As filed with the Securities and Exchange Commission on December 21, 2004
Commission File No. 333-103061
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PARADIGM MEDICAL INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 3841 87-0459536
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
2355 South 1070 West
Salt Lake City, Utah 84119
(801) 977-8970
(Address and telephone number of registrant's principal executive offices
and principal place of business)
John Y. Yoon, President and Chief Executive Officer,
2355 South 1070 West
Salt Lake City, Utah 84119
(801) 977-8970
(Name, address and telephone number of agent for service)
----------------------
Copies to:
Randall A. Mackey, Esq.
Mackey Price Thompson & Ostler
350 American Plaza II
57 West 200 South
Salt Lake City, Utah 84101-3663
Telephone: (801) 575-5000
Approximate date of proposed sale to the public:
As soon as practicable after this Registration
Statement becomes effective.
If any of the securities being registered on this Form are being
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 (the "Securities Act"), check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
---------------------------
CALCULATION OF REGISTRATION FEE
================================================================ ============ ============== ============== =============
Title of each Proposed Proposed
class of Amount maximum maximum Amount of
securities to be to be offering aggregate registration
registered registered price offering fee
per Share price
---------------------------------------------------------------- ------------ -------------- -------------- -------------
Resale of Common Stock issuable upon exercise of Class A
Warrants 1,000,000 $ 7.50 $7,500,000 (1)
Resale of Common Stock issuable upon exercise of Kenneth
Jerome Warrants 100,000 8.125 812,500 (1)
Resale of Common Stock issuable upon exercise of Kenneth
Jerome Warrants 100,000 7.50 750,000 (1)
Resale of Common Stock issuable upon exercise of Cyndel
Warrants 225,000 4.00 900,000 (1)
Resale of Common Stock issuable upon exercise of Cyndel
Warrants 250,000 3.00 750,000 (1)
Resale of Common Stock issuable upon exercise of Limberg
Warrants 200,000 4.00 800,000 (1)
Resale of Common Stock issuable upon exercise of Limberg
Warrants 50,000 4.75 237,500 (1)
Resale of Common Stock issuable upon exercise of Limberg
Warrants 50,000 6.75 337,500 (1)
Resale of Common Stock issuable upon exercise of Hemmer
Warrants 75,000 7.50 562,500 (1)
Resale of Common Stock issuable upon exercise of Kohn and
Sucoff Warrants 100,000 4.00 400,000 (1)
Resale of Common Stock issuable upon exercise of Series E
Preferred Warrants 241,095 4.00 964,380 (1)
Resale of Common Stock issuable upon exercise of Series F
Preferred Warrants 230,589 4.00 922,356 (1)
Resale of Common Stock issuable upon exercise of Options 600,000 4.00 2,400,000 (1)
Resale of Common Stock issuable upon exercise of Options 73,103 5.00 365,515 (1)
Resale of Common Stock issuable upon exercise of Options 150,000 6.00 900,000 (1)
Resale of Common Stock issuable upon exercise of Options 786,000 2.75 2,161,500 (1)
Resale of Common Stock issuable to certain holders of
Common Stock 425,000 4.00 1,700,000 (1)
Resale of Common Stock issuable to certain holders of
Common Stock 1,307,484 2.125 2,778,404 (1)
Resale of Common Stock issuable to certain holders of
Common Stock 425,580 2.14 910,741 (1)
Resale of Common Stock issuable to certain holders of
Common Stock 1,968,509 1.16 2,283,470 (1)
Resale of Common Stock issuable upon exercise of Rodman
& Renshaw Warrants 35,000 2.00 70,000 (1)
Resale of Common Stock issuable upon exercise of Warrants 788,750 .25 197,188 (1)
Resale of Common Stock issuable to certain holders of
common stock 365,327 .25 91,332 (1)
---------- ---
Total 9,546,437 $ 0
====
================================================================ ============ ============== ============== =============
(1) No registration fee is required as securities were previously
registered by Form SB-2 Registration Statement, No. 333-2496, effective
as of July 10, 1996; Form SB-2 Registration Statement No. 333-57711,
effective as of September 14, 1998; Form SB-2 Registration Statement
No. 333-68471, effective as of January 4, 1999; Form SB-2 Registration
Statement No. 333-77267, effective as of May 7, 1999; Form S-3
Registration Statement No. 333-93725, effective as of January 6, 2000;
Form S-3 Registration Statement No. 333-44154, effective as of
September 1, 2000; Form S-3 Registration Statement No. 333-50846,
effective as of December 8, 2000; Form S-3 Registration Statement No.
333-66742, effective as of August 22, 2001; Form S-3 Registration
Statement No. 333-75912, effective as of June 21, 2002; Form S-3
Registration Statement No. 333-97837, effective as of September 26,
2002; and From S-3 Registration Statement No. 33-103061, effective as
of February 14, 2003. Pursuant to Rule 429, this is a combined
registration statement which relates to the securities previously
registered by the earlier registration statements and the securities
being registered by this registration statement. The number of
securities being carried forward, which were previously registered by
the earlier registration statements, is 14,479,693 shares of common
stock, and the total amount of the previously paid registration fees
associated with such securities that were previously registered is
$22,703.74. The number of shares being registered by this registration
statement is 9,546,437 shares.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective on
such date as the Commission acting pursuant to said Section 8(a) may determine.
PROSPECTUS
----------
9,546,437 Shares of Common Stock
PARADIGM MEDICAL INDUSTRIES, INC.
Paradigm Medical Industries, Inc. is registering for resale a total of
12,083,584 shares of common stock. Our COMMON STOCK AND Class A warrants are
quoted on the Over-the-Counter Bulletin Board under the symbols PMED.OB and
PMEDW.OB. On December 17, 2004, the last reported sale price for our common
stock was $.10 per share and the last reported sale price for our Class A
warrants was $.02 per warrant.
We are registering the resale of common stock for certain shareholders
and will only receive proceeds to the extent that outstanding warrants or
options are exercised. The exercise price for all of the outstanding warrants
and options exceeds the current trading price for our common stock and, as a
result, the outstanding warrants and options are not likely to be exercised
unless the trading price increases substantially. There are only 200,000 shares
of our common stock underlying these warrants and options that are exercisable
for less than $.20 per share. All other shares of our common stock being
registered are either outstanding or will be issued upon conversion of
outstanding preferred stock, and we will derive no proceeds from the conversions
or subsequent resales of such shares.
Investing in the common stock involves risks that are described in the
"Risk Factors" section beginning on page 6 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is December ___, 2004.
3
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It may
not contain all of the information that is important to you. To understand this
offering fully, you should read the entire prospectus carefully, including the
risk factors and the financial statements.
The Company
We develop, manufacture, source, market and sell ophthalmic surgical
and diagnostic instrumentation and related accessories, including disposable
products. Our surgical equipment is designed for minimally invasive cataract
treatment. A cataract is a condition, which largely affects the elderly
population, in which the natural lens of the eye hardens and becomes cloudy,
thereby reducing visual acuity. Treatment consists of removal of the cloudy lens
and replacement with a synthetic lens implant, which restores visual acuity.
Cataract surgery is the single largest volume and revenue producing outpatient
surgical procedure for ophthalmologists worldwide. The Health Care Finance
Administration reports that in the United States approximately two million
cataract removal procedures are performed annually, making this the largest
outpatient procedure reimbursed by Medicare. Most cataract procedures are
performed using a method called phacoemulsification or "phaco", which employs a
high frequency (40 kHz to 60 kHz) ultrasonic probe needle device to fragment the
cataract while still in the eye and remove it in pieces by suction through a
small incision.
We sell our equipment and related products in all countries of the
world in which we are permitted to do so. The nature of the regulatory approval
processes in those countries vary by country but, in general terms, follow the
approach of the regulatory approval processes of the United States Food and Drug
Administration, or FDA, and the approval processes of the countries in the
European Union. The status of specific approvals is detailed in the table in the
Business section of this prospectus.
We market two cataract surgery systems with related accessories and
disposable products. Our cataract removal system, the Photon(TM) laser system,
is a laser cataract surgery system marketed as the next generation of cataract
removal. The Photon(TM) product has yet to be approved by the Food and Drug
Administration. Except for the Photon(TM) laser system, which can only be sold
in countries outside of the United States, our 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. Both the Photon(TM) and the Precisionist ThirtyThousand
(TM) are manufactured as an Ocular Surgery Workstation(TM). At present, because
the Photon(TM) has not received FDA approval, it does not provide significant
revenue to us. We are in the process of completing the clinical trials in order
to file for FDA approval. However, due to the uncertainty surrounding the
timetable for obtaining FDA approval and the lack of significant revenue from
other surgical products, we have recorded an inventory reserve against the
majority of inventory associated with the Photon(TM) and Precisionist Thirty
Thousand(TM).
Our diagnostic products include a P55 pachmetric 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, Inc. in 1998. We developed and offered for sale in the
fall of 2000 the P45, which combines the A/B scope and the P40 UBM Biomicroscope
in one machine. The perimeter and the corneal topographer were added when we
acquired the outstanding shares of the stock of Vismed, Inc. d/b/a/ Dicon(TM) in
June 2000. We acquired Ocular Blood Flow, Ltd. in June of 2000, whose principal
product is the Blood Flow Analyzer(TM). This product is designed for the
measurement of intraocular pressure and pulsatile ocular blood flow volume for
detection and treatment of glaucoma. We are currently attempting to develop
additional applications for all of our diagnostic products.
We rely upon several products for revenues. For the nine months ended
September 30, 2004, 32% of our revenues were derived from the Dicon(TM)
diagnostic products sales (the perimeter and corneal topographer), 21% of
revenues from Blood Flow Analyzer(TM) sales, 28% of revenues from P40 and P45
UBM Ultrasound Biomicroscope sales, 10% of revenues from Humphrey Systems
diagnostic product sales (the P55 pachymetric analyzer and the P37 Ultrasonic
A/B Scan), and 9% of revenues from services, disposables and other sales. For
the fiscal year ended December 31, 2003, 36% of our revenues were derived from
the Dicon (TM) diagnostic products sales (the perimeter and corneal
topographer), 16% of revenues from Blood Flow Analyzer(TM) sales, 20% of
revenues from P40 and P45 UBM Ultrasound Biomicroscope sales, 9% of revenues
from Humphrey Systems diagnostic product sales (the P55 pachymetric analyzer,
the P20 A-Scan and the P37 A/B Scan), 11% of revenues from cataract removal
surgery sales, including the sale of our SIStem(TM) and Odyssey(TM) product
lines, and 8% of revenues from services, disposables and other sales.
For the fiscal year ended December 31, 2002, 28% of our revenues were
derived from the Dicon(TM) diagnostic products sales (the perimeter and the
corneal topographer), 9% of revenues from Blood Flow Analyzer(TM) sales, 24% of
revenues from the P40 and P45 UBM Ultrasound Biomicroscope sales, 11% of
4
revenues from Humphrey systems diagnostic products sales (the P55 pachymetric
analyzer, the P20 A-Scan and the P37 A/B Scan), 5% of revenues from cataract
removal surgery sales, and 23% of revenues from services, disposables and other
sales. Our principal executive offices are located at 2355 South 1070 West, Salt
Lake City, Utah 84119 and our telephone number is (801) 977-8970.
Audited revenues for the fiscal year ended December 31, 2003 were
$3,059,000 as compared to $5,368,000 for the comparable period for fiscal 2002.
Unaudited revenues for the nine months ended September 30, 2004 were $2,288,000
as compared to $2,225,000 for the comparable period of 2003.
On March 18, 2004, our board of directors appointed John Y. Yoon as
President and Chief Executive Officer of the company, replacing Jeffrey F.
Poore, who served in those positions from March 19, 2003 to March 18, 2004. Our
board of directors terminated Mr. Poore's employment for cause as defined in the
employment agreement. On March 22, 2004, our board of directors appointed Aziz
A. Mohabbat as Vice President of Operations and Chief Operating Officer of the
company, replacing David I. Cullumber who resigned as Chief Operating Officer
and Chief Technical Officer on March 22, 2004 to pursue other business
opportunities. Mr. Mohabbat had previously served as Chief Operating Officer of
the Company from August 2002 to March 2003, and as Vice President of Operations
from 2001 to March 2003.
On June 23, 2003, our board of directors appointed Gregory Hill as Vice
President of Finance, Treasurer and Chief Financial Officer of the Company,
replacing Heber C. Maughan, who resigned as Vice President of Finance, Treasurer
and Chief Financial Officer to pursue other business opportunities. Mr. Hill
resigned from his positions on December 5, 2003 to pursue other business
opportunities.
The board of directors has not yet appointed a new Chief Financial
Officer since Gregory Hill resigned in an effort to conserve our financial
resources. Moreover, since Mr. Hill's resignation, we have endeavored to reduce
our operating expenditures, which has resulted in a reduction in the number of
our employees. Luis A. Mostacero, our Controller, is currently handling the
responsibilities previously assumed by Mr. Hill when he served as our Chief
Financial Officer. It is our intention to appoint a new Chief Financial Officer
in the future when we have adequate funds to do so.
The Offering
Securities Offered ... The resale of 9,546,437 shares of common stock,
consisting of the following:
o The resale of 1,000,000 shares issuable
upon exercise of Class A warrants with
an exercise price of $7.50 per share.
o The resale of 200,000 shares issuable
upon exercise of warrants by Kenneth
Jerome & Co. with exercise prices
ranging from $7.50 to $8.l25 per share.
o The resale of 475,000 shares issuable
upon exercise of warrants by Cyndel &
Co., Inc. with exercise prices ranging
from $3.00 to $4.00 per share.
o The resale of 300,000 shares issuable
upon exercise of warrants by Dr. Michael
B. Limberg with exercise prices ranging
from $4.00 to $6.75 per share.
o The resale of 75,000 shares issuable
upon the exercise of warrants by John W.
Hemmer with exercise price of $7.50 per
share.
o The resale of 50,000 shares issuable
upon exercise of warrants by Helen Cohn
with an exercise price of $4.00 per
share.
o The resale of 50,000 shares issuable
upon the exercise of warrants by Ronit
Sucoff with an exercise price of $4.00
per share.
o The resale of 35,000 shares issuable
upon the exercise of warrants by Rodman
& Renshaw, Inc. with an exercise price
of $2.00 per share.
o The resale of 241,095 shares issuable
upon the exercise of warrants by Series
E preferred holders with an exercise
price of $4.00 per share.
o The resale of 230,589 shares issuable
upon exercise of warrants by Series F
preferred holders with an exercise price
of $4.00 per share.
5
o The resale of 788,750 shares issuable
upon exercise of warrants by Paul L.
Archambeau, M.D., John H. Banzhaf,
Daniel S. Lipson, Douglas A. MacLeod,
M.D., Douglas A. MacLeod, M.D. Profit
Sharing Trust, St. Mark's Eye Institute,
Milan Holdings, Ltd., Frank G. Mauro and
Delbert D. Reichardt with an exercise
price of $.25 per share.
o The resale of 150,000 shares issuable
upon exercise of options by executive
officers, employees and directors with
an exercise price of $6.00 per share.
o The resale of 73,103 shares issuable
upon exercise of options by executive
officers, employees and directors with
an exercise price of $5.00 per share.
o The resale of 600,000 shares issuable
upon exercise of options by executive
officers, employees and directors with
an exercise price of $4.00 per share.
o The resale of 786,000 shares issuable
upon exercise of options by executive
officers, employees and directors with
an exercise price of $2.75 per share.
o The resale of 4,491,900 shares.
Common stock
outstanding prior to 25,764,868 shares.
the offering .........
Common stock
outstanding after the 35,311,305 shares.
offering .............
Use of proceeds....... All funds received by us upon the exercise of
the warrants and options will be used for
general corporate purposes. We will not receive
any proceeds from the conversion of the shares
of Series E preferred stock or Series F
preferred stock.
Risk Factors/Dilution. The offering involves a high degree of risk.
Nasdaq symbols
Common stock..... PMED.OB
Class warrants... PMEDW.OB
RISK FACTORS
Before you invest in our common stock, you should be aware of the risks
described below which constitute material risks to potential investors. You
should consider carefully these risk factors together with all of the other
information included in this prospectus before you decide to invest in our
common stock. If any of the following risks actually occurs, our business,
financial condition and results of operations could suffer, in which case the
trading price of our common stock could decline. No investment should be made by
any person who is not in a position to lose the entire amount of his investment.
Special Note Regarding Forward-Looking Statements
Some of the information in this prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. These statements discuss future expectations,
contain projections of results of operations or of financial condition or state
other "forward-looking" information. When considering such forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this Prospectus. The risk factors noted in this section and other
factors noted throughout this prospectus, including certain risks and
uncertainties, could cause our actual results to differ materially from those
contained in any forward-looking statement.
6
Our auditors have expressed substantial doubt about our ability to continue as a
going concern.
Due to our significant recurring losses and our inability to generate
sufficient cash flows from operations to satisfy our liabilities and sustain
operations, our auditors have expressed substantial doubt about our ability to
continue as a going concern. Although we have had success in raising working
capital from the sale of our common stock in the past, the going concern
language in our auditors' report could negatively affect our ability to raise
such funds in the future. Some investors are unwilling to invest with companies
that have going concern language in the auditors' report and others demand
substantial discounts from the market price. Unless we are able to raise
additional working capital through the sale of our common stock, we will not be
able to continue the development of our products nor will we be able to pay our
existing current liabilities, which could result in protection under bankruptcy
laws. Under certain conditions, including but not limited to having judgments
rendered against us in a court of law, a group of creditors could force us into
bankruptcy due to our inability to pay the liabilities arising out of such
judgments. At this time, we are unable to assess the likelihood that we would
seek bankruptcy protection in the near future. There can be no assurance that we
will be successful in raising working capital from the sale of our common stock.
We have limited working capital, have accumulated significant losses, and expect
our losses to continue.
As of December 31, 2003, we had a deficit working capital of
$(197,000). As of September 30, 2004, our working capital was $76,000. Our
accumulated deficit was $56,817,000 as of December 31,2003, and $56,629,000 as
of September 30, 2004. We had a net loss of $11,155,000 for the fiscal year
ended December 31, 2002 and $3,161,000 for the fiscal year ended December 31,
2003, but a net profit of $188,000 for the nine months ended September 30, 2004.
Our losses have resulted principally from costs incurred in connection with
research and development, including clinical trials, of the laser surgery
system. We did not sell medical products until late 1992. Our ability to become
profitable largely depends on successfully developing clinical applications and
obtain regulatory approvals for our laser surgery products, including the
Photon(TM) laser system, and to effectively market such products. The problems
and expenses frequently encountered in developing new products and the
competitive industry in which we operate will impact whether we are successful.
We may never achieve profitability. Furthermore, we may encounter substantial
delays and unexpected expenses related to research, development, production,
marketing, regulatory matters or other unforeseen difficulties.
Because our securities trade on the OTC Bulletin Board, your ability to sell
your shares in the secondary market may be limited.
Since June 26, 2003, our shares have traded on the OTC Bulletin Board.
As a result, it may be more difficult for an investor to dispose of our
securities, or to obtain accurate quotations on their market value. Furthermore,
the prices for our securities may be lower than might otherwise be obtained. On
October 8, 2002, we received a notice from Nasdaq's Listing Qualifications staff
that for the previous 30 consecutive trading days, the price of our common stock
closed below the minimum $1.00 per share requirement for continued inclusion on
Nasdaq. The notice further provided that if at anytime before April 7, 2003, the
bid price of our common stock closed at $1.00 or more for a minimum of 10
consecutive trading days, we would be notified by the staff that we comply with
such rule.
On April 15, 2003, we received notice of a determination by Nasdaq's
Listing Qualifications staff that we failed to comply with the minimum bid price
rules for continued listing set forth in Nasdaq's rules. Specifically, the
notice stated that we have not regained compliance with the minimum $1.00
closing bid price per share requirement (noting that pursuant to the October 8,
2002, notice from the Nasdaq Listing Qualifications staff, we were provided 180
calendar days, or until April 7, 2003, to regain compliance with this
requirement) and we do not qualify with the $5,000,000 shareholders equity,
$50,000,000 market value of listed securities or $750,000 net income from
continuing operations requirement for an additional 180 calendar day compliance
period to comply with Nasdaq's rules. The April 15, 2003, notice further stated
that as of December 31, 2002, we reported stockholders' equity of $2,847,000 and
net losses from continuing operations of approximately $11,155,000, and as of
April 14, 2003, the market value of our listed securities was $4,208,108.
Accordingly, our common stock would be delisted from the Nasdaq SmallCap Market
at the opening of business on April 24, 2003. Separately, Nasdaq informed us
that listing fees of $22,500 and $18,000 under Rule 4310(c)(13) are owed to the
Nasdaq SmallCap Market.
We requested an oral hearing before a Nasdaq Listing Qualifications
Panel to review the staff's determination. The request automatically stayed the
delisting of our common stock. On April 23, 2003, we received formal notice from
Nasdaq that a hearing to consider our appeal would be held on May 29, 2003. On
May 29, 2003, Dr. Jeffrey F. Poore, our former President and Chief Executive
Officer; Randall A. Mackey, our Chairman of the Board; and Dr. David M. Silver,
a director of the company, attended an oral hearing before a Nasdaq Listing
Qualifications Panel in Washington, D.C. At the hearing Dr. Poore presented to
the panel a definitive plan both for regaining compliance with the particular
deficiencies cited in the April 15, 2003, letter from the Nasdaq Listing
Qualifications staff and sustaining long-term compliance with the Nasdaq
Marketplace Rules, including all applicable maintenance criteria. On June 24,
2003 we received notification from the Nasdaq Listing Qualifications Panel that
we were to be delisted from the Nasdaq Stock Market effective June 26, 2003. Our
securities trade on the OTC Bulletin Board effective June 26, 2003. Because our
7
securities are delisted from the Nasdaq SmallCap Market and now trade on the OTC
Bulletin Board, additional sales requirements on broker-dealers will adversely
affect the ability of purchasers to sell our securities and the trading price of
our securities could decline.
Moreover, because our securities currently trade on the OTC Bulletin
Board, they are subject to the rules promulgated under the Securities Exchange
Act of 1934, as amended, which impose additional sales practice requirements on
broker-dealers that sell securities governed by these rules to persons other
than established customers and "accredited investors" (generally, individuals
with a net worth in excess of $1,000,000 or annual individual income exceeding
$200,000 or $300,000 jointly with their spouses). For such transactions, the
broker-dealer must determine whether persons that are not established customers
or accredited investors qualify under the rule for purchasing such securities
and must receive that person's written consent to the transaction prior to sale.
Consequently, these rules may adversely affect the ability of purchasers to sell
our securities and otherwise affect the trading market in our securities.
Because our shares may be deemed "penny stocks," you may have difficulty selling
them in the secondary trading market.
The Commission has adopted regulations which generally define a "penny
stock" to be any non-Nasdaq equity security that has a market price (as therein
defined) less than $5.00 per share or with an exercise price of less than $5.00
per share, subject to certain exceptions. For any transactions by broker-dealers
involving a penny stock (unless exempt), rules promulgated under the Securities
Exchange Act of 1934 require delivery, prior to a transaction in a penny stock,
of a risk disclosure document relating to the penny stock market. Disclosure is
also required to be made about compensation payable to both the broker-dealer
and the registered representative and current quotations for the securities.
Furthermore, monthly statements are required to be sent disclosing recent price
information for the penny stocks.
If the litigants in the class action lawsuits succeed on any of their claims and
we are denied coverage for the lawsuits under our Directors and Officers
Liability and Company Insurance Policy, we would be unable to pay such
liability, and we would be forced to seek bankruptcy protection.
On May 14, 2003, a complaint was filed in the United States District
Court, District of Utah, captioned Richard Meyer, individually and on behalf of
all others similarly suited v. Paradigm Medical Industries, Inc., Thomas Motter,
Mark Miehle and John Hemmer, Case No. 2:03 CV00448TC. The complaint also
indicates that it is a "Class Action Complaint for Violations of Federal
Securities Law and Plaintiffs Demand a Trial by Jury." We have 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 we falsely stated in our
Securities and Exchange Commission filings and press releases that we had
received authorization to use an insurance reimbursement CPT code from the CPT
Code Research and Development Division of the American Medical Association 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 we never received the CPT code from the American Medical
Association at any time. Nevertheless, it is alleged that we continued to
misrepresent in our SEC filings and press releases that we had received the CPT
code. It is also alleged that we have never made a full, corrective disclosure
with respect to this alleged misstatement.
The complaint also alleges that on July 11, 2002, we issued a press
release falsely announcing that we had received a purchase order from Valdespino
Associates Enterprises and Westland Financial Corporation for 200 sets of our
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 we had never received a true purchase
order for our products. As a result of these alleged misstatements, the
complaint contends that the price of our 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 our common shares during that period suffered
substantial damages. The complaint requests judgment for unspecified damages,
together with interest and attorney's fees.
We dispute 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, we issued a press
release that stated we had received authorization to use common procedure
terminology or CPT code number 92120 for our Blood Flow Analyzer(TM). This press
release was based on a letter we 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 our Blood
Flow Analyzer(TM).
