-3
Balance Sheet F-4
Statements of Operations F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
--------------------------------------------------------------------------------
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Paradigm Medical Industries, Inc.
Salt Lake City, Utah
We have audited the accompanying balance sheet of Paradigm Medical Industries,
Inc. (the Company) as of December 31, 2004, and the related statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, audits of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Paradigm Medical Industries,
Inc. as of December 31, 2004, and the results of their operations and their cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has a working capital deficit and has suffered recurring
operating losses, which raises substantial doubt about its 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 these uncertainties.
Chisholm, Bierwolf & Nilson
Bountiful, Utah
April 8, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and stockholders of
Paradigm Medical Industries, Inc.
We have audited the statements of operations, stockholders' equity, and cash
flows of Paradigm Medical Industries, Inc. (the Company) for the year ended
December 31, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects the results of operations and cash flows of Paradigm
Medical Industries, Inc. for the year ended December 31, 2003, in conformity
with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2, the Company
has incurred significant losses, and has been unable to generate 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 LC
Salt Lake City, Utah
March 5, 2004
F-3
PARADIGM MEDICAL INDUSTRIES, INC.
Balance Sheet
December 31, 2004
--------------------------------------------------------------------------------
Assets
------
Current assets:
Cash $ 131,000
Receivables, net 657,000
Inventories, net 720,000
Prepaid and other assets 65,000
------------------
Total current assets 1,573,000
Intangibles, net 679,000
Property and equipment, net 109,000
------------------
Total assets $ 2,361,000
------------------
--------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 752,000
Accrued liabilities 858,000
Current portion of capital lease obligations 47,000
------------------
Total current liabilities 1,657,000
------------------
Capital lease obligations, net of current portion 14,000
------------------
Commitments and contingencies -
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized, 1,751,770 shares issued
and outstanding (aggregate liquidation
preference of $1,043,000) 2,000
Common stock, $.001 par value, 80,000,000
shares authorized, 25,627,764 shares issued
and outstanding 25,000
Additional paid-in capital 57,470,000
Accumulated deficit (56,807,000)
------------------
Total stockholders' equity 690,000
------------------
Total liabilities and stockholders' equity $ 2,361,000
------------------
--------------------------------------------------------------------------------
See accompanying notes to financial statements. F-4
PARADIGM MEDICAL INDUSTRIES, INC.
Statements of Operations
Years Ended December 31,
-------------------------------------------------------------------------------------------------
2004 2003
----------------------------------
Sales $ 3,062,000 $ 3,059,000
Cost of sales 1,217,000 2,086,000
-----------------------------------
Gross profit 1,845,000 973,000
-----------------------------------
Operating expenses:
General and administrative (874,000) (2,446,000)
Marketing and selling (801,000) (920,000)
Research and development (768,000) (1,033,000)
Impairment of assets - (150,000)
Gain on settlement of liabilities 206,000 436,000
-----------------------------------
Total operating expenses (2,237,000) (4,113,000)
-----------------------------------
Operating loss (392,000) (3,140,000)
-----------------------------------
Other income (expense):
Interest income - 3,000
Other expenses (27,000) -
Interest expense (22,000) (24,000)
Gain on sale of investment 505,000 -
-----------------------------------
Total other income (expense) 456,000 (21,000)
-----------------------------------
Income (loss) before provision for income taxes 64,000 (3,161,000)
Provision for income taxes - -
-----------------------------------
Net income (loss) $ 64,000 $ (3,161,000)
-----------------------------------
Beneficial conversion feature on Series G preferred stock - (217,000)
Series G preferred stock dividend due to registration rights (54,000) -
Deemed dividend from Series G preferred detachable
warrants - (53,000)
-----------------------------------
Net income (loss) applicable to common shareholders $ 10,000 $ (3,431,000)
-----------------------------------
Earnings (loss) per common share - basic $ - $ (0.14)
-----------------------------------
Earnings (loss) per common share - diluted $ - $ (0.14)
-----------------------------------
Weighted average common shares - basic 25,405,000 24,058,000
-----------------------------------
Weighted average common shares - diluted 27,669,000 24,058,000
-----------------------------------
-------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-5
PARADIGM MEDICAL INDUSTRIES, INC.
Statements of Stockholders' Equity
Years Ended December 31, 2004 and 2003
------------------------------------------------------------------------------------------------------------------------
Preferred Additional Stock
Stock Common Paid-In Subscription Accumulated
(See Note 8) Shares Amount Capital Receivable Deficit
--------------------------------------------------------------------------------
Balance at January 1, 2003 $ - 21,954,238 $ 22,000 $ 56,775,000 $ (294,000) $ (53,656,000)
Conversion of preferred stock - 115,998 - - - -
Issuance of common stock for:
Cash - 1,658,032 2,000 428,000 - -
Settlement of litigation - 1,562,000 1,000 258,000 - -
Commission on sale on sale of common
stock - 82,526 - - - -
Issuance of stock options and warrants
for Services - - - 35,000 - -
Issuance of Series G preferred stock
for:
Cash 2,000 - - 268,000 - -
Write off of subscription receivable - - - (294,000) 294,000 -
Net loss - - - - - (3,161,000)
--------------------------------------------------------------------------------
Balance at December 31, 2003 2,000 25,372,794 25,000 57,470,0000 - (56,817,000)
Conversion of preferred stock - 255,000 - - - -
Series G preferred stock dividend due
to registration rights - - - - - (54,000)
Net income - - - - - 64,000
--------------------------------------------------------------------------------
Balance at December 31, 2004 $ 2,000 25,627,764 $ 25,000 $ 57,470,000 $ - $ (56,807,000)
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-6
PARADIGM MEDICAL INDUSTRIES, INC.
Statements of Cash Flows
Years Ended December 31,
-----------------------------------------------------------------------------------------------------------
2004 2003
-----------------------------------
Cash flows from operating activities:
Net income (loss) $ 64,000 $ (3,161,000)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 137,000 319,000
Issuance of stock option/warrant for services - 35,000
Common stock issued for settlement of litigation - 259,000
Provision for losses on receivables (369,000) 123,000
Provision for losses on inventory (224,000) 403,000
Gain on sale of investment (505,000) -
Impairment of Intangibles and investments 150,000
(Gain) loss on settlement of liabilities (206,000) (436,000)
(Gain) loss on disposal of assets 13,000 -
(Increase) decrease in:
Receivables 420,000 113,000
Inventories 507,000 1,243,000
Prepaid and other assets 76,000 (44,000)
Increase (decrease) in:
Accounts payable 42,000 53,000
Accrued liabilities (432,000) 236,000
-----------------------------------
Net cash used in
operating activities (477,000) (707,000)
-----------------------------------
Cash flows from investing activities:
Purchase of property and equipment - (2,000)
Cash proceeds from sales of investment 532,000 -
-----------------------------------
Net cash provided by (used in)
investing activities 532,000 (2,000)
-----------------------------------
Cash flows from financing activities:
Proceeds from issuance of Series G preferred stock - 270,000
Principal payments on notes payable and long-term debt (56,000) (53,000)
Proceeds from exercise of common stock warrants and options - 430,000
-----------------------------------
Net cash (used in) provided by
financing activities (56,000) 647,000
-----------------------------------
Net change in cash (1,000) (62,000)
Cash, beginning of year 132,000 194,000
-----------------------------------
Cash, end of year $ 131,000 $ 132,000
-----------------------------------
-----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-7
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
December 31, 2004 and 2003
--------------------------------------------------------------------------------
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 blood flow
analyzer, a pachymeter, an A-Scan, an A/B Scan,
ultrasound biomicroscopes, a perimeter, and a corneal
topographer.
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.
Accounts Receivable
Accounts receivable are carried at original invoice
amount less an estimate made for doubtful receivables
based on a review of all outstanding amounts on a
monthly basis. Specific reserves are estimated by
management based on certain assumptions and variables,
including the customer's financial condition, age of the
customer's receivables, and changes in payment
histories. Trade receivables are written off when deemed
uncollectible. Recoveries of trade receivables
previously written off are recorded when received.
A trade receivable is considered to be past due if any
portion of the receivable balance has not been received
by the contractual pay date. Interest is not charge on
trade receivables that are past due.
Inventories
Inventories are stated at the lower of cost or market,
cost is determined using the weighted average method.
--------------------------------------------------------------------------------
F-8
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Property and Equipment
and Significant Property and equipment are recorded at cost, less
Accounting accumulated depreciation. Depreciation on property and
Policies equipment is determined using the straight-line method
Continued 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.
Intangible Assets
As of December 31, 2004, intangible assets consisted of
goodwill related to the purchase of Ocular Blood Flow,
Ltd., product rights, capitalized payments to
manufacturers for engineering and design services and
patent costs. The company performed an impairment test
on all intangible assets at December 31, 2004. As a
result it was not necessary to incur any impairment
expense of intangible assets.
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, capitalized engineering, and
patents were fully amortized as of December 31, 2004.
The Company reviews 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. The Company performs 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 and
estimates of sales proceeds. Where applicable, an
appropriate discount rate is used, based on the
Company's cost of capital rate or location-specific
economic factors.
--------------------------------------------------------------------------------
F-9
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 net
operating loss carryforwards, 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.
Stock options and warrants granted to non-employees for
services are accounted for in accordance with SFAS No.
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.
--------------------------------------------------------------------------------
F-10
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Stock - Based Compensation - Continued
and Significant 123, "Accounting for Stock-Based Compensation," to
Accounting stock-based employee compensation.
Policies
Continued
Years Ended December 31,
--------------------------------
2004 2003
--------------------------------
Net income (loss) applicable to common
shareholders- as reported $ 10,000 $ (3,431,000)
Deduct: total stock-based employee
compen-sation determined under fair value
based method for all awards, net of related (362,000) (595,000)
tax effects
--------------------------------
Net loss applicable to common shareholders -
pro forma $ (352,000) $ (4,026,000)
--------------------------------
Earnings per share:
Basic and diluted - as reported $ - $ (.14)
--------------------------------
Basic and diluted - pro forma $ (.01) $ (.17)
--------------------------------
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,
----------------------------------------
2004 2003
----------------------------------------
Expected dividend yield $ - $ -
Expected stock price
Volatility 112% - 173% 110%-117%
Risk-free interest rate 4% 4%
Expected life of options 2-7 years 2-7 years
The weighted average fair value of options granted
during 2004 and 2003 are $0.09 and $0.16, respectively.
Earnings Per Share
The computation of basic earnings per common share is
based on the weighted average number of shares
outstanding during each year.
--------------------------------------------------------------------------------
F-11
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Earnings Per Share- Continued
and The computation of diluted earnings per common share is
Significant based on the weighted average number of shares
Accounting outstanding during the year plus the common stock
Policies equivalents, which would arise from the conversion of
Continued preferred stock to common stock and 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
6,036,469 shares of common stock at prices ranging from
$0.16 to $12.98 per share were outstanding at December
31, 2003, but were not included in the diluted earnings
per share calculation for 2003 because the effect would
have been antidilutive.
The following table is a reconciliation of basic and
diluted weighted average shares for the years ended
December 31, 2004 and 2003.
Years Ended December 31,
--------------------------------
2004 2003
--------------------------------
Basic weighted average shares outstanding 25,405,000 24,058,000
Common stock equivalent-convertible
preferred stock 2,047,000 -
Diluted effect of stock options and warrants 217,000 -
--------------------------------
Diluted weighted average shares outstanding 27,669,000 24,058,000
--------------------------------
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).
--------------------------------------------------------------------------------
F-12
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Research and Development
and Costs incurred in connection with research and
Significant development activities are expensed as incurred. These
Accounting costs consist of direct and indirect costs associated
Policies with specific projects as well as fees paid to various
Continued entities that perform certain research on behalf of the
Company.
