UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-QSB/A
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2004
[ ] 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.
(Exact name of registrant as specified in its charter)
Delaware 87-0459536
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 South 1070 West, Salt Lake City, Utah 84119
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (801) 977-8970
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for 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 whether the small business issuer is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.001 par value 25,509,868
----------------------------- ----------------
Title of Class Number of Shares
Outstanding as of
June 30, 2004
Class A Warrant to Purchase
One Share of Common Stock 1,000,000
----------------------------- ----------------
Title of Class Number of Warrants
Outstanding as of
June 30, 2004
PARADIGM MEDICAL INDUSTRIES, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2004
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements....................................................................................... 1
Condensed Balance Sheet (unaudited) - June 30, 2004........................................................ 1
Condensed Statements of Operations (unaudited) for the three and six months ended
June 30, 2004 and June 30, 2003............................................................................ 2
Condensed Statements of Cash Flows (unaudited) for the six months
ended June 30, 2004 and June 30, 2003 ..................................................................... 3
Notes to Condensed Financial Statements (unaudited)........................................................ 4
Item 2. Management's Discussion and Analysis or
Plan of Operation .................................................................................. 6
Item 3. Controls and Procedures .............................................................................. 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................... 10
Item 2. Changes in Securities..................................................................................... 15
Item 3. Defaults Upon Senior Securities........................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders....................................................... 15
Item 5. Other Information......................................................................................... 15
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 15
Signature Page .................................................................................................... 18
i
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
June 30, 2004
--------------
ASSETS
Current Assets
Cash & Cash Equivalents $ 102,000
Receivables, Net 446,000
Inventory 801,000
Prepaid Expenses 47,000
----------------
Total Current Assets 1,396,000
Intangibles, Net 679,000
Property and Equipment, Net 166,000
----------------
Total Assets $ 2,241,000
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade Accounts Payable 724,000
Accrued Expenses 1,040,000
Current Portion of Long-term Debt 57,000
----------------
Total Current Liabilities 1,821,000
Long-term Debt 33,000
----------------
Total Liabilities 1,854,000
Stockholders' Equity:
Preferred Stock, Authorized:
5,000,000 Shares, $.001 par value
Series A
Authorized: 500,000 shares; issued and
outstanding: 5,627 shares at June 30, 2004 -
Series B
Authorized: 500,000 shares; issued and
outstanding: 8,986 shares at June 30, 2004 -
Series C
Authorized: 30,000 shares; issued and
outstanding: zero shares at June 30, 2004 -
Series D
Authorized: 1,140,000 shares; issued and
outstanding: 5,000 shares at June 30, 2004 -
Series E
Authorized: 50,000; issued and
outstanding: 1,000 at June 30, 2004 -
Series F
Authorized: 50,000; issued and
outstanding: 4,598.75 at June 30, 2004 -
Series G
Authorized: 2,000,000; issued and
outstanding: 1,981,560 at June 30, 2004 2,000
Common Stock, Authorized:
80,000,000 Shares, $.001 par value; issued and
outstanding: 25,509,868 at June 30, 2004 25,000
Additional paid-in-capital 57,470,000
Accumulated Deficit (57,110,000)
----------------
Total Stockholders' Equity 387,000
----------------
Total Liabilities and Stockholders' Equity $ 2,241,000
================
See accompanying notes to condensed financial statements
1
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30
2004 2003 2004 2003
------------- ------------- ------------- -------------
Sales $ 806,000 $ 645,000 $ 1,389,000 $ 1,372,000
Cost of Sales 273,000 538,000 501,000 881,000
------------- ------------- ------------- -------------
Gross Profit 533,000 107,000 888,000 491,000
Operating Expenses:
Marketing and Selling 164,000 229,000 349,000 552,000
General and Administrative 139,000 1,060,000 445,000 1,536,000
Research, development and service 153,000 294,000 380,000 574,000
Impairment of assets - 159,000 - 159,000
------------- ------------- ------------- -------------
Total Operating Expenses 456,000 1,742,000 1,174,000 2,821,000
------------- ------------- ------------- -------------
Operating Income (Loss) 77,000 (1,635,000) (286,000) (2,330,000)
Other Income and (Expense):
Interest Income - - - 3,000
Interest Expense (7,000) (5,000) (12,000) (13,000)
Other Income (Expense - - 5,000 -
------------- ------------- ------------- -------------
Total Other Income and (Expense) (7,000) (5,000) (7,000) (10,000)
Net income (loss) before provision
for income taxes 70,000 (1,640,000) (293,000) (2,340,000)
Income taxes - - - -
------------- ------------- ------------- -------------
Net income (loss) $ 70,000 $ (1,640,000) $ (293,000) $ (2,340,000)
============= ============= ============= =============
Net Loss Per Common Share
- Basic and Diluted $ - $ (.07) $ (.01) $ (.10)
============= ============= ============= =============
Weighted Average Outstanding
Shares - Basic 25,373,000 23,983,000 25,373,000 22,985,000
============= ============= ============= =============
- Diluted 27,675,000 23,983,000 25,373,000 22,985,000
============= ============= ============= =============
See accompanying notes to condensed financial statements.