8
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. We are
endeavoring to obtain reimbursement by insurance payors in other states where
there is currently no reimbursement being made. We believe we have continued to
correctly represent in our Securities and Exchange Commission filings that the
CPT Editorial Research and Development Department of the American Medical
Association has advised us that CPT code number 92120 is the appropriate CPT
code for our Blood Flow Analyzer(TM), for reimbursement purposes for doctors
using the device.
On July 11, 2002, we issued a press release that stated we received a
purchase order from Westland Financial Corporation and Valdespino Associates
Enterprises for 200 complete sets of our 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 we entered into with Westland Financial
Corporation for the sale of 200 complete sets of our surgical and diagnostic
equipment to Mexican ophthalmic practitioners. The press release also stated
that the initial order was for $70 million of our 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 our 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 our product sales to the Mexican ophthalmic
practitioners. In that press release the board stated that we had been in
discussions for the prior nine months with Westland Financial Corporation, aimed
at supplying our 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, we 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
our medical device products in Mexico, but we 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 our
common stock was artificially inflated and the persons who purchased our 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 our securities in the class action suit filed on July 11, 2003,
stated that our 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 our 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 our securities in the
consolidated class action. On June 28, 2004, a consolidated amended class action
complaint was filed on behalf of purchasers of our securities. The consolidated
complaint is similar to the three class action complaints and alleges that we
made false representations regarding the CPT code for the Blood Flow
Analyzer(TM), but it includes additional allegations that we 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 we made false statements regarding the purchase order from Westland
Financial Corporation and Valdespino Associates Enterprises. We believe the
consolidated complaint is without merit and intend to vigorously defend and
protect our interests in the case.
We were 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 our application
for insurance.
9
We have paid $30,000 to U.S. Fire toward satisfaction of the $250,000
retention that is applicable to the consolidated cases. We have advised U.S.
Fire that we cannot pay the $250,000 retention due to our current financial
circumstances. As a consequence, on January 8, 2004, we entered into a
non-waiver agreement with U.S. Fire in which U.S. Fire agreed to fund and
advance our retention obligation in consideration for which we have 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, we are required to reimburse U.S. Fire the sum of $10,000 per
month until the entire amount of $250,000 has been paid to U.S. Fire. We have
made payments to U.S. Fire in the aggregate amount of $30,000, of which our 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 we or our 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 we 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 we agree to pay U.S. Fire,
on demand, the full amount of all costs advanced by U.S. Fire, except for those
amounts that we 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, we would owe our
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.
We will be in default under the non-waiver agreement if we fail 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 we are not successful
in defending and protecting our interests in the cases, resulting in a judgment
against us for substantial damages, we 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., 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 us on
January 31, 2002, in which we agreed to purchase all the assets of Innovative in
consideration for the issuance of 1,310,000 shares of the Company's common stock
to Innovative. The complaint claims we breached the asset purchase agreement.
The complaint also claims that we allegedly made false and misleading statements
pertaining to the Blood Flow Analyzer(TM) and concerning a purchase order from
Valdespino Associates Enterprises and Westland Financial Corporation. The
purpose of these statements, according to the complaint, was to induce
Innovative to sell its assets and purchase the shares of our common stock at
artificially inflated prices while simultaneously deceiving Innovative and
Barton into believing that 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 our
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.
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 we also did not file a registration statement with the Securities and
Exchange Commission within five months of the closing date of the asset purchase
transaction. As a result, the complaint alleges that the value of the shares of
our common stock issued to Innovative in the transaction declined, and
Innovative and Barton suffered damages in an unspecified amount to be proven at
trial. We filed an answer to the complaint and also filed counterclaims against
Innovative and Barton for breach of contract. We believe the complaint is
without merit and intend to vigorously defend and protect our interests in the
action. If we are not successful in defending and protecting our interests in
this action, and a judgment for substantial damages is entered against us, and
U.S. Fire denies coverage in the litigation under the Directors and Officers
Liability and Company Reimbursement Policy, we 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." We have 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 we
falsely stated in Securities and Exchange Commission filings and press releases
that we had received authorization to use an insurance reimbursement CPT code
from the CPT Code Research and Development Division of the American Medical
Association in connection with the Blood Flow Analyzer(TM), adding that the CPT
code provides for a reimbursement to doctors of $57.00 per patient for the Blood
Flow Analyzer(TM).
10
The purpose of these statements, according to the complaint, was to
induce investors to purchase shares of our 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 our
Series E preferred stock in the private offering suffered substantial damages to
be proven at trial. The complaint also alleges that we 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. We filed an answer to
the complaint. We believe the complaint is without merit and intend to
vigorously defend our interests in the action. If we are not successful in
defending and protecting our interests in the action, resulting in a judgment
against us for substantial damages, and U.S. Fire denies coverage in the
litigation under the Directors and Officers Liability and Company Reimbursement
Policy, we would be unable to pay such liability and, as a result, would be
forced to seek bankruptcy protection.
On December 8, 2004, we announced that verbal agreements have been made
to settle certain lawsuits brought against us and our former executive officers,
Thomas F. Motter, Mark R. Miehle and John W. Hemmer. The following are the
lawsuits that have been verbally settled:
o The class action lawsuit filed on May 14, 2003 by Richard Meyer,
individually and on behalf of all others similarly situated,
against us and certain former executive officers in the United
States District Court for the District of Utah, which was
consolidated into a single action on June 28, 2004 with two other
class action lawsuits -- the class action lawsuit filed by Michael
Marone on June 2, 2003 and the class action lawsuit filed by Lidia
Milian on July 21, 2003 against us and our former executive
officers in the same court. The consolidated action is captioned
In re Paradigm Medical Industries Securities Litigation, with lead
plaintiffs Rock Solid Investments of Miami, Inc., Brito & Brito
Accounting, Inc. and Joseph Savanjo.
o The class action lawsuit filed on October 14, 2003 by Albert
Kinzinger, Jr., individually and on behalf of all others similarly
situated, in the Third District Court for the State of Utah
against us and certain former executive officers.
o The lawsuit filed on July 10, 2003 by Innovative Optics, Inc.
against us and certain former executive officers.
Under the terms of the settlement agreements, U.S. Fire Insurance
Company, which issued a Directors and Officers Liability and Company
Reimbursement Policy to us for the period from July 10, 2002 to July 10, 2003,
has agreed to pay $2,500,000 in cash to the classes in the class action lawsuits
and to Innovative Optics, Inc. in settlement of these lawsuits. Under the terms
of settlement, we are to pay U.S. Fire the sum of $220,000, representing the
remaining amount owing under a $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. The remaining retention obligation of $220,000 is
payable in monthly installments of $10,000 until the entire amount owing is
paid.
The parties to the settlement and their respective legal counsel are in
the process of preparing written settlement agreements to memorialize the terms
of the verbal agreements. Settlement of the lawsuits is subject to certain
conditions, which include but are not limited to the following:
o Each of the settlement classes shall, in their respective actions
and at their own expense, obtain preliminary approval of the terms
of settlement by both the court in the federal action and the
court in the state action.
o After obtaining a court order granting preliminary approval of the
terms of settlement in the respective actions, each of the classes
are required, in their respective actions and at their own
expense, to provide notice to all persons that are potential
members of the federal settlement class and the state settlement
class, respectively.
o The federal settlement class members and the state settlement
class members shall have a period of time from the date of the
mailing of such notice in which to "opt-out" of the federal
settlement class and state settlement class, respectively.
Under the terms of the settlement, 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 settlement class
or the state settlement class exceeds $250,000. However, if such "opt-outs"
exceed $250,000, the parties in the class have a period of time 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 in the event the "opt-outs" exceed $250,000 and the parties are
unable to reduce the amount of "opt-outs" within an allowable time period, the
terms and conditions of the settlement agreements will have no further force and
effect, and all parties will be restored to their respective positions in the
various legal actions prior to such settlement.
11
If the litigants in other lawsuits succeed on any of their claims, we may be
unable to pay such liability and we would be forced to seek bankruptcy
protection.
We have been involved in other lawsuits besides the class action
lawsuits. If the litigants in these other lawsuits succeed on any of their
claims, we may be unable to pay such liability and, as a result, we could be
forced to seek bankruptcy protection. These other lawsuits include (i) the
complaint filed against us on June 20, 2003 by Citicorp Vendor Finance, Inc.,
formerly known as Copelco Capital, Inc., alleging that $49,626 plus interest is
due for the leasing of two copy machines; (ii) the complaint filed against us on
August 3, 2003, by Corinne Powell, a former employee, alleging that at the time
we laid her off, 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, plus attorney's fees and a wage penalty under Utah law; (iii)
the complaint filed against us on September 10, 2003 by Larry Hicks for payments
due under a consulting agreement in the aggregate amount of $110,000 minus
whatever we have paid to him prior to such termination, plus attorney's fees and
a wage penalty under Utah law; and (iv) the complaint brought against us on or
about May 25, 2004 by Jeffrey F. Poore, former President and Chief Executive
Officer of the company, alleging that we unlawfully terminated his employment
with us and, as a result, he demands judgment against us 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, and for money judgment equal to
the value of the stock options granted to him under the employment agreement.
If we are unable to obtain additional capital, we would be required to eliminate
certain activities that would adversely effect our operations.
We may require substantial funds for various purposes, including
continuing research and development, expanding clinical trials, completing the
FDA approval process for our products (including the Photon(TM) laser system),
and manufacturing and marketing our existing products. We will need to seek
additional capital, possibly through public or private sales of our securities,
in order to fund our activities on a long-term basis. Adequate funds may not be
available when needed or on terms acceptable to us. Insufficient funds may
require us to delay, scale back or eliminate certain or all of our research and
development programs or to license third parties to commercialize products or
technologies that we would otherwise seek to develop ourselves, which may
materially adversely affect our continued operations.
Our research activities may not result in any commercially profitable products.
The science and technology of medical products, including lasers, is
rapidly evolving. Our medical systems may require significant further research,
development, testing and regulatory clearances. They are also subject to the
risks of failure inherent in the development of products based on innovative
technologies. These risks include the possibility that any or all of the
proposed products will prove to be ineffective or unsafe; that they fail to
receive necessary regulatory clearances; that the proposed products are
uneconomical; that others hold proprietary rights which preclude us from
marketing such products; or that others market better products. Accordingly, we
are unable to predict whether our research and development activities will
result in any commercially profitable products. Further, due to the extended
testing and regulatory review process required, we may be unable to sell our
current and proposed products. There is also no guarantee that we will be able
to develop and sell a glaucoma surgery system.
We are uncertain of obtaining FDA approval for our Photon(TM) laser system and
further development of the Photon(TM) is on hold until our financial situation
improves, and we may lose our rights to manufacture or sell the Photon(TM) laser
system if we are unable to agree on the correct method of calculating royalty
payments under a license agreement.
We are subject to substantial regulation by the Food and Drug
Administration or FDA and other federal and state regulatory agencies. FDA
regulations require us to obtain either 510(k) clearance or pre-marketing
approval prior to marketing a product in the United States. We are also subject
to foreign regulation and must receive various types of approvals from foreign
government agencies prior to selling our products in some countries. The
clearance and approval processes for both the FDA and foreign regulatory
authorities are costly, time consuming and uncertain. In addition, we are
required to obtain FDA approval before exporting a device that has not received
FDA marketing clearance or approval. We may never be able to obtain these
required government approvals. Delays or failure to obtain such approvals would
materially and adversely effect us, as would changes in existing requirements.
We have received 510(k) clearance from the FDA for our ultrasonic surgery
systems allowing us to sell both devices in the United States. We have also
received 510(k) clearance to market our Blood Flow Analyzer(TM).
In May 1995, we were granted an investigational device exemption for
our Photon(TM) laser system allowing us to conduct clinical studies in support
of our application with the FDA to obtain approval to market the system. During
the clinical trials, we discovered that the Photon(TM) laser system may not
effectively remove hard (dense or impacted) cataracts. In May 1998, we received
FDA clearance to conduct clinical tests on soft cataracts. We believe the FDA
will approve our 510(k) predicate device application for the Photon(TM) laser
system because in the United States most cataracts are removed before tissue
hardens. We received an FDA warning letter in August 2000 concerning
12
deficiencies in the Phase I clinical trials and, after making several
submissions to the FDA, we received a letter from the FDA in February 2001
stating that the deficiencies had been corrected and the clinical trials could
continue.
We have completed the authorized clinical studies and, in October 2001,
made a supplemental submission to the FDA regarding the 510(k) application. We
received a preliminary review from the FDA of our supplemental submission in
December 2001 and submitted additional clinical information to the FDA on
February 6, 2002. On May 7, 2002, we received a letter from the FDA requesting
further clinical information. We have generated additional clinical information
in response to the letter and are uncertain if we will make a submission to the
FDA with the additional clinical information. Because of the "going concern"
status of the company, management has focused efforts on those products and
activities that will, in its opinion, achieve the most resource efficient
short-term cash flow to the company. As reflected in the results for the fiscal
year ended December 31, 2003, diagnostic products are currently our major focus
and the Photon(TM) and other extensive research and development projects have
been put on hold pending future evaluation when our financial position improves.
Our focus is not on any specific diagnostic product or products, but rather on
our entire group of diagnostic products.
We have also received FDA approval to manufacture and export the
Photon(TM) laser system internationally. However, we have not yet obtained
approval from some foreign countries to market the laser product where approval
is necessary. We anticipate that many contemplated applications of our currently
existing and planned products will be subject to the lengthy regulatory approval
process, including preclinical studies, clinical trials and extensive regulatory
review. This process could take many years and require the expenditure of
substantial resources.
The Photon(TM) laser system is protected under a United States patent
issued to Daniel M. Eichenbaum, M.D. in 1987 and subsequently assigned to
PhotoMed International, Inc. and a Japanese patent issued to us in 1997. The
United States patent expired in September 2004. We secured the exclusive
worldwide rights to this patent from PhotoMed by means of a license agreement
dated July 7, 1993. The license agreement expires when the United States patent
rights expire in September 2004. PhotoMed and Dr. Eichenbaum brought legal
action against us on September 11, 2000 involving an amount of royalties that
are allegedly due and owing to them from the sale of equipment by us under the
license agreement.
We have paid $14,736 to bring all royalty payments up to date through
June 30, 2001. We have been working with PhotoMed and Dr. Eichenbaum to insure
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 parties are unable to agree on a method of
calculating royalties, there is risk that PhotoMed and Dr. Eichenbaum may amend
the complaint to request termination of the license agreement and, if
successful, we would lose our rights to manufacture or sell the Photo(TM) laser
system.
Purchasers of our common shares could experience dilution from our tendering
puts under a private equity line of credit agreement with Triton West.
On June 30, 2000, we entered into a private equity line of credit
agreement with Triton West Group, Inc., in which Triton agreed to provide an
amount up to $20,000,000 to us in order to purchase put common shares pursuant
to the terms and conditions of the agreement. Under the agreement, we may elect
for a period of three years from the effective date of December 8, 2000 (the
date on which the Securities and Exchange Commission declared effective a
registration statement registering shares to be purchased by Triton on put
transactions with us) to exercise our right to tender a put notice to Triton.
The put notice requires Triton to purchase shares of our common stock at 88% of
the market price on the trading day immediately following the valuation period,
which is a period of five trading days beginning two days before the trading day
on which the put notice is deemed to be delivered and two trading days after
such date. Under certain conditions, the purchase price will be reduced to 85%
of the market price of our common stock. The agreement provides certain
restrictions on the tendering of puts. The maximum amount of each put (which may
vary from $750,000 to $2,000,000) is to be determined according to a schedule
based on the trading price of our common stock at the time and the average
30-day volume of such shares. There must be a minimum of 15 business days
between puts. Moreover, a registration statement must be effective registering
the shares of common stock covered by the put. There may be significant dilution
associated with tendering put notices under the agreement. Because a
registration statement is not effective registering the shares issuable under
the equity line of credit, our equity line of credit is currently not available
as a source of equity. The equity line of credit agreement expired by its terms
on December 8, 2003, but the Company is currently in the process of renewing the
agreement.
13
Purchasers of our Common shares will experience dilution if a threatened lawsuit
by Douglas A. MacLeod, M.D. and related entities succeeds on its claims and we
are required to issue additional common shares and warrants to them.
We 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 our common stock and warrants to
purchase 1,192,500 shares of our 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. We believe 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 our common stock or
any additional warrants under the terms of the mutual release. However, if Dr.
MacLeod succeeds on his claims, there would be dilution associated with having
to issue additional common shares and warrants to him and the related entities.
Our products may become obsolete due to rapid technological change.
Our market is subject to rapid technological change. Development by
others of new or improved products, processes or technologies may make our
products obsolete or less competitive. Accordingly, we must continue investing
in research and development on our existing products and to develop new
products. Despite such investment, our current or proposed products may be
unsuccessful.
Our Photon(TM) laser system could receive competition from other laser systems
that are well financed with well-recognized trade names.
Our Photon(TM) laser system will potentially receive competition from
other laser systems, such as excimer, holmium (Ho:YAG), Erbium (Er:YAG), Nd:YLF
(Neodymium:Yttrium-Lithium-Fluoride) or lasers of other wave lengths.
Competition may also come from other medical devices and other surgical
techniques. Further, the cataract surgical device industry is dominated by a
small number of large competitors that are well established in the marketplace,
have experienced management, are well financed and have a well recognized trade
name related to their product lines. We may be unable to penetrate the existing
market and acquire a sufficient market share to be profitable. Significant
competitive factors that will affect future sales include regulatory approvals,
performance, pricing, timely product shipment, safety, customer support,
convenience of use and patient and general market acceptance.
Our new products may incur unexpected production problems, which would impact
our sales and profits.
New ventures, particularly those involved in a highly technical
industry such as the medical industry, have substantial inherent risks. These
risks are in three general areas: technical, mechanical and human.
Notwithstanding any pre-production planning, new products can incur unexpected
problems in full-scale production, which cannot always be foreseen or accurately
predicted. Designs can become unworkable, for unpredicted reasons. Quality
control and component sourcing failures can also be expected from time to time.
Any business, including ours, is substantially dependent upon the capabilities
and performance of both management, engineering and sales personnel. Mistakes in
judgment or performance can be costly and, in certain instances, disabling.
Therefore, management skill, experience, character and reliability are of
significant importance.
Mistakes may occur in the design and manufacture of our products, which could
prevent or limit the sales of such products.
The high-technology product line requires us to deal with suppliers and
subcontractors supplying highly specialized parts, operating highly
sophisticated and narrow tolerance equipment and performing highly technical
calculations. Components must be custom designed and manufactured, which is not
only complicated and expensive, but can also require a number of months to
accomplish. Slight mistakes in either the design or manufacture can result in
unsatisfactory parts that may not be correctable. Because our business requires
the talents of various professions, mistakes from very slight oversights or
miscommunications can occur, resulting not only in costly delays and lost
orders, but also in disagreements regarding liability and, in any event,
extended delays in production. Moreover, we rely on suppliers that are related
to each other for parts and equipment. When dealing with related suppliers the
terms on which parts and equipment are purchased may not be as favorable as
could be obtained from unrelated third-party suppliers.
14
We are dependent upon a limited number of key suppliers for components and parts
used in our products and the interruption in the supply of these components and
parts could impede our ability to deliver our products to market.
We currently purchase components and parts used in our products from a
limited number of key suppliers. Although we maintain alternative suppliers, our
reliance on our 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 our revenues to decline. In
addition, any interruption or discontinuance in the supply of components or
parts could have an adverse effect on our business, results of operation and
financial condition. Further, a significant price increase from any of our
principal suppliers could cause our profitability to decline if we cannot
increase the prices of our products to our customers. Our principal suppliers
include Capistrano Labs, U.S. Ultrasound and Anello.
No independent marketing studies have been made to confirm the commercial demand
for the Photon(TM) laser system and the Blood Flow Analyzer(TM).
We believe that there is substantial commercial demand for our
Photon(TM) laser system and our Blood Flow Analyzer(TM) for the eyes at a
profitable price. However, this belief is solely based on our management's
experience and judgment. At this time, there have been no independent marketing
studies by independent professional marketing firms to reliably confirm the
extent of this demand, the price ranges within which it exists and the amount of
promotion necessary to exploit whatever demand does exist.
Our Photon(TM) laser system may not be accepted in the marketplace because it
does not remove hard cataracts.
Our products may not be accepted in the marketplace. Such acceptance
will depend on a number of factors including receiving regulatory approvals,
demonstrating the safety, and advantages of our products over existing systems
and techniques. Our Photon(TM) laser system may never gain market acceptance
since the system does not effectively remove hard (dense or impacted) cataracts.
Further, we may be unable to successfully market our products even if they
perform successfully in clinical applications. Our Precisionist
ThirtyThousand(TM) Workstation(TM) may not gain acceptance unless we can reduce
or eliminate the vacuum surge and develop additional, complementary surgical
devices for installation in that host system. Vacuum surge is a phenomenon that
occurs when the tip of the ultrasonic needle is obstructed by target tissue,
allowing pressure to build up and, if the pressure is not released, a rush of
fluid goes from the chamber of the eye into the needle to equalize the pressure.
The result can be complications to the eye such as posterior capsule rupture,
iris capture and chamber collapse. We believe this phenomenon affects all other
ultrasonic cataract removal systems currently on the market.
Our pending patents may not be perfected and our present or future patents may
infringe upon the patents of others, which could restrict or prevent the
manufacture and sale of our products.
We depend on our ability to license and obtain patents and on the
adherence to confidentiality agreements executed by employees, consultants and
third-parties to maintain the proprietary nature of our technology and to
operate without infringing on the proprietary rights of others. A United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. protects our laser probe.
These patent rights expire in September 2004. Patents have also been granted to
the Blood Flow Analyzer(TM) in the United States and the United Kingdom, to the
Dicon(TM) Topographer in the United States, and to the Dicon(TM) Perimeter in
the United States, the United Kingdom, Germany and Switzerland. The pending
patents may not be perfected. Also, our present or future products may be found
to infringe upon the patents of others. If our products are found to infringe on
the patents, or otherwise impermissibly utilize the intellectual property of
others, our development, manufacture and sale of such products could be severely
restricted or prohibited. We may be required to obtain licenses to utilize such
patents or proprietary rights of others and acceptable terms may be unavailable.
If we do not obtain such licenses, the development, manufacture or sale of
products requiring such licenses would be materially adversely affected. In
addition, we could incur substantial costs in defending ourselves against
challenges to our patents or infringement claims made by third parties or in
enforcing any patents we may obtain.
Because patents only provide limited protection, others could produce and
distribute products similar to the Photon(TM) laser system and the Blood Flow
Analyzer(TM).
We rely on the protections for our products that we hope to realize
under the United States and foreign patent laws. However, patents provide
limited protections. We have a United States and Japanese patent on the
hand-held probe design and applications for various foreign patents are either
pending or planned, and the patents for the Blood Flow Analyzer(TM) for the eyes
are reported by Ocular Blood Flow, Ltd. to have been approved in the United
States and the United Kingdom. Similar devices, however, could be designed that
do not infringe on our patent rights, but that are similar enough to compete
against our patented products. Moreover, it is possible that an unpatented but
15
prior existing device or design may exist that has never been made public and
therefore is not known to us or the industry in general. Such a device could be
introduced into the market without infringing on our current patent. If any such
competing non-infringing devices are produced and distributed, our profit
potential would be seriously limited, which would seriously impair our
viability.
Some of our products may be denied reimbursement by third-party payors, such as
government programs and private insurance plans.
We anticipate that our medical devices will generally be purchased by
ophthalmologists and hospitals that will then bill various third-party payors,
such as government programs and private insurance plans, for the health care
services provided to their patients. Government agencies generally reimburse at
a fixed rate based on the procedure performed. Some of the potential procedures
for which our medical devices may be used, however, may be denied reimbursement
as elective. In addition, third-party payors may deny reimbursement if they
determine that the use of our products was unnecessary, inappropriate, not
cost-effective, experimental or used for a non-approved indication. Certain
purchasers of our Blood Flow Analyzer,(TM), for example, have had difficulty in
obtaining reimbursement from insurance carriers. Even if we receive FDA
clearances for our products, third-party payors may nevertheless deny
reimbursement. Furthermore, third-party payors increasingly challenge the prices
charged for medical products and services. Reimbursement from third-party payors
may be unavailable or if available, that reimbursement may be limited when
compared with reimbursement for competitive procedures, thereby materially
adversely affecting our ability to profitably sell products. The market for our
products could also be adversely affected by recent federal legislation that
reduces reimbursements under the capital cost pass-through system utilized in
connection with the Medicare program. Failure by hospitals and other users of
our products to obtain reimbursement from third-party payors or changes in
government and private third-party payors' policies toward reimbursement for
procedures employing our products would have a material adverse effect on us.
Congress may introduce legislation that could result in price limits and
utilization controls on our products.