Concentration of Risk
The market for ophthalmic 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.
The Company's high technology product line requires the
Company to deal with suppliers and subcontractors
supplying highly specialized parts, operating highly
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 $1
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, 2004 and 2003, no
single customer represented more than 10 percent of
total net sales.
--------------------------------------------------------------------------------
F-13
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Concentration of Risk - Continued
and Significant Accounts receivable are due from medical distributors,
Accounting surgery centers, hospitals, optometrists and
Policies ophthalmologists located throughout the U.S. and a
Continued 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.
Warranty
The Company provides product warranties on the sale of
certain products that generally extend for one year from
the date of sale. The Company maintains a reserve for
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 2003 financial statements have
been reclassified to conform to the presentation of the
current year financial statements.
Series G Preferred Stock Dividends
Under the terms of the private offering of Series G
preferred shares, the Company is required to file a
registration statement with the Securities and Exchange
Commission to register the common shares issuable to the
Series G preferred stockholders upon conversion of their
Series G preferred shares and exercise of their
warrants. If the registration statement has not been
declared effective within 120 days of the initial
closing of such offering on August 29, 2003, there is a
penalty of 2% per month payable to the Series G
preferred. Stockholders in common shares (or 39,631
common shares per month) until the registration
statement is declared effective. As of December 31,
2004, the Company had recorded a liability of $54,000
related to the 356,682 common shares to be issued to the
Series G preferred stockholders because a registration
--------------------------------------------------------------------------------
F-14
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Series G Preferred Stock Dividends - Continued
and statement had not been declared effective as of that
Significant date.
Accounting
Policies
Continued
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 its liabilities and sustain
operations, and the Company has incurred significant
losses from operations. These factors raise substantial
doubt about the Company's ability to continue as a going
concern.
The Company's continuation as a going concern is
dependent on its ability to generate sufficient income
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 to obtain additional
capital and financing.
In addition, the Company has taken significant steps to
reduce costs and increase operating efficiencies,
including the consolidation of several manufacturing,
accounting and management responsibilities. Such
consolidation resulted in significant headcount
reductions as well as savings in other overhead costs.
The Company has also significantly reduced the use of
consultants, which has resulted in a large decrease in
expenses, and reduced the direct sales force from six to
five representatives, which has resulted in less
payroll, travel and other selling expenses. Although
these cost savings have significantly reduced the
Company's losses and ongoing cash flow needs, if the
Company is unable to obtain equity or debt financing, it
may be unable to continue development of its products
and may be required to substantially curtail or cease
operations.
--------------------------------------------------------------------------------
F-15
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
3. Detail of Receivables
Certain Trade receivables $ 758,000
Balance Allowance for doubtful accounts (101,000)
Sheet -------------
Accounts
$ 657,000
-------------
Inventories
Finished goods $ 648,000
Raw materials 1,490,000
Reserve for obsolescence (1,418,000)
-------------
$ 720,000
-------------
Accrued liabilities:
Consulting and litigation reserve $ 492,000
Payroll and employment benefits 84,000
Sales tax payable 42,000
Customer deposits 10,000
Accrued royalties 13,000
Deferred revenue 7,000
Warranty and return allowance 149,000
Other accrued expenses 61,000
-------------
$ 858,000
-------------
4. Intangible Intangible assets consist of the following at December
Assets 31, 2004:
Goodwill, net of accumulated
amortization of $120,000 $ 679,000
-------------
Other intangible assets:
Product and technology rights 769,000
Engineering and design costs 482,000
Patents 92,000
-------------
1,343,000
Accumulated amortization (1,343,000)
-------------
Total other intangible asstes -
-------------
Net intangible assets $ 679,000
-------------
--------------------------------------------------------------------------------
F-16
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
4. Intangible Amortization expense for the years ended December 31,
Assets 2004 and 2003 was $3,000 and $79,000, respectively.
Continued
During the year ended December 31, 2003, the Company
evaluated the carrying value of its unissued patent
costs and product and technology rights for
recoverability. This analysis, based on the estimated
future cash flows associated with such assets, resulted
in an impairment expense of $81,000 related to patents
and product and technology rights.
5. Property and Property and equipment consists of the following:
Equipment
Office equipment $ 750,000
Computer equipment 658,000
Furniture and fixtures 252,000
Leasehold improvements 166,000
-------------
1,826,000
Accumulated depreciation
and amortization (1,717,000)
-------------
$ 109,000
-------------
6. Lease During the years ended December 31, 2004 and 2003, 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 (212,000)
-------------
$ 79,000
-------------
Amortization expense on assets under capital leases
during the years ended December 31, 2004 and 2003 was
$39,000 and $56,000, respectively.
--------------------------------------------------------------------------------
F-17
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
6. Lease Capital lease obligations have imputed interest rates of
Obligations approximately 7% to 22%. The leases are secured by
Continued equipment. Future minimum payments on the capital lease
obligations are as follows:
2005 $ 54,000
2006 14,000
--------------
68,000
Less amount representing interest (7,200)
-------------
Present value of future minimum
lease payments 61,000
Less current portion (47,000)
-------------
Long-term portion $ 14,000
-------------
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, 2004 are approximately as follows:
Year Ending December 31, Amount
------------------------ ------
2005 $ 140,000
-------------
Total future minimum rental payments $ 140,000
-------------
Rent expense related to noncancelable operating leases
was approximately $137,000 and $159,000 for the years
ended December 31, 2004 and 2003, respectively.
--------------------------------------------------------------------------------
F-18
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. 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,
------------------------------------
2004 2003
------------------------------------
Income tax (provision) benefit at
statutory rate $ (24,000) $ 1,170,000
Expiration of research and
development tax credit
carryforwards - -
Meals and entertainment (3,000) (7,000)
Other - 2,000
Change in valuation allowance 27,000 (1,165,000)
------------------------------------
$ - $ -
------------------------------------
Deferred tax assets (liabilities) are comprised of the
following:
Net operating loss carryforward $ 16,984,000
Depreciation, amortization, and impairment 853,000
Allowance and reserves 828,000
Research and development tax credit
carryforwards 56,000
-----------------
18,721,000
Valuation allowance (18,721,000)
-----------------
$ -
-----------------
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-19
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. Income At December 31, 2004, the Company had net operating loss
Taxes carryforwards of approximately $48 million and research
Continued and development tax credit carryforwards of
approximately $56,000. These carryforwards are available
to offset future taxable income and expire in 2004
through 2021. 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.
8. 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 80,000,000 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, 2004 was $6,000.
3. The shares are convertible at the option of the
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.
--------------------------------------------------------------------------------
F-20
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Series A Preferred Stock - Continued
Stock 5. The Company may, at its option, redeem all of the
Continued 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, 2004
was $36,000.
3. The shares are convertible at the option of the
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.
--------------------------------------------------------------------------------
F-21
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Series C Preferred Stock
Stock In January 1998, the Company authorized the issuance of
Continued a total of 30,000 shares of Series C Preferred Stock,
$.001 par value, $100 stated value. As of December 31,
2004 there were no Series C Preferred Stock issued and
outstanding. 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 was 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.
Series D Preferred Stock
In January 1999, the Company's Board of Directors
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
--------------------------------------------------------------------------------
F-22
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Series D Preferred Stock - Continued
Stock an amount per share equal to the greater of (a) the
Continued 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, 2004 was $9,000.
3. Each share was 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.
Series E Preferred Stock
In May 2001, the Company authorized the issuance of a
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
--------------------------------------------------------------------------------
F-23
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Series E Preferred Stock - Continued
Stock dividends; or (b) the stated value, subject to
Continued adjustment. Total liquidation preference at December 31,
2004 was $100,000.
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.
4. The holders of the shares have no voting rights.
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.
--------------------------------------------------------------------------------
F-24
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Series F Preferred Stock - Continued
Stock 2. Upon the liquidation of the Company, the holders of
Continued 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, 2004 was $245,000.
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 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.
Series G Preferred Stock
In August 2003, the Company authorized the issuance of a
total of 2,000,000 shares of Series G Preferred Stock
$.001 par value, $1.00 stated value. The Series G
Preferred Stock has the following rights and privileges:
1. The holders of the shares are entitled to dividends
at the rate of 7% 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.
--------------------------------------------------------------------------------
F-25
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital
Stock Series G Preferred Stock - Continued
Continued 2. Upon the liquidation of the Company, the holders of
the Series G 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 of $.25 per share
plus declared but unpaid dividends. Total
liquidation preference at December 31, 2004 was
$432,000.
3. Each share is convertible, at the option of the
holder at any time until August 1, 2005, into 1
share of common stock at an initial conversion
price, subject to adjustment for dividends, equal to
one share of common stock for each share of Series G
Preferred Stock. The Series G Preferred Stock shall
be converted into common stock subject to adjustment
(a) on August 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 G
Preferred Stock were registered and (ii) the average
closing price of the common stock for the 15-day
period immediately prior to the date in which notice
of redemption is given by the Company to the holders
of the Series G Preferred Stock is at least $.50 per
share. In 2003, the Company recorded a beneficial
conversion feature of $217,000 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
--------------------------------------------------------------------------------
8. Capital The following table summarizes preferred stock activity
Stock during the years ended December 31, 2004 and 2003:
Continued
------------------------------------------------------------------------------------------------------------------------------------
Series A Series B Series C Series D Series E Series F Series G
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
Balance at
January 1,
2003 5,627 $ - 8,986 $ - - $ - 5,000 $ - 1,500 $ - 6,272 $ - - $ -
Issuance of
Series G
preferred
stock for
cash - - - - - - - - - - - - 1,764,706 $ 2,000
Issuance of
Series G
preferred
stock for
commissions - - - - - - - - - - - - 216,854 $ -
Conversion of
preferred
stock - - - - - - - - (500) - (1,675) - - -
-----------------------------------------------------------------------------------------------------------------------
Balance at
December
31, 2003 5,627 - 8,986 - - - 5,000 - 1,000 - 4,597 - 1,981,560 2,000
Issuance of
Series G
preferred
stock for
cash - - - - - - - - - - - - - -
Conversion
of
preferred
stock - - - - - - - - - - - - (255,000) -
-----------------------------------------------------------------------------------------------------------------------
Balance at
December
31, 2004 5,627 $ - 8,986 $ - - $ - 5,000 $ - 1,000 $ - 4,597 $ - 1,726,560 $ 2,000
-----------------------------------------------------------------------------------------------------------------------
Authorized 500,000 500,000 30,000 1,140,000 50,000 50,000 2,000,000
-----------------------------------------------------------------------------------------------------------------------
Liquidation
preference $ 6,000 $ 36,000 $ - $ 9,000 $ 100,000 $245,000 $432,000
-----------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
F-27
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. 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 3,700,000 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.
The Company granted the following options and warrants
during the year ended December 31, 2004:
o Options to officers and the board of directors
to purchase 1,775,000 shares of common stock
at an exercise price ranging from $0.10 to
$0.14.
The Company granted the following options and warrants
to non-employees during the year ended December 31,
2003:
o Warrants to purchase 200,000 shares of common
stock at an exercise price of $0.16 per share
in return for consulting services.
o Warrants to investors to purchase 422,633
shares of common stock at an exercise price of
$0.75.
o In connection with the Series G Preferred
Stock offering, the Company issued warrants to
purchase, in aggregate 382,353 shares of
common stock at exercise prices ranging from
$0.25 to $0.50.