2
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2004 2003
(Unaudited) (Unaudited)
Cash Flows from Operating Activities:
------------------------------------
Net Loss $ (293,000) $ (2,340,000)
Adjustment to Reconcile Net Loss to Net
Cash Used In Operating Activities:
Depreciation and Amortization 81,000 214,000
Issuance of Common Stock for Services - -
Issuance of Stock Option/Warrant for Services - 35,000
Issuance of Common Stock for Settlement
Of potential litigation - 190,000
Increase/decrease in Inventory Reserve - 382,000
Provision for Losses on Receivables - 83,000
Impairment of Intangible and other assets - 159,000
Loss on disposal of assets 6,000 -
(Increase) Decrease from Changes in:
Trade Accounts Receivable 262,000 350,000
Inventories 202,000 299,000
Prepaid Expenses 94,000 19,000
Increase (Decrease) from Changes in:
Trade Accounts Payable 18,000 (10,000)
Accrued Expenses and Deposits (379,000) 619,000
-------------- ---------------
Net Cash Used in Operating Activities (9,000) -
-------------- ---------------
Cash Flow from Investing Activities:
------------------------------------
Purchase of Property and Equipment - (1,000)
Increase in Patents and Intangibles - -
Proceeds from the sale of assets 6,000 -
Net Cash Paid in Acquisition - -
-------------- ---------------
Net Cash Provided By Investing Activities 6,000 (1,000)
-------------- ---------------
Cash Flows from Financing Activities:
-------------------------------------
Additions to notes payable - -
Principal Payments on Notes Payable (27,000) (26,000)
Sale of stock and exercise of warrants - 417,000
-------------- ---------------
Net Cash Used In Financing Activities (27,000) 391,000
-------------- ---------------
Net Decrease in Cash and Cash Equivalents (30,000) 390,000
Cash and Cash Equivalents at Beginning of Period 132,000 194,000
-------------- ---------------
Cash and Cash Equivalents at End of Period $ 102,000 $ 584,000
============== ===============
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest $ 12,000 $ 13,000
============== ===============
Cash Paid for Income Taxes $ - $ -
============== ===============
See accompanying notes to financial statements
3
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Significant Accounting Policies
-------------------------------
The accompanying condensed financial statements of the Company have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. These condensed financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) that, in the opinion of management, are necessary to present fairly
the results of operations of the Company for the periods presented. These
condensed financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's Form 10KSB for the
year ended December 31, 2003. The results of operations for the three and six
months ended June 30, 2004, are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2004.
Going Concern
-------------
The accompanying financial statements have been prepared 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. 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 options to obtain additional capital and financing.
In addition, the Company has taken significant steps to reduce costs and
increase operating efficiencies. Specifically, the Company has significantly
reduced the use of consultants, which has resulted in a large decrease in
expenses. However, sales force increased from three to five representatives in
June, which has resulted in more 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.
Net loss Per Share
------------------
Net loss per common share is computed on the weighted average number of common
and common equivalent shares outstanding during each period. Common stock
equivalents consist of convertible preferred stock, common stock options and
warrants. Common equivalent shares are excluded from the computation when their
effect is anti-dilutive. Other common stock equivalents consisting of options
and warrants to purchase 5,879,170 and 6,502,361 shares of common stock and
preferred stock convertible into 2,302,000 and 402,000 shares of common stock at
June 30, 2004 and 2003, respectively, have not been included in loss periods
because they are anti-dilutive.
4
For the three months ended June 30, 2004 the options and warrants to purchase
5,879,170 shares of common stock were excluded because of the treasury stock
method.