Members of Congress have introduced legislation to change aspects of
the delivery and financing of health care services. Such legislation to control
or reduce public (Medicare and Medicaid) and private spending on health care, to
reform the methods of payment for health care goods and services by both the
public and private sectors, and to provide universal access to health care may
be passed. We cannot predict what form this legislation may take or the effect
of such legislation on our business. It is possible that the legislation
ultimately enacted by Congress will contain provisions resulting in price limits
and utilization controls which may reduce the rate of increase in the growth of
the ophthalmic laser market or otherwise adversely affect our business. It is
also possible that future legislation could result in modifications to the
nation's public and private health care insurance systems that will affect
reimbursement policies in a manner adverse to us. We also cannot predict what
other legislation relating to our business or the health care industry may be
enacted, including legislation relating to third-party reimbursement, or what
effect legislation may have on the results of our operations.
Our product liability insurance could be inadequate to cover liabilities if we
face significant product liability claims against us.
The nature of our business exposes it to risk from product liability
claims and there can be no assurance that we can avoid significant product
liability exposure. We maintain product liability insurance providing coverage
up to $2,000,000 per claim with an aggregate policy limit of $2,000,000. There
is substantial doubt that this amount of insurance would be adequate to cover
liabilities should we face significant claims. A successful products liability
claim brought against us could have a material adverse effect on our business,
operating results and financial condition. Further, product liability insurance
is becoming increasingly expensive, and there can be no assurance that we will
successfully maintain adequate product liability insurance at acceptable rates,
or at all. Should we be unable to maintain adequate product liability insurance,
our ability to market our products would be significantly impaired. Any losses
that we may suffer from future liability claims or a voluntary or involuntary
recall of our products and the damage that any product liability litigation or
voluntary or involuntary recall may do to the reputation and marketability of
our products would have a material adverse effect on our business, operating
results and financial condition.
Our future products sales in foreign countries could be adversely affected by a
significant increase in value of the U.S. dollar against local currencies,
economic and political instability, and changes in the regulatory processes and
other regulations.
We anticipate that a significant portion of our future product sales
will be in foreign countries. Because we quote prices for our products and
accept payment on sales principally in U.S. dollars, any significant increase in
the value of the U.S. dollar against local currencies may make our products less
competitive with foreign products. The economic and political instability of
some foreign countries also may affect the ability of ophthalmologists and
others to purchase our products, or the ability of potential customers to pay
for the procedures for which our products are used. In addition, other specific
risks in doing business in foreign countries include changes in the regulatory
processes affecting our products, in controls governing foreign payments by our
customers, and in regulations, taxes and customs duties or requirements that may
16
be imposed on the purchase of our products. The foreign countries where our
products are sold include but are 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. Certain of countries may experience political, economic or
social instability, which could adversely affect our sales.
The market price of our securities could fluctuate significantly.
Our common stock and Class A warrants were delisted on The Nasdaq
SmallCap Market effective June 26, 2003 and currently trade on the OTC Bulletin
Board. Factors such as announcements by us of the regulatory status of products,
quarterly variations in our financial results, the gain or loss of material
contracts, changes in management, regulatory changes, trends in the industry or
stock market and announcements by competitors, among other things, could cause
the market price of such securities to fluctuate significantly.
We may issue preferred shares with preferences in an equal or prior rank to
existing preferred shares.
Our certificate of incorporation authorizes the issuance of shares of
"blank check" preferred stock, which will have such designations, rights and
preferences as our board of directors may determine from time to time.
Accordingly, our Board of Directors is empowered, without stockholder approval
(but subject to applicable government regulatory restrictions), to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights of the holders of
our common stock. Those terms and conditions may include preferences on an equal
or prior rank to existing preferred stock. Those shares may be issued on such
terms and for such consideration as the board then deems reasonable and such
stock shall then rank equally in all aspects of the series and on the
preferences and conditions so provided, regardless of when issued. In the event
of such issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of our company. As of November 30, 2004, the following preferred shares
were issued and outstanding: 5,627 shares of Series A preferred stock
convertible into 6,753 common shares; 8,986 shares of Series B preferred stock
convertible into 10,783 common shares; no shares of Series C preferred stock;
5,000 shares of Series D preferred stock convertible into 8,750 common shares;
1,000 shares of Series E preferred stock convertible into 53,333 common shares;
4,598.75 shares of Series F preferred stock convertible into 245,267 common
shares; and 1,726,560 shares of Series G preferred stock convertible into
1,981,560 common shares.
Our preferred shares have rights that amount to a preference over the shares of
this offering.
Our preferred shares have dividend and liquidation rights that amount
to preferences over the shares of this offering. We must pay any cash dividends
to our holders of preferred shares before paying cash dividends to the holders
of the shares of this offering. The dividend rights of our preferred shares are
as follows: for Series A and Series B preferred shares, $.24 per share per annum
payable, at our option, in cash from surplus earnings; for Series C preferred
shares, 12% non-cumulative preferred shares payable, at our option, in common
stock or cash from surplus earnings; and for Series D, E, F and G preferred
shares, 8% non-cumulative preferred dividends payable, at our option, in common
stock or cash from surplus earnings. Upon our liquidation, we must pay
preferential distributions to our preferred shareholders before paying any
distributions to holders of the shares of this offering. The liquidation rights
of our preferred shares are as follows: for Series A preferred shares, $1.00 per
share, plus accrued and unpaid dividends; for Series B preferred shares, $4.00
per share, plus accrued and unpaid dividends; for Series C preferred shares, the
stated value of $100.00 per share, plus declared but unpaid dividends; for
Series D preferred shares, the stated value of $1.75 per share, plus declared
but unpaid dividends; for Series E, F, and G preferred shares, the greater of
(i) the amount of distributions such shares would have received had the holders
converted such preferred shares into common stock immediately prior to
liquidation, or (ii) the stated value of $100.00 per share, plus declared but
unpaid dividends.
Exercise of outstanding options and warrants will dilute existing stockholders
and could decrease the market price of our common stock
As of November 30, 2004, we had issued and outstanding 25,764,868
shares of our common stock, shares of Series A, B, D, E, F and G preferred stock
convertible into 1,825,743 shares of common stock, and outstanding options and
warrants to purchase 8,365,444 additional shares of common stock. The existence
of the outstanding preferred shares, options and warrants may adversely affect
the market price of our common stock and the terms under which we could obtain
additional equity capital. Included in the outstanding options is 1,000,000
options issued to John Y. Yoon, our President and Chief Executive Officer, under
the terms of his employment agreement with us. These options are exercisable at
$.13 per share and vest in 36 equal monthly installments of 27,778 shares,
beginning on April 30, 2004 until such shares are fully vested.
17
We do not expect to pay any cash dividends in the foreseeable future.
We issued a stock dividend on our Series A preferred stock and Series B
preferred stock on January 8, 1996, to stockholders of record as of December 31,
1994. We have not paid any cash dividends on our common shares and do not expect
to declare or pay any cash or other dividends in the foreseeable future so that
we may reinvest earnings, if any, into the development of the business. The
holders of our Series A preferred stock, Series B preferred stock, Series C
preferred stock, Series D preferred stock, Series E preferred stock, Series F
preferred stock and Series G preferred stock are entitled to non-cumulative cash
dividends paid out of surplus earnings.
We may have continuing liability following our rescission offer in 1996 to
Series B preferred shareholders.
We issued 493,000 shares of Series B preferred stock in 1994 and 1995.
The Series B shares may not have been sold in compliance with certain aspects of
California corporate law and federal and state securities laws. Concurrently
with our July 1996 public offering, we provided the Series B shareholders with a
rescission offer to repurchase all Series B preferred shares or rescission
shares owned by the Series B shareholders. The Series B shareholders were
offered the right to rescind their purchases and receive a refund of the price
paid by them of $4.00 per share plus an amount equal to the interest thereon at
rates ranging from 6% to 12% per annum from the date the rescission shares were
purchased to July 25, 1996, the date our public offering closed and each
rescinding shareholder was paid by us. The original purchasers of approximately
93% of the Series B shares (460,250 shares) rejected the rescission offer by
responding as requested in the rescission offer or by failing to return a
response within 30 days of receiving the rescission offer. Two shareholders
owning a combined total of 32,750 shares accepted the rescission offer. We
purchased the 32,750 shares from the two shareholders accepting the rescission
offer from the proceeds from our public offering.
The rescission offer was designed to reduce any type of contingent
liability we may be subject to in connection with its private placement of
Series B preferred stock. However, the rescission offer may not have fully
relieved us from exposure to contingent liability under federal or state
securities laws. Not every state statutorily provides for voluntary rescission
offers. In addition, other states, although authorizing rescission offers, do
not completely limit the liability of the offeror. Thus, we may have continuing
liability in certain states following the rescission offer. Other than the
payments in 1996 to the two shareholders accepting the rescission offer, we have
made no additional payments thereunto as no other shareholder has accepted the
rescission offer. Moreover, there has been no litigation by a shareholder
involving the private offering of Series B preferred stock or the rescission
offer. As of November 30, 2004, a total of 484,014 shares of Series B preferred
stock have been converted into 580,817 shares of common stock. There are a total
of 8,986 shares of Series B preferred stock issued and outstanding, which are
convertible into 10,783 shares of common stock.
Because we failed to hold an annual shareholders meeting in fiscal 2003 and
fiscal 2004, the Delaware Court of Chancery may order an annual meeting to be
held upon request by a shareholder.
We did not hold an annual meeting of the shareholders for fiscal 2003
or fiscal 2004 in order to avoid the costs of such a meeting, including the cost
of preparing and mailing a proxy statement and annual report to each of our
shareholders. There were no actions taken in 2003 or 2004 by the board of
directors or our management that required shareholder approval. Under Delaware
law, we are required to hold an annual shareholders meeting each year. A failure
to hold an annual shareholders meeting does not affect otherwise valid corporate
acts or work a forfeiture or dissolution of the company. Moreover, under
Delaware law, directors continue to serve as directors despite lack of an annual
shareholders meeting until the next annual shareholders meeting and until their
successors have been elected and qualified. However, if we fail to hold an
annual shareholders meeting for a period of 30 days after the date designated in
our bylaws for the annual meeting, the Delaware Court of Chancery may order an
annual meeting to be held upon the application of any of our shareholders. If an
annual meeting is ordered to be held by the court, we would have to incur the
costs of holding the meeting, including the cost of preparing and mailing the
proxy statement and annual report to each of our shareholders. We anticipate
holding an annual shareholders meeting in 2004.
We have indemnification agreements with certain officers and directors that may
require us to indemnify them in a civil or criminal action.
Our certificate of incorporation eliminates in certain circumstances
the liability of directors for monetary damages for breach of their fiduciary
duty as directors. We have entered into indemnification agreements with certain
directors and officers. Each such indemnification agreement provides that we
will indemnify the indemnitee against expenses, including reasonable attorneys'
fees, judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of his performance of his duties as a
18
director or officer, other than an action instituted by the director or officer.
The indemnification agreements will also require that we indemnify the director
or other party thereto in all cases to the fullest extent permitted by
applicable law. Each indemnification agreement will permit the director or
officer that is party thereto to bring suit to seek recovery of amounts due
under the indemnification agreement and to recover the expenses of such a suit
if he or she is successful.
Our Board of Directors has the right to issue additional shares of common stock
and to create a new series of preferred stock that could dilute holders of
common stock.
Our board of directors has the inherent right under applicable Delaware
law, for whatever value the board deems adequate, to issue additional common
shares up to the limit of shares authorized by the certificate of incorporation,
and, upon such issuance, all holders of shares of common stock, regardless of
when they are issued, thereafter generally rank equally in all aspects of that
class of stock, regardless of when issued. Our board of directors likewise has
the inherent right, limited only by applicable Delaware law and provisions of
the Certificate of Incorporation to increase the number of preferred shares in a
series, to create a new series of preferred shares and to establish preferences
and all other terms and conditions in regard to such newly-created series. Any
of those actions will dilute the holders of common shares and also affect the
relative position of the holders of any series of any class. Current
stockholders have no rights to prohibit such issuances nor inherent "preemptive"
rights to purchase any such stock when offered.
USE OF PROCEEDS
Holders of our warrants are not obligated to exercise any of their
warrants and holders of our options are not obligated to exercise any of their
options. The closing bid price of our common shares on The Nasdaq SmallCap
Market was $.10 on December 17, 2004. Only 788,750 of our common shares
underlying the warrants and options are exercisable for less than $2.00 per
share and such warrants are exerciseable at $.25 per share. As a consequence,
most of the outstanding warrants and options are not likely to be exercised
unless the trading price increases substantially. All other shares of our common
stock being registered are either outstanding or will be issued upon conversion
of outstanding preferred stock and we will derive no proceeds from the
conversions or subsequent resales of such shares.
If there are any net proceeds from this offering, we will use these net
proceeds to fund working capital requirements. In the event sufficient proceeds
are not received, our short term plan is to meet cash needs through external
financing sources such as bank financing, a public offering of our securities
and private offerings of debt and/or equity. We expect the cash flow from
operations to provide additional funds for us as operating revenues increase.
The cost, timing and the amount of funds required for such uses by us
cannot be previously determined at this time and will be based upon, among other
things, competitive developments, the rate of our progress in product
development, and the availability of alternative methods of financing. In
addition, our Board of Directors has broad discretion in determining how the
proceeds of this offering will be allocated.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Dividends paid in cash pursuant to outstanding shares of our Series A,
Series C, Series D, Series E, Series F and Series G preferred stock are only
payable from our surplus earnings and are non-cumulative and therefore, no
deficiencies in dividend payments from one year will be carried forward to the
next. We currently intend to retain future earnings, if any, to fund the
development and growth of our proposed business and operations. Any payment of
cash dividends in the future on the common stock will be dependent upon our
financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, restrictions, if any, under any debt
obligations, as well as other factors that our board of directors deems
relevant.
CAPITALIZATION
The following table sets forth our capitalization on an actual basis as
of December 31, 2003 and September 30, 2004.
19
December 31, September 30,
2003 2004
------------- --------------
Long-term obligations $ 61,000 $ 22,000
Stockholders' Equity:
Series A Preferred Stock, $.001 par value per share; 500,000
shares authorized, 5,627 issued and outstanding - -
Series B Preferred Stock, $.001 par value per share;
500,000 shares authorized, 8,986 issued and outstanding - -
Series C Preferred Stock, $.001 par value per share;
30,000 shares authorized, 0 issued and outstanding - -
Series D Preferred Stock, $.001 par value per share;
1,140,000 shares authorized, 5,000 issued and outstanding - -
Series E Preferred Stock, $.001 par value per share;
50,000 shares authorized, 1,000 issued and outstanding - -
Series F Preferred Stock, $.001 par value per share;
50,000 shares authorized, 5,623.75 and 4,597 issued and
outstanding, respectively - -
Series G Preferred Stock, $.001 par value per share;
2,000,000 shares authorized, 1,981,560 issued and
outstanding 2,000 2,000
Common Stock, $.001 par value per share; 80,000,000
shares authorized, 24,991,432 and 25,509,868 issued and
outstanding, respectively 25,000 25,000
Additional paid-in-capital, common stock 57,470,000 57,470,000
Accumulated deficit (56,817,000) (56,629,000)
Total stockholders' equity 680,000 868,000
Total Capitalization $ 741,000 $ 890,000
20
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our authorized capital stock consists of 80,000,000 shares of common
stock, $.001par value per share, and 5,000,000 shares of preferred stock, $.001
par value per share. We have created seven classes of preferred stock,
designated as Series A preferred stock, Series B preferred stock, Series C
preferred stock , Series D preferred stock, Series E preferred stock, Series F
preferred stock and Series G preferred stock.
Our common stock and Class A warrants trade on the OTC Bulletin Board
under the respective symbols of "PMED.OB" and "PMEDW.OB." Prior to July 22,
1996, there was no public market for the common stock. From July 22, 1996 to
June 25, 2003, our common stock and Class A warrants were listed on the Nasdaq
SmallCap Market. Since June 25, 2003, our common stock and Class A warrants have
traded on the OTC Bulletin Board. As of December 17, 2004, the closing sale
prices of the common stock and Class A warrants were $0.10 per share and $.02
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.
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 (through December 17, 2004).. .12 .08 .02 .02
Our Series A preferred stock, Series B preferred stock, Series C
preferred stock, Series D preferred stock, Series E preferred stock, Series F
preferred stock and Series G preferred stock are not publicly traded. As of
November 30, 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.
We have never paid any cash dividends on our common stock and does not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We must pay cash dividends to holders of our Series A preferred, Series
B preferred, Series C preferred, Series D preferred stock, Series E preferred,
Series F preferred stock and Series G preferred stock before it can pay any cash
dividend to holders of our common stock. Dividends paid in cash pursuant to
outstanding shares of our Series A, Series B, Series C, Series D, Series E,
Series F and Series G preferred stock are only payable from our surplus
earnings, and are non-cumulative and therefore, no deficiencies in dividend
payments from one year will be carried forward to the next.
21
We currently intend to retain future earnings, if any, to fund the
development and growth of our proposed business and operations. Any payment of
cash dividends in the future on the common stock will be dependent upon our
financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, restrictions, if any, under any debt
obligations, as well as other factors that our board of directors deems
relevant. We issued 6,764 shares of our Series A preferred and 6,017 shares of
our Series B preferred on January 8, 1996 as a stock dividend to Series A and
Series B preferred shareholders of record as of December 31, 1994.
SELECTED FINANCIAL DATA
The following table sets forth our selected financial data for the
years ended December 31, 2002 and 2003, and the nine months ended September 30,
2003 and 2004. The selected financial data as of and for the years ended
December 31, 2002 and 2003 are derived from our financial statements, which have
been audited by Tanner & Co. The selected financial data as of and for the nine
months ended September 30, 2003 and 2004 are derived from our unaudited
quarterly financial statements. The following financial information should be
read in conjunction with the Financial Statements, and related notes thereto.
For the year ended For the nine months ended
December 31, September 30,
Statement of Operations Data: 2002 2003 2003 2004
----------------------------- ---- ---- ---- ----
Net Sales.................. $5,368,000 $3,059,000 $2,225,000 $2,288,000
Net cost of sales.......... 4,210,000 2,086,000 1,237,000 859,000
Operating expenses......... 2,277,000 4,549,000 3,526,000 1,793,000
Operating loss............. (11,119,000) (3,576,000) (2,538,000) (364,000)
Other income (expense)..... (36,000) 415,000 (233,000) 552,000
Net income (loss).......... (11,155,000) (3,161,000) (2,305,000) 188,000
Net income (loss) applicable
to common shareholders..... (11,155,000) (3,431,000) (2,305,000) 188,000
Net income (loss) per common
share...................... $(.63) $(.14) $(.10) $.01
Shares used in computing
net income (loss) per share 17,736,000 24,058,000 22,795,000 25,373,000
As of As of As of
Balance Sheet Data: December 31, December 31, September 30,
------------------ 2002 2003 2004
------------ ------------ -------------
Current assets........................... $3,868,000 $1,984,000 $1,772,000
Current liabilities...................... 2,362,000 2,181,000 1,696,000
Working capital (deficit)................ 1,506,000 (197,000) 76,000
Total assets............................. 5,289,000 2,922,000 2,586,000
Accumulated deficit...................... (53,656,000) (56,817,000) (56,629,000)
Stockholder's equity .................... 2,847,000 680,000 868,000
22
MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
This report contains forward-looking statements and information
relating to us that is based on beliefs of management as well as assumptions
made by, and information currently available to management. These statements
reflect its current view respecting future events and are subject to risks,
uncertainties and assumptions, including the risks and uncertainties noted
throughout the document. Although we have attempted to identify important
factors that could cause the actual results to differ materially, there may be
other factors that cause the forward-looking statements not to come true as
anticipated, believed, projected, expected or intended. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may differ materially from those described herein as
anticipated, believed, projected, estimated, expected or intended.
Critical Accounting Policies
Revenue Recognition. We recognize 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, we require 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, we recognize revenue when
the product ships. If the purchase order requires specific installation or
customer acceptance, we recognize revenue when such installation or acceptance
has occurred. Title to the product passes to the customer upon shipment. This
revenue recognition policy does not differ among the various different product
lines. We guarantee the functionality of its product. If our product does not
function as marketed when received by the customer, we either make the necessary
repairs on site or have the product shipped to us for the repair work. Once the
product has been repaired and retested for functionality, it is re-shipped to
the customer. We provide warranties that generally extend for one year from the
date of sale. Such warranties cover the necessary parts and labor to repair the
product as well as any shipping costs that may be required. We maintain a
reserve for estimated warranty costs based on 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. We do not
accept customer orders, and therefore do not recognize revenue, until the sales
price is fixed.
4. Collectibility is reasonably assured. With limited exceptions, we
require down payments on product prior to shipment. In some cases, we require
payment in full prior to shipment. We also perform credit checks on new
customers and ongoing credit checks on existing customers. We maintain an
allowance for doubtful accounts receivable based on historical experience and
management's current expectations.
Recoverability of Inventory. Since our inception, we have purchased
several complete lines of inventory. In some circumstances we have been able to
utilize certain items acquired and others remain unused. On a quarterly basis,
we attempt to identify inventory items that have shown relatively no movement or
very slow movement. Generally, if an item has shown little or no movement for
over a year, it is determined not to be recoverable and a reserve is established
for that item. In addition, if we identify products that have become obsolete
due to product upgrades or enhancements, a reserve is established for such
products. We intend to make efforts to sell these items at significantly
discounted prices. If items are sold, the cash received would be recorded as
revenue, but there would be no cost of sales on such items due to the reserve
that has been recorded. At the time of sale, the inventory would be reduced for
the item sold and the corresponding inventory reserve would also be reduced.
Recoverability of Goodwill and Other Intangible Assets. Our intangible
assets consist of goodwill, product and technology rights, engineering and
design costs, and patent costs. Intangibles with a determined life are amortized
on a straight-line basis over their determined useful life and are also
evaluated for potential impairment if events or circumstances indicate that the
carrying amount may not be recoverable. Intangibles with an indefinite life,
such as goodwill, are not amortized but are tested for impairment on an annual
basis or when events and circumstances indicate that the asset may be impaired.
Impairment tests include comparing the fair value of a reporting unit with its
carrying net book value, including goodwill. To date, our determination of the
fair value of the reporting unit has been based on the estimated future cash
flows of that reporting unit.
23
Allowance for Doubtful Accounts. We record 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. Our 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. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors discussed in this section. Our fiscal year is from January 1 through
December 31.
We are engaged in the design, development, manufacture and sale of high
technology diagnostic and surgical eye care products. Given the "going concern"
status of Paradigm Medical, management has focused efforts on those products and
activities that will, in its opinion, achieve the most resource efficient
short-term cash flow. As seen in the results for the fiscal year ended December
31, 2003 and the nine months ended September 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 our
financial position improves. We do not focus on a specific diagnostic product or
products but, instead, on this entire diagnostic product group. During the
fiscal year 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 Odyssey(TM) product lines, which were fully reserved. We 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. Although management
believes these adjustments are sufficient, it will continue to monitor and
evaluate our financial position and the recoverability of our assets.
Our ultrasound diagnostic products include a P55 pachymetric analyzer,
a P37 Ultrasound A/B Scan, a P40 UBM Ultrasound Biomicroscope and a P45 Plus UBM
Biomicroscope, the technology for which was acquired from Humphrey Systems in
1998. We introduced the P45 Plus in the fall of 2000, which combines the A/B
Scan, and the Biomicroscope into one machine. In addition, we market our Blood
Flow Analyzer(TM) acquired in the purchase of Ocular Blood Flow Ltd. in June
2000. Other diagnostic products are the Dicon(TM) LD 400 Auto Perimeter and the
Dicon (TM) CT 200 Corneal Topographer, which were acquired in the acquisition of
Vismed d/b/a Dicon in June 2000. We purchased the inventory, design and
production rights of the SIStem(TM) , the Odyssey(TM) and the Surgetrol from
Mentor Corporation in October 1999, which were designed to perform minimally
invasive cataract surgery. In November 1999, we entered into a Mutual Release
and Settlement Agreement with the manufacturer of the Precisionist
ThirtyThousand(TM) in which we purchased the raw materials and finished goods
inventory to bring the manufacturing of this product in-house. During the fourth
quarter of 2003, we sold all inventory and rights associated with the SIStem(TM)
and the Odyssey(TM) for $125,000. This transaction resulted in sales of $125,000
with $0 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, 2003 and the
nine months ended September 30, 2004, diagnostic products are currently our
major focus and the Photon(TM) and other extensive research and development
projects have been put on hold pending future evaluation when the financial
position of the company improves. Due to the lack of current evidence to support
recoverability, we have recorded an inventory reserve to offset the inventory
associated with the Photon(TM) and the Precisionist Thirty Thousand(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. We do not
focus on a specific diagnostic product or products but, instead, on this entire
product group.
We have shown improvement in our manufacturing efficiencies, as well as
the timeliness and the quality of our services to our 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 the second quarter of 2004, we
were 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, we
have 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, we determined
that the warranty accrual should be reduced by approximately $300,000. We will
continue to closely monitor the warranty accrual usage to ensure that the proper
amount has been accrued.