--------------------------------------------------------------------------------
F-28
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Stock Option A schedule of the options and warrants is as follows:
Plan and
Warrants
Continued
Number of Exercise
-------------------------------- Price Per
Options Warrants Share
--------------------------------------------------
Outstanding at
January 1, 2003 2,486,535 2,565,022 $ 2.00 - 12.98
Granted 2,150,000 1,404,986 0.16 - 0.25
Exercised - - -
Expired - (1,162,025) 5.06 - 8.12
Forfeited (1,008,079) - 0.21 - 6.00
--------------------------------------------------
Outstanding at
December 31, 2003 3,628,456 2,807,983
Granted 1,775,000 - 0.10 - 0.14
Exercised - - -
Expired (187,500) (161,019) 2.38 - 4.00
Forfeited (1,369,750) (200,000) 0.16 - 5.00
--------------------------------------------------
Outstanding at
December 31, 2004 3,846,206 2,446,964 $ 0.10 - 12.98
--------------------------------------------------
The following table summarizes information about stock
options and warrants outstanding at December 31, 2004:
Outstanding Exercisable
------------------------------------ -----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
----------------------------------------------------- -----------------------
$ 0.16 - 0.75 3,724,986 2.76 $ 0.20 2,236,653 $ 0.34
2.00 - 5.00 2,267,301 2.27 3.62 2,350,676 3.73
6.00 - 8.13 275,000 1.00 3.27 275,000 6.55
12.98 25,883 N/A 12.98 25,883 12.98
----------------------------------------------------- -----------------------
$ 0.16 - 12.98 6,293,170 2.50 $ 1.63 4,888,212 $ 2.39
----------------------------------------------------- -----------------------
--------------------------------------------------------------------------------
F-29
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Sale of In July 2004, the Company sold its investment in
Investment International Bioimmune Systems, Inc. (IBS) for $532,000
cash. Because, for book purposes, the Company's
investment in IBS had previously been reduced to $0, the
net sales price was recorded as a gain as follows.
Sale of IBS stock $532,000
Less commissions 27,000
--------
Net gain $505,000
--------
11. Gain on Due to the Company's ongoing cash flow difficulties,
Settlement of during 2003 and 2004 most vendors and suppliers were
Liabilities contacted with attempts to negotiate reduce payments and
settlements of settlements of outstanding accounts
payable and accrued expenses. While some vendors refused
to negotiate and demanded payment in full, some vendors
were willing to settle for a reduced amount. The
accounts payable forgiven by vendors and suppliers and
accrued expenses settled resulted in a gain of $206,000
and $436,000 in 2004 and 2003, respectively.
12. Related Party A law firm, of which the chairman of the board of
Transactions directors of the Company is a shareholder, has rendered
legal services to the Company. The Company paid this
firm $100,000 and $97,000, for the years ended December
31, 2004 and 2003, respectively. As of December 31,
2004, the Company owed this firm $197,000, which is
included in accounts payable.
During the year ended December 31, 2004, the Company
increased accrued liabilities and increased accumulated
deficit for $54,000 for accrued preferred stock
dividends related to registration rights on the Series G
preferred stock.
13. Supplemental During the year ended December 31, 2003, the Company:
Cash Flow
Information o Granted 200,000 warrants for consulting
services, which is recorded as an increase to
general and administrative expense and
additional paid-in capital of $35,000.
o Issued 1,562,000 shares of common stock,
valued at $258,000 based on the trading
prices on the date of issuance, as settlement
of potential litigation. This amount is
included in general and administrative
expenses and additional paid-in capital.
--------------------------------------------------------------------------------
F-30
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
13. Supplemental o Incurred an obligation of approximately
Cash Flow $46,000 for the settlement of accrued
Information liabilities of approximately $83,000 and
Continued recorded a corresponding gain of $37,000.
o Reduced subscription receivable and
additional paid-in capital for $294,000.
Actual amounts paid for interest and income taxes are as
follows:
Years Ended
December 31,
-----------------------------------
2004 2003
-----------------------------------
Interest $ 22,000 $ 24,000
-----------------------------------
Income taxes $ - $ -
-----------------------------------
14. Export Sales Total sales include export sales by major geographic
area as follows:
Years Ended
December 31,
-----------------------------------
Geographic Area 2004 2003
--------------- -----------------------------------
Far East $ 529,000 $ 272,000
South America 50,000 9,000
Middle East 233,000 228,000
Europe 684,000 363,000
Canada 68,000 62,000
Mexico - 9,000
Africa 9,000 -
-----------------------------------
$ 1,573,000 $ 943,000
-----------------------------------
--------------------------------------------------------------------------------
F-31
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
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 matching contributions at the Company's discretion.
During the years ended December 31, 2004 and 2003, the
Company contributed approximately zero and $1,000 to the
Plan, respectively.
16. Commitments and Consulting Agreements
Contingencies On April 3, 2003, the Company entered into a consulting
agreement with Kinexsys Corporation ("Kinexsys"). Under
the terms of the agreement, Kinexsys through its Senior
Partner, Timothy R. Forstrom, is to prepare a capital
markets plan and a corporate positioning and
communications plan for the Company, for which Kinexsys
is to receive warrants to purchase up to 200,000 shares
of the Company's common stock at an exercise price of
$.16 per share. The capital markets plan is to include a
detailed analysis of the Company's capital market
structure in relation to current investors, market
trends and projected equity movements, and
recommendations on capital management strategies. The
corporate positioning and communications plan is to
include a corporate positioning matrix for markets,
analysts, customers and partners, and a communications
plan. The agreement is for a one-year term but may be
renewed at the option of both parties. The Agreement
expired on April 3, 2004.
During the year ended December 31, 1999 the Company
entered a consulting agreement with a former officer of
the Company, which expired 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
required monthly payments of $6,000 through June 2003.
As of December 31, 2003, this agreement was settled in
conjunction with the royalty agreement for the Blood
Flow Analyzer (see Royalty Agreements in Note 14).
--------------------------------------------------------------------------------
F-32
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments and Litigation
Contingencies An action was brought against the Company in March 2000
Continued by George Wiseman, a former employee, in the Third
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 its common stock) pursuant to Utah law. The
action is based upon an extension of a written
employment agreement. The Company disputes the amount
allegedly owed and intends to vigorously defend against
the action.
An action was brought against the Company on September
11, 2000 by PhotoMed International, Inc. and Daniel M.
Eichenbaum, M.D. 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 under a
license agreement dated July 7, 1993, with respect to
the sale of certain equipment, plus costs and attorneys'
fees. Certain discovery has taken place and the Company
has paid royalties of $16,000, which the Company
believes brings all payments current as of the date of
last payment on January 7, 2005. The Company has been
working with PhotoMed 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. An 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. However, if the parties are unable
to agree on a method for calculating royalties, there is
a risk that PhotoMed and Dr. Eichenbaum might amend
their complaint to request termination of the license
agreement and, if successful, the Company would lose its
right to manufacture and sell the Photon(TM) laser
system.
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
--------------------------------------------------------------------------------
F-33
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments and Litigation - Continued
Contingencies Securities Law and Plaintiffs Demand a Trial by Jury."
Continued The Company has retained legal counsel to review 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 Financial
Corporation.
More specifically, the complaint alleges that the
Company falsely stated in its Securities and Exchange
Commission filings and press releases that it had
received authorization to use an insurance reimbursement
CPT code from the CPT Code Research and Development
Division of the American Medical 16. Commitments and
Association for reimbursement to doctors in connection
with the Blood Flow Contingencies Analyzer(TM), adding
that the CPT code provides for a reimbursement to
doctors Continued of $57.00 per patient for use of the
Blood Flow Analyzer(TM). According to the complaint, the
CPT code was critical. Without a reimbursement code,
physicians would not purchase the Blood Flow
Analyzer(TM) because they could not receive compensation
for performance of medical procedures using the medical
device. The complaint further contends that the Company
never received the CPT code from the American Medical
Association at any time. Nevertheless, it is alleged
that the Company continued to misrepresent in its SEC
filings and press releases that it had received the CPT
code. It is also alleged that the Company has never made
a full, corrective disclosure with respect to this
alleged misstatement.
The complaint also alleges that on July 11, 2002, the
Company issued a press release falsely announcing that
it had received a purchase order from Valdespino
Associates Enterprises and Westland Financial
Corporation for 200 sets of its entire portfolio of
products, with $70 million in systems to be delivered
over a two-year period, then another $35 million of
orders to be completed in the third year. The complaint
further alleges that the Company had never received a
true purchase order for its products. As a result of
these alleged misstatements, the complaint contends that
the price of the Company's shares of common stock was
artificially inflated during the period from April 25,
2001 through May 14, 2003, and the persons who purchased
or retained the Company's common shares during that
period suffered substantial damages. The complaint
requests judgment for unspecified damages, together with
interest and attorney's fees.
--------------------------------------------------------------------------------
F-34
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments and Litigation - Continued
Contingencies The Company disputes having issued false and misleading
Continued statements concerning the Blood Flow AnalyzerTM and a
purchase order from Westland Financial Corporation and
Valdespino Associates Enterprises. On April 25, 2001,
the Company issued a press release that stated it had
received authorization to use common procedure
terminology or CPT code number 92120 for the Blood Flow
AnalyzerTM. This press release was based on a letter the
Company received from the CPT Editorial Research and
Development Department of the American Medical
Association stating that CPT code number 92120 was the
appropriate common procedure terminology or CPT code
number for doctors to use when reporting certain
procedures performed with the Blood Flow AnalyzerTM.
Currently, there is reimbursement by insurance payors to
doctors using the Blood Flow Analyzer(TM) in 22 states
and partial reimbursement in four other states. The
amount of reimbursement to doctors using the Blood Flow
Analyzer(TM) generally ranges from $56.00 to $76.00 per
patient, depending upon the insurance payor. Insurance
payors providing reimbursement for the Blood Flow
Analyzer(TM) have the discretion to increase or reduce
the amount of reimbursement. The Company is endeavoring
to obtain reimbursement by insurance payors in other
states where there is currently no reimbursement being
made. The Company believes it has continued to correctly
represent in its Securities and Exchange Commission
filings that the CPT Editorial Research and Development
Department of the American Medical Association has
informed the Company that CPT code number 92120 is the
appropriate code for doctors to use when reporting
certain procedures performed with the Blood Flow
Analyzer(TM).
On July 11, 2002, the Company issued a press release
that stated it received a purchase order from Valdespino
Associates Enterprises and Westland Financial
Corporation for 200 complete sets of the Company's
entire product portfolio of diagnostic and surgical
equipment for Mexican ophthalmic practitioners, to be
followed by a second order of 100 sets of equipment. The
press release was based on a purchase order dated July
10, 2002 that the Company entered into with Westland
Financial Corporation for the sale of 200 complete sets
of the Company's surgical and diagnostic equipment to
Mexican ophthalmic practitioners. The press release also
stated that the initial order was for $70 million of the
--------------------------------------------------------------------------------
F-35
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments and Litigation - Continued
Contingencies Company's equipment to be filled over a two-year period
Continued followed by the second order of $35 million in equipment
to be completed in the third year. The press release
further stated that delivery would be made in traunches
of 25 complete sets of the Company's equipment,
beginning in 30 days from the date of the purchase
order.
On September 13, 2002, the board of directors issued a
press release updating the status of its product sales
to the Mexican ophthalmic practitioners. In that press
release the board stated that the Company had been in
discussions for the prior nine months with Westland
Financial Corporation, aimed at supplying its medical
device products to the Mexican market. In the past, the
Company has had a business relationship with Westland
Financial. Upon investigation, the board of directors
had determined that the purchase order referenced in the
July 11, 2002 press release was not of such a nature as
to be enforceable for the purpose of sales or revenue
recognition. In addition, the Company had not sent any
shipment of medical products to Mexican ophthalmic
practitioners nor received payment for those products
pursuant to those discussions. The September 13, 2002
press release also stated that discussions were
continuing with Westland Financial Corporation regarding
sales and marketing activities for the Company's medical
device products in Mexico, but the Company could not, at
the time, predict or provide any assurance that any
transactions would result.