The following table is a reconciliation of the net loss numerator of basic and
diluted net loss per common share for the three and six month periods ended June
30, 2004 and June 30, 2003:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Basic weighted average shares outstanding 25,373,000 23,983,000 25,373,000 22,985,000
Common stock equivalents - convertible preferred stock 2,302,000 - - -
----------------------------------------------------
Diluted weighted average shares outstanding 27,675,000 23,983,000 25,373,000 22,985,000
====================================================
Preferred Stock Conversions
---------------------------
Under the Company's Articles of Incorporation, holders of the Company's Class A
and Class B Preferred Stock have the right to convert such stock into shares of
the Company's common stock at the rate of 1.2 shares of common stock for each
share of preferred stock. During the six months ended June 30, 2004, no shares
of Series A Preferred Stock and no shares of Series B Preferred Stock were
converted to the Company's Common Stock.
Holders of Series D Preferred have the right to convert such stock into shares
of the Company's common stock at the rate of one share of common stock for each
share of preferred stock. During the six months ended June 30, 2004, no shares
of Series D Preferred Stock were converted to the Company's Common stock.
Holders of Series E Preferred have the right to convert such stock into shares
of the Company's common stock at the rate of 53.3 shares of common stock for
each share of preferred stock. During the six months ended June 30, 2004, no
shares of Series E Preferred Stock were converted to the Company's Common stock.
Holders of Series F Preferred have the right to convert such stock into shares
of the Company's common stock at the rate of 53.3 shares of common stock for
each share of preferred stock. During the six months ended June 30, 2004, no
shares of Series F Preferred Stock were converted to shares of the Company's
Common stock.
Holders of Series G Preferred have the right to convert such stock into shares
of the Company's common stock at the rate of one share of common stock for each
share of preferred stock. During the six months ended June 30, 2004, no shares
of Series G Preferred Stock were converted to shares of the Company's Common
stock.
Warrants
--------
The fair value of warrants granted as described herein is estimated at the date
of grant using the Black-Scholes option pricing model. The exercise price per
share is reflective of the then current market value of the stock. No grant
exercise price was established at a discount to market. All warrants are fully
vested, exercisable and nonforfeitable as of the grant date. The Company granted
no warrants to purchase the Company's common stock during the period ended June
30, 2004.
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.
5
Stock options and warrants granted to non-employees for services are accounted
for in accordance with SFAS 123 which requires expense recognition based on the
fair value of the options/warrants granted. The Company calculates the fair
value of options and warrants granted by use of the Black-Scholes pricing model.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation.
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
------------ ----------- -------- ----------
Net income (loss) - as reported $ 70,000 (1,640,000) (293,000) (2,340,000)
Deduct: total stock-based employee
compensation determined under fair value
based method for all awards, net of
related tax effects (109,000) (274,000) (210,000) (311,000)
Net loss - pro forma $ (39,000) (1,914,000) (503,000) (2,651,000)
------------ ----------- -------- ----------
Earnings per share:
Basic and diluted - as reported $ - (0.07) (0.01) (0.10)
Basic and diluted - pro forma $ (0.00) (0.08) (0.02) (0.12)
Related Party Transactions
--------------------------
Payments for legal services to the firm of which the chairman of the board of
directors is a partner were approximately $20,000 and $24,000 for the three
months ended June 30, 2004 and 2003, respectively.
Accrued Expenses
----------------
Accrued expenses consist of the following at June 30, 2004:
Accrued consulting and litigation reserve $ 509,000
Accrued payroll and employee benefits 165,000
Sales taxes payable 35,000
Customer deposits 10,000
Accrued royalties 74,000
Deferred revenue 77,000
Warranty and return allowance 136,000
Other accrued expenses 34,000
------------
Total $ 1,040,000
============
Subsequent Event
----------------
In July 2004, the Company sold its investment in 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 full amount of $532,000
will be recorded as a gain in the quarter ended September 30, 2004.
Item 2: 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.
6
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 exits. Prior to shipment of
product, the Company requires 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 the
customer upon shipment. This revenue recognition policy does not differ among
the 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 do 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.
7
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
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 three months ended June 30,
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.
Results of Operations
Three Months Ended June 30, 2004, Compared to Three Months Ended June
30, 2003
Net sales for the three months ended June 30, 2004 increased by
$161,000, or 25%, to $806,000 as compared to $645,000 for the same period of
2003. This increase was due primarily to the strength in diagnostic products
specifically the perimetry and topography lines as well as strong growth in the
Paradigm's patented Blood Flow Analyzer product line. 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 service enabled significantly reduced wait times and reserve
requirements. Finally, we delivered these results with three full time sales
representatives in 2004 compared with four sales representatives in 2003. At the
end of the quarter, two additional sales representatives were added.