24
Activities for the twelve months ended December 31, 2003 and 2002 and
the nine months ended September 30, 2004, included sales of our 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 May 7, 2002, we received a letter from the FDA requesting further
clinical information regarding the Photon(TM). We are in the process of
generating the additional clinical information in response to the letter. We
cannot market or sell the Photon(TM) in the United States until FDA approval is
granted. On November 4, 2002, we received FDA approval for expanded indications
of use of the Blood Flow Analyzer(TM) for pulsatile ocular blood flow, volume
and pulsatility equivalence index. Also, we are continuing our efforts to
educate the payers of Medicare claims throughout the country about the Blood
Flow Analyzer(TM), its purposes and the significance of our performance in
patient care in order to achieve reimbursements to the providers. These efforts
should lead to a more positive effect on sales.
In April 2001, we received written authorization from the CPT Editorial
Research and Development Department of the American Medical Association to use a
common procedure terminology or CPT code number 92120 for our Blood Flow
Analyzer(TM), for reimbursement purposes for doctors using the device. However,
certain insurance payers have elected not to reimburse doctors using the Blood
Flow Analyzer(TM). We believe the reasons why insurance payors initially elected
not to reimburse doctors using the CPT code were the relatively high volume of
claims that began to be submitted under CPT code number 92120 compared to the
limited volume of claims previously submitted under this code, and the time
consumed by the Blood Flow Analyzer(TM) test, which some payors may have
believed was less than what is allowed under CPT code number 92120. This trend
began shortly after insurance payors were presented with reimbursement requests
under this code, and we believe these reasons were the basis for the initiation
of non-payment.
The impact of this nonpayment by certain payors on our future
operations is a lower volume of sales, particularly in those states where
reimbursement is not yet approved or is delayed. Currently, there is
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), we are 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). We are 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
our international sales. The U.S. recessionary economic trend has impacted our
domestic sales. Additionally, we restructured our sales organization and sales
channels by decreasing our direct sales force who are full-time employees from
10 direct domestic sales representatives on January 1, 2003, to five direct
sales employees on December 31, 2003. As of September 30, 2004, we had four
direct domestic sales representatives. The dependent sales force was reduced
because we do not have sufficient revenues to justify the larger direct sales
force. One of the challenges for fiscal 2004 and 2005 will be the judicious
reconstruction of the sales force in anticipation of increased sales. We are
projecting an increase in revenues in 2004; however, there can be no assurance
that such increase will occur. We are anticipating increased sales through three
key activities. First, we plan to increase the number of our direct sales
contacts. In our second quarter one full-time direct sales representative was
added in Seattle, Washington to serve the Pacific Northwest market. Late in the
second quarter we added another direct sales representative in Atlanta, Georgia.
Second, we will resume marketing campaigns with the development of
advertising in the third quarter for placement in key industry publications.
Additionally we will begin marketing via direct mail and telephone for feature
enhancements and service contracts.
Third, we plan to release new products and services. Specifically, at
the end of the second quarter, an improved version of the auto-perimeter was
introduced as well as revenue-generating software upgrades to the existing base
of auto-perimeter customers. Additional new products and partnerships are in
development.
As of September 30, 2004, we had four direct domestic sales
representatives in the United States, two of whom have been recently hired, and
28 ophthalmic and medical product distributors outside the United States. We
hope to benefit from these two recently hired sales representatives in the
United States as they gain familiarity, through training, of our diagnostic
products. Due to concerns over the budget and the effectiveness of trade shows,
we exhibited at only three trade shows during 2003 and one trade show through
September 30, 2004. We monitor trade show attendance to determine the extent to
which we will exhibit at future trade shows.
25
In April 2002, we announced the closure of our San Diego facility in
anticipation of the termination of the lease for that location. The operations
were transferred to the Salt Lake City facility. We incurred a reduction of
force of 28 San Diego personnel. The consolidation was intended to save costs
and to eliminate duplicities in functions and facilities that occurred with the
acquisition of Dicon. The cost of the consolidation was approximately $80,000.
In January 2002, we purchased certain assets and lease obligations of
Innovative Optics, Inc. by issuing an aggregate of 1,272,825 shares of our
common stock (636,412 shares are held in escrow pending the result of a project
to reduce the cost of the disposable razor blades utilized by the microkeratome,
which was acquired in the transaction), warrants to purchase 250,000 shares of
our common stock at $5.00 per share, exercisable over a period of three years
from the closing date, and $100,000 in cash. The transaction was accounted for
as a purchase in accordance with Statement of Financial Accounting Standards No.
141.
We acquired from Innovative Optics the raw materials, work-in-process
and finished goods inventories. Additionally, it acquired the patents and trade
name associated with the product, the furniture and equipment of Innovative
Optics used in the manufacturing process of the microkeratome console and the
inspection and packaging of the disposable blades. We subsequently issued
477,039 shares of common stock that were held in escrow at a value of $630,000,
based on the market price of such shares on the date of issuance. This amount
was charged to in-process research and development because the issuance of such
shares related to the continuing research and development of the microkeratome
blades.
We were unsuccessful in reducing the costs of the blade production
process and were unable to supply blades to the user base. We terminated our
marketing and sales efforts for the microkeratome, but we continue to search for
an alternative source of blades. Because we determined that we could not
manufacture the blades to support our customer base at an economical cost, in
accordance with Statement of Financial Accounting Standards No. 142, due to the
lack of projected future cash flows, during 2002 we recorded an impairment
expense of $2,082,000 for the remaining book value of property and equipment and
intangible assets purchased from Innovative Optics. In addition, we recorded an
inventory reserve for the remaining inventory purchased from Innovative Optics
of approximately $160,000.
On September 19, 2002, we completed a transaction with International
Bio-Immune Systems, Inc., a Delaware corporation, in which we acquired 2,663,254
of its shares, or 19.9% of its outstanding shares, and warrants to purchase
1,200,000 shares of its common stock at $2.50 per share for a period of two
years, through the exchange and issuance of 736,945 shares of our common stock,
the lending of 300,000 shares of our common stock to the company, and the
payment of certain of its expenses through the issuance of an aggregate of
94,000 shares of our common stock to the company and its counsel. The issuance
of 736,945 shares were valued based on the market price of our common stock on
the date of the transaction and resulted in an investment in International
Bio-Immune Systems, when combined with a cash investment of $65,000 made in
2000, of $879,000. The 300,000 shares were also valued at the market price on
the date of issuance and were recorded as a stock subscription receivable of
$294,000 because such shares will either be paid for or returned in the future.
International Bio-Immune Systems is a privately held biotechnology
based, cancer diagnostic and immunotherapy company, located in Great Neck, New
York, with potential clinically effective products for the diagnosis, treatment
and imaging of patients with major tumor types (e.g. colon, lung, cervix,
pancreas and breast). International Bio-Immune Systems does not produce
significant revenues as its products have not received FDA approval. Due to the
uncertainty of future cash flows and the fact that the FDA has not approved the
products, we were unable to support the value of the investment by substantiated
methods and determined that the likelihood of recovery of our investment was
remote. Therefore, in accordance with generally accepted accounting principles,
the investment of $879,000 was charged to impairment expense in 2002.
On August 3, 2004, we sold our investment in International Bio-Immune
Systems, Inc. for $533,000 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, our investment in International Bio-Immune Systems, had been reduced
to $0, the full amount of the $533,000 received from the sale of the
International Bio-Immune Systems common shares and warrants will be reported as
a gain in the quarter ended September 30, 2004.
26
The tragic events of September 11, 2001, the Afghanistan conflict and
the Iraq war combined with a recessionary trend in the economy have had a
negative effect on our sales. International attendance at the trade shows
following September 11, 2001, and through 2003 were down markedly. The absence
of these professionals eliminates many opportunities for us to demonstrate and
sell our products to this sector. It is difficult to quantify how much an effect
that these events have had on us, but we believe that we have suffered some
negative impact due to September 11, 2001, the Afghanistan conflict, the Iraq
war and the downturn in the economy in general, which may continue for an
indefinite period of time.
Results of Operations
Nine Months Ended September 30, 2004, Compared to Nine Months Ended
September 30, 2003
Net sales increased by $63,000, or 3%, to $2,288,000 for the nine
months ended September 30, 2004, from $2,225,000 for the comparable period in
2003. Our diagnostic products sales increased by $336,000, or 19%, to
$2,085,000, or 91% of revenues, during the first nine months of 2004 compared
with $1,750,000, or 79% of total revenues, for the comparable period of 2003.
In the first nine months of 2004, sales of our P40 and P45 UBM
Ultrasound Biomicroscopes were $639,000, or 28% of total revenues, compared to
$421,000, or 19% of total revenues, in the same period of 2003. Sales from the
Blood Flow Analyzer(TM) increased by $178,000 to $475,000, or 21% of total
revenues, during the first two quarters of 2004 compared with $297,000, or 13%
of total revenues, in the same period of last year.
During the first nine months of 2004, sales from P37 A/B Scan Ocular
Ultrasound Diagnostic increased to $229,000, or 10% of total revenue, slightly
up from the $222,000, or 10% of total revenues, in the same period last year.
Sales of the LD 400 and TKS 5000 Autoperimeters and the CT 200 Corneal
Topographer were slightly lower in the second quarter, with total revenue of
$741,000, or 32% of total revenues, in the first three quarters of 2004 compared
with $808,000, 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 nine month period ended September 30 2004,
we 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, for the comparable period of 2003.
Gross profit for the nine months ended September 30, 2004 increased by
18% to 62% of total revenues, compared to 44% of total revenues, for the same
period in 2003. The increase was mainly due to an increase in the reserve for
inventory obsolescence of $382,000 in the nine months ended September 30, 2003.
There was a decrease of $226,000 in the reserve during the nine months ended
September 30, 2004; however this decrease was the result of a write-off of
inventory directly against the reserve. The $382,000 increase in inventory
reserve in 2003 resulted in an increase to cost of sales whereas the $226,000
reduction in 2004 resulted in a corresponding reduction to inventory and did not
have any effect on the statement of operations.
Marketing and selling expenses decreased by $164,000, or 30%, to
$547,000 for the nine months ended September 30, 2004, from $711,000 for the
comparable period in 2003. This reduction was due primarily to more effective
use of marketing programs. During this period two 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.
General and administrative expenses decreased by $1,164,000, or 62%, to
$703,000 for the nine months ended September 30, 2004, from $1,867,000 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
September 30, 2004, we 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 we have 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 nine
months ended September 30, 2003 also included $443,000 in accruals to settle
outstanding disputes and $83,000 for additional allowance for doubtful accounts
receivable.
Research, development and service expenses decreased by $246,000, or
45%, to $543,000 for the nine months ended September 30, 2004, from $789,000 for
the same period in 2003. Expenses associated with the development of new
products during the first nine months of 2004 decreased compared to the same
period in 2003, as a result of our cost reduction program.
27
There was no impairment of assets for the nine months ended September
30, 2004, compared to $159,000 in impairment of assets recorded in the same
period of 2003.
Other income mainly consists of a gain recorded from the sale of our
investment in International Bioimmune Systems, Inc. In July 2004, we sold our
investment in International Bioimmune Systems, Inc. (IBS) for $532,000 cash.
Because, for book purposes, our investment in IBS had previously been reduced to
$0, the full amount of $532,000 was recorded as a gain in the quarter ended
September 30, 2004.
Fiscal Year Ended December 31, 2003, Compared to Fiscal Year Ended
December 31, 2002
Net sales decreased by $2,309,000, or 43%, to $3,059,000 for the twelve
months ended December 31, 2003, from $5,368,000 for the comparable period in
2002. Sales of our diagnostic products and related accessories were $2,484,000,
or 81% of total revenues, during the twelve months of 2003 compared with
$4,015,000, or 75% of total revenues, for the comparable period of 2002. Sales
of surgical products and related accessories totaled $324,000, or 11% of total
revenues, for the twelve months of the current year in comparison with $556,000,
or 10%, of total revenues in the comparable period of 2002. Surgical product
sales for 2003 include the sale of the SIStem(TM) and Odyssey(TM) product lines
for $125,000 in cash. In 2003, sales of the P40 and P45 UBM Ultrasound
Biomicroscope and related accessories were $615,000, or 20% of total revenues,
compared to $1,303,000, or 24% of total revenues, in the same period of 2002.
Sales from the Blood Flow Analyzer(TM) and related accessories decreased by
$121,000 to $499,000, or 16% of total revenues, during the year ended December
31, 2003 compared with $620,000, or 12% of total revenues, in the same period of
last year. During the twelve months of 2003, sales from other ultrasound
products and related accessories totaled $270,000, or 9% of total revenues,
compared with $606,000, or 11% of total revenues, in the same period last year.
Sales of the perimeter and corneal topographer and related accessories generated
$1,100,000, or 36% of total revenues, in 2003 compared with $1,487,000, or 28%
of total revenues, during the same period of 2002.
There were a number of material reasons that contributed to the
decrease in sales during the twelve months ended December 31, 2003, compared to
the same period of 2002. Along with generally weak economic conditions in the
United States, we initiated the restructuring of our management structure, our
sales organization and the development of new sales channels during the twelve
months ended December 31, 2003. During the first three months of 2003, we
reduced our direct sales force from 10 representatives to five representatives,
and during the remainder of 2003, there were only five direct sales
representatives compared to 10 direct sales representatives during the
comparable period of 2002. International sales were impacted by weakness in the
economies of the large industrial countries and by the residual impact of the
Afghanistan situation, which had a negative impact on sales to the Middle East,
Pakistan, India and other countries in that region.
The decrease in sales of the P40 and P45 Plus Ultrasound Biomicroscope
as well as other products was the direct result of the restructuring of the
sales and marketing organization. With respect to the decrease in sales of the
Biomicroscope, there has not been an increase in price, competition remains
similar to what it has been previously, and there are no other particular
factors of which we are aware. This restructuring has significantly reduced the
sales expenses and funds dedicated to marketing. In addition, the sales channels
have been altered to include distributor and independent sale representatives
instead of relying more on a direct sales force. Domestic and international
sales have also decreased as a result of the global financial markets declines
beginning in 2000 and the adverse impact of the events of September 11, 2001.
Other reasons for the decrease in sales were the uncertainties
resulting from our efforts to reduce costs and constraints on availability of
funds that reduced our ability to upgrade and enhance its products and pursue
further regulatory approvals for its products. Our objective is to focus our
sales efforts on the products with the highest potential for sales and strong
margins.
Gross profit for the year ended December 31, 2003 was 32% of total
revenues, compared to 22% for the same period in 2002. Cost of goods sold for
the year ended December 31, 2003 was $2,086,000 as compared to $4,210,000 for
the same period in 2002, a reduction of $2,124,000. Cost of goods sold for the
year ended December 31, 2003 included an increase in the reserve for obsolete or
estimated non-recoverable inventory of $403,000. Cost of goods sold for 2002
included an increase in the reserve for obsolete or estimated non-recoverable
inventory of $1,755,000. Since its inception, we have purchased several complete
lines of inventory. While our initial intention was to utilize the substantial
majority of inventory acquired in the manufacture of our products, in some
circumstances we have been unable to utilize certain items acquired.
28
On a quarterly basis, we attempt to identify inventory items that have
shown relatively no movement or very slow movement. Generally, if an item has
shown little or no movement for over a year, it is determined not to be
recoverable and a reserve is established for that item. In addition, if we
identify products that have become obsolete due to product upgrades or
enhancements, a reserve is established for such products. Such analysis resulted
in material increases in the reserve for obsolete or estimated non-recoverable
inventory in 2003 and 2002. There can be no assurance that we will not identify
further obsolete inventory due to significant declines in sales of certain
products or technological advances of products in the future. We intend to make
efforts to sell these items at significantly discounted prices. If items are
sold, the cash received would be recorded as revenue, but there would be no cost
of sales on such items due to the reserve that has been recorded. At the time of
sale, the inventory would be reduced for the item sold and the corresponding
inventory reserve would also be reduced. We do not expect the sales of these
items to be significant in the future. During 2003, we sold all inventory,
rights, and technology related to the SIStem and Odyssey product lines for
$125,000. All of the inventory sold in this transaction had previously been
fully reserved. Therefore, upon the sale, we 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 $1,875,000, or 67%, to
$920,000 in 2003, from $2,795,000 in 2002 due primarily to the lower headcounts
of sales persons and travel related and associated sales expenses.
General and administrative expenses decreased by $1,256,000, or 34%, to
$2,446,000 in 2003, from $3,702,000 in 2002, reflecting the results of our
efforts to reduce costs, specifically costs associated with maintaining two
manufacturing facilities and consulting costs. As noted above, in April 2002, we
announced the closure of our San Diego facility in anticipation of the
termination of the lease for that location. All operations associated with the
San Diego facility were transferred to the Salt Lake City facility. We incurred
a reduction of force of 28 San Diego personnel. The consolidation was intended
to save costs and to eliminate duplicities in functions and facilities that
occurred with the acquisition of Dicon. The cost of the consolidation was
approximately $80,000. We believe that the annual cost savings of the closure of
the San Diego facility are approximately $2 million. Administrative salaries and
wages decreased from approximately $786,000 in 2002 to approximately $321,000 in
2003. Depreciation and amortization expense, which includes amortization of
leasehold improvements, decreased by approximately $305,000, or 49%, to $319,000
in 2003 compared to the same period of last year. General and administrative
expenses for 2003 included $123,000 for additions to the allowance for doubtful
accounts and increases in accruals of $443,000 to settle outstanding disputes.
In addition, general and administrative expense for the twelve months
ended December 31, 2003, included $259,000 for 1,562,000 shares of common stock
issued to settle potential litigation. We 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. We 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, development and service expenses decreased by $1,786,000, or
63%, to $1,033,000 in 2003, from $2,819,000 in 2002. This decrease was mainly
due to the issuance of common stock to Innovative Optics in the fourth quarter
of 2002, which was valued at $630,000 and expensed as in-process research and
development costs. Expenses associated with the development of new products
during the twelve months of 2003 decreased compared to the same period in 2002
as a consequence of our efforts to reduce costs and focus on products that are
fully developed and have the highest potential for sales and strong margins.
Impairment of assets was $150,000 in 2003, compared to $2,961,000 in
2002. The impairment expense for 2003 was due to a reduction in the value of
certain intangible assets based on their currently estimated fair value. The
impairment expense for 2002 was due to an evaluation by us of our intangible
assets, namely goodwill and patents, rights, and trade name acquired from
Innovative Optics, resulting in a charge of $1,949,000 as a write down of the
goodwill and other intangibles. The remaining impairment charge of $1,012,000
was a result of the write-off of the investment in IBS of $879,000 and other
assets of $133,000.
Due to our ongoing cash flow difficulties, during 2003 most vendors and
suppliers were contacted 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 $436,000.
Other income and (expense) increased by $15,000 to net expense of
$21,000 in 2003, from expense of $(36,000) for the same period in 2002. During
2003, interest income was $3,000 compared with $10,000 during 2002. We had a
$22,000 reduction in interest expense to $(24,000) in 2003, from $(46,000) in
2002 due to a decrease in interest expense related to capital leases.
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Liquidity and Capital Resources
We used $440,000 cash in operating activities for the nine months ended
September 30, 2004, compared to $712,000 for the nine months ended September 30,
2003. The decrease in cash used by operating activities for the nine months
ended September 30, 2004 was primarily attributable to a significant reduction
in net loss and a decrease in inventory, partially offset by a decrease in
accrued expenses and deposits. Our 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 $42,000 for
the nine months ended September 30, 2004, versus cash provided of $726,000 in
the same period in 2003. During the nine months ended September 30, 2004, we did
not sell any shares of common or preferred stock. In the past, we have relied
heavily upon sales of our common and preferred stock to fund operations. There
can be no assurance that such equity funding will be available on terms
acceptable to us in the future.
We had working capital of $76,000 as of September 30, 2004. In the
past, we have relied heavily upon sales of our common and preferred stock to
fund operations. There can be no assurance that such equity funding will be
available on terms acceptable to us in the future. We will continue to seek
funding to meet our working capital requirements through collaborative
arrangements and strategic alliances, additional public offerings and private
placements of our securities; and bank borrowings. In July 2004, we sold our
investment in International Bio-Immune Systems, Inc. for $532,000 cash. We are
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 our
products will be sufficient to assure our operations through March 31, 2005. We
will continue to seek funding through the sale of common and preferred stock.
As of September 30, 2004, we had net operating loss carry-forwards
(NOLs) of approximately $36 million. These carry-forwards are available to
offset future taxable income, if any, and have begun to expire in 2001 and
extend for twenty years. Our ability to use net operating loss carryforwards
(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 September 30, 2004, we had accounts payable of $653,000, a
significant portion of which is over 90 days past due. We have contacted many of
the vendors or companies that have significant amounts of payables past due in
an effort to delay payment, renegotiate a reduced settlement payment, or
establish a longer-term payment plan. While some companies have been willing to
renegotiate the outstanding amounts, others have demanded payment in full. Under
certain conditions, including but not limited to judgments rendered against us
in a court of law, a group of creditors could force us into bankruptcy due to
our inability to pay the liabilities arising out of such judgments at that time.
In addition to the accounts payable noted above, we also have non-cancelable
capital lease obligations and operating lease obligations that require the
payment of approximately $172,000 in 2005, and $14,000 in 2006.
We have taken numerous steps to reduce costs and increase operating
efficiencies. These steps consist of the following:
1. We closed our 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. We have significantly reduced the use of consultants, which has
resulted in a large decrease to these expenses.
3. We have reduced our direct sales force to five representatives,
which has resulted in less payroll, travel and other selling expenses.
Because we have significantly fewer sales representatives, our ability
to generate sales has been reduced.
We have taken measures to reduce the amount of uncollectible accounts
receivable such as more thorough and stringent credit approval, improved
training and instruction by sales personnel, and frequent direct communication
with the customer subsequent to delivery of the system. The allowance for
doubtful accounts was 37% of total outstanding receivables as of September 30,
2004 and 40% as of December 31, 2003. The allowance for doubtful accounts has
decreased from $470,000 at December 31, 2003 to $424,000 at September 30, 2004.
The downturn in the economy worldwide has resulted in increased difficulty in
collecting certain accounts. Certain international dealers have some aged unpaid
invoices that have not been resolved. We have addressed our credit procedures
and collection efforts and have instituted changes that require more payments at
the time of sale through letters of credit and not on a credit term basis.
30
We intend to continue our efforts to reduce the allowance for doubtful
accounts as a percentage of accounts receivable. We have ongoing efforts to
collect a significant portion of the sales price in advance of the sale or in a
timely manner after delivery. The majority of the receivables included in the
allowance for doubtful accounts are a result of sales before we implemented the
various changes to improve the collectibility of our receivables. During the
nine months ended September 30, 2004, we had a net recovery of receivables
previously allowed for of $46,000 and during the twelve months ended December
31, 2003, we added a net of $123,000 to the allowance for doubtful accounts. We
believe that by requiring a large portion of payment prior to shipment, it has
greatly improved the collectibility of our receivables.
We carried an allowance for obsolete or estimated non-recoverable
inventory of $1,416,000 at September 30, 2004, or approximately 65% of total
inventory, respectively. This inventory reserve was decreased by $226,000 during
the nine months ended September 30, 2004 due to management's evaluation of the
recoverability of certain inventory items. Our means of expansion and
development of product has been largely from acquisition of businesses, product
lines, existing inventory, and the rights to specific products. Through such
acquisitions, we have acquired substantial inventory, some of which the eventual
use and recoverability was uncertain. In addition, we have a significant amount
of inventory relating to 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, we attempt to identify inventory items that have
shown relatively no movement or very slow movement. Generally, if an item has
shown little or no movement for over a year, it is determined not to be
recoverable and a reserve is established for that item. In addition, if we
identify products that have become obsolete due to product upgrades or
enhancements, a reserve is established for such products. We intend to make
efforts to sell these items at significantly discounted prices. If items are
sold, the cash received would be recorded as revenue, but there would be no cost
of sales on such items due to the reserve that has been recorded. At the time of
sale, the inventory would be reduced for the item sold and the corresponding
inventory reserve would also be reduced. During the fourth quarter of 2003, we
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. We do not expect the sales of these items, if any,
to be significant in the future.
At this time, our 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 our obtaining adequate funding. We
estimate 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
We have not realized a reduction in the selling price of our products
as a result of domestic inflation. Nor have we experienced unfavorable profit
reductions due to currency exchange fluctuations or inflation with our foreign
customers. All sales transactions to date have been denominated in U.S. Dollars.
Impact of New Accounting Pronouncements
In November 2003, the EITF reached a consensus on Issue No.00-21,
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides
guidance on how to account for certain arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue
No. 00-21 did not have a material impact on our operating results or financial
condition.
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 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 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 March
15, 2005. The adoption of FIN 46 had no effect on our consolidated financial
position, results of operations or cash flows.