On June 2, 2003, a complaint was filed in the 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
July 11, 2003, a complaint was filed in the same United
States District Court, captioned Lidia Milian v.
Paradigm Medical Industries, Inc., Thomas Motter, Mark
Miehle and John Hemmer, Case No. 2:03 CV00617PGC. Both
complaints seek class action status. These cases are
substantially similar in nature to the Meyer case,
including the contention that as a result of allegedly
false statements regarding the Blood Flow AnalyzerTM and
the purchase order from Westland Financial Corporation
and Valdespino Associates Enterprises, the price of the
Company's common stock was artificially inflated and the
persons who purchased the Company's common shares during
the class period suffered substantial damages. In a
press release dated July 11, 2003, captioned "Milberg
--------------------------------------------------------------------------------
F-36
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments and Litigation - Continued
Contingencies Weiss announces the filing of a class action suit
Continued against Paradigm Medical Industries, Inc. on behalf of
investors," the law firm of Milberg Weiss Bershad Hynen
& Levach LLP, which represents purchasers of the
Company's securities in the class action suit filed on
July 11, 2003, stated that the Company alleged
misrepresentations caused the market price of the stock
to be artificially inflated during the class period. As
a result, it is alleged that investors suffered millions
of dollars in damages from the Company's alleged
misstatements.
The cases request judgment for unspecified damages,
together with interest and attorney's fees. These cases
have now been consolidated with the Meyer case into a
single action, captioned In re: Paradigm Medical
Industries Securities Litigation, Case No. 03-CV-448TC.
The law firm of Milberg Weiss Bershad & Schulman LLP is
representing purchasers of the Company's securities in
the consolidated class action. On June 28, 2004, a
consolidated amended class action complaint was filed on
behalf of purchasers of the Company's securities. The
consolidated complaint is similar to the three class
action complaints and alleges that the Company made
false representations regarding the CPT code for the
Blood Flow Analyzer(TM), but it includes additional
allegations that the Company failed to disclose in a
timely manner that doctors were being denied
reimbursement for procedures performed with the Blood
Flow Analyzer(TM). The consolidated complaint also
alleges that the Company made false statements regarding
the purchase order from Westland Financial Corporation
and Valdespino Associates Enterprises. The Company
believes the consolidated complaint is without merit and
intends to vigorously defend and protect its interests
in the case.
The Company was issued a Directors and Officers
Liability and Company Reimbursement Policy by United
States Fire Insurance Company for the period from July
10, 2002 to July 10, 2003 that contains a $5,000,000
limit of liability, which is excess of a $250,000
retention. The officers and directors named in the
consolidated cases have requested coverage under the
policy. U.S. Fire is currently investigating whether it
may have a right to deny coverage for the consolidated
cases based upon policy terms, conditions and exclusions
or to rescind the policy based upon misrepresentations
contained in its application for insurance.
--------------------------------------------------------------------------------
F-37
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments and Litigation - Continued
Contingencies The Company has paid $30,000 to U.S. Fire toward
Continued satisfaction of the $250,000 retention that is
applicable to the consolidated cases. The Company has
advised U.S. Fire that it cannot pay the $250,000
retention due to its current financial circumstances. As
a consequence, on January 8, 2004, the Company entered
into a non-waiver agreement with U.S. Fire in which U.S.
Fire agreed to fund and advance the Company's retention
obligation in consideration for which the Company has
agreed to reimburse U.S. Fire the sum of $5,000 a month,
for a period of six months, with the first of such
payments due on February 15, 2004. Thereafter,
commencing on August 15, 2004, the Company is currently
required to reimburse U.S. Fire the sum of $10,000 per
month until the entire amount of $250,000 has been
reimbursed to U.S. Fire. The Company has made payments
to U.S. Fire in the aggregate amount of $30,000 of which
its last payment of $10,000 was made on October 11,
2004. These payments were for the $5,000 monthly
payments due during the six month period from February
15 to July 15, 2004, leaving a remaining retention
obligation to U.S. Fire of $220,000.
In the event U.S. Fire determines that the Company or
the former officers and directors named in the
consolidated cases are not entitled to coverage under
the policy, or that it is entitled to rescind the
policy, or should the Company be declared in default
under the non-waiver agreement on account of its failure
to make the monthly payments owed to U.S. Fire for
funding the Company's retention obligation, then the
Company agrees to pay U.S. Fire, on demand, the full
amount of all costs advanced by U.S. Fire, except for
those amounts that the Company may have reimbursed to
U.S. Fire pursuant to the monthly payments due under the
non-waiver agreement. Moreover, if U.S. Fire denies
coverage for the consolidated cases under the policy,
the Company would owe its litigation counsel in the
class action lawsuits, for any legal fees not paid by
U.S. Fire. However, U.S. Fire has currently agreed to
pay the legal fees relating to the class action
lawsuits.
The Company will be in default under the non-waiver
agreement if it fails to make any payment due to U.S.
Fire thereunder when such payment is due, or institute
proceedings to be adjudicated as bankrupt or insolvent.
U.S. Fire's obligation to advance defense costs under
the agreement will terminate in the event that the
$5,000,000 policy limit of liability is exhausted. If
--------------------------------------------------------------------------------
F-38
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments and Litigation - Continued
Contingencies U.S. Fire denies coverage for the consolidated cases
Continued under the policy and the Company is not successful in
defending and protecting its interests in the cases,
resulting in a judgment against the Company for
substantial damages, the Company would not be able to
pay such liability and, as a result, would be forced to
seek bankruptcy protection.
On July 10, 2003, an action was filed in the United
States District Court, District of Utah, by Innovative
Optics, Inc. and Barton Dietrich Investments, L.P.
Defendants include us, 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 the Company on January
31, 2002, in which the Company agreed to purchase all
the assets of Innovative in consideration for the
issuance of 1,310,000 shares of the Company's common
stock to Innovative. The complaint claims the Company
breached the asset purchase agreement. The complaint
also claims that the Company allegedly made false and
misleading statements pertaining to the Blood Flow
Analyzer(TM) and concerning a purchase order from
Valdespino Associates Enterprises and Westland Financial
Corporation. The purpose of these statements, according
to the complaint, was to induce Innovative to sell its
assets and purchase the shares of the Company's common
stock at artificially inflated prices while
simultaneously deceiving Innovative and Barton into
believing that the Company's shares were worth more than
they actually were. The complaint contends that had
Innovative and Barton known the truth they would not
have sold Innovative to us, would not have purchased the
Company's stock for the assets of Innovative, or would
not have purchased the stock at the inflated prices that
were paid. The complaint further contends that as a
result of the allegedly false statements, Innovative and
Barton suffered substantial damages in an amount to be
proven at trial.
The complaint also 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 the
Company 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 the Company's common stock issued
to Innovative in the transaction declined, and
--------------------------------------------------------------------------------
F-39
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments and Litigation - Continued
Contingencies Innovative and Barton suffered damages in an amount to
Continued be proven at trial. The Company filed an answer to the
complaint and also filed counterclaims against
Innovative and Barton for breach of contract. The
Company believes the complaint is without merit and
intends to vigorously defend and protect its interests
in the action. If the Company is not successful in
defending and protecting its interests in this action,
resulting in a judgment against the Company for
substantial damages, and U.S. Fire denies coverage in
the litigation under the Directors and Officers
Liability and Company Reimbursement Policy, the Company
would not be able to pay such liability and, as a
result, would be forced to seek bankruptcy protection.
On October 14, 2003, an action was filed in the Third
Judicial District Court, Salt Lake County, State of
Utah, captioned Albert Kinzinger, Jr., individually and
on behalf of all others similarly situated vs. Paradigm
Medical Industries, Inc., Thomas Motter, Mark Miehle,
Randall A. Mackey, and John Hemmer, Case No. 030922608.
The complaint also indicates that it is a "Class Action
Complaint for Violations of Utah Securities Laws and
Plaintiffs Demand a Trial by Jury." The Company has
retained legal counsel to review the complaint, which
appears to be focused on alleged false or misleading
statements pertaining to the Blood Flow Analyzer(TM).
More specifically, the complaint alleges that the
Company falsely stated in Securities and Exchange
Commission filings and press releases that it 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 the Blood Flow Analyzer(TM).
The purpose of these statements, according to the
complaint, was to induce investors to purchase shares of
the Company's Series E preferred stock in a private
placement transaction at artificially inflated prices.
The complaint contends that as a result of these
statements, the investors that purchased shares of its
Series E preferred stock in the private offering
suffered substantial damages to be proven at trial. The
complaint also alleges that the Company sold Series E
preferred shares without registering the sale of such
shares or obtaining an exemption from registration. The
complaint requests rescission, compensatory damages and
treble damages, including interest and attorneys' fees.
--------------------------------------------------------------------------------
F-40
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments and Litigation - Continued
Contingencies The Company filed an answer to the complaint. The
Continued Company believes the complaint is without merit and
intends to vigorously defend its interests in the
action. If the Company is not successful in defending
and protecting its interests in the action, resulting in
a judgment against it for substantial damages, and U.S.
Fire denies coverage in the litigation under the
Directors and Officers Liability and Company
Reimbursement Policy, the Company would not be able to
pay such liability and, as a result, would be forced to
seek bankruptcy protection.
On January 26, 2005, the Company completed a written
settlement agreement to settle the lawsuit that
Innovative Optics, Inc. and Barton Dietrich Investments,
L.P. brought against the Company and its former
executive officers. Under the terms of the settlement,
U.S. Fire agreed to pay Innovative Optics, Inc. and
Barton Dietrich Investments, L.P. the sum of $367,500 in
cash. Payment of this amount is contingent, however,
upon the courts in the federal and state class action
lawsuits granting final approval of the settlements
reached in those respective actions, and such orders
becoming final and non-appealable.
On February 23, 2005, the Company executed written
settlement agreements to settle the federal and state
court class action lawsuits that were filed against the
Company and its former executive officers. Under the
terms of settlement of the federal court class action
lawsuit, U.S. Fire agreed to pay the sum of $1,507,500
in cash to the class members that purchased the
Company's securities during the period between April 17,
2002 and November 4, 2002. Under the terms of settlement
of the state court class action lawsuit, U.S. Fire
agreed to pay the sum of $625,000 in cash to the class
members that purchased shares of Series E Convertible
preferred stock on or about July 11, 2001.
As a condition to the settlement agreements to settle
the federal and state court class action lawsuits, the
courts in such lawsuits must have entered orders
granting final approval of the settlements reached in
those respective actions, and such orders must have
become final and non-appealable. On March 3, 2005, the
federal court entered an order granting preliminary
approval of the settlement in the federal court class
action lawsuit and providing for notice to be sent to
potential class members. On April 18, 2005, a hearing
was held in the state court and the court entered a
--------------------------------------------------------------------------------
F-41
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments and Litigation - Continued
Contingencies minute entry granting preliminary approval of the
Continued settlement in the state court class action lawsuit.
As a further condition to the settlement agreements to
settle the federal and state court class action
lawsuits, both settlement agreements provide that U.S.
Fire must not have exercised its option to terminate the
settlement agreements. U.S. Fire has the option to
terminate the settlement agreements if the cumulative
dollar value of the claims held by individuals or
entities that "opt out" of the federal and state class
action lawsuits exceeds $250,000. If such "opt outs"
exceed $250,000, however, plaintiffs in the federal and
state court class action lawsuits will have five days to
cure by reducing the amount of "opt outs" to less than
$250,000.
If U.S. Fire exercises its option to terminate the
settlement agreements, then all parties to the
settlement agreements will be restored to their
respective positions in the various actions as of the
date of the settlement agreements. In addition, the
terms and provisions of the settlement agreements will
have no further force and effect on the various parties
and will be deemed null and void in their entirety.