For the three months ended June 30, 2004, sales from the diagnostic
product line totaled $699,000, or 87% of total revenues, compared to $577,000,
or 89% of total revenues for the same period of 2003. There were no sales from
the surgical line for the three months ended June 30, 2004, compared to $68,000,
or 11% of total revenues for the corresponding period of 2003. The remaining 13%
of sales, or $107,000, during the three months ended June 30, 2004 was from
parts, disposables, and service revenue.
Sales of the Ultrasonic Biomicroscope were $125,000 during the second
quarter 2004, or 15% of total quarterly revenues, compared to $167,000, or 26%
of total revenues for the same period last year. Sales of the Blood Flow
Analyzer(TM) increased dramatically by $88,000 to $168,000, or 21% of total
revenues for the three months ended June 30, 2004, compared to net sales of
$80,000, or 12% of total revenues during the same period in 2003. Sales from the
other ultrasonic products increased to $95,000 or 12% of total revenues for the
quarter ended June 30, 2004 compared to $36,000, or 6% of total revenues for the
same period last year. Combined sales of the perimeter and corneal topographer
were $311,000, or 39% of the total revenues for the three months ended June 30,
2004, compared to $294,000, or 46% of total revenues for the same quarter of
2003.
Sales have been lower both for the Company and, in the Company's
opinion, for the industry due to the slowdown in the economy. Our objective is
to focus our sales efforts on the products with the highest potential for sales
and strong margins.
For the three months ended June 30, 2004, gross profit increased by 50%
to 66% of total revenues, compared to the 17% of total revenues for the
comparable period of 2003. The 2003 figure included the burden of a $332,000
inventory reserve while the second quarter of 2004 required no reserve.
Marketing and selling expenses decreased by approximately $65,000, or
28%, to $164,000, for the three months ended June 30, 2004, from $229,000 for
the comparable period in 2003, due mainly to more focused spending and tighter
controls on travel and living expenses. Despite the cost control efforts, the
Company was able to attend the ASCRs show in San Diego, California and add one
additional sales representative in the second quarter of 2004. This brings the
field headcount to four sales representatives; equivalent to the number of sales
representatives in the second quarter of 2003.
General and administrative expenses decreased by $921,000, or 87%, to
$139,000 for the three months ended June 30, 2004, from $1,060,000 for the
comparable period in 2003. During the quarter ended June 30, 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
8
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 expenses for the second quarter of 2004 also include a
$147,000 increase in reserve for doubtful accounts. The decrease is also in part
due to cost containment measures and reduced headcount. The general and
administrative expense in the three months ended June 30, 2003 also included
some significant additional, including $443,000 in accruals to settle
outstanding disputes and $160,000 for additional allowance for doubtful
accounts.
Research, development and service expenses decreased $141,000, or 48%
for the three months ended June 30, 2004, compared to $294,000 recorded in the
same period of 2003. Service department expenses, production development and
support expenses, which include indirect manufacturing costs of purchasing,
shipping and supervisory personnel, all decreased in the second quarter of 2004
compared to the same period a year ago. Much of the improvement is the result of
reorganization of the service department yielding not only cost improvement but
dramatically lower response times and enabled clean up of the service unit
backlogs.
Six Months Ended June 30, 2003, Compared to Six Months Ended June 30, 2002
Net sales increased by $17,000, or 1.2%, to $1,389,000 for the six
months ended June 30, 2004, from $1,372,000 for the comparable period in 2003.
The Company's diagnostic products sales increased by $117,000, or 10%, to
$1,252,000, or 90% of revenues during the first six months of 2004 compared with
$1,135,000, or 83% of total revenues for the comparable period of 2003.
The increase in net sales for the six months ended June 30, 2004, was
largely attributable to the increased sales in the second quarter of 2004, with
sales at $806,000. The increase in sales during the second quarter of 2004 was
primarily due to three factors. First, with the Company under new management,
production was streamlined to improve on-time delivery of products. Second, the
service department was reorganized and much of the outstanding backlog of
service issues were addressed. This, in turn, increased distributor confidence
and led to additional orders. Finally, a greater focus was placed on sales
forecasting and account development, as well as an emphasis on sales in Europe
and in Asia.