31
In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS 133,
Accounting for Derivatives and Hedging Activities. SFAS 149 is generally
effective for derivative instruments, including derivative instruments embedded
in certain contracts, entered into or modified after June 30, 2003. The adoption
of SFAS 149 did not have a material impact on our operating results or financial
condition.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
clarifies the accounting for certain financial instruments with characteristics
of both liabilities and equity and requires that those instruments be classified
as liabilities in statements of financial position. Previously, many of those
financial instruments were classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. On November 7, 2003, FASB Staff Position 150-3 was issued, which
indefinitely deferred the effective date of SFAS 150 for certain mandatory
redeemable non-controlling interests. As we do not have any of these financial
instruments, the adoption of SFAS 150 did not have any impact on our financial
statements.
In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 revises or
rescinds portions of the interpretive guidance included in Topic 13 of the
codification of staff accounting bulletins in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The adoption of SAB 104 did not have a material
effect on our results of operations or financial position.
BUSINESS
General
We develop, manufacture, source, market and sell ophthalmic surgical
and diagnostic instrumentation and related accessories, including disposable
products. Our surgical equipment is designed for minimally invasive cataract
treatment. We market two cataract surgery systems with related accessories and
disposable products. Our cataract removal system, the Photon(TM) laser system,
is a laser cataract surgery system marketed as the next generation of cataract
removal. 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 our major focus and the Photon(TM) and other extensive
research and development projects have been put on hold pending future
evaluation when the financial position of the company improves. Due to the lack
of FDA approval and the lack of current evidence to support recoverability, we
have 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. Our focus is not on any specific diagnostic product or
products, but rather on our entire group of diagnostic products. The Photon(TM)
can be sold in markets outside of the United States. Both the PhotonTM and the
Precisionist ThirtyThousand(TM) are manufactured as an Ocular Surgery
Workstation(TM). We are considering marketing the Photon(TM) and other lasers
for use in eye care.
Our diagnostic products include a pachymeter, the P55 Pachymetric
Analyzer, the P37 A/B Scan Ocular Ultrasound Diagnostic, the P40 UBM Ultrasound
Biomicroscope, the P45 Plus UBM Biomicroscope, the Dicon(TM) LD 400
Autoperimeter, the Dicon(TM) TKS 500 Autoperimeter, the Dicon(TM) CT 200 Corneal
Topographer and the Blood Flow Analyzer(TM). The diagnostic ultrasound products
including the P55 pachymeter, the P37 A/B Scan, the P40 biomicroscope and the
P45 Plus biomicroscope were acquired from Humphrey Systems, a division of Carl
Zeiss in 1998. We developed and offered for sale in the fall of 2000 the P45,
which combines the P37 A/B Scan and the UBM biomicroscope into one machine. The
perimeter and the corneal topographer were added when we acquired the
outstanding shares of the stock of Vismed, Inc. d/b/a/ Dicon(TM) in June 2000.
We 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
treatment of glaucoma. We are currently developing additional applications for
all of our 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
32
outpatient procedure reimbursed by Medicare. Most cataract procedures are
performed using a method called phacoemulsification or "phaco", which employs a
high frequency (40 kHz to 60 kHz) ultrasonic probe needle device to fragment the
cataract while still in the eye and remove it in pieces by suction through a
small incision.
In June 1997, we received FDA clearance to market the Blood Flow
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. Our 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, we 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, we 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, we entered into an agreement for purchase and sale of
assets with the Humphrey Systems Division of Carl Zeiss, Inc. to acquire the
ownership and manufacturing rights to certain assets of Humphrey Systems that
are used in the manufacturing and marketing of an ultrasonic
microprocessor-based line of ophthalmic diagnostic instruments, including the
Ultrasonic Biometer Model 820, the A/B Scan System Model 837, the Ultrasound
Pachymeter Model 855, and the Ultrasound Biomicroscope Model 840, and all
accessories, packaging and end-user collateral materials for each of the product
lines for the sum of $500,000, payable in the form of 78,947 shares of common
stock which were issued to Humphrey Systems and 26,316 shares of common stock
which were issued to business broker Douglas Adams. If the net proceeds received
by Humphrey Systems from the sale of the shares issued pursuant to the Agreement
was less than $375,000, after payment of commissions, transfer taxes and other
expenses relating to the sale of such shares, we would be required to issue
additional shares of common stock, or pay additional funds to Humphrey Systems
as would be necessary to increase the net proceeds from the sale of the assets
to $375,000. Since Humphrey Systems realized only $162,818 from the sale of
78,947 shares of our common stock, we issued 80,000 additional shares in January
1999 to enable Humphrey Systems to receive its guaranteed amount. The amount of
$21,431 was paid to us as excess proceeds from the sale of this additional
stock.
The rights to the ophthalmic diagnostic instruments, which have been
purchased from Humphrey Systems, complement both our cataract surgical equipment
and our ocular Blood Flow 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. We 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, we 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 our cataract surgery product line
by adding entry-level, moderately priced cataract surgery products. The
transaction was paid for with $1.5 million worth of our common stock. 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, we sold all inventory and rights
associated with the SIStem(TM) and Odyssey(TM) for $125,000 in cash.
On June 5, 2000, we 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, we purchased the Innovatome(TM) microkeratome of
Innovative Optics, Inc. by issuing an aggregate of 1,272,825 shares of its
common stock, warrants to purchase 250,000 shares of our common stock at $5.00
per share, exercisable over a period of three years from the closing date, and
$100,000 in cash. The transaction was accounted for as a purchase in accordance
with Statement of Financial Accounting Standards No. 141. We acquired from
Innovative Optics raw materials, work in process and finished goods inventories.
Additionally, we acquired the furniture and equipment used in the manufacturing
process of the microkeratome console and the inspection and packaging of the
disposable blades.
33
We were unsuccessful in supplying the disposable blades. We
discontinued the marketing and sales efforts of this product during the third
quarter of 2002. On April 1, 2002, we entered into a consulting agreement with
John Charles Casebeer, M.D. to develop and promote the microkeratome. For Dr.
Casebeer's services during the period from April 1, 2002 to September 30, 2002,
we issued him a total of 43,684 shares of our common stock, representing payment
of $100,000 in stock for his services. On October 9, 2003, an additional 300,000
shares of our common stock was issued to Dr. Casebeer in settlement of a lawsuit
he brought against us for additional consideration due under the consulting
agreement. 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, we completed a transaction with International
Bio-Immune Systems, Inc., a Delaware corporation , in which we acquired
2,663,254 shares, or 19.9% of the outstanding shares of its common stock, and
warrants to purchase 1,200,000 shares of its common stock of at $2.50 per share
for a period of two years, through the exchange and issuance of 736,945 shares
of our common stock, the lending of 300,000 shares of our common stock to the
company and the payment of certain of its expenses through the issuance of an
aggregate of 94,000 shares of our common stock to the company and its counsel.
International Bio-Immune Systems, Inc. may sell the 300,000 shares of
our common stock loaned by us and the proceeds therefrom shall be deemed a loan
from us payable on the earlier of September 19, 2002, or the closing of any
private placement or public offering of the securities of International
Bio-Immune Systems, any merger involving more than 50% of the outstanding shares
of International Bio-Immune Systems, or any sale, dissolution, transfer, or
assignment of corporate assets other than in the ordinary course of business.
Interest shall accrue on the unpaid principal of the loan at the rate of 10% per
annum. If International Bio-Immune Systems does not sell the shares by September
19, 2004, it is required to return the shares, or any amount which has not been
sold, to us. International Bio-Immune Systems currently controls the voting
decisions regarding these shares. 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.
On August 3, 2004, we sold our investment in International Bio-Immune
Systems, Inc. for $533,000 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.
On December 3, 2003, we 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 us by American Optisurgical for the assets was $125,000. The purchase
agreement also contained a noncompete provision in which we 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, we 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 us: (i) review of and make recommendations regarding our business plan and
promotional materials; (ii) identify and contact potential investors in the
United States and Europe for potential investment in our securities; (iii)
organize meetings with potential investors and participate in such meetings; and
(iv) assist us in future financings, mergers, acquisitions and potential
buyouts.
The term of the agreement is for a period of three months, which is 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 our 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: Our business originated with Paradigm Medical, Inc.,
a California corporation formed in October 1989. Paradigm Medical, Inc.
developed our present ophthalmic business and was operated by our 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, we were
a dormant public shell existing under the name French Bar Industries, Inc.
34
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, we caused a
1-for-7.96 reverse stock split of our shares of common stock. We then acquired
all of the issued and outstanding shares of common stock of Paradigm Medical,
Inc. using shares of our own common stock as consideration. As part of the
merger, we changed our name from French Bar Industries, Inc. to Paradigm Medical
Industries, Inc. and the management of Paradigm Medical, Inc. assumed control of
the company. In April 1994, we caused a 1-for-5 reverse stock split of our
shares of common stock. In February 1996, we re-domesticated to Delaware
pursuant to a reorganization.
Overview
Disorders of the Eye: The human eye is a complex organ which functions
much like a camera, with a lens in front and a light-sensitive screen, the
retina, in the rear. The intervening space contains a transparent jelly-like
substance, the vitreous, which together with the outer layer, the sclera and
cornea, helps the eyeball to maintain its shape. Light enters through the
cornea, a transparent domed window at the front of the eye. The size of the
pupil, an aperture in the center of the iris, controls the amount of light that
is then focused by the lens onto the retina as an upside-down image. The lens is
the internal optical component of the eye and is responsible for adjusting
focus. The lens is enclosed in a capsule. The retina is believed to contain more
than 130 million light-receptor cells. These cells convert light into nerve
impulses that are transmitted right-side up by the optic nerve to the brain,
where they are interpreted. Muscles attached to the eye control its movements.
Birth defects, trauma from accidents, disease and age related
deterioration of the components of the eye could all contribute to eye
disorders. The most common eye disorders are either pathological or refractive.
Many pathological disorders of the eye can be corrected by surgery. These
include cataracts (clouded lenses), glaucoma (elevated pressure in the eye),
corneal disorders such as scars, defects and irregular surfaces and
vitro-retinal disorders such as the attachment of membrane growths to the retina
causing blood leakage within the eye. All of these disorders can impair vision.
Many refractive disorders can be corrected through the use of eyeglasses and
contact lenses. Myopia (nearsightedness), hyperopia (farsightedness) and
presbyopia (inability to focus) are three of the most common refractive
disorders.
Ultrasound Technology: Ultrasound devices have been used in
ophthalmology since the late 1960's for diagnostic and surgical applications
when treating or correcting eye disorders. In diagnostics, ultrasound
instruments are used to measure distances and shapes of various parts of the eye
for prescription of eyeglasses and contact lenses and for calculation of lens
implant prescriptions for cataract surgery treatment. These devices emit sound
waves through a hand-held probe that is placed onto or near the eye with the
sound waves emitted being reflected by the targeted tissue. The reflection
"echo" is computed into a distance value that is presented as a visual image, or
cross-section of the eye, with precise measurements displayed and printed for
diagnostic use by the surgeon.
Surgical use of 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.
35
Lasers are widely accepted in the ophthalmic community for treatment of
certain eye disorders and are popular for surgical applications because of their
relatively non-invasive nature. In general, ophthalmic lasers, such as argon,
Nd:YAG and excimer (argon-fluoride) are used to coagulate, cut or ablate
targeted tissue. The argon laser is used to treat leaking blood vessels on the
retina (retinopathy) and retinal detachment. The excimer laser is used in
corneal refractive surgery. The Nd:YAG pulsed laser is used to perforate clouded
posterior capsules (posterior capsulotomy) and to relieve glaucoma-induced
elevated pressure in the eye (iridotomy, trabeulorplasty, transcleral
cyclophotocoagulation). Argon, Nd:YAG and excimer lasers are primarily used for
one or two clinical applications each. In contrast to these conventional laser
systems, our Photon(TM) laser cataract system is designed to be used for
multiple ophthalmic applications, including certain new applications that may be
made possible with our proprietary technology. Such new applications, however,
must be tested in clinical trials and be approved by the FDA.
Products
Our principal proprietary surgical products are systems for use by
ophthalmologists to perform surgical treatment procedures to remove cataracts.
We have complete ownership of each product with no technological licensing
limitations.
Precisionist ThirtyThousand(TM): The Precisionist ThirtyThousand(TM) is
our core phaco surgical technology. The Precisionist(TM) was placed into
production and offered for sale in 1997. As a phaco cataract surgery system, we
believe 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 our 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
set-ups, with a second level of sub-programmed custom modes within each major
surgical screen (i.e., ultrasound phaco and irrigation/aspiration modes). The
Precisionist(TM) features our newly developed proprietary fluidics panel which
is completely non-invasive for improved sterility and to provide a surgical
environment in the eye that virtually eliminates fluidic surge and solves
chamber maintenance problems normally associated with phaco cataract surgery.
This new fluidics system provides greater control for the surgeon and allows the
safe operation at much higher vacuum settings by sampling changes in aspiration
100 times per second. Greater vacuum in phaco surgery means less use of
ultrasound or laser energy to fragment the cataract and less chance for
surrounding tissue damage. In addition to the full complement of surgical
modalities (e.g., irrigation, aspiration, bipolar coagulation and anterior
vitrectomy), system automation includes "dimensional" audio feedback of vacuum
levels and voice confirmation for major system functions, providing an intuitive
environment in which the advanced phaco surgeon can concentrate on the surgical
technique rather than the equipment. Sales of the Precisionist(TM) and related
accessories were 0% and 3% of the total revenues in the fiscal years 2003 and
2002, respectively, and 0% of the total revenues for the nine months ended
September 30, 2004.
Ocular Surgery Workstation(TM): The Ocular Surgery Workstation(TM)
comprises the base system of the Precisionist ThirtyThousand(TM) and is the
first system to our knowledge, which uses the expansive capabilities of today's
advanced computer technology to offer seamless open architecture expandability
of the system hardware and software modules. The Workstation(TM) utilizes an
embedded open architecture computer developed for us and controlled by a
proprietary software system developed by us that interfaces with all components
of the system. Ultrasound, fluidics (irrigation), aspiration, venting,
coagulation and anterior vitrectomy (pneumatic) are all included in the base
model. Each component is controlled as a peripheral module within this fully
integrated system. This approach allows for seamless expansion and refinement of
the Workstation(TM) with the ability to add other hardware and software
features. Expansion such as our Photon(TM) laser system and hardware for
additional surgical applications are easily implemented by means of a
pre-existing expansion rack, which resides in the base of the 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), we will refer
to the Workstation(TM) as the Photon(TM) Ocular Surgery Workstation(TM). To
date, we have 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 our 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 us. 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
36
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.
Our Phase I clinical trials demonstrated that this probe could easily reduce the
size of the cataract incision from 3.0 mm to under 2.0 mm thereby reducing
surgical trauma and complementing current foldable intraocular implant
technology.
The laser probe may also eliminate any possibility for burns around the
incision or at the cornea and may therefore be used with cataract surgery
techniques that utilize a more delicate clear cornea incision which can
eliminate sutures and be conducted with topical anesthesia. However, this system
may not effectively remove harder grade cataracts. Harder grade cataracts can be
removed using the already existing ultrasound capability of the
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
and the nine months ended September 30, 2004, diagnostic products are currently
our major focus and the Photon(TM) and other extensive research and development
projects have been put on hold pending future evaluation when our financial
position improves. Due to the uncertainty surrounding the timetable for
obtaining FDA approval and the lack of significant revenue from the other
surgical products, we have recorded an inventory reserve against the majority of
the inventory associated with the Photon(TM) and the Precisionist Thirty
Thousand(TM). Our focus is not on any specific diagnostic product or products,
but rather on our entire group of diagnostic products.
At some point in the future, we may intend, subject to economic
feasibility and the availability of adequate funds, to refine the laser delivery
system and laser cataract surgical technique used on soft cataracts through
expanded research and clinical studies. Subject to the aforementioned
constraints, we intend to refine the fluidics management system by improving
chamber maintenance during surgical procedures and to develop techniques to
optimize time and improve invasive techniques through expanded research and
clinical studies. As for as we can determine, no integrated single laser
photofragmenting probe is presently available on the market that uses laser
energy directly, contained in an enclosed probe, to denature cataract tissue at
a precise location inside the eye while simultaneously irrigating and aspirating
the site.
Our laser system is based upon the concept that pulsed laser energy
produced with the micro-processor controlled Nd:YAG laser system provides
ophthalmic surgeons with a more precise and less traumatic alternative in
cataract surgery. Although conventional ultrasonic surgical systems have proven
effective and reliable in clinical use for many years, their use of high
frequency shock waves and vibration to fragment the cataract can make the
procedure difficult and can present risk of complication both during and after
surgery. In contrast, our laser system, which utilizes short centralized energy
bursts, should permit the delivery of the laser beam with less trauma to
adjacent tissue. Therefore, unlike ultrasonic systems, whose vibrations and
shock waves affect (and can damage) non-cataracts tissues within the eye, our
Photon(TM) laser cataract system should only affect tissues with which it comes
into direct contact.
In October of 2000, we 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 FDA. 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 our major focus and the Photon(TM) and other
extensive research and development projects have been put on hold pending future
evaluation when the financial position of the company improves. Our focus is not
on any specific diagnostic product or products, buy rather on the entire group
of diagnostic products.
37
The SIStem(TM) and the Odyssey(TM): The SIStem(TM) and the Odyssey(TM)
have been our 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 11% and 4% of the total revenues for
fiscal years 2003 and 2002, respectively, and 0% of the total revenues for the
nine months ended September 30, 2004. On December 3, 2003, we 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, our surgical systems utilize or will utilize accessory
instruments and disposables, some of which are proprietary to us. These include
replacement ultrasound tips, sleeves, tubing sets and fluidics packs, instrument
drapes and laser cataract probes. We intend to expand its disposable accessories
as it further penetrates the cataract surgery market and expands the treatment
applications for its Workstation(TM). These products contributed approximately
0% and 3% of the total revenues for 2003 and 2002, respectively, and 0% of the
total revenues for the nine months ended September 30, 2004.
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, we 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. Our 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 our 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.
We market 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 we commenced selling the system in
September 1997. In addition to the Humphrey products, this diagnostic product
allowed us to expand its market to approximately 35,000 optometry practitioners
in the United States in addition to the approximately 18,000 ophthalmic
practitioners who currently perform eye surgeries and are candidates for our
surgical systems.
In April 2001, we received 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 our 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). We are continuing our aggressive campaign to educate the payers
about the Blood Flow Analyzer(TM), its purposes and the significance of its
performance in patient care in order to achieve reimbursements to the doctors.
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. We are
endeavoring to obtain reimbursement by insurance payors in other states where
there is currently no reimbursement being made.
38
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, we received FDA approval on our 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, we are continuing our 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 our Blood Flow Analyzer(TM). Sales of the
Blood Flow Analyzer(TM) and related accessories accounted for approximately 16%
and 12% of total revenues for the fiscal years ended December 31, 2003 and 2002,
respectively, and 21% of total revenues for the nine months ended September 30,
2004.
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% and 20% of the total revenues for 2003 and 2002, respectively,
and 28% of the total revenues for the nine months ended September 30, 2004.
LD 400FT: The LD 400FT, or Fast Threshold Autoperimeter, is the
successor to the LD 400. The device is an autoperimeter used to measure patient
visual fields. The LD 400FT is identical in hardware to the LD 400 but it uses
new software to enable a fast threshold test. This test reduces the time
required by ophthalmologists and optometrists conducting autoperimetry tests by
more than 40% by running an abbreviated test at light levels determined to be
sufficient to be seen in normal patients. The procedure currently takes more
than 15 minutes. The fast threshold test by the LD 400FT is similar to tests by
other devices on the market. Healthy patients will pass the test. Patients with
reduced visual fields will be flagged by the test enabling the device to
automatically run a more comprehensive examination to determine the extent of
the visual field loss. All existing LD 400s can be upgraded to support the new
fast threshold test through the purchase of a software package.
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 9% and 7% of
the total revenues for 2003 and 2002, respectively, and 4% of the total revenues
for the nine months ended September 30, 2004. An enhanced version of the CT
200(TM), the CT 2000(TM), is scheduled to be introduced during the fourth
quarter of 2003. We are 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. We are also revising our upgrade to offer the CT 200(TM) with
Windows 2000 software rather than the Windows XP software that we 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 2003 and 2002, and
3% of the total revenues for the nine months ended September 30, 2004.
P20 A-Scan Biometric Ultrasound Analyzer: The A-Scan has been removed
from our line of diagnostic products. The A-Scan is a prerequisite procedure
reimbursed by Medicare and is performed before every cataract surgery. Over
5,000 A-Scan systems have been installed in the worldwide market, representing a
substantial market opportunity for software upgrades and extended warranty
contract sales. A-Scan sales were approximately 2% of the total revenues for
both 2003 and 2002, and 0% of the total revenues for the nine months ended
September 30, 2004.
P37 A/B Scan Ocular Ultrasound Diagnostic: The A/B Scan is used by
retinal sub-specialists to identify foreign bodies in the posterior chamber of
the eye and to evaluate the structural integrity of the retina. The A/B Scan is
attractive to the general ophthalmic community at large because of its lower
price point. Sales from this product were approximately 4% and 7% of the total
revenues for 2003 and 2002, respectively, and 6% of the total revenues for the
nine months ended September 30, 2004.
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 us the proprietary rights to this device. The P40
39
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 we have repositioned for
broader market sales penetration. Formerly sold only to glaucoma sub-specialty
practitioners, we 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.
The P40 biomicroscope related surgical filtering procedures are fully
reimbursable by Medicare and insurance providers. This untapped new market
positions us with our proprietary P40 biomicroscope and to our knowledge, the
only commercially viable product of this type on the market, as a leader in the
rapidly expanding glaucoma imaging and treatment segment. In the fall of 2000 we
introduced the P45 UBM Ultrasound Biomicroscope, which combines the P40
biomicroscope and the P37 A/B Scan Ocular Ultrasound Diagnostic in one
instrument. We believe that by combining functions, the P45 biomicroscope will
appeal to a broader market. The P40 biomicroscope and related accessories sales
were approximately 7% and 12% of the total revenues for 2003 and 2002,
respectively, and 12% of the total revenues for the nine months ended September
30, 2004. The P45 UBM Ultrasound Biomicroscope and related accessories sales
contributed approximately 13% and 12% of the total revenues for 2003 and 2002,
respectively, and 17% of the total revenues for the nine months ended September
30, 2004.
On October 25, 2004, we 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 us the exclusive right to manufacture, market, sell
and distribute an ultrasound biomicroscope. Upon execution of the agreement, we
paid $30,000 to E-Technologies for engineering costs associated with the
development of the biomicroscope. Once the bioimicroscope receives FDA approval,
we agree to pay E-Technologies an additional fee of $45,000.
In consideration for the exclusive right to manufacture and distribute
the biomicroscope, we agree to pay E-Technologies the sum of $5,000 for each of
the first 25 biomicroscopes sold by us. Thereafter, we agree to pay
E-Technologies the sum of $4,000 for each biomicroscope sold. As an additional
condition, we agree 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, we received ISO 9001 and EN 46001 certification using
TUV Essen as the notified body. Under ISO 9001 certification, our products are
now CE marked. The CE mark allows us to ship product for revenue into the
European Community. We successfully retained our certification in 2002.
Parts and Services: The parts and services revenue from the repair and
service of equipment sold accounted for approximately 8% and 11% of the total
revenues in 2003 and 2002, respectively, and 9% of the total revenues for the
nine months ended September 30, 2004.
Sales of other products represented 0% and 4% of the total revenues in
2003 and 2002, respectively, and 0% of the total revenues for the nine months
ended September 30, 2004.