Under the terms of the settlement agreements regarding
the federal and state court class action lawsuits and
the lawsuit that Innovative Optics, Inc. and Barton
Dietrich Investors, L.P. brought against the Company and
its former executive officers, U.S. Fire has agreed to
pay a total of $2,500,000 in cash to the classes in the
class action lawsuits and to Innovative Optics, Inc. and
Barton Dietrich Investments, L.P. in settlement of these
lawsuits. Under the terms of settlement, Paradigm
Medical is to pay U.S. Fire the sum of $220,000
representing the remaining amount owing under the
$250,000 retention obligation in the insurance policy,
and to execute a policy release in favor of U.S. Fire as
to coverage under the insurance policy.
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 $50,000 plus interest is due for the leasing
of three copy machines that were delivered to the
Company's Salt Lake City facilities on or about April of
--------------------------------------------------------------------------------
F-42
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments and Litigation - Continued
Contingencies 2000. The action also seeks an award of attorney's fees
Continued and costs incurred in the collection. The Company
disputes the amounts allegedly owed, asserting that two
of the machines were returned to the leasing company
because they did not work properly. A responsive
pleading has been filed. The Company was engaged in
settlement discussions with CitiCorp until counsel for
CitiCorp withdrew from the case. New counsel for
CitiCorp has been appointed and it is anticipated that
settlement discussions will resume.
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 the Company 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. On August 28, 2003, the Company agreed
to a settlement of the case with Franklin Funding by
agreeing to make 24 monthly payments of $2,000 to
Franklin Funding, with the first monthly payment due on
August 29, 2003. As of March 31, 2005, the Company has
made 19 monthly payments of $2,000 each to Franklin
Funding.
The Company received demand letters dated July 18, 2003,
September 26, 2003 and November 10, 2003 from counsel
for Douglas A. MacLeod, M.D., a shareholder of the
company. In the July 18, 2003 letter, Dr. MacLeod
demands that he and certain entities with which he is
involved or controls, namely the Douglas A. MacLeod,
M.D. Profit Sharing Trust, St. Marks' Eye Institute and
Milan Holdings, Ltd., be issued a total of 2,296,667
shares of the Company's common stock and warrants to
purchase 1,192,500 shares of its common stock at an
exercise price of $.25 per share. Dr. MacLeod claims
that these common shares and warrants are owing to him
and the related entities under the terms of a mutual
release dated January 16, 2003, which he and the related
entities entered into with us. Dr. MacLeod renewed his
request for these additional common shares and warrants
in the September 26, 2003 and November 10, 2003 demand
letters. The Company believes that Dr. MacLeod's claims
and assertions are without merit and that neither he nor
the related entities are entitled to any additional
shares of its common stock or any additional warrants
under the terms of the mutual release. The Company
--------------------------------------------------------------------------------
F-43
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments and Litigation - Continued
Contingencies intends to vigorously defend against any legal action
Continued that Dr. MacLeod may bring.
On August 3, 2003, a complaint was filed against the
Company 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 the Company laid off Ms. Powell
on March 25, 2003, she was owed $2,000 for business
expenses, $11,000 for accrued vacation days, $13,000 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. On
March 29, 2005, the Company agreed to a settlement with
Ms. Powell of her claims for unpaid business expenses,
accrued vacation days, and unpaid commissions by
agreeing to pay her $13,000. The Company has not yet
made payment to Ms. Powell for the agreed upon
settlement amount.
On September 10, 2003, an action was filed against the
Company by Larry Hicks in the Third Judicial District
Court, Salt Lake County, State of Utah, (Civil No.
030922220), for payments due under a consulting
agreement with us. The complaint claims that monthly
payments of $3,083 are due for the months of October
2002 to October 2003 under a consulting agreement and,
if the agreement is terminated, for the sum of $110,000
minus whatever the Company has paid Mr. Hicks prior to
such termination, plus costs, attorney's fees and a wage
penalty pursuant to Utah law. The Company has filed an
answer in which it denies any liability to Mr. Hicks.
Formal discovery in the matter has commenced. The
Company disputes the amount allegedly owed and intends
to vigorously defend against such action.
On November 7, 2003, a complaint was filed against the
Company by Todd Smith, a former employee, in the Third
Judicial District Court, Salt Lake County, State of Utah
(Civil No. 030924951 CN). Defendants consist of the
Company and Randall Mackey, a director of the Company.
The complaint alleges that while an employee of the
Company, Mr. Smith was granted stock options to purchase
16,800 shares of common stock exercisable at $5.00 per
share. Mr. Smith claims unpaid wages in the amount of
--------------------------------------------------------------------------------
F-44
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments and Litigation - Continued
Contingencies the fair market value of the stock options he claims he
Continued was prevented from exercising, attorney's fees, and a
continuing wage penalty under Utah law. The Company
believes the claims are without merit and intends to
vigorously defend against such action.
On May 25, 2004, an action was brought against the
Company by Jeffrey F. Poore, former President and Chief
Executive Officer of the Company, in the Third Judicial
District Court of Salt Lake County, State of Utah (Civil
No. 040910875). The complaint alleges that the Company
unlawfully terminated the written employment agreement
between Mr. Poore and the Company. As a result, Mr.
Poore demands judgment against the Company for $350,000,
representing his annual salary for the two remaining
years under the employment agreement, for money judgment
based on the value of his benefits for the two remaining
years under the employment agreement, including profit
sharing plans, 401(k) and cafeteria plans, health,
hospitalization, dental, disability and other insurance
plans canceled by the Company, and for money judgment
equal to the value of the stock options granted to him
under the employment agreement. The Company disputes the
amounts allegedly owed in the complaint and believes
that there was a sufficient basis to terminate Mr.
Poore's employment for cause under the terms of the
employment agreement. Accordingly, the Company intends
to vigorously defend against the action.
On August 9, 2004, a third party complaint was brought
against the Company by Wakefield Eye Center and Dr.
Kenneth C. Westfield (collectively "Westfield"). The
original action was brought by American Express Business
Finance Corporation against Westfield on May 27, 2004 in
the District Court, Clark County, State of Nevada (Civil
No. A486307, Dept. No. XXI) concerning the financing of
the purchase of a Blood Flow Analyzer(TM) involving
Westfield Eye Center. The transaction took place during
the latter half of 2001. Westfield takes the position
that if there is liability of Westfield to American
Express this liability is ultimately ours and the other
third-party defendants. The amount being sought against
Westfield by American Express in the original action
includes the sum of $30,000, together with interest and
attorney's fees. Westfield's alleged claims against the
Company include fraud, breach of contract, promissory
estoppel, declaratory relief, negligence, negligent
supervision, damages for injuries resulting from actions
--------------------------------------------------------------------------------
F-45
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments and Litigation - Continued
Contingencies of employee/contractor, wilful and wanton misconduct,
Continued conspiracy, and breach of fiduciary duty as well as
costs and attorney's fees. Westfield also seeks punitive
damages. The Company has filed an answer to the third
party complaint in which the Company denies liability.
Formal discovery in the matter involving us has
commenced. The case has been referred to arbitration.
The Company intends to vigorously defend the action.
On March 31, 2005, an action was filed against the
Company by Joseph W. Spadafora in the United States
District Court, District of Utah (Civil No. 2:05CV00278
TS). The complaint alleges that Dr. Spadafora was a
clinical investigator in the study for the FDA involving
the Company's Photon(TM) laser system where he performed
numerous surgeries using the Photon(TM). Dr. Spadafora
contends that in meetings with Company personnel he
suggested ways in which the handpiece on the Photon(TM)
could be improved. Dr. Spadafora further contends that
on August 5, 1999, the Company filed a patent
application for an improved handpiece with the United
States Patent and Trademark Office but he was not named
as one of the inventors or a co-inventor on the patent
application.
On September 24, 2004, the Company was issued a patent
entitled, "Laser Surgival Handpiece with Photon Trap."
Because the Company did not list Dr. Spadafora as one of
the inventors or a co-inventor on the patent, Dr.
Spadafora is requesting in his complaint that a court
order be entered declaring that he is the inventor or
co-inventor of the patent and, as a result, is entitled
to all or part of the royalties and profits that the
Company earned or will earn from the sale of any product
incorporating or using the improved handpiece, plus
interest and attorney's fees. The Company disputes the
claims made by Dr. Spadafora and intends to vigorously
defend against such action.
The Company is 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 its
financial condition or results of operations.
Royalty Agreements
The Company had a royalty agreement with the president
of OBF. The agreement provided for the payment of 10%
royalty of the net sales related to the Blood Flow
Analyzer.
--------------------------------------------------------------------------------
F-46
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments and Royalty Agreements - Continued
Contingencies During 2003, a settlement was reached with the president
Continued of OBF whereby the royalty payments were forfeited and
no longer are an obligation of the Company. The
over-accrued amount of $147,000 was reversed during 2003
to reflect the settlement agreement.
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 expires when the United States
patent rights expire in September 2004. Through December
31, 2003, no significant royalties have been paid under
this agreement.
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 is 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.
18. Recent In December 2003, the FASB issued Interpretation No. 46
Accounting ("FIN 46R") (revised December 2003), Consolidation of
Pronounce- Variable Interest Entities, an Interpretation of
ments Accounting Research Bulletin No. 51 ("ARB 51"), which
addresses how a business enterprise should evaluate
whether it has a controlling interest in an entity
though means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB
Interpretation No. 46 (FIN 46), which was issued in
January 2003. Before concluding that it is appropriate
to apply ARB 51 voting interest consolidation model to
an entity, an enterprise must first determine that the
entity is not a variable interest entity (VIE). As of
the effective date of FIN 46R, an enterprise must
--------------------------------------------------------------------------------
F-47
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
18. Recent evaluate its involvement with all entities or legal
Accounting structures created before February 1, 2003, to determine
Pronounce- whether consolidation requirements of FIN 46R apply to
ments those entities. There is no grandfathering of existing
entities. Public companies must apply either FIN 46 or
FIN 46R immediately to entities Continued created after
January 31, 2003 and no later than the end of the first
reporting period that ends after December 15, 2004. The
adoption of FIN 46 had no effect on the Company's
consolidated financial position, results of operations
or cash flows.
In December 2004, FASB issued SFAS 153 "Exchanges of
Nonmonetary Assets--an amendment of APB Opinion No. 29".
The guidance in APB Opinion No. 29, Accounting for
Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based
on the fair value of the assets exchanged. The guidance
in that Opinion, however, included certain exceptions to
that principle. This Statement amends Opinion 29 to
eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the
entity are expected to change significantly as a result
of the exchange. The Company does not believe adoption
of SFAS 153 will have any impact on the Company's
consolidated financial statements.
In November 2004, the FASB issued SFAS 151 "Inventory
Costs--an amendment of ARB No. 43". This Statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and
wasted material (spoilage). Paragraph 5 of ARB 43,
Chapter 4, previously stated that ". . . under some
circumstances, items such as idle facility expense,
excessive spoilage, double freight, and re-handling
costs may be so abnormal as to require treatment as
current period charges. . . ." This Statement requires
that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so
abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the
production facilities. The provisions of this Statement
shall be effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company
does not believe adoption of SFAS 151 will have any
impact on the Company's consolidated financial
statements.
--------------------------------------------------------------------------------
F-48
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
18. Recent In December 2004, the FASB issued FASB Statement No. 123
Accounting (revised 2004), "Shared-Based Payment." Statement 123(R)
Pronounce- addresses the accounting for share-based payment
ments transactions in which an enterprise receives employee
Continued services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair
value of the enterprise's equity instruments or that may
be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the
grant-date fair-value of stock options and other
equity-based compensation issued to employees in the
income statement. The revised Statement generally
requires that an entity account for those transactions
using the fair-value-based method, and eliminates the
intrinsic value method of accounting in APB Opinion No.