In the first six months of 2004, sales of the Ultrasonic Biomicroscope
were $267,000, or 19% of total revenues, compared to $210,000, or 15% of total
revenues in the same period of 2003. Sales from the Blood Flow Analyzer(TM)
increased by $49,000 to $292,000, or 21% of total revenues during the first two
quarters of 2004 compared with $243,000, or 18% of total revenues in the same
period of last year.
During the first half of 2004, sales from other ultrasonic products
totaled $131,000, or 9% of total revenue slightly up over the $129,000, or 9% of
total revenues in the same period last year. Sales of the perimeter and corneal
topographer continued to be strong, particularly after the second quarter
increase posting total revenue of $563,000, or 41% of total revenues in the
first two quarters of 2004 compared with $552,000, or 40% of total revenues,
during the same period of 2003.
Gross profit for the six months ended June 30, 2004 was 64% of total
revenues, compared to 36% of total revenues for the same period in 2003. The
increase is mainly due to the increase in the reserve for obsolete inventory of
$332,000 in the six months ended June 30, 2003.
9
Marketing and selling expenses decreased by $203,000, or 37%, to
$349,000 for the six months ended June 30, 2004, from $552,000 for the
comparable period in 2003. This reduction was due primarily to the lower
headcounts of sales persons and travel related and associated sales expenses.
General and administrative expenses decreased by $1,091,000, or 71%, to
$445,000 for the six months ended June 30, 2004, from $1,536,000 for the same
period in 2003. During the quarter ended June 30, 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 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 for the six months ended June
30, 2004 also included a $147,000 increase in reserve for doubtful accounts.
This reduction was also in part due to cost containment measures and reduced
headcount. The general and administrative expenses in the six months ended June
30, 2003 further included some significant additional expenses, including
$443,000 in accruals to settle outstanding disputes and $83,000 for additional
allowance for doubtful accounts. In addition, general and administrative expense
for the six months ended June 30, 2003 included $190,000 for 1,262,000 shares of
common stock issued to settle potential litigation. The favorable reduction in
general and administrative expense in 2004 also reflects the ongoing results of
the Company's cost reduction program.
Research, development and service expenses decreased by $194,000, or
34%, to $380,000 for the six months ended June 30, 2004, from $574,000 for the
same period in 2002. Expenses associated with the development of new products
during the first six months of 2004 decreased compared to the same period in
2003, as a consequence of the Company's cost reduction program.
There was no impairment of assets for the six months ended June 30,
2004, compared to $159,000 in impairment of assets recorded in the same period
of 2003.
Liquidity and Capital Resources
The Company used $9,000 cash in operating activities for the six months
ended June 30, 2004, compared to $0 for the six months ended June 30, 2003. The
increase in cash used by operating activities for the six months ended June 30,
2004 was primarily attributable to reduction in accrued expenses and deposits.
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 $27,000 for the six months
ended June 30, 2004, versus cash provided of $391,000 in the same period in
2003. During the six months ended June 30, 2004, the Company did not sell any
shares of common or preferred stock. In the past, the Company has relied heavily
upon sales of its common and preferred stock to fund operations. There can be no
assurance that such equity funding will be available on terms acceptable to the
Company in the future.
At June 30, 2004, the Company had a working capital deficit of
$425,000. In the past, the Company has relied heavily upon sales of its common
and preferred stock to fund operations. There can be no assurance that such
equity 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/or private placements of its securities or bank
borrowings. In July 2004, the Company sold its investment in International Bio-
Immune Systems, Inc. (IBS) for $532,000 cash. The Company is uncertain whether
or not the combination of the cash received from the sale of IBS stock and the
benefits from sales of the Company's products will be sufficient to assure the
Company's operations through December 31, 2004. The Company will continue to
seek funding through the sale of common and preferred stock.
At June 30, 2004, the Company had net operating loss carry-forwards
(NOLs) of approximately $34,800,000. These carry-forwards 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.
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.
Item 3. Controls and Procedures
a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of March 31, 2004. Based on this evaluation,
our principal executive officer and our principal financial officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective and adequately designed to ensure that
the information required to be disclosed by us in the reports we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in applicable rules and forms.
(b) Changes in internal controls over financial reporting.
During the quarter ended June 30, 2004, there has been no change in
our internal control over financial reporting that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
10
PART II Other Information
Item 1. 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 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 attorney's fees. Discovery has
taken place and the Company has paid royalties of $14,736 to bring all payments
up to date through June 30, 2001. 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. The issue in
dispute concerning the method of calculating royalties is whether royalties
should be paid on returned equipment. Since July 1, 2001, only one Photon(TM)
laser system has been sold and no systems returned. Thus, the amount of
royalties due, according to the Company's calculations, is $600. The Company
intends to make payment of this amount to PhotoMed and Dr. Eichenbaum and, as a
result, to have the legal action dismissed. 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.