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:
40
Commercial Reimbursement % 2003 % 2004 Regulatory
Product (1) Product Class Development Status Sales Sales(2) Approvals
P55 System, Complete Yes 3% 3% FDA
Pachymetric Imaging, 510(K)
Analyzer Pulsed K844299*
Echo ISO 9001:
Diagnostic 1994, EN
ISO 9001**
P20 A-Scan System, Discontinued Yes 2% 0% FDA
Biometric Imaging, 510(K)
Ultrasound Pulsed K844299*
Analyzer Echo ISO 9001:
Diagnostic 1994,
EN ISO
9001**
P37 A/B Transducer, Complete Yes 4% 6% FDA
Scan Ultrasound 510(K)
Ocular Diagnostic K844299*
Ultrasound ISO 9001:
Diagnostic 1994,
EN ISO
9001**
P40 UBM System, Complete Yes 7% 12% FDA
Ultrasound Imaging, 510(K)
BioMicroscope Pulsed K844299*
Echo ISO 9001:
Ultrasound 1994,
Diagnostic EN ISO
9001**
P45 UBM System, Complete Yes 13% 17% FDA
Ultrasound Imaging, 510(K)
Biomicroscope, Pulsed K844299*
Workstation Echo ISO 9001:
Plus Ultrasound 1994,
Diagnostic EN ISO
9001**
BFA Ocular Tonometer, Complete Yes**** 16% 21% FDA
Blood Flow Manual 510(K)
Analyzer(TM) Diagnostic K844299*
and ISO 9001:
Disposables 1994,
EN ISO
9001**
CT 200 Topographer Complete Yes 9% 4% FDA
Corneal Corneal 510(K)
Topography AC-Powered K844299*
System Diagnostic ISO 9001:
1994,
EN ISO
9001**
LD 400 Perimeter, Complete Yes 24% 24% FDA
Autoperimetry Automatic 510(K)
System AC-Powered K844299*
Diagnostic ISO 9001:
1994,
EN ISO
9001**
LD 400FT Perimeter, Complete Yes 0% 0% FDA
Autoperimetry Automatic 510(K)
System AC-Powered K844299*
Diagnostic ISO 9001:
1994,
EN ISO
9001**
TKS 5000 Perimeter, Complete Yes 3% 4% FDA
Autoperimetry Automatic 510(K)
System AC-Powered, K844299*
Diagnostic ISO 9001:
1994,
EN ISO
9001**
41
Precisionist Phacofragmentation Complete Yes 0% 0% FDA
Thirty 510(K)
Thousand(TM), K844299*
Ocular ISO 9001:
Surgery 1994,
Workstation EN ISO
with 9001**
Surgical
Equipment
and
Disposables
SIStem(TM) Phacofragmentation Sold Yes 11% 0% FDA
and 510(K)
Odyssey(TM)(3) K844299*
Photon(TM) Phacoemulsification In-Process(5) No 0% 0% IDE
Laser, BFA tips G940151
Ocular ISO 9001:
Surgery 1994,
Workstation EN ISO
with 9001
Surgical
Equipment
and
Disposables(4)
Parts and Perimeter, Complete Yes 8% 9% FDA
Services BFA, 510(K)
Tonometer, K844299*
Topographer, ISO 9001:
Ultrasound 1994,
Workstations, EN ISO
Systems, 9001**
Imaging
--------------------------
(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) Sales for 2004 are for the nine months ended September 30, 2004.
(3) 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.
(4) Due to the lack of recent evidence to support the recoverability of
inventory associated with the Photon(TM), we have recorded a reserve to
offset the majority of such inventory on hand.
(5) The Photon(TM) is in-process and not complete because we have 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, our current products are developed and available for sale in the
footnote (1) of the table. Our possible future efforts to finalize development
of the Photon(TM) and obtain the necessary regulatory approvals would depend on
our 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 we would not receive
as expected. The "Use of Proceeds" section provides information on the estimated
application of proceeds for Research and Development. We anticipate that a
majority of the estimated costs for Research and Development will be used for
the enhancement and upgrading of our current products approved for sale. We are
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.
42
Any possible future efforts to complete development of the Photon(TM)
laser system and obtain the necessary regulatory approvals would depend on
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 we would not receive as expected. The
"Use of Proceeds" section provides information on the estimated application of
proceeds for research and development. We anticipate that a majority of the
estimated costs for research and development will be used for the enhancement
and upgrading of our current products being offered for sale. We estimate that
the liquidity needed to complete the clinical trials on the Photon(TM) in order
to obtain the necessary FDA regulatory approval to be approximately $225,000.
We currently purchase components and parts used in our products from a
limited number of key suppliers. Our reliance on our 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 our
revenues to decline. In addition, any interruption or discontinuance in the
supply of components or parts could have an adverse effect on our business,
results of operation and financial condition. Our 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
years as the health care environment stabilizes and as the growing elderly
population produces an increased number of cataract surgeries. As a consequence
of these factors, the market should see a greater rate of replacement of older
machines that hospitals and surgeons have been postponing for longer than usual.
Current Market Acceptance and Potential: The principal purchasers of
our products have been ophthalmologists, optometrists and clinics in many
countries throughout the world. We believe that the market for our products is
being driven by: (i) the aging of the population, which is evidenced by the
domestic and international cataract surgery volume growth trend over the past
ten years, (The National Eye Institute reported in March 2002 that the number of
blind or visually impaired Americans is likely to double over the next 30
years.) (ii) the entry by emerging countries (including China, Russia, and other
countries in Asia, Eastern Europe and Africa) into advanced technology medical
care for their populations, (iii) increased awareness worldwide of the benefits
of the minimally invasive phaco cataract procedure and (iv) the introduction of
technology improvements such as our laser system.
Marketing Organization: We market our products internationally through
a network of dealers and domestically through direct sales representatives,
independent sales representatives, and ophthalmic product distributors. As of
December 31, 2003, we had ten direct domestic sales representatives in the
United States and 65 foreign dealers. As of November 30, 2004, we had four
direct domestic sales representatives in the United States and 28 foreign
dealers. These sales representatives are assigned exclusive territories and have
entered into contracts with us that contain performance quotas. Domestic sales
channels have been expanded to include independent sales representatives and
distributors who began training on our products in August 2003. We also plan to
continue to market our products by identifying customers through internal market
research, trade shows and direct marketing programs. We also utilize a Clinical
Advisory Board comprised of leading ophthalmic surgeons in the United States and
Europe who speak at conventions, train ophthalmologists and visit foreign
doctors and dealers to promote our products.
43
Product advertising is intended to be focused in the major industry
trade newspapers. Most of the ophthalmologists or optometrists in the United
States receive one or more of these magazines through professional subscription
programs. The media has shown strong interest in our technology and products, as
evidenced by several recent front-page articles in these publications.
Manufacturing and Raw Materials: Currently, we maintain a 23,238 square
foot facility in Salt Lake City. We transferred the manufacturing activities for
the Blood Flow Analyzer(TM) to San Diego from Occular Blood Flow, Ltd. in
England during 2001. During the second quarter of 2002, we consolidated and
closed the San Diego operations into the Salt Lake City facility. The facility
accommodates our manufacturing, marketing and engineering capabilities. We
manufacture under systems of quality control and testing, which comply with the
Quality System Requirements established by the FDA, as well as similar
guidelines established by foreign governments, including the CE Mark and
IS0-9001.
We subcontract the manufacturing of some of its ancillary instruments,
accessories and disposables through specified vendors in the United States.
These products are contracted in quantities and at costs consistent with our
financial purchasing capabilities and pricing needs. We manufacture certain
accessories and fluidics surgical tubing sets at our facility in Salt Lake City.
Product Service and Support: Service for our products is overseen from
our Salt Lake City location and is augmented by our international dealer network
who provide technical service and repair. Installation, on-site training and a
limited product warranty are included as the standard terms of sale. We provide
distributors with replacement parts at no charge during the warranty period.
International distributors are responsible for installation, repair and other
customer service to installed systems in their territory. All systems parts are
modular sub-components that are easily removed and replaced. We maintain
adequate parts inventory and provides overnight replacement parts shipments to
its dealers.
On July 11, 2002, we entered into a Major Account Facilitator Contract
with Peter Kristensen and F. Briton McConkie. Under the terms of the contract,
Messrs. Kristensen and McConkie agreed to serve as intermediators between us and
an international agent or customer that would result in an order for 150
Photon(TM) laser systems in Asia. The contract provides that upon execution, we
are to issue 100,000 shares of our common stock to Messrs. Kristensen and
McConkie to cover all expenses associated with the pursuit of the transaction,
and upon presentation of a verified order to us, we have agreed to issue an
additional 100,000 shares of common stock to Messrs. Kristensen and McConkie.
Upon completion, and delivery and receipt of payment in full from the
international agent or customer for the 150 Photon(TM) laser systems, Messrs.
Kristensen and McConkie would be issued an additional 480,000 shares of common
stock for serving as transaction facilitator. We have issued a total of 100,000
shares of our common stock to Messrs. Kristensen and McConkie pursuant to the
terms of the contract.
Messrs. Kristensen and McConkie have retained Ralph Thompson of Novus
Technologies, a Utah based firm, to assist in the marketing and sales of our
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 us in the sale of our Photon(TM)
laser system in Asia, he has not been successful to date in selling our
Photon(TM) laser system to any customers in China or other Asian countries.
Research and Development
Our primary market for our surgical products is the cataract surgery
market. However, we believe that our laser systems may potentially have broader
ophthalmic applications. Consequently, we believe that a strong research and
development capability is important for our future. In addition to our expanded
in-house research and development capabilities, we have enlisted several
recognized and respected consultants and other technical personnel to act in
technical and medical advisory capacities.
We believe our research and development capabilities provide us with
the ability to respond to regulatory developments, including new products, new
product features devised from our users and new applications for our products on
a timely and proprietary basis. We intend to continue investing in research and
development and to strengthen our ability to enhance existing products and
develop new products.
Research, development and service expenses (which includes production
and manufacturing support and the service department expenses) decreased by
$1,786,000, or 63%, to $1,033,000 for the twelve months ended December 31, 2003,
from $2,819,000 for the same period in 2002. Pursuant to the asset purchase
agreement with Innovative Optics, Inc., we issued 477,000 shares of our common
stock, which was valued at $630,000 based upon the current market value of the
stock at the time of issue. This amount was recorded in 2002 as in-process
research and development costs related to the blade cost reduction project. No
such expense was recorded in 2003. Consulting fees related to software
development and enhancements increased to $197,000 during 2002 from $111,000 for
the same period in 2002. None of the costs of research and development
activities during 2003 and 2002 was borne directly by customers.
44
From December 1, 2000 to November 30, 2002, we entered into a series of
consulting agreements with Michael B. Limberg, M.D., in which he agreed to
evaluate new technologies and instruments for us. For his services during that
period, we issued Dr. Limberg a total of 48,000 shares of our common stock and
warrants to purchase 300,000 shares of common stock at exercise prices ranging
from $4.00 to $6.75 per share.
During the period in which Thomas F. Motter served as our 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 our president and chief
executive officer from March 19, 2003 to March 18, 2004, decided not to utilize
the clinical advisory board. Instead, he consulted with former members of the
advisory board on an informal basis. John Y. Yoon, who currently serves as our
president and chief executive officer, has also decided not to utilize the
clinical advisory board. We currently have no agreements with any former members
of the clinical advisory board and none of these former members hold or own any
rights to our products or technologies.
Competition
General. We are subject to competition in the cataract surgery and the
glaucoma diagnostic markets from two principal sources: (i) manufacturers of
competing ultrasound systems used when performing cataract treatments and (ii)
developers of technologies for ophthalmic diagnostic and surgical instruments
used for treatment. A few large companies that are well established in the
marketplace, have experienced management, are well financed and have well
recognized trade names and product lines dominate the surgical equipment
industry. We believe that the combined sales of five entities account for over
90% of the cataract surgery market. The remaining market is fragmented among
emerging smaller companies, some of which are foreign. The ophthalmic diagnostic
market has a similar composition.
Most major competitors either entered or expanded into the cataract or
glaucoma markets through the acquisition of smaller, entrepreneurial
high-technology manufacturing companies. Therefore, because existing competitors
or other entities desiring to enter the market could conceivably acquire current
entrepreneurial enterprises with small market activity, any and all competitors
must be considered to be formidable.
The Cataract Surgical System Industry. The major manufacturers
utilizing ultrasonic technology offer products currently in use. Those systems
rely on accessories including single-use cassette packs and other ancillary
surgical disposables such as saline solution, sutures and intraocular lenses for
their profits. The cassette packs are required for fluid and tissue collection
during the surgical procedure. The cassette packs are generally unique and
proprietary to their respective systems and represent a barrier to entry for
third-party, lower-cost after-market suppliers. While there is growing market
resistance in the United States and internationally to single-use cassettes, we
anticipate that manufacturers of ultrasound equipment will continue to develop
and enhance their present ultrasound products in order to protect their
investments in system and cassette technology and to protect their profits from
sales of these cassettes and accessories. Our Precisionist Thirty 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 us with the quality control and income capability
of cassette sales.
The international market, with significantly lower medical budgets, has
not been able to justify the expense of using disposable components. Budgetary
constraints have limited current manufacturers from gaining a significant share
of the international ultrasound equipment market, and have provided a niche for
the emerging smaller companies discussed above.
Ultrasound Equipment Manufacturers. As a relatively recent entrant into
the cataract surgical equipment market with a newer equipment line, we are
establishing ourself and, as yet, do not hold a significant share of the market.
We currently recognize Bausch & Lomb, Alcon Laboratories, and Allergan Medical
Optics as our primary competitors in the ultrasound phaco cataract equipment
market.
Laser Equipment Manufacturers. There are several other companies
attempting to develop laser equipment for cataract surgery. These companies can
be differentiated by the laser wavelength employed for the cataract surgery.
Based on the information currently available to us; Er:YAG laser wavelength
appears to offer a less viable means of removing cataracts than the Nd:YAG
wavelength used by the 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 same risk factors of phaco, thereby
eliminating the benefits of using a laser to remove the cataract. We also
believe that our product is sufficiently distinctive and, if properly marketed,
can capture a significant share of the cataract surgical device market. However,
there are substantial risks in undertaking a new venture in an established and
already highly competitive industry. In the short-term, we are seeking to
exploit these opportunities. Depending upon further developments, we may
ultimately exploit those opportunities through a merger with a stronger entity
already established or one that desires to enter the medical industry.
We believe that our ability to compete successfully will depend on our
capability to create and maintain advanced technology, develop proprietary
products, attract and retain scientific personnel, obtain patent or other
proprietary protection for our products and technologies, obtain required
regulatory approvals and manufacture, assemble and successfully market products
either alone or through third parties.
45
The Retinal Diagnostic Market. The Glaucoma Research Foundation
suggests that with the aging of the so-called baby boom generation, there will
be an increase of macular degeneration and glaucoma in the United States, the
leading causes of adult blindness worldwide. The National Eye Institute stated
in 2002 that the number of visually impaired Americans is likely to double over
the next three decades. Their report estimated that 2.4 million people suffer
some vision impairment in this country. The damage caused by these diseases is
irreversible. The preconditions for the onset of macular degeneration or
glaucoma are low ocular blood flow and/or high intraocular pressure. Diagnostic
screening is important for individuals susceptible to these diseases. People in
high risk categories include: African Americans over 40 years of age, all
persons over 60 years of age, persons with a family history of glaucoma or
diabetes, and the very nearsighted. The glaucoma Research Foundation recommends
that these high-risk individuals be tested regularly for glaucoma. According to
the U.S. Census Bureau, in 1995 there were over 30 million adults 65 years of
age and older and 8 million African Americans 45 years of age and older. The
Glaucoma Research Foundation reports that glaucoma currently accounts for more
than 7 million visits to physicians annually.
We are subject to intense competition in the ophthalmic diagnostic
market from well-financed, established companies with recognizable trade names
and product lines and new and developing technologies. The industry is dominated
by several large entities which we believe account for the majority of
diagnostic equipment sales. We continue to derive revenues from the sale of its
ultrasound diagnostic equipment and blood flow analyzer. The blood flow analyzer
is designed to detect glaucoma in an earlier stage than is presently possible.
In addition, the device performs tonometry and blood flow analysis. Other
ophthalmic diagnostic devices that do not detect glaucoma in the early stages of
the disease as does our analyzer retail at comparable prices. Thus, we believe
that we can compete in the diagnostic market place based upon the lower price
and improved diagnostic functions of the analyzer.
Intellectual Property Protection
Our cataract surgical products are proprietary in design, engineering
and performance. Our surgical ultrasonic products have not been patented to date
because the primary technology for ultrasonic tissue fragmentation, as available
to all competitors in the market, is mainly in the public domain.
We did acquire proprietary intellectual property in the transaction
with Humphrey Systems when we purchased the diagnostic ultrasonic product line
in 1999. This technology uses ultrasound to create a high-resolution computer
image of the unseen parts of the eye that is a "map" for the practitioner. The
P40 UBM Ultrasound Biomicroscope, one of the ultrasonic products we purchased,
is subject to a license agreement dated September 27, 1990, with Sunnybrook
Health Science Center. Under the terms of the license agreement, we have the
exclusive worldwide rights to manufacture and sell the UBM biomicroscope, for
which we are required to pay a royalty of $150 for each licensed product sold.
The license agreement was automatically terminated by its terms on September 27,
2002, at which time we had a royalty free world-wide license to use and sell the
P40 UBM Ultrasound Biomicroscope. However, we have a continuing obligation after
such termination to continue to use and sell the biomicroscope only in the field
of ophthalmology.
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 us in 1997 for the
utility and methods of laser ablation, aspiration and irrigation of tissue
through a hand-held probe of a unique design. The United States patent expired
in September 2004.
We secured the exclusive worldwide rights to this patent shortly after
its issue, and to the international patents pending, from PhotoMed by means of a
license agreement dated July 7, 1993. The license agreement provides us with the
rights to manufacture, distribute and sell a laser system using the Photon(TM)
laser cataract probe and related components to customers on a world wide basis,
for which PhotoMed is to receive a 1% royalty on all net sales of such systems
and related components 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. We are 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, we have agreed to be actively engaged in either research and
development of a saleable product utilizing the patent or in marketing and
selling such a product.
46
The license agreement was amended on December 5, 1997 to allow PhotoMed
the right to conduct research, development and marketing utilizing the patent in
certain medical subspecialties other than ophthalmology for which we would
receive royalty payments equal to 1% of the proceeds from the net sales of
products utilizing the patent. The license agreement expired when the United
States patent rights expired in September 2004, but the license agreement shall
be automatically extended or renewed for any term of extension or renewal
awarded for the patent rights. In addition, we have 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 us on
September 11, 2000 involving an amount of royalties that are allegedly due and
owing to them from the sale of equipment by us. We have paid $14,736 to bring
all royalty payments up to date through June 30, 2001. We have 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, we would lose our 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 us in 2002 for a laser surgical device for the removal
of intraocular tissue including a handpiece and a trap. The patent is due to
expire in August 2019. There are also two pending United States patents relating
to the Photon(TM) laser cataract probe.
The Blood Flow Analyzer(TM) has been granted a patent in the United
Kingdom in 1998 and in the United States in 1999, and has a patent pending in
Japan. These patents relate to pneumatic pressure probes for use in measuring
change in intra-ocular pressure and in measuring pulsatile ocular blood flow.
The United States patent rights expire in January 2019 and the United Kingdom
patent rights expire in November 2015.
The 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.
Our trademarks are important to our business. It is our policy to
pursue trademark registrations for its trademarks associated with its products
as appropriate. Also, we rely on common law trademark rights to protect its
unregistered trademarks, although common law trademark rights do not provide us
with the same level of protection as would U.S. federal registered trademarks.
Common law trademark rights only extend to the geographical area in which the
trademark is actually used while U.S. federal registration prohibits the use of
the trademark by any party anywhere in the United States.
We also rely on trade secret law to protect some aspects of our
intellectual property. All of our key employees, consultants and advisors are
required to enter into a confidentiality agreement with us. Most of our
third-party manufacturers and formulators are also bound by confidentiality
agreements with us.
Regulation
The FDA under the Food, Drug and Cosmetics Act regulates our surgical
and diagnostic systems as medical devices. As such, these devices require
Premarket clearance or approval by the FDA prior to their marketing and sale.
Such clearance or approval is premised on the production of evidence sufficient
for us to show reasonable assurance of safety and effectiveness regarding our
products. Pursuant to the Food, Drug and Cosmetics Act, the FDA regulates the
manufacture, distribution and production of medical devices in the United States
and the export of medical devices from the United States. Noncompliance with
applicable requirements can result in fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production, denial
of Premarket clearance or approval for devices. Recommendations by the FDA that
we not be allowed to enter into government contracts and criminal prosecution
may also be made.
Following the enactment of the Medical Device Amendments to the Food,
Drug and Cosmetics Act in May 1976, the FDA began classifying medical devices in
commercial distribution into one of three classes: Class I, II or III. This
classification is based on the controls that are perceived to be necessary to
reasonably ensure the safety and effectiveness of medical devices. Class I
devices are those devices, the safety and effectiveness of which can reasonably
be ensured through general controls, such as adequate labeling, advertising,
pre-marketing notification and adherence to the FDA's Quality System
Requirements regulations. Some Class I devices are exempt from some of the
general controls. Class II devices are those devices the safety and
effectiveness of which can reasonably be assured through the use of special
controls, such as performance standards, postmarket surveillance, patient
registries and FDA guidelines. Class III devices are devices that must receive
pre-marketing approval by the FDA to ensure their safety and effectiveness.
Generally, Class III devices are limited to life-sustaining, life-supporting or
implantable devices, or to new devices that have been found not to be
substantially equivalent to legally marketed devices.
47
There are two principal methods by which FDA approval may be obtained.
One method is to seek FDA approval through a pre-marketing notification filing
under Section 510(k) of the Food, Drug and Cosmetics Act. If a manufacturer or
distributor of a medical device can establish that a proposed device is
"substantially equivalent" to a legally marketed Class I or Class II medical
device or to a pre-1976 Class III medical device for which the FDA has not
called for a pre-marketing approval, the manufacturer or distributor may seek
FDA Section 510(k) pre-marketing clearance for the device by filing a Section
510(k) pre-marketing notification. The Section 510(k) notification and the claim
of substantial equivalence will likely have to be supported by various types of
data and materials, possibly including clinical testing results, obtained under
an Investigational Device Exemption granted by the FDA. The manufacturer or
distributor may not place the device into interstate commerce until an order is
issued by the FDA granting pre-marketing clearance for the device. There can be
no assurance that we will obtain Section 510(k) pre-marketing clearance for any
of the future devices for which we seek such clearance including the 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 pre-marketing approval, and allow the
proposed device to be marketed in the United States. The FDA may determine,
however, that the proposed device is not substantially equivalent, or may
require further information, such as additional test data, before the FDA is
able to make a determination regarding substantial equivalence. A "not
substantially equivalent" determination or a request for additional information
could delay our market introduction of our products and could have a material
adverse effect on our business, operating results and financial condition.
The alternate method to seek approval is to obtain pre-marketing
approval from the FDA. If a manufacturer or distributor of a medical device
cannot establish that a proposed device is substantially equivalent to another
legally marketed device, whether or not the FDA has made a determination in
response to a Section 510(k) notification, the manufacturer or distributor will
have to seek pre-marketing approval for the proposed device. A pre-marketing
approval application would have to be submitted and be supported by extensive
data, including preclinical and clinical trial data to prove the safety and
efficacy of the device. If human clinical trials of a proposed device are
required and the device presents a significant risk, the manufacturer or the
distributor of the device will have to file an Investigational Device Exemption
application with the FDA prior to commencing human clinical trials. The
Investigational Device Exemption application must be supported by data,
typically including the results of animal and mechanical testing. If the
Investigational Device Exemption application is approved, human clinical trials
may begin at a specific number of investigational sites, and the approval letter
could include the number of patients approved by the FDA.
An Investigational Device Exemption clinical trial can be divided into
several parts or phases. Sometimes, a company will conduct a feasibility study
(Phase I) to confirm that a device functions according to its design and
operating parameters. This is a usual clinical trial site. If the Phase I
results are promising, the applicant may, with the FDA's permission, expand the
number of clinical trial sites and the number of patients to be treated to
assure reasonable stability of clinical results. Phase II studies are performed
to confirm predictability of results and the absence of adverse reactions. The
applicant may, upon receipt of the FDA's authorization, subsequently expand the
study to a third phase with a larger number of clinical trial sites and a
greater number of patients. This involves longer patient follow-up times and the
collection of more patient data. Product claims, labeling and core data for the
pre-marketing approval are derived primarily from this portion of the clinical
trial. The applicant may also, upon receipt of the FDA's permission, consolidate
one or more of such portions of the study. Sponsors of clinical trials are
permitted to sell those devices distributed in the course of the study, provided
such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. Although both approval methods may require
clinical testing of the device in question under an approved Investigational
Device Exemption, the pre-marketing approval procedure is more complex and time
consuming.
Upon receipt of the pre-marketing approval application, the FDA makes a
threshold determination whether the application is sufficiently complete to
permit a substantive review. If the FDA determines that the pre-marketing
approval is sufficiently complete to permit a substantive review, the FDA will
"file" the application. Once the submission is filed, the FDA has by regulation
90 days to review it; however, the review time is often extended significantly
by the FDA asking for more information or clarification of information already
provided in the submission. During the review period, an advisory committee may
also evaluate the application and provide recommendations to the FDA as to
whether the device should be approved. In addition, the FDA will inspect the
manufacturing facility to ensure compliance with the FDA's Quality System
Requirements prior to approval of a pre-marketing application. While the FDA has
responded to pre-marketing approval applications within the allotted time
period, pre-marketing approval reviews generally take approximately 12 to 18
months or more from the date of filing to approval. The pre-marketing approval
process is lengthy and expensive, and there can be no assurance that such
approval will be obtained for any of our products determined to be subject to
such requirements. A number of devices for which other companies have sought
pre-marketing approval have never been approved for marketing.
Any products manufactured or distributed by us pursuant to a premarket
clearance notification or pre-marketing approval are or will be subject to
pervasive and continuing regulation by the FDA. The Food, Drug and Cosmetics Act
also requires that our products be manufactured in registered establishments and
48
in accordance with Quality System Requirements regulations. Labeling,
advertising and promotional activities are subject to scrutiny by the FDA and,
in certain instances, by the Federal Trade Commission. The export of medical
devices is also subject to regulation in certain instances. In addition, the use
of our products may be regulated by various state agencies. All lasers
manufactured for us are subject to the Radiation Control for Health and Safety
Act administered by the Center for Devices and Radiological Health of the FDA.