25, "Accounting for Stock Issued to Employees", which
was permitted under Statement 123, as originally issued.
The revised Statement requires entities to disclose
information about the nature of the share-based payment
transactions and the effects of those transactions on
the financial statements. Statement 123(R) is effective
for public companies that do not file as small business
issuers as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005.
For public companies that file as small business
issuers, Statement 123(R) is effective as of the
beginning of the first interim or annual reporting
period that begins after December 15, 2005 (i.e., first
quarter 2006 for the Company). All public companies must
use either the modified prospective or the modified
retrospective transition method. Early adoption of this
Statement for interim or annual periods for which
financial statements or interim reports have not been
issued is encouraged. The Company believes that the
adoption of this pronouncement may have a material
impact on the Company's financial statements.
--------------------------------------------------------------------------------
F-49
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
Item 8A. Controls and Procedures
Under the supervision and with the participation of the Company's
management, including its principal executive officer and principal financial
officer, the Company evaluated the effectiveness of the design and operation of
its disclosure controls and procedures (as defined in Rule 13a-15(e) or
15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based
upon that evaluation, the principal executive officer and principal financial
officer concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were effective and adequately
designed to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in applicable rules
and forms.
During the fourth fiscal quarter, there has been no change in the
Company's internal control over financial reporting (as defined in Rule
13a-15(f) or 15d-15(f) under the Exchange Act) that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
As of March 31, 2005, the Company's executive officers and directors,
their ages and their positions are set forth below:
Name Age Position
---- --- --------
John Y. Yoon 41 President and Chief Executive Officer
Aziz A. Mohabbat 45 Vice President of Operations and Chief
Operating Officer
Randall A. Mackey, Esq. 59 Chairman of the Board and Director
David M. Silver, PhD. 63 Director
Keith D. Ignotz 57 Director
John C. Pingree 64 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.
John Y. Yoon has served as the Company's President and Chief Executive
Officer since March 19, 2004. From June 2003 to March 19, 2004, Mr. Yoon served
as Senior Director of Marketing, Enterprise Voice Solutions Division of 3Com
Corporation. From 1997 to June 2003, he served as Senior Director of Product
Management and Director of Product Management of 3Com Corporation. During the
period from 1996 to 1997, Mr. Yoon was Director of Strategic Planning and
Product Development of US Robotics. During the period from 1993 to 1996, he
served as Manager of Marketing and Strategic Planning, Senior Director of
Product Management and Management of Product Development for Ericsson, Inc. From
1990 to 1993, Mr. Yoon was Manager of Public Service Marketing and Product Line
Manager of Mobile Radios for Ericsson, Inc. During the period from 1986 to 1988,
he was Product Planner of Business and Industrial Trucking and Marketing
Research Analyst for General Electric Mobile Communications. Mr. Yoon received a
B.A. degree in Economics from Harvard College in 1985 and an M.B.A. degree from
Duke University in 1992.
Aziz A. Mohabbat has served as Chief Operating Officer of the Company
since March 23, 2004 and from August 2002 to March 2003, and as Vice President
of Operations since March 23, 2004 and from 2001 to March 2003. From 2000 to
2001, he served as Managing Director of the San Diego Division of the Company
and from 1999 to 2000 as its Regulatory Affairs and Quality Assurance Manager.
From March 2003 to March 2004, Mr. Mohabbat served as Division Manager of the
Medical Division of TUV Rheilland of North America, a medical products safety
35
and compliance services company. From 1997 to 1999, he served as Operations and
Regulatory Affairs and Quality Assurance Manager of Codan U.S., a subsidiary of
Codan GmbH, a manufacturer of disposable sterile and non-sterile medical
devices. Prior to 1989, Mr. Mohabbat held various management and bioengineering
positions in the medical laboratory and diagnostics field in the Eye Care Clinic
of the University Hospital-Eppendorf and the General Hospital of Barmbek in
Hamburg, Germany. Mr. Mohabbat received a B.S. degree in Medical Laboratory
Technology in 1986 from St. George Hospital College in Hamburg, Germany. He is a
member of the American Society for Quality Assurance.
Randall A. Mackey, Esq. has been the Company's 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 & Ostler
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 and as a member of the American Marketing Association of
the American Association of Diabetes Education.
John C. Pingree has been a director since April 2004. He has been the
Executive Director of the Semnani Foundation since August 2001, which funds
projects to assist women and children in developing countries. From July 1998 to
July 2001, Mr. Pingree was a Mission President for the Church of Jesus Christ of
Latter-day Saints, serving in Mexico City, Mexico. From 1977 to 1997, Mr.
Pingree was General Manager and Chief Executive Officer of Utah Transit
Authority. From 1970 to 1975, he was Director of Marketing for Memorex
Corporation. From 1967 to 1970, Mr. Pingree was Regional Manager, Sales Planning
at Xerox Corporation. He also currently serves as a member of the Utah State
Board of Education. Mr. Pingree received a B.A. degree in Economics from the
University of Utah and an M.B.A. degree from the Harvard Business School.
Appointment of New President and Chief Executive Officer
On March 18, 2004, John Y. Yoon was appointed as the Company's
President and Chief Executive Officer, replacing Jeffrey F. Poore who had served
in those positions from March 19, 2003 to March 18, 2004.
Appointment of New Chief Operating Officer
On March 23, 2004, Aziz A. Mohabbat was appointed as the Company's Vice
President of Operations and Chief Operating Officer, replacing David I.
Cullumber who had served as Chief Operating Officer since November 6, 2003. Mr.
Mohabbat had previously served as the Company's Chief Operating Officer from
August 2002 to March 2003, and as Vice President of Operations from 2001 to
March 2003.
36
Board Meetings and Committees
The Board of Directors held a total of six meetings during the fiscal
year ended December 31, 2004. No director attended fewer than 75% of all
meetings of the Board of Directors during the 2004 fiscal year. The Audit
Committee of the Board of Directors consists of directors Dr. David M. Silver,
Randall A. Mackey, Keith D. Ignotz and John C. Pingree. The Audit Committee met
one time during the fiscal year. The Audit Committee is primarily responsible
for reviewing the services performed by its independent public accountants and
internal audit department and evaluating its accounting principles and its
system of internal accounting controls. The Compensation Committee of the Board
of Directors consists of directors Dr. David M. Silver, Randall A. Mackey, Keith
D. Ignotz and John C. Pingree. The Compensation Committee met one time during
the fiscal year. The Compensation Committee is primarily responsible for
reviewing compensation of executive officers and overseeing the granting of
stock options.
Pursuant to Item 406 of Regulation S-K under the Securities Exchange
Act of 1934, the Company has not yet adopted a code of ethics that applies to
its principle executive officer, principal financial officer, controller or
persons performing similar functions. The Company is still in the process of
studying this issue and intends to adopt a code of ethics in the near future.
The Company's Board of Directors has determined that Keith D. Ignotz
and John C. Pingree, who currently serve as directors of the Company as well as
a member of the Company's audit committee, are independent audit committee
financial experts.
Item 10. Executive Compensation
The following table sets forth, for each of the last three fiscal
years, the compensation received by John Y. Yoon, President and Chief Executive
Officer, and other executive officers whose salary and bonus for all services in
all capacities exceed $100,000 for the fiscal years ended December 31, 2004,
2003 and 2002.
37
Summary Compensation Table
Annual Compensation Long Term Compensation
Awards Payouts
Other Securities
Annual Restricted Underlying Long-term All Other
Name and Compen- Stock Options/ Incentive Compensa-
Principal Position Year Salary$ Bonus($) sation($) Awards($) SARs(#) Payouts($) tion($)
------------------ ---- ------- -------- --------- --------- ------- ---------- ---------
John Y. Yoon 2004(1) $110,961(4) 0 $18,494(4) 0 1,000,000(5) 0 0
President and Chief
Executive Officer
Aziz A. Mohabbat 2004(1) $106,244 0 0 0 0 0 0
Vice President of 2003(2) $ 24,219 0 0 0 0 0 0
Operations and Chief 2002(3) $126,878 0 0 0 0 0 $9,634(7)
Operating Officer(6)
Jeffrey F. Poore 2004(1) $ 41,052 0 0 0 0 0 0
Former President and 2003(2) $136,015 0 0 0 1,000,000(8) 0 0
Chief Executive
Officer
David I. Cullumber, 2004(1) $ 15,894 0 $18,059(9) 0 0 0 0
Former Chief 2003(2) $ 22,312 0 $16,616(9) 0 150,000(10) 0 0
Operating Officer
and Chief Technical
Officer
Gregory C. Hill 2004(1) 0 0 0 0 0 0 0
Former Vice 2003(2) $ 34,000 0 0 0 0 0 0
President of Finance
and Chief Financial
Officer
Thomas F. Motter 2004(1) 0 0 0 0 0 0 0
Former Chairman of 2003(2) 0 0 0 0 0 0 0
the Board and Chief 2002(3) $187,483(11) 0 0 0 0 0 $19,750(12)(13)
Executive Officer
Mark R. Miehle 2004(1) 0 0 0 0 0 0 0
Former President and 2003(2) 0 0 0 0 0 0 0
Chief Operating 2002(3) $134,202 0 0 0 55,000(14) 0 $18,000(12)(15)
Officer
Heber C. Maughan 2004(1) 0 0 0 0 0 0 0
Former Vice 2003(2) $ 36,855 0 0 0 150,000(17) 0 0
President of Finance 2002(3) $114,416 0 0 0 0 0 0
and Chief Financial
Officer(16)
--------------------
38
(1) For the fiscal year ended December 31, 2004
(2) For the fiscal year ended December 31, 2003
(3) For the fiscal year ended December 31, 2002
(4) Of the salary payable to Mr. Yoon pursuant to his employment agreement,
$110,961 was paid to him during 2004 and the remaining amount of
$18,494 payable in 2004 was deferred until the Company's board of
directors has determined that its financial condition is improved.
(5) On March 18, 2004, the Company's board of directors granted Mr. Yoon
options to purchase 1,000,000 shares of the Company's common stock at
an exercise price of $.13 per share.
(6) Mr. Mohabbat has served a Vice President of Operations and Chief
Operating Officer since March 22, 2004 and as Chief Operating Officer
from August 30, 2002 to March 2003. He was not an officer in prior
years.
(7) The amounts under "All Other Compensation" for 2004 consist of payments
to Mr. Mohabbat for accrued vacation days prior to his resignation from
the Company in March 2003.
(8) On March 19, 2003, the Company's board of directors granted Mr. Poore
options to purchase 1,000,000 shares of its common stock at an exercise
price of $.16 per share. These options were terminated on March 18,
2003 when the Company's board of directors terminated Mr. Poore's
employment for cause as defined in the employment agreement.
(9) the Company paid A-Mech Engineering, Inc. a total of $16,616 and
$18,059 for consulting services during 2003 and 2004, respectively.
From 1982 to March 2004, Mr. Cullumber served as President of A-Mech
Engineering, Inc.
(10) On November 6, 2003, the Company's board of directors granted Mr.
Cullumber options to purchase 150,000 shares of the Company's common
stock at an exercise price of $.21 per share. These options were
terminated on June 20, 2003, 90 days after Mr. Cullumber resigned as
the Company's Chief Operating Officer and Chief Technical Officer.
(11) Although Mr. Motter resigned as Chairman and Chief Executive Officer on
August 30, 2002, he continued to receive his salary under the terms of
his employment agreement through December 16, 2002.
(12) The amounts under "All Other Compensation" for 2004, 2003 and 2002
include payments related to the operation of automobiles and/or
automobiles and insurance by the named executives.
(13) The amounts under "All Other Compensation" for 2002 include payments
related to the residential housing accommodations for the Company's
employees, living outside of Utah while they were working at its
corporate headquarters in Salt Lake City, leased from Mr. Motter at
$2,500 per month.