The Company received a demand letter dated December 9, 2002 from
counsel for Dan Blacklock, dba Danlin Corp. The letter demands payment in the
amount of $65,160 for manufacturing and supplying parts for microkeratome
blades. The Company's records show that it received approximately $34,824 in
parts from the Danlin Corp., but that the additional amounts that the Danlin
Corp contends are owed were from parts that were received but rejected by the
Company because they had never been ordered. On August 14, 2003, the Company
agreed to make a $13,650 payment to Danlin Corp. in settlement of the dispute.
The Company since made the $13,650 payment to Danlin Corp.
On May 14, 2003, a complaint was filed in the United States District
Court, District of Utah, captioned Richard Meyer, individually and on behalf of
all others similarly suited v. Paradigm Medical Industries, Inc., Thomas Motter,
Mark Miehle and John Hemmer, Case No. 2:03 CV00448TC. The complaint also
indicates that it is a "Class Action Complaint for Violations of Federal
Securities Law and Plaintiffs Demand a Trial by Jury." The Company has 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.
11
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
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 have 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.
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 advised it that CPT code number 92120 is
the appropriate CPT code for the Company's Blood Flow Analyzer(TM), for
reimbursement purposes for doctors using the device.
On July 11, 2002, the Company issued a press release that stated it
received a purchase order from Westland Financial Corporation and Valdespino
Associates Enterprises for 200 complete sets of its 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 its 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
regarding the status of the Company's 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 the Company's medical device products to the Mexican market.
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.
12
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 represents purchasers of the Company's securities in the class
action suit filed on July 11, 2003, stated that the Company's 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 the Company's
application for insurance.
The Company has paid only $5,000 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
the $5,000 payment due to U.S. Fire on February 15, 2004, but have not yet made
the payments due to U.S. Fire on March 15, April 15, May 15 and June 15, 2004.
In the event U.S. Fire determines that the Company or its 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, for not making the monthly
payments in a timely manner that are owed to U.S. Fire, 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 it 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, it would be unable to
pay such liability and, as a result, would be forced to seek bankruptcy
protection.
On July 10, 2003, a complaint was filed in the United States District
Court, District of Utah captioned Innovative Optics, Inc. and Barton Dietrich
Investments, L.P. v. Paradigm Medical Industries, Inc., Mackey Price & Thompson,
Thomas Motter, Mark Miehle and John Hemmer, Case No. 2:03 CV 00582DB. 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 they allegedly 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.
13
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 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
Innovative and Barton suffered damages in an unspecified 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, and a judgment for substantial damages
is entered against it, and U.S. Fire denies coverage in the litigation under the
Directors and Officers Liability and Company Reimbursement Policy, the Company
would be unable 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 the Company's 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
attorney's 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 be unable to pay such liability and, as a result, would be forced to seek
bankruptcy protection.
An action was filed on June 20, 2003 in the Third Judicial District
Court, Salt Lake County, State of Utah (Civil No. 030914195) by CitiCorp Vendor
Finance, Inc., formerly known as Copelco Capital, Inc. The complaint claims that
$49,626 plus interest is due for the leasing of two copy machines that were
delivered to 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 the
equipment it returned to the leasing company did not work properly. A responsive
pleading has not yet been filed. The Company is currently engaged in settlement
discussions with CitiCorp.
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 attorney's 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.
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 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. The Company disputes the amounts allegedly owed and intends to
vigorously defend and protect its interests in the action.
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 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 disputes the amount allegedly owed and
intends to vigorously defend against such action.
14
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.
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 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. 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.
15
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)
4.1 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)
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 Unger(19)
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
16
-----------------
(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 Annual Report on Form 10-KSB, as filed
on April 14, 2004.
(19) Incorporated by reference from Report on Form 10-QSB, as filed on
August 16, 2004.
(b) Reports on Form 8-K
------------------------
No reports were filed by the Company during the quarter ended June 30,
2004.
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
PARADIGM MEDICAL INDUSTRIES, INC.
November 4, 2004 /s/ John Y. Yoon
-------------------------------------
John Y. Yoon
President and Chief Executive Officer
November 4, 2004 /s/ Luis A. Mostacero
-------------------------------------
Luis A. Mostacero, Controller
18