The law requires laser manufacturers to file new product and annual reports and
to maintain quality control, product testing and sales records, to incorporate
certain design and operating features in lasers sold to end users pursuant to
specific performance standards, and to comply with labeling and certification
requirements. Various warning labels must be affixed to the laser, depending on
the class of the product, as established by the performance standards.
Although we believe that we currently comply and will continue to
comply with all applicable regulations regarding the manufacture and sale of
medical devices, such regulations are always subject to change and depend
heavily on administrative interpretations. There can be no assurance that future
changes in review guidelines, regulations or administrative interpretations by
the FDA or other regulatory bodies, with possible retroactive effect, will not
materially adversely affect us. In addition to the foregoing, we are subject to
numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of potentially hazardous substances. There can be no
assurance that we will not be required to incur significant costs to comply with
such laws and regulations and that such compliance will not have a material
adverse effect upon our ability to conduct business.
We and the manufacturers of our products may be inspected on a routine
basis by both the FDA and individual states for compliance with current Quality
System Requirements regulations and other requirements.
Congress has considered several comprehensive federal health care
programs designed to broaden coverage and reduce the costs of existing
government and private insurance programs. These programs have been the subject
of criticism within Congress and the health care industry, and many alternative
programs and features of programs have been proposed and discussed. Therefore,
we cannot predict the content of any federal health care program, if any is
passed by Congress, or its effect on us and our business. Some measures that
have been suggested as possible elements of a new program, such as government
price ceilings on non-reimbursable procedures and spending limitations on
hospitals and other healthcare providers for new equipment, could have an
adverse effect on our business, operating results or financial condition.
Uncertainty concerning the features of any health care program considered by the
Congress, its adoption by the Congress and the effect of the program on our
business could result in volatility of the market price of our common stock.
Furthermore, the introduction of our products in foreign countries may
require us to obtain foreign regulatory clearances. We believe that only a
limited number of foreign countries have extensive regulatory requirements,
including France, Germany, Korea, China and Japan. The time involved for
regulatory approval in foreign countries varies and can take a number of years.
A number of European and other economically advanced countries, including Italy,
Norway, Spain and Sweden, have not developed regulatory agencies for intensive
supervision of such devices. Instead, they generally have been willing to accept
the approval of the FDA. Therefore, a pre-marketing approval, Section 510(k) or
approved Investigational Device Exemption from the FDA is tantamount to approval
in those countries. These countries and most developing countries have simply
deferred direct discretion to licensed practicing surgeons to determine the
nature of devices that they will use in medical procedures. Our two ultrasound
systems, the Photon(TM) laser cataract system we are developing and the ocular
blood flow analyzer are all devices, which require FDA approval. Therefore, a
significant aspect of the acceptance of the devices in the market is the our
effectiveness in obtaining the necessary approvals. Having an approved
Investigational Device Exemption allows us to export a product to qualified
investigational sites.
Regulatory Status of Products
All of our products, with the exception of the Photon(TM), are approved
for sale in the U.S. by the FDA under a 510(k). All of our products have been
accepted for import into CE countries and various non-CE countries.
We 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 us and is
widely used in the medical industry and other industries as well. Of particular
significance is the fact that this particular component has received previous
market clearance from the FDA for other ophthalmic and medical applications.
Also of significance is our belief that the surgical treatment method used with
the Photon(TM) laser is similar to the current ultrasound cataract treatment
employed by ophthalmologists.
We submitted a Premarket Notification 510(k) application to the FDA for
the 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 we
submitted an Investigational Device Exemption application to provide for a
"modest clinical study" in order to collect the data required by the FDA for
clearance of the Photon(TM) laser cataract system. The FDA granted this
49
Investigational Device Exemption in May 1995 for a Phase I Feasibility Study. We
began human clinical trials in April 1996 and completed the Phase I study in
November 1997. We started Phase II trials in September 1998 and completed
numerous cases of treatment group and control group patients, which were
included in our submission to the FDA.
We received a warning letter dated August 30, 2000, from the Office of
Compliance, Center for Devices and Radiological Health of the Food and Drug
Administration relating to certain deficiencies in the human clinical trials for
our Photon(TM) Laser Cataract System. The warning letter concerns the conditions
found by the FDA during several audits at our clinical sites. The FDA's comments
were isolated to the administrative procedures of compiling data from the
clinical sites. We responded to the warning letter in a submission dated
September 27, 2000. In the submission we took corrective action that included
submitting a revised clinical protocol and case report forms and procedures for
the collection and control of data. In a subsequent letter dated November 2,
2000 to us, the FDA granted conditional approval provided that we correct
certain deficiencies. After providing several additional submissions to the FDA,
we received a letter dated February 13, 2001 from the FDA stating that the
deficiencies had been corrected and the clinical trials could continue.
Subsequent to the warning letter, we received approval to continue our
clinical trials, the results of which were included in our supplemental
submission to the FDA in October 2001 for the existing (510)(k) predicate device
application for the Photon(TM) laser system. In December 2001, we received a
preliminary review from the FDA regarding the supplemental submission. As a
result of that preliminary review, we submitted additional clinical information
to the FDA on February 6, 2002. The application is receiving ongoing review by
the FDA. On May 7, 2002, we received a letter from the FDA requesting further
clinical information. We have generated additional clinical information in
response to the letter and are uncertain if we will make a submission to the FDA
with the additional clinical information. Because of the "going concern" status
of the company, management has focused efforts on those products and activities
that will, in its opinion, achieve the most resource efficient short-term cash
flow to the company. Our diagnostic products are currently our major focus and
the Photon(TM) and other extensive research and development prospects have been
put on hold pending future evaluation when our financial position improves. Our
focus is not on any specific diagnostic product or products, but rather on our
entire group of diagnostic products.
Facilities
Our 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, we 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, we pay all real estate and
personal property taxes and the insurance costs on the premises.
We believe that these facilities are adequate and satisfy our needs for
the foreseeable future.
Employees
As of November 30, 2003, we had 30 full-time employees. This number
does not include our manufacturer's representatives who are independent
contractors rather than our employees. We also utilize several consultants and
advisors. There can be no assurance that we will be successful in recruiting or
retaining key personnel. None of our employees are a member of a labor union and
we have never experienced any business interruption as a result of any labor
disputes.
In December 2001, we initiated the first phase of a corporate
downsizing program to reduce our operating expenses. We implemented the second
phase of our downsizing program in the second quarter of 2002, by closing and
transferring our manufacturing from our site in San Diego, California to Salt
Lake City, resulting in further reductions in operating expenses. As a result of
the downsizing program and some resignations, the number of our employees has
been reduced by 75% from 112 to 30 employees. The estimated cost savings from
the downsizing program will be in excess of $2,000,000 annually. The costs of
downsizing have included one-time expenses of approximately $43,000 for moving
and travel. In addition, we incurred additional one-time expenses of
approximately $18,000 for housing accommodations for key employees working in
Salt Lake City. We realized a net cost savings from downsizing in excess of $2
million during each of the years 2003 and 2002.
Legal Proceedings
An action was brought against us in March 2000 by George Wiseman, a
former employee, in the Third District Court of Salt Lake County, State of Utah.
The complaint alleges that we owe Mr. Wiseman 6,370 shares of our common stock
plus costs, attorney's fees and a wage penalty (equal to 1,960 additional shares
50
of our common stock) pursuant to Utah law. The action is based upon an extension
of a written employment agreement. We dispute the amount allegedly owed and
intend to vigorously defend against the action.
An action was brought against us 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 we have paid royalties of $14,736 to bring all payments up to date
through June 30, 2001. We have 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 our calculations, is $981. We intend 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, we would lose our 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
Securities Law and Plaintiffs Demand a Trial by Jury." We have 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 we falsely stated in our
Securities and Exchange Commission filings and press releases that we had
received authorization to use an insurance reimbursement CPT code from the CPT
Code Research and Development Division of the American Medical Association 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 we never received the CPT code from the American Medical
Association at any time. Nevertheless, it is alleged that we continued to
misrepresent in our SEC filings and press releases that we had received the CPT
code. It is also alleged that we have never made a full, corrective disclosure
with respect to this alleged misstatement.
The complaint also alleges that on July 11, 2002, we issued a press
release falsely announcing that we had received a purchase order from Valdespino
Associates Enterprises and Westland Financial Corporation for 200 sets of our
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 we had never received a true purchase
order for our products. As a result of these alleged misstatements, the
complaint contends that the price of our 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 our common shares during that period suffered
substantial damages. The complaint requests judgment for unspecified damages,
together with interest and attorney's fees.
We dispute 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, we issued a press
release that stated we had received authorization to use common procedure
terminology or CPT code number 92120 for our Blood Flow Analyzer(TM). This press
release was based on a letter we 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 our 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. We are
endeavoring to obtain reimbursement by insurance payors in other states where
51
there is currently no reimbursement being made. We believe we have continued to
correctly represent in our Securities and Exchange Commission filings that the
CPT Editorial Research and Development Department of the American Medical
Association has advised us that CPT code number 92120 is the appropriate CPT
code for our Blood Flow Analyzer(TM), for reimbursement purposes for doctors
using the device.
On July 11, 2002, we issued a press release that stated we received a
purchase order from Westland Financial Corporation and Valdespino Associates
Enterprises for 200 complete sets of our 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 we entered into with Westland Financial
Corporation for the sale of 200 complete sets of our surgical and diagnostic
equipment to Mexican ophthalmic practitioners. The press release also stated
that the initial order was for $70 million of our 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 our 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 our product sales to the Mexican ophthalmic
practitioners. In that press release the board stated that we had been in
discussions for the prior nine months with Westland Financial Corporation, aimed
at supplying our 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, we 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
our medical device products in Mexico, but we 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 our
common stock was artificially inflated and the persons who purchased our 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 our securities in the class action suit filed on July 11, 2003,
stated that our 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 our 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 our securities in the
consolidated class action. On June 28, 2004, a consolidated amended class action
complaint was filed on behalf of purchasers of our securities. The consolidated
complaint is similar to the three class action complaints and alleges that we
made false representations regarding the CPT code for the Blood Flow
Analyzer(TM), but it includes additional allegations that we 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 we made false statements regarding the purchase order from Westland
Financial Corporation and Valdespino Associates Enterprises. We believe the
consolidated complaint is without merit and intend to vigorously defend and
protect our interests in the case.
We were 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 our application
for insurance.
We have paid $30,000 to U.S. Fire toward satisfaction of the $250,000
retention that is applicable to the consolidated cases. We have advised U.S.
Fire that we cannot pay the $250,000 retention due to our current financial
circumstances. As a consequence, on January 8, 2004, we entered into a
non-waiver agreement with U.S. Fire in which U.S. Fire agreed to fund and
advance our retention obligation in consideration for which we have agreed to
reimburse U.S. Fire the sum of $5,000 a month for a period of six months, with
52
the first of such payments due on February 15, 2004. Thereafter, commencing on
August 15, 2004, we are 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. We
have made payments to U.S. Fire in the aggregate amount of $30,000 of which our
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 we or our 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 we 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 we agree to pay U.S. Fire,
on demand, the full amount of all costs advanced by U.S. Fire, except for those
amounts that we 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, we would owe our
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.
We will be in default under the non-waiver agreement if we fail 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 we are not successful
in defending and protecting our interests in the cases, resulting in a judgment
against us for substantial damages, we 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., 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 us on
January 31, 2002, in which we agreed to purchase all the assets of Innovative in
consideration for the issuance of 1,310,000 shares of the Company's common stock
to Innovative. The complaint claims we breached the asset purchase agreement.
The complaint also claims that we allegedly made false and misleading statements
pertaining to the Blood Flow Analyzer(TM) and concerning a purchase order from
Valdespino Associates Enterprises and Westland Financial Corporation. The
purpose of these statements, according to the complaint, was to induce
Innovative to sell its assets and purchase the shares of our common stock at
artificially inflated prices while simultaneously deceiving Innovative and
Barton into believing that 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 our
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.
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 we also did not file a registration statement with the Securities and
Exchange Commission within five months of the closing date of the asset purchase
transaction. As a result, the complaint alleges that the value of the shares of
our common stock issued to Innovative in the transaction declined, and
Innovative and Barton suffered damages in an unspecified amount to be proven at
trial. We filed an answer to the complaint and also filed counterclaims against
Innovative and Barton for breach of contract. We believe the complaint is
without merit and intend to vigorously defend and protect our interests in the
action. If we are not successful in defending and protecting our interests in
this action, and a judgment for substantial damages is entered against us, and
U.S. Fire denies coverage in the litigation under the Directors and Officers
Liability and Company Reimbursement Policy, we 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." We have 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 we
falsely stated in Securities and Exchange Commission filings and press releases
that we had received authorization to use an insurance reimbursement CPT code
from the CPT Code Research and Development Division of the American Medical
Association in connection with the Blood Flow Analyzer(TM), adding that the CPT
code provides for a reimbursement to doctors of $57.00 per patient for the Blood
Flow Analyzer(TM).
53
The purpose of these statements, according to the complaint, was to
induce investors to purchase shares of our 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 our
Series E preferred stock in the private offering suffered substantial damages to
be proven at trial. The complaint also alleges that we 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. We filed an answer to
the complaint. We believe the complaint is without merit and intend to
vigorously defend our interests in the action. If we are not successful in
defending and protecting our interests in the action, resulting in a judgment
against us for substantial damages, and U.S. Fire denies coverage in the
litigation under the Directors and Officers Liability and Company Reimbursement
Policy, we would be unable to pay such liability and, as a result, would be
forced to seek bankruptcy protection.
On December 8, 2004, we announced that verbal agreements have been made
to settle certain lawsuits brought against us and our former executive officers,
Thomas F. Motter, Mark R. Miehle and John W. Hemmer. The following are the
lawsuits that have been verbally settled:
o The class action lawsuit filed on May 14, 2003 by Richard Meyer,
individually and on behalf of all others similarly situated,
against us and certain former executive officers in the United
States District Court for the District of Utah, which was
consolidated into a single action on June 28, 2004 with two other
class action lawsuits -- the class action lawsuit filed by Michael
Marone on June 2, 2003 and the class action lawsuit filed by Lidia
Milian on July 21, 2003 against us and our former executive
officers in the same court. The consolidated action is captioned
In re Paradigm Medical Industries Securities Litigation, with lead
plaintiffs Rock Solid Investments of Miami, Inc., Brito & Brito
Accounting, Inc. and Joseph Savanjo.
o The class action lawsuit filed on October 14, 2003 by Albert
Kinzinger, Jr., individually and on behalf of all others similarly
situated, in the Third District Court for the State of Utah
against us and certain former executive officers.
o The lawsuit filed on July 10, 2003 by Innovative Optics, Inc.
against us and certain former executive officers.
Under the terms of the settlement agreements, U.S. Fire Insurance
Company, which issued a Directors and Officers Liability and Company
Reimbursement Policy to us for the period from July 10, 2002 to July 10, 2003,
has agreed to pay $2,500,000 in cash to the classes in the class action lawsuits
and to Innovative Optics, Inc. in settlement of these lawsuits. Under the terms
of settlement, we are to pay U.S. Fire the sum of $220,000, representing the
remaining amount owing under a $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.
The parties to the settlement and their respective legal counsel are in
the process of preparing written settlement agreements to memorialize the terms
of the verbal agreements. Settlement of the lawsuits is subject to certain
conditions, which include but are not limited to the following:
o Each of the settlement classes shall, in their respective actions
and at their own expense, obtain preliminary approval of the terms
of settlement by both the court in the federal action and the
court in the state action.
o After obtaining a court order granting preliminary approval of the
terms of settlement in the respective actions, each of the classes
are required, in their respective actions and at their own
expense, to provide notice to all persons that are potential
members of the federal settlement class and the state settlement
class, respectively.
o The federal settlement class members and the state settlement
class members shall have a period of time from the date of the
mailing of such notice in which to "opt-out" of the federal
settlement class and state settlement class, respectively.
Under the terms of the settlement, 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 settlement class
or the state settlement class exceeds $250,000. However, if such "opt-outs"
exceed $250,000, the parties in the class have a period of time to cure by
reducing the amount of "opt-outs" to less than $250,000. The remaining retention
obligation of $220,000 is payable in monthly installments of $10,000 until the
entire amount owing is paid.
If U.S. Fire exercises its option to terminate the settlement
agreements in the event the "opt-outs" exceed $250,000 and the parties are
unable to reduce the amount of "opt-outs" within an allowable time period, the
terms and conditions of the settlement agreements will have no further force and
effect, and all parties will be restored to their respective positions in the
various legal actions prior to such settlement.
An action was filed on June 20, 2003 in the Third Judicial District
Court, Salt Lake County, State of Utah (Civil No. 030914195) by Citicorp Vendor
Finance, Inc., formerly known as Copelco Capital, Inc. The complaint claims that
$49,626 plus interest is due for the leasing of two copy machines that were
delivered to our Salt Lake City facilities on or about April of 2000. The action
also seeks an award of attorney's fees and costs incurred in the collection. We
54
dispute the amounts allegedly owed, asserting that the equipment we returned to
the leasing company did not work properly. A responsive pleading has been filed.
We were engaged in settlement discussions with Citicorp until counsel for
Citicorp withdrew from the case. New counsel has not yet been appointed to
represent Citicorp in the case.
An action was filed in June, 2003 in the Third Judicial District Court,
Salt Lake County, State of Utah (Civil No. 030914719) by Franklin Funding, Inc.
in which it alleges that we had entered into a lease agreement for the lease of
certain equipment for which payment is due. It is claimed that there is due and
owing approximately $89,988 after accruing late fees, interest, repossession
costs, collection costs and attorneys' fees. On August 28, 2003, we 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 November 30, 2004, we have made 16 monthly payments of
$2,300 each to Franklin Funding.
We 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 our common stock and warrants to
purchase 1,192,500 shares of our 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. We believe 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 our common stock or
any additional warrants under the terms of the mutual release. We intend to
vigorously defend against any legal action that Dr. MacLeod may bring.
On August 3, 2003, a complaint was filed against us by Corinne Powell,
a former employee, in the Third Judicial District Court, Salt Lake County, State
of Utah (Civil No. 030918364). Defendants consist of the Company and Randall A.
Mackey, Dr. David M. Silver and Keith D. Ignotz, directors of the company. The
complaint alleges that at the time we laid off Ms. Powell on March 25, 2003, she
was owed $2,030 for business expenses, $11,063 for accrued vacation days,
$12,818 for unpaid commissions, the fair market value of 50,000 stock options
exercisable at $5.00 per share that she claims she was prevented from
exercising, attorney's fees and a continuing wage penalty under Utah law. We
dispute the amounts allegedly owed and intend to vigorously defend and protect
our interests in the action.
On September 10, 2003, an action was filed against us 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 we have paid Mr. Hicks prior to such
termination, plus costs, attorney's fees and a wage penalty pursuant to Utah
law. We dispute the amount allegedly owed and intend to vigorously defend
against such action.
On May 25, 2004, an action was brought against us 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 we unlawfully terminated the written
employment agreement between Mr. Poore and us. As a result, Mr. Poore demands
judgment against us 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 us,
and for money judgment equal to the value of the stock options granted to him
under the employment agreement. We dispute the amounts allegedly owed in the
complaint and believe that there was a sufficient basis to terminate Mr. Poore's
employment for cause under the terms of the employment agreement. Accordingly,
we intend to vigorously defend against the action.
On August 9, 2004, a third party complaint was brought against us by
Wakefield Eye Center. The original action was brought by American Express
Business Corporation against Westfield Eye Center 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 Eye Center 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 Eye Center 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 us 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. We have filed an answer to the third party complaint in which
we deny liability. Formal discovery in the matter involving us has not commenced
apart from initial disclosure requirements. The case has been referred to
arbitration. We intend to vigorously defend the action.
We are not a party to any other material legal proceedings outside the
ordinary course of its business or to any other legal proceedings which, if
adversely determined, would have a material adverse effect on our financial
condition or results of operations.
55
MANAGEMENT
Directors and Executive Officers
As of November 30, 2004, our executive officers and directors, their
ages and their positions are set forth below:
Name Age Position
---- --- --------
John Y. Yoon 40 President and Chief Executive Officer
Aziz A. Mohabbat 44 Vice President of Operations and Chief
Operating Officer
Randall A. Mackey, Esq. 58 Chairman of the Board, Secretary and
Director
David M. Silver, Ph.D. 61 Director
Keith D. Ignotz 54 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 our 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 3 Com
Corporation. From 1997 to June 2003, he served as Senior Director of Product
Management and Director of Product Management of 3 Com 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 our Chief Operating Officer since March
23, 2004 and from August 2002 to March 2003, and 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 our 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 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 our Chairman of the Board since August
20, 2002, and a director since January 2000. He had served as a director of the
company from November 1995 to September 1998. Mr. Mackey has been President of
the Salt Lake City law firm of Mackey Price & Thompson since 1992, and a
shareholder and director of the firm and its predecessor firms since 1989. Mr.
Mackey received a B.S. degree in Economics from the University of Utah in 1968,
an M.B.A. degree from the Harvard Business School in 1970, a J.D. degree from
Columbia Law School in 1975 and a B.C.L. degree from Oxford University in 1977.
Mr. Mackey has also served as Chairman of the Board from June 2001 to May 2003,
and as a director from 1998 to May 2003 of Cimetrix, Incorporated, a software
development company. Mr. Mackey has additionally served as Chairman of the Board
from July 2000 to July 2003 and as a trustee from 1993 to July 2003 of Salt Lake
Community College.
David M. Silver, Ph.D. has been a director since January 2000. He had
served as a director of the company from November 1995 to September 1998. Dr.
Silver is a Principal Senior Scientist in the Milton S. Eisenhower Research and
Technology Development Center at the Johns Hopkins University Applied Physics
56
Laboratory, where he has been employed since 1970. He served as the J. H.
Fitzgerald Dunning Professor of Ophthalmology in the Johns Hopkins Wilmer Eye
Institute in Baltimore during 1998-99. He received a B.S. degree from Illinois
Institute of Technology, an M.A. degree from Johns Hopkins University and a
Ph.D. degree from Iowa State University before holding a postdoctoral fellowship
at Harvard University and a visiting scientist position at the University of
Paris.
Keith D. Ignotz has been a director since November 2000. He has been
President and Chief Operating Officer of SpectRx, Inc., a medical technology
company that he founded in 1992, which develops, manufactures and markets
alternatives to traditional blood-based medical tests. From 1986 to 1992, Mr.
Ignotz was Senior Vice President of Allergan Humphrey, Inc., a medical
electronics company. From 1985 to 1986, he was President of Humphrey Instruments
Limited-SKB, a medical electronics company, and from 1980 to 1985, Mr. Ignotz
was President of Humphrey Instruments GmbH, also a medical electronics company.
Mr. Ignotz also served on the Board of Directors of Vismed, Inc., d/b/a Dicon
from 1992 to June 2000. Mr. Ignotz received a B.A. degree in Sociology and
Political Science from San Jose University and an M.B.A. degree from Pepperdine
University. Mr. Ignotz has served as a trustee of Pennsylvania College of
Optometry since 1990, as a director for FluoRx, Inc. since 1997, and as a member
of the American Marketing Association of the American Association of Diabetes
Education.
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 our 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 our Vice President
of Operations and Chief Operating Officer, replacing David I. Cullumber who had
resigned as Chief Operating Officer and Chief Technical Officer. Mr, Cullumber
served as Chief Operating Officer from November 6, 2003 to March 22, 2004. Mr.
Mohabbat had previously served as our Chief Operating Officer from August 2002
to March 2003, and as Vice President of Operations from 2001 to March 2003.
Board Meetings and Committees
The Board of Directors held a total of seven meetings during the fiscal
year ended December 31, 2003. No director attended fewer than 75% of all
meetings of the Board of Directors during the 2003 fiscal year. The Audit
Committee of the Board of Directors consists of directors Dr. David M. Silver,
Randall A. Mackey and Keith D. Ignotz. The Audit Committee met twice during the
fiscal year. The Audit Committee is primarily responsible for reviewing the
services performed by our independent public accountants and internal audit
department and evaluating our accounting principles and our system of internal
accounting controls. The Compensation Committee of the Board of Directors
consists of directors Dr. David M. Silver, Randall A. Mackey and Keith D.
Ignotz. The Compensation Committee met two times during the fiscal year. The
Compensation Committee is primarily responsible for reviewing compensation of
executive officers and overseeing the granting of stock options.
Executive Compensation
The following table sets forth, for each of the last three fiscal
years, the compensation received by Thomas F. Motter, former Chairman of the
Board, and Chief Executive Officer and other executive officers whose salary and
bonus for all services in all capacities exceed $100,000 for the fiscal years
ended December 31, 2003, 2002 and 2001.