(14) On January 29, 2002, the Company's Board of Directors granted Mr.
Miehle options to purchase the 55,000 shares of the Companys common
stock at an exercise price of $2.75 per share. These options were
terminated on February 28, 2004, one year after expiration of a six
month consulting agreement with the Company, which expired on February
28, 2003.
(15) On September 3, 2002, the Company entered into a consulting agreement
with Mr. Miehle in which the Company was required to pay him monthly
consulting fees of $5,000 over a period of six months. The Company paid
him a total of $15,000 for consulting services during the months of
September, October and November of 2002.
(16) Mr. Maughan served as Interim Chief Executive Officer from August 30,
2002 to March 19, 2003. He served as Vice President of Finance,
Treasurer and Chief Financial Officer from October 1, 2001 until his
resignation on May 31, 2003.
(17) On May 13, 2003, the Company's Board of Directors granted Mr. Maughan
options to purchase 150,000 shares of its common stock at an exercise
price of $.16 per share. These options were terminated on August 29,
2003, 90 days after Mr. Maughan resigned as Vice President of Finance
and Chief Financial Officer.
39
Options
The following table sets forth information regarding stock options
granted during the fiscal year ended December 31, 2004, to each named executive
officer.
Option Grants in Last Fiscal Year
Individual Grants
Percentage of Total
Number of Securities Options Granted to Exercise Price
UnderlyingOptions Employees in Per Share Expiration
Name Granted (#) Fiscal Year(%) ($/Sh) Date
---- ----------- -------------- ------ ----
John Y. Yoon............ 1,000,000(1) 56.3% $.13 4/1/09
Aziz A. Mohabbat........ 200,000(2) 11.3% $.12 4/1/09
(1) Options vest in 36 monthly installments of 27,778 shares, beginning on
April 30, 2004, until such shares are vested.
(2) Options vest in 36 monthly installments of 5,556 shares, beginning on
April 30, 2004, until such shares are vested.
The following table sets forth information regarding unexercised
options to acquire shares of the Company's common stock held as of December 31,
2004, by each named executive officer.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 2004(#) at December 31, 2004($)
----------------------- -----------------------
Shares Acquired Value
Name on Exercise Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
John Y. Yoon.............. 0 0 250,002 749,998 0 0
Aziz A. Mohabbat............ 0 0 50,004 149,996 0 0
The following table sets forth information regarding unexercised
options to acquire shares of the Company's common stock held as of December 31,
2004 by each named executive officer.
40
Director Compensation
On April 19, 2004, John C. Pingree, a director of the Company, was
granted options to purchase 125,000 shares of itscommon stock at an exercise
price of $.12 per share. On September 30, 2004, Messrs. Randall A. Mackey, Dr.
David M. Silver and Keith D. Ignotz, directors of the company, were each granted
options to purchase 125,000 shares of the Company's common stock at an exercise
price of $.13 per share. In addition, outside directors are also reimbursed for
their expenses in attending board and committee meetings. Directors are not
precluded from serving the Company 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, the Company's Board of Directors adopted a 401(k)
Retirement Savings Plan. Under the terms of the 401(k) plan, effective as of
November 1, 1996, the Company may make discretionary employer matching
contributions to its 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 the Company and satisfy other plan requirements are eligible to participate
in the plan.
1995 Stock Option Plan
The Company adopted a 1995 Stock Option Plan, for the officers,
employees, directors and consultants of its 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 its common stock. On February 16, 1996, options for
substantially all 300,000 shares were granted. On June 9, 1997, its 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, its 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, its 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, its 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, its
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.
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
employees. Non-incentive stock options may be granted to any person, including,
but not limited to, its employees, independent agents, consultants as the
compensation committee believes has contributed, or will contribute, to its
success as the compensation committee believes has contributed, or will
contribute, to its 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 its
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 its 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 its 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.
41
Employment Agreements
The Company entered into an employment agreement with Thomas F. Motter,
which commenced on January 1, 1998 and expired on December 31, 2002. The
employment agreement required Mr. Motter to devote substantially all of his
working time as the Company's Chairman and Chief Executive Officer, provided
that he may be terminated for "cause" (as provided in the agreements) and
prohibited him from competing with the Company for two years following the
termination of his employment agreement. The employment agreement provided for
the payment of an initial base salary of $135,000, effective as of January 1,
1998. The employment agreement also provided for salary increases and bonuses as
would 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 as Chairman and Chief Executive Officer
on August 30, 2002. He continued to receive his salary under the terms of the
employment agreement through December 16, 2002.
The Company entered into an employment agreement with Mark R. Miehle,
which commenced on June 5, 2000, and was to expire on June 4, 2003. The
employment agreement required Mr. Miehle to devote substantially all of his
working time as the Company's President and Chief Operating Officer, provided
that he may be terminated for "cause" (as provided in the agreement) and
prohibited him from competing with the Company for two years following the
termination of his employment agreement. The employment 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 the
Company's common stock at $6.00 per share, to be vested in equal annual amounts
over a three year period. The employment 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 the employment
agreement with 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.
The Company entered into an employment agreement with Jeffrey F. Poore,
which commenced on March 19, 2003 and expires on March 19, 2006. The employment
agreement requires Mr. Poore to devote substantially all of his working time as
the Company's President and Chief Executive Officer, provided that he may be
terminated for "cause" (as provided in the agreement) and prohibits him from
competing with the Company for two years following the termination of his
employment agreement. The employment agreement provides for the payment of an
initial base salary of $175,000, effective as of March 19, 2003. The employment
agreement also provides for salary increases and bonuses as shall be determined
at the discretion of the Board of Directors. The employment agreement further
provides for the issuance of stock options to purchase 1,000,000 shares of the
Company's 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.
On March 18, 2004, the Board of Directors terminated Mr. Poore's
employment for cause as defined in the employment agreement. As a result of the
termination of the employment agreement, the Company believes that it has no
further obligations to make salary or bonus payments or provide benefits to Mr.
Poore and all of his stock options have terminated. On May 25, 2004, Mr. Poore
brought a lawsuit against the Company. In his complaint he alleges that the
Company unlawfully terminated his employment and, as a consequence, demands
judgment against us for $350,000, representing his annual salary for the two
remaining years under the employment agreement, for money judgment for the value
of his benefits for the two remaining years under the employment agreement, and
for the value of the stock options granted to him. The Company disputes the
claims in the complaint and believe there was a sufficient basis to terminate
Mr. Poore's employment for cause under the terms of the employment agreement.
The Company entered into an employment agreement with John Y. Yoon,
which commenced on March 18, 2004 and expires on March 18, 2007. The employment
agreement requires Mr. Yoon to devote substantially all of his working time as
the Company's President and Chief Executive Officer, providing that he may be
terminated for "cause" (as provided in the agreement) and prohibits him from
competing with the Company for two years following the termination of his
employment agreement. The employment agreement provides for the payment of an
initial base salary of $175,000, effective as of April 1, 2004. The employment
agreement also provides for salary increases and bonuses as shall be determined
at the discretion of the Board of Directors. The employment agreement further
provides for the issuance of stock options to purchase 1,000,000 shares of the
Company's common stock at $.13 per share. The options vest in 36 equal monthly
installments of 27,778 shares, beginning on April 30, 2004 until such shares are
vested.
In the event of a change of control of the Company, then all
outstanding stock options granted to Mr. Yoon shall be immediately vested. A
change of control shall be deemed to have occurred if (i) a tender offer shall
be made and consummated for the ownership of more than 25% of the Company's
42
outstanding shares; (ii) the Company shall be merged or consolidated with
another corporation and, as a result, less than 25% of the outstanding common
shares of the surviving corporation shall be owned in the aggregate by the
Company's former shareholders, as the same shall have listed prior to such
merger or consolidation; (iii) the Company shall sell all or substantially all
of its assets to another corporation that is not a wholly owned subsidiary or
affiliate; (iv) as a result of any contested election for the Board of
Directors, or any tender or exchange offer, merger of business combination or
sale of assets, the persons who were directors of the Company before such a
transaction shall cease to constitute a majority of the Board of Directors; or
(v) a person other than an officer or director of the Company shall acquire more
than 20% of the outstanding shares of common stock of the Company.
The Company entered into an employment agreement with Aziz A. Mohabbat
on October 5, 2004, which was effective as of April 1, 2004, and expires on
March 18, 2006. However, the term shall be extended an additional one year
period to March 18, 2007 in the event Mr. Mohabbat moves from San Diego,
California to Salt Lake City, Utah and becomes a resident of the state of Utah.
The employment agreement requires Mr. Mohabbat to devote substantially all of
his working time as the Company's Vice President of Operations and Chief
Operating Officer, provided that he may be terminated for "cause" (as provided
in the agreement) and prohibits him from competing with the Company for two
years following the termination of the employment agreement. The employment
agreement provides for the payment of an initial base salary of $144,500,
effective as of April 1, 2004. The employment agreement also provides for salary
increases and bonuses as shall be determined at the discretion of the Company's
Board of Directors. The employment agreement further provides for the issuance
of stock options to purchase 200,000 shares of the Company's common stock at
$.12 per share. These options vest in 36 equal monthly installments of 5,556
shares, beginning on April 30, 2004, until such shares are vested.
In the event of a change of control of the Company, then all
outstanding stock options granted to Mr. Mohabbat shall be immediately vested. A
change of control shall be deemed to have occurred if (i) a tender offer shall
be made and consummated for the ownership of more than 25% of the Company's
outstanding shares; (ii) the Company is merged or consolidated with another
corporation and, as a result, less than 25% of the outstanding common shares of
the surviving corporation shall be owned in the aggregate by the Company's
former shareholders, as the same shall have listed prior to such merger or
consolidation; (iii) the Company sells all or substantially all of its assets to
another corporation that is not a wholly owned subsidiary or affiliate; (iv) as
a result of any contested election for the Company's Board of Directors, or any
tender or exchange offer, merger of business combination or sale of assets, the
persons who were the directors before such a transaction shall cease to
constitute a majority of the Company's Board of Directors; or (v) a person other
than an officer or director of the Company shall acquire more than 20% of the
outstanding shares of the Company's common stock.
Severance Agreement
On August 30, 2002, the Board of Directors terminated the employment
agreement with Mark R. Miehle who had been serving as its President and Chief
Operating Officer. Under the terms of the termination of Mr. Miehle's employment
agreement, the stock options issued to him on April 19, 2000 to purchase 150,000
shares of its common stock at $6.00 per share, on September 11, 2001 to purchase
110,000 shares of its common stock at $2.75 per share, and on January 28, 2002
to purchase 55,000 shares of its common stock at $2.75 per share were fully
vested as of the date of such termination and continue to be exercisable for a
period of one year following the termination of a consulting agreement, at which
time such options would expire.
The termination of the employment agreement also required the Company
to enter into a consulting agreement with Mr. Miehle. Under the terms of the
consulting agreement, Mr. Miehle was to provide consulting services to the
Company for a period of six months for a fee of $5,000 per month. The consulting
agreement was to be automatically renewed for an additional six months at a fee
of $3,000 per month unless the Company delivered written notice to Miehle at
least 30 days prior to the end of the initial six month term that the Company
would not renew the agreement. The Company paid Mr. Miehle a total of $15,000
under the consulting agreement for consulting services during the months of
September, October and November of 2002. The Company also provided written
notice to Mr. Miehle more than 30 days prior to the end of the initial six month
term of the consulting agreement of its intention not to renew the agreement.
Consulting Agreement
On April 3, 2003, the Company entered into a consultant agreement with
Kinexsys Corporation ("Kinexsys"). Under the terms of the agreement, Kinexsys
through its Senior Partner, Timothy R. Forstrom, was to prepare a capital
markets plan and a corporate positioning and communications plan for the
Company, for which Kinexsys was to receive warrants to purchase up to 200,000
shares of the Company's common stock at an exercise price of $.16 per share. The
capital markets plan was to include a detailed analysis of the Company's capital
market structure in relation to current investors, market trends and projected
equity movements, and recommendations on capital management strategies. The
corporate positioning and communications plan was to include a corporate
positioning matrix for markets, analysts, customers and partners, and a
communications plan. The agreement was for a one-year term but could be renewed
at the option of both parties. The Agreement expired on April 3, 2004.
43
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth certain information with respect to
beneficial ownership of the Company's common stock as of March 31, 2005 for (i)
each executive officer (ii) each director, (iii) each person known to the
Company 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) 3,068,451 11.1%
502 South M Street
Tacoma Washington 98405
Dr. David M. Silver (3) 761,166 2.7%
Randall A. Mackey (3) 725,000 2.6%
Keith D. Ignotz (3) 454,560 1.6%
John Y. Yoon (3) 222,224 *
John C. Pingree (3) 231,500 *
Aziz A. Mohabbat (3) 44,448 *
------------
Executive officers and directors
as a group (six persons) 2,438,898 8.8%
-----------------
*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) Based on the Company's shareholder records, Dr. McLeod owns 1,218,451
shares and is the Company's largest sole shareholder. Dr. McLeod's
beneficial ownership is believed to also include 400,000 shares held by
the Douglas A. MacLeod, M.D. Profit Sharing Trust, 200,000 shares held
by St. Mark's Eye Institute and 720,000 shares held by Milan Holdings,
Ltd., which the Company believes Dr. MacLeod to have sole or shared
voting and dispositive powers with regard to such shares. Dr. McLeod's
beneficial ownership further includes shares that may be acquired
currently or within 60 days after March 31, 2005 through the exercise
of warrants as follows: Dr. MacLeod, 200,000 shares; Douglas A.
MacLeod, M.D. Profit Sharing Trust; 100,000 shares; St. Mark's Eye
Institute, 50,000 shares; and Milan Holdings, Ltd., 180,000 shares.
(3) The amounts shown include shares that may be acquired currently, or
within 60 days after March 31, 2005 through the exercise of stock
options are follows: Dr. Silver, 725,000 shares; Mr. Mackey, 725,000
shares; Mr. Ignotz, 453,851 shares; Mr. Yoon, 222,224; Mr. Pingree,
125,000 shares; and Mr. Mohabbat, 44,448 shares.
Item 12. Certain Relationships and Related Transactions
The information set forth herein describes certain transactions between
the Company 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 the Company than those that could be obtained from unaffiliated
parties.
Thomas F. Motter, the Company's former Chairman of the Board and Chief
Executive Officer, leased his former residence to the Company for $2,500 per
month. The primary use of the residential property was for housing
accommodations for its employees living outside of Utah while they were working
at its corporate headquarters in Salt Lake City. The Company paid $2,500 and
$14,000 in rent during 2003 and 2002, respectively. This agreement was
terminated on January 31, 2003.
The Company entered into a consulting agreement with Mark R. Miehle,
the its 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. The Company did not renew the contract upon its expiration. The
Company paid $1,000 and $15,000 under this agreement during 2003 and 2002,
respectively, 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 &
Ostler, which rendered legal services in connection with various corporate
matters. Legal fees and expenses paid to Mackey Price Thompson & Ostler for the
fiscal years ended December 31, 2004 and 2003, totaled $100,000 and $97,000,
respectively. As of December 31, 2004, the Company owed this firm $197,727,
which is included in accounts payable.
44
PART IV
Item 13. Exhibits and Reports on Form 8-K
(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(10)
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 Specimen Series C Convertible Preferred Stock Certificate(4)
4.8 Certificate of the Designations, Powers, Preferences and Rights of
the Series C Convertible Preferred Stock(4)
4.9 Specimen Series D Convertible Preferred Stock Certificate (6)
4.10 Certificate of the Designations, Powers, Preferences and Rights of
the Series D Convertible Preferred Stock (7)
4.11 Warrant to Purchase Common Stock with Cyndel & Co. (6)
4.12 Warrant to Purchase Common Stock with R.F. Lafferty & Co., Inc.
(6)
4.13 Warrant to Purchase Common Stock with Dr. Michael B. Limberg (7)
4.14 Warrant to Purchase Common Stock with John W. Hemmer (7)
4.15 Stock Purchase Warrant with Triton West Group, Inc.(9)
4.16 Warrant to Purchase Common Stock with KSH Investment Group,
Inc.(9)
4.17 Warrant to Purchase Common Stock with Consulting for Strategic
Growth, Ltd.(9)
4.18 Certificate of Designations, Powers, Preferences and Rights of the
Series G Convertible Preferred Stock (14)
10.1 Exclusive Patent License Agreement with PhotoMed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 1995 Stock Option Plan (1)
10.4 Employment Agreement with Thomas F. Motter (5)
10.5 Stock Purchase Agreement with Ocular Blood Flow, Ltd. and Malcolm
Redman (7)
10.6 Consulting Agreement with Malcolm Redman (7)
10.7 Royalty Agreement with Malcolm Redman (7)
10.8 Registration Rights with Malcolm Redman (7)
10.9 Employment Agreement with Mark R. Miehle (8)
10.10 Agreements with Steven J. Bayern and Patrick M. Kolenik (8)
10.11 Private Equity Line of Credit Agreement with Triton West Group,
Inc. (9)
10.12 Asset Purchase Agreement with Innovative Optics, Inc. and Barton
Dietrich Investments, L.P.(10)
10.13 Escrow Agreement with Innovative Optics, Inc., Barton Dietrich
Investments, L.P. (10)
10.14 Assignment and Assumption Agreement with Innovative Optics,
Inc.(10)
10.15 General Assignment and Bill of Sale with Innovative Optics,
Inc.(10)
10.16 Non-Competition and Confidentiality Agreement with Mario F.
Barton(10)
10.17 Termination of Employment Agreement with Mark R. Miehle(12)
45
10.18 Consulting Agreement with Mark R. Miehle(12)
10.19 Employment Agreement with Jeffrey F. Poore (13)
10.20 License Agreement with Sunnybrook Health Science Center(15)
10.21 Major Account Facilitator Contract(15)
10.22 Mutual Release with Douglas A. MacLeod, M.D. and Others(15)
10.23 Purchase Agreement with American Optisurgical, Inc.(15)
10.24 Purchase Order with Westland Financial Corporation(16)
10.25 Non-Waiver Agreement with United States Fire Insurance Company(16)
10.26 Employment Agreement with John Y. Yoon(17)
10.27 Consulting Agreement with Dr. John Charles Casebeer(18)
10.28 Consulting Agreement with Kinexsys Corporation(18)
10.29 Stock Purchase and Sale Agreement with William Ungar (19)
10.30 Employment Agreement with Aziz A. Mohabbat (20)
10.31 Investment Banking Agreement with Alpha Advisory Services, Inc.
(21)
10.32 Manufacturing and Distribution Agreement with E-Technologies, Inc.
(21)
10.33 Settlement Agreement with Innovative Optics, Inc., Barton Dietrich
Investments, L.P. and United States Fire Insurance Company (22)
31.1 Certification pursuant to 18 U.S.C. Section 1350, as enacted by
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as enacted by
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-----------------
(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 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
November 1, 2000.
(9) Incorporated by reference from Report on Form 10-KSB, as filed on
April 16, 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.
(14) Incorporated by reference from Report on Form 10-QSB, as filed on
November 14, 2003.
(15) Incorporated by reference from Amendment No. 2 to Registration
Statement on Form SB-2, as filed on December 15, 2003.
(16) Incorporated by reference from Amendment No. 3 to Registration
Statement on Form SB-2, as filed on February 27, 2004.
(17) Incorporated by reference from Current Report on Form 8-K, as
filed on March 23, 2004.
(18) Incorporated by reference from Report in Form 10-KSB, as filed on
April 14, 2004.
(19) Incorporated by reference from Quarterly Report on Form 10-QSB, as
filed on August 16, 2004.
(20) Incorporated by reference from Amendment No. 6 to Registration
Statement on Form SB-2, as filed on October 20, 2004.
(21) Incorporated by reference from Report on Form 10-QSB, as filed on
November 15, 2004.
(22) Incorporated by reference from Current Report on Form 8-K, as
filed on January 26, 2005.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 2004.
Item 14. Principal Accountant Fees and Services
Fees for the 2004 annual audit of the financial statements and related
quarterly review services were approximately $35,000. Fees in 2004 related to
the review of registration statements and assistance in responding to SEC
comments were approximately $16,000. Fees in 2004 for edgarization of filings
were approximately $10,000. Fees in 2004 for tax return preparation were
approximately $7,000. Other fees in 2004 for meetings and other consultation
were approximately $1,000.
46
Fees for the 2003 annual audit of the financial statements and related
quarterly review services were approximately $51,000. Fees in 2003 related to
the review of registration statements and assistance in responding to SEC
comments were approximately $14,000. Fees in 2003 for edgarization of filings
were approximately $8,000. Fees in 2003 for tax return preparation were
approximately $10,000. Other fees in 2003 for meetings and other consultation
were approximately $3,000.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, there unto duly authorized.
PARADIGM MEDICAL INDUSTRIES, INC.
Dated: May 12, 2005 By: /s/ John Y. Yoon
-------------------------------------
John Y. Yoon,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in counterpart on behalf of
the Company on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John Y. Yoon President and Chief Executive May 12, 2005
----------------------- Officer (Principal Executive
John Y. Yoon Officer)
/s/ Randall A. Mackey Chairman of the Board and May 12, 2005
----------------------- Director
Randall A. Mackey
/s/ David M. Silver Director May 12, 2005
-----------------------
David M. Silver, Ph.D.
/s/ Keith D. Ignotz Director May 12, 2005
-----------------------
Keith D. Ignotz
/s/ John C. Pingree Director May 12, 2005
-----------------------
John C. Pingree
/s/ Luis A. Mostacero Controller (Principal Financial May 12, 2005
----------------------- and Accounting Officer)
Luis A. Mostacero
48
EXHIBIT 31.1
------------
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John Y. Yoon, certify that:
1. I have reviewed this annual report on Form 10-KSB of Paradigm Medical
Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under the
Company's supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is
being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this annual report the
Company's conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this annual report based on such evaluation; and
(c) Disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
registration's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on the Company's most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 12, 2005
/s/ John Y. Yoon
------------------------------------
John Y. Yoon
President and Chief Executive Officer
EXHIBIT 31.2
------------
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Luis A. Mostacero, certify that:
1. I have reviewed this annual report on Form 10-KSB of Paradigm Medical
Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this annual
report based on such evaluation; and
(c) Disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
registration's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 12, 2005
/s/ Luis A. Mostacero
----------------------
Luis A. Mostacero
EXHIBIT 32.1
------------
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Paradigm Medical Industries,
Inc. (the "Company") on Form 10-KSB for the period ending December 31, 2004, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, John Y. Yoon, President and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section
906 of the Sarbanes- Oxley Act of 2002, that, to the best of my knowledge and
belief:
(a) the Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(b) the information contained in the Report fairly presents, in all
material respect, the financial condition and result of operations
of the Company.
/s/ John Y. Yoon
-----------------
Date: May 12, 2005 John Y. Yoon
President and Chief Executive Officer
EXHIBIT 32.2
------------
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Paradigm Medical Industries,
Inc. (the "Company") on Form 10-KSB for the period ending December 31, 2004, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Luis A. Mostacero, Controller of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that, to the best of my knowledge and belief:
(a) the Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(b) the information contained in the Report fairly presents, in all
material respect, the financial condition and result of operations
of the Company.
/s/ Luis A. Mostacero
----------------------
Date: May 12, 2005 Luis A. Mostacero
Controller