57
Summary Compensation Table
Annual Compensation Long Term Compensation
Award Payouts
Other Securities
Annual Restricted Underlying Long-term All Other
Name and Compen- Stock Options/ Incentive Compensa-
Principal Position Year Salary$ Bonus($) sation($)(6) Awards($) SARs(#) Payouts(4) tion(4)
------------------ ---- ------- -------- ------------ ----------- ----------- ---------- -----------
Jeffrey F. Poore 2003(1) $136,015 0 0 0 1,000,000(6) 0 0
President and Chief
Executive Officer
David I. Cullumber, 2003(1) $22,312 0 $16,616(7) 0 150,000(8) 0 0
Chief Operating Officer
and Chief Technical
Officer
Gregory C. Hill 2003(1) $ 34,000 0 0 0 0 0 0
Former Vice President
of Finance and Chief
Financial Officer
Thomas F. Motter 2002(2) $187,483(9) 0 0 0 0 0 $19,750(4)(5)
Former Chairman of the 2001(3) $200,000 $22,380(10) 0 0 925,000(11) 0 $ 6,000(4)
Board and Chief
Executive Officer
Mark R. Miehle 2002(2) $134,202 0 0 0 55,000(12) 0 $18,000(4)(14)
Former President and 2001(3) $150,000 0 0 0 110,000(13) 0 $ 6,000(4)
Chief Operating Officer
Aziz A. Mohabbat 2003(1) $ 24,219 0 0 0 0 0 0
Former Vice President 2002(2) $126,878 0 0 0 0 0 0
of Operations(15)
Heber C. Maughan 2003(1) $ 36,855 0 0 0 150,000(17) 0 0
Former Chief Financial 2002(2) $114,416 0 0 0 0 0 0
Officer(16) 2001(3) $ 27,500 0 0 0 30,000(18) 0 0
--------------------
(1) For the fiscal year ended December 31, 2003
(2) For the fiscal year ended December 31, 2002
(3) For the fiscal year ended December 31, 2001
(4) The amounts under "All Other Compensation" for 2003, 2002 and 2001
include payments related to the operation of automobiles and/or
automobiles and insurance by the named executives.
(5) The amounts under "All Other Compensation" for 2002 include payments
related to the residential housing accommodations for our employees,
living outside of Utah while they were working at our corporate
headquarters in Salt Lake City, leased from Mr. Motter at $2,500 per
month.
(6) On March 19, 2003, our board of directors granted Mr. Poore options to
purchase 1,000,000 shares of our common stock at an exercise price of
$.16 per share.
(7) We paid A-Mech Engineering, Inc. a total of $16,616 for consulting
services during 2003. From 1982 to August 2003, Mr. Cullumber served as
President of A-Mech Engineering, Inc.
(8) On November 6, 2003, our board of directors granted Mr. Cullumber
options to purchase 150,000 shares of our common stock at an exercise
price of $.21 per share.
(9) 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.
(10) We awarded Mr. Motter a cash bonus in June 2001.
(11) On September 11, 2001, we granted Mr. Motter options to purchase
925,000 shares of our common stock at an exercise price of $2.75 per
share.
(12) On January 29, 2002, our Board of Directors granted Mr. Miehle options
to purchase the 55,000 shares of our common stock at an exercise price
of $2.75 per share.
(13) On September 11, 2001, our Board of Directors granted Mr. Miehle
options to purchase 110,000 shares of our common stock at an exercise
price of $2.75 per share.
(14) On September 3, 2002, we entered into a consulting agreement with Mr.
Miehle in which we are required to pay him monthly consulting fees of
$5,000 over a period of six months. We paid him a total of $15,000 for
consulting services during the months of September, October and
November of 2002.
(15) Mr. Mohabbat was named as Interim Chief Operating Officer on August 30,
2002. He was not an officer in prior years.
(16) Mr. Maughan was named as Interim Chief Executive Officer on August 30,
2002. He was appointed Vice President of Finance, Treasurer and Chief
Financial Officer on October 1, 2001.
58
(17) On May 13, 2003, our Board of Directors granted Mr. Maughan options to
purchase 150,000 shares of our common stock at an exercise price of
$.16 per share.
(18) On October 1, 2001, our Board of Directors granted options Mr. Maughan
options to purchase 30,000 shares of our common stock at an exercise
price of $2.75 per share.
Options
The following table sets forth information regarding stock options
granted during the fiscal year ended December 31, 2003, to each named executive
officer.
Option Grants in Last Fiscal Year
Individual Grants
--------------------------------------------------------------------------
Percentage of
Total Options
Number of Securities Granted to Exercise Price
UnderlyingOptions Employees in Per Share Expiration
Name Granted (#) Fiscal Year(%) ($/Sh) Date
---- --------------------- -------------- -------------- ----------
Jeffrey F. Poore.................... 1,000,000(1) 56.3% $.16 3/19/08
David I. Cullumber.................. 150,000(2) 8.5% $.21 11/6/08
Gregory C. Hill..................... 0 -- -- --
Heber C. Maughan.................... 150,000(3) 8.5% $.16 5/13/08
Aziz A. Mohabbat.................... 0 -- -- --
(1) Options for 800,000 shares vested on March 19, 2003, options for an
additional 100,000 shares vest on March 19, 2004, and options for the
remaining 100,000 shares vest on March 19, 2005.
(2) Options vest in three equal annual installments, beginning on November
6, 2003.
(3) Options vest in three equal annual installments, beginning on May 13,
2003.
The following table sets forth information regarding unexercised
options to acquire shares of our common stock held as of December 31, 2003, by
each named executive officer.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 2003(#) at December 31, 2003($)
----------------------- -----------------------
Shares Acquired Value
Name on Exercise Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
Jeffrey F. Poore......... 0 0 800,000 200,000 0 0
David I. Cullumber....... 0 0 50,000 100,000 0 0
Gregory C. Hill.......... 0 0 0 0 0 0
Heber C. Maughan......... 0 0 50,000 100,000 0 0
Aziz A. Mohabbat......... 0 0 0 0 0 0
Director Compensation
On July 11, 2003, Messrs. Randall A. Mackey, Dr. David M. Silver and
Keith D. Ignotz, directors of our company, were each granted options to purchase
125,000 shares of our common stock at an exercise price of $.25 per share. In
addition, outside directors are also reimbursed for their expenses in attending
board and committee meetings. Directors are not precluded from serving us in any
other capacity and receiving compensation therefore. The options were not issued
at a discount to the then market price.
Employee 401(k) Plan
In October 1996, our board of directors adopted a 401(k) Retirement
Savings Plan. Under the terms of the 401(k) plan, effective as of November 1,
1996, we may make discretionary employer matching contributions to our employees
who choose to participate in the plan. The plan allows the board to determine
the amount of the contribution at the beginning of each year. The Board adopted
a contribution formula specifying that such discretionary employer matching
59
contributions would equal 100% of the participating employee's contribution to
the plan up to a maximum discretionary employee contribution of 3% of a
participating employee's compensation, as defined by the plan. All persons who
have completed at least six months' service with us and satisfy other plan
requirements are eligible to participate in the plan.
1995 Stock Option Plan
We adopted a 1995 Stock Option Plan, for the officers, employees,
directors and consultants of our company on November 7, 1995. The plan
authorized the granting of stock options to purchase an aggregate of not more
than 300,000 shares of our common stock. On February 16, 1996, options for
substantially all 300,000 shares were granted. On June 9, 1997, our shareholders
approved an amendment to the plan to increase the number of shares of common
stock reserved for issuance thereunder from 300,000 shares to 600,000 shares. On
September 3, 1998, our shareholders approved an amendment to the plan to
increase the number of shares of common stock reserved for issuance thereunder
from 600,000 shares to 1,200,000 shares. On November 29, 2000, our shareholders
approved an amendment to the plan to increase the number of shares of common
stock reserved for issuance thereunder from 1,200,000 shares to 1,700,000
shares. On September 11, 2001, our shareholders approved an amendment to the
1995 plan to increase the number of shares of common stock reserved for issuance
thereunder from 1,700,000 shares to 2,700,000 shares. On June 13, 2003, our
shareholders approved an amendment to the plan to increase the member of shares
of common stock reserved for issuance thereunder from 2,700,000 shares to
3,700,000 shares.
The compensation committee administers the 1995 Stock Option Plan. In
general, the compensation committee will select the person to whom options will
be granted and will determine, subject to the terms of the plan, the number,
exercise, and other provisions of such options. Options granted under the plan
will become exercisable at such times as may be determined by the compensation
committee. Options granted under the plan may be either incentive stock options,
as such term is defined in the Internal Revenue Code, or non-incentive stock
options. Incentive stock options may only be granted to persons who are our
employees. Non-incentive stock options may be granted to any person, including,
but not limited to, our employees, independent agents, consultants as the
compensation committee believes has contributed, or will contribute, to our
success as the compensation committee believes has contributed, or will
contribute, to our success. The compensation committee determines the exercise
price of options granted under the 1995 Stock Option Plan, provided that, in the
case of incentive stock options, such price is not less than 100% (110% in the
case of incentive stock options granted to holders of 10% of voting power of our
stock) of the fair market value (as defined in the plan) of the common stock on
the date of grant. The aggregate fair market value (determined at the time of
option grant) of stock with respect to which incentive stock options become
exercisable for the first time in any year cannot exceed $100,000.
The term of each option shall not be more than ten years (five years in
the case of incentive stock options granted to holders of 10% of the voting
power of our stock) from the date of grant. The Board of Directors has a right
to amend, suspend or terminate the 1995 Stock Option Plan at any time; provided,
however, that unless ratified by our shareholders, no amendment or change in the
plan will be effective that would increase the total number of shares that may
be issued under the plan, materially increase the benefits accruing to persons
granted under the plan or materially modify the requirements as to eligibility
and participation in the plan. No amendment, supervision or termination of the
plan shall, without the consent of an employee to whom an option shall
heretofore have been granted, affect the rights of such employee under such
option.
Employment Agreements
We entered into an employment agreement with Thomas F. Motter, which
commenced on January 1, 1998 and expires on December 31, 2002. The employment
agreement requires Mr. Motter to devote substantially all of his working time as
our Chairman and Chief Executive Officer, provided that he may be terminated for
"cause" (as provided in the agreements) and prohibits him from competing with us
for two years following the termination of his employment agreement. The
employment agreement provides for the payment of an initial base salary of
$135,000, effective as of January 1, 1998. The employment agreement also
provides for salary increases and bonuses as shall be determined at the
discretion of the Board of Directors. Effective as of October 1, 1999, the Board
of Directors approved an increase in Mr. Motter's annual base salary to
$160,000, and effective as of July 1, 2000, the board approved an increase in
his annual base salary to $200,000, which remained in effect during 2002. Mr.
Motter resigned 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.
We entered into an employment agreement with Mark R. Miehle, which
commenced on June 5, 2000, and was to expire on June 4, 2003. The employment
agreement required Mr. Miehle to devote substantially all of his working time as
our President and Chief Operating Officer, provided that he may be terminated
for "cause" (as provided in the agreement) and prohibited him from competing
with us for two years following the termination of his employment agreement. The
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 our 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
60
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.
We 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
our President and Chief Executive Officer, provided that he may be terminated
for "cause" (as provided in the agreements) and prohibits him from competing
with us for two years following the termination of the 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 our
Board of Directors. The employment agreement further provides for the issuance
of stock options to purchase 1,000,000 shares of our common stock at $.16 per
share, of which options to purchase 800,000 shares of common stock shall vest on
March 19, 2003, options for an additional 100,000 shares of common stock shall
vest on March 19, 2004, and options for an additional 100,000 shares of common
stock shall vest on March 19, 2005.
On March 18, 2004, our 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, we believe that we have 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 us. In his complaint he alleges that we 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. We dispute 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.
We 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
our President and Chief Executive Officer, provided that he may be terminated
for "cause" (as provided in the agreement) and prohibits him from competing with
us for two years following the termination of the 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 our
Board of Directors. The employment agreement further provides for the issuance
of stock options to purchase 1,000,000 shares of our common stock at $.13 per
share. These 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 our outstanding
shares; (ii) we are 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 our former shareholders, as the
same shall have listed prior to such merger or consolidation; (iii) we 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 our Board of Directors, or any tender or exchange offer, merger of business
combination or sale of assets, the persons who were our directors before such a
transaction shall cease to constitute a majority of our 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 our common stock.
We entered into an employment agreement with Aziz A. Mohabbat on
October 5, 2004, which is 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 our 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 us 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 our Board of Directors. The employment agreement further
provides for the issuance of stock options to purchase 200,000 shares of our
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 our outstanding
shares; (ii) we are merged or consolidated with another corporation and, as a
result, less than 25% of the outstanding common shares of the surviving
61
corporation shall be owned in the aggregate by our former shareholders, as the
same shall have listed prior to such merger or consolidation; (iii) we 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 our Board of Directors, or any tender or exchange offer, merger of business
combination or sale of assets, the persons who were our directors before such a
transaction shall cease to constitute a majority of our 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 our 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 our 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 our common stock at $6.00 per share, on September 11, 2001 to purchase
110,000 shares of our common stock at $2.75 per share, and on January 28, 2002
to purchase 55,000 shares of our 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 us to enter
into a consulting agreement with Mr. Miehle. Under the terms of the consulting
agreement, Mr. Miehle is to provide consulting services to us for a period of
six months for a fee of $5,000 per month. The consulting agreement is to be
automatically renewed for an additional six months at a fee of $3,000 per month
unless we deliver written notice to Miehle at least 30 days prior to the end of
the initial six month term that we will not renew the agreement. We 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. We 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 our intention not to review the
agreement.
Consulting Agreement
On April 3, 2003, we entered into a consultant agreement with Kinexsys
Corporation. 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 us, for which Kinexsys is to
receive warrants to purchase up to 200,000 shares of our common stock at an
exercise price of $.16 per share. The capital markets plan is to include a
detailed analysis of our 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.
Limitation of Liability and Indemnification
We reincorporated in Delaware in February 1996, in part, to take
advantage of certain provisions in Delaware's corporate law relating to
limitations on liability of corporate officers and directors. We believe that
the reincorporation into Delaware, the provisions of its Certificate of
Incorporation and Bylaws and the separate indemnification agreements outlined
below are necessary to attract and retain qualified persons as directors and
officers. Our Certificate of Incorporation limits the liability of directors to
the maximum extent permitted by Delaware law. This provision is intended to
allow our directors the benefit of Delaware General Corporation Law that
provides that directors of Delaware corporations may be relieved of monetary
liabilities for breach of their fiduciary duties as directors, except under
certain circumstances, including breach of their duty of loyalty, acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, unlawful payments of dividends or unlawful stock repurchases
or redemptions or any transaction from which the director derived an improper
personal benefit. Our Bylaws provide that we shall indemnify our officers and
directors to the fullest extent provided by Delaware law. Our Bylaws authorize
the use of indemnification agreements and we have entered into such agreements
with each of our directors and executive officers.
There is pending litigation against Thomas F. Motter, Mark R. Miehle
and John W. Hemmer, former officers of the company, to whom we have
indemnification obligations. The pending litigation consists of class action
complaints for alleged violations of the federal securities laws filed in the
United States District Court, District of Utah, captioned Richard Meyer,
individually and on behalf of others similarly situated v. Paradigm Medical
Industries, Inc., Thomas Motter, Mark Miehle and John Hemmer, Case No. 2:03
CV00448TC, Michael Marrone v. Paradigm Medical Industries, Inc., Thomas Motter,
Mark Miehle, and John Hemmer, Case No. 2:03 CV00513PGC, and Milian v. Paradigm
Medical Industries, Inc., Thomas Motter, Mark Miehle and John Hemmer, Case No.
2:03 CV00617PGC. We have retained legal counsel to review the complaints, which
appear 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.
62
More specifically, each of the complaints alleges that we falsely
stated in our Securities and Exchange Commission filings and press releases that
we had received authorization to use an insurance reimbursement CPT code from
the CPT Code Research and Development Division of the American Medical
Association in connection with the Blood Flow Analyzer(TM), adding that the CPT
code provides for a reimbursement to doctors of $57.00 per patient for use of
the Blood Flow Analyzer(TM). The complaints also allege that on July 11, 2002,
we issued a press release falsely announcing that we had received a purchase
order from Valdespino Associates Enterprises and Westland Financial Corporation
for 200 sets of our 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. As a result of these statements, the complaints
contend that the price of our shares of common stock was artificially inflated
during the period from April 25, 2001 through May 14, 2003, and the persons who
purchased our common shares during that period suffered substantial damages. The
complaints request judgment for unspecified damages, together with interest and
attorneys' fees. These three cases have been consolidated into a single action.
If we are not successful in defending and protecting our interests in these
cases, resulting in a judgment against us for substantial damages, and U.S. Fire
Insurance Company denies coverage in the cases under the Directors and Officers
Liability and Company Reimbursement Policy, we would not be able to pay the
indemnification obligations and, as a result, would be forced to seek bankruptcy
protection.
There is also pending litigation against Messrs. Motter, Miehle and
Hemmer in an action filed in the United States District Court, District of Utah
by Innovative Optics, Inc. The complaint claims that Innovative and Barton
entered into an asset purchase agreement with us on January 31, 2002, in which
we agreed to purchase all the assets of Innovative in consideration for the
issuance of 1,310,000 shares of the Company's common stock to Innovative. The
complaint also claims that we allegedly made false and misleading statements
pertaining to the Blood Flow Analyzer(TM) and concerning a purchase order from
Valdespino Associates Enterprises and Westland Financial Corporation. The
purpose of these statements, according to the complaint, was to induce
Innovative to sell its assets and purchase the shares of our common stock at
artificially inflated prices while simultaneously deceiving Innovative and
Barton into believing that the Company's shares were worth more than they
actually were. Had Innovative and Barton known the truth, the complaint
contends, they would not have sold Innovative to us, would not have purchased
our 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 these statements, Innovative and Barton suffered substantial damages
in an amount to be proven at trial.
The complaint further claims that 491,250 of the shares to be issued to
Innovative in the asset purchase transaction were not issued on a timely basis
and we also did not file a registration statement with the Securities and
Exchange Commission within five months of the closing date of the asset purchase
transaction. As a result, the complaint alleges that the value of the shares of
our common stock issued to Innovative in the transaction declined, and
Innovative and Barton suffered damages in an amount to be proven at trial. We
filed an answer to the complaint and also filed counterclaims against Innovative
and Barton for breach of contract. If we are not successful in defending and
protecting our interests in this action, resulting in a judgment against us for
substantial damages, and U.S. Fire denies coverage in the cases under the
Directors and Officers Liability and Company Reimbursement Policy, we would not
be able to pay the indemnification obligations and, as a result, would be forced
to seek bankruptcy protection.
Finally, there is also pending litigation against Messrs. Motter,
Miehle and Hemmer and Randall A. Mackey, Chairman of the Board and Secretary, to
whom we have indemnification obligations, in a class action complaint 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. We have 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 we 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 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 our 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 our
Series E preferred stock in the private offering suffered substantial damages to
be proven at trial. The complaint also alleges that we 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. We filed an answer to
the complaint. If we are not successful in defending and protecting our
interests in the action, resulting in a judgment against us for substantial
damages, and U.S. Fire denies coverage in this action under the Directors and
Officers Liability and Company Reimbursement Policy, we would not be able to pay
the indemnification obligations and, as a result, would be forced to seek
bankruptcy protection.
63
Except for these litigation matters, there is no pending litigation or
proceedings involving a director, officer, employee or other agent of our
company as to which indemnification is being sought, nor are we aware of any
threatened litigation that may result in claims for indemnification by any
director, officer, employee or other agent.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933, as amended,
and is, therefore, unenforceable.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers, directors and persons who own more than 10% of any class of
our common stock to file initial reports of ownership and reports of changes of
ownership of common stock. Such persons are also required to furnish us with all
Section 16(a) reports they file. Based solely on our review of the copies of
such reports received by us with respect to fiscal 2003, or written
representations from certain reporting persons, we believe that all filing
requirements applicable to its directors, officers and greater than 10%
beneficial owners were complied with.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of November 30, 2004 for (i) each
executive officer (ii) each director, (iii) each person known to us to be the
beneficial owner of more than 5% of the outstanding shares, and (iv) all
directors and officers as a group.
Number of Percent of
Name and Address(1) Shares Ownership
------------------- --------- -----------
Douglas A. MacLeod, M.D. (2) 3,068,451 12.0%
502 South M Street
Tacoma Washington 98405
Dr. David M. Silver (3) 761,166 3.0%
Randall A. Mackey (3) 725,000 2.8%
Keith D. Ignotz (3) 454,560 1.7%
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 9.5%
-----------------
*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 our shareholder records, Dr. McLeod owns 1,218,451 shares and
is our 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 we
believe 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 November 30, 2004 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 November 30, 2004 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.
64
CERTAIN TRANSACTIONS
The information set forth herein describes certain transactions between
us and certain affiliated parties. Future transactions, if any, will be approved
by a majority of the disinterested members and will be on terms no less
favorable to us than those that could be obtained from unaffiliated parties.
Thomas F. Motter, our former Chairman of the Board and Chief Executive
Officer, leased his former residence to us for $2,500 per month. The primary use
of the residential property was for housing accommodations for our employees
living outside of Utah while they were working at our corporate headquarters in
Salt Lake City. We paid $2,500 and $14,000 in rent during 2003 and 2002,
respectively. This agreement was terminated on January 31, 2003.
We entered into a consulting agreement with Mark R. Miehle, our former
president and chief operating officer for a period of six-months commencing on
September 3, 2002. The agreement was renewable for additional six month terms.
We did not renew the contract upon its expiration. We paid $1,000 and $15,000
under this agreement during 2003 and 2002, respectfully, and had an accrual of
$5,000 as of December 31, 2002.
Randall A. Mackey, a director since January 21, 2000, and from
September 1995 to September 3, 1998 and chairman of the board since August 30,
2002, is President and a shareholder of the law firm of Mackey Price & Thompson,
which rendered legal services in connection with various corporate matters.
Legal fees and expenses paid to Mackey Price & Thompson for the fiscal years
ended December 31, 2003 and 2002, totaled $97,000 and $167,000, respectively.
Legal fees and expenses paid to the firm for legal services for the nine months
ended September 30, 2004 totaled $80,000 compared to $61,078 for the nine months
ended September 30, 2003. As of December 31, 2003, we owed this firm $136,000,
which is included in accounts payable.
SELLING SECURITYHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock being registered for resale as of November 30,
2004, (i) by each of the holders of common stock pursuant to registration
rights, and (ii) by each of the holders of Series E and Series F Convertible
preferred stock, assuming each of the Series E and Series F preferred
shareholders elects to convert the respective Series E and Series F preferred
shares into shares of common stock for resale; (iii) by each of the holders of
warrants, assuming each of the warrantholders elects to exercise the warrants to
purchase shares of common stock for resale; and (iv) by each of the holders of
stock options, assuming each of the optionholders elects to exercise the options
to purchase shares of common stock for resale; the number of shares of common
stock to be sold by each selling securityholder, and the percentage of each
selling securityholder after the sale of the common stock included in this
prospectus.
Shares Beneficially Number of
Owned Prior to Shares Being Shares Beneficially
Offering Offered Owned After Offering
Shareholders Number Percent Number Percent
------------ ------ ------- ------ -------
John T. Ablamsky(1) 35,000 * 3,000 32,000 *
Steven J. Ablamsky(2) 35,000 * 3,000 32,000 *
Morris Ades(3) 29,167 * 2,500 26,667 *
Francis Anderson(4) 8,346 * 8,346 0 *
Joseph S. Anile II 112,933 * 112,933 0 *
Paul L. Archambeau, M.D.(5) 255,000 1.0% 255,000 0 *
BNB Associates Investments LP (6) 43,750 * 3,750 40,000 *
Dr. Ronald A. and Karen Balkin(7) 155,833 * 12,500 143,333 *
Darin Baker(8) 2,604 * 2,604 0 *
John H. Banzhaf(9) 7,887 * 7,887 0 *
Jerry Bassin(10) 29,167 * 2,500 26,667 *
Steven J. Bayern (11) 112,500 * 112,500 0 *
Alan Beinhacker(12) 541 * 541 0 *
Dr. Valery Berger(13) 2,500 * 2,500 0 *
Michael Bollag(14) 3,750 * 3,750 0 *
Dr. Richard G. Bowe, IRA(15) 29,167 * 2,500 26,667 *
Craig S. Brewer(16) 5,000 * 5,000 0 *
65
Christopher Brothers1(17) 2,604 * 2,604 0 *
Roland A. Catalano, IRA(18) 87,500 * 7,500 80,000 *
Chicago Investments, Inc.(19) 87,500 * 7,500 80,000 *
James Corman(20) 29,167 * 2,500 26,667 *
Cyndel & Co., Inc.(21) 487,500 1.9% 487,500 0 *
Lenore Deluca(22) 1,234 * 1,234 0 *
Paul Dorfman(23) 1,287 * 1,287 0 *
Jack Dushey(24) 2,500 * 2,500 0 *
Michael Fenton(25) 467 * 467 0 *
Henry A. Fredericks Sep. Property
Trust dated 10/12/88 (26) 29,167 * 2,500 26,667 *
Robert L. Frome (27) 222,917 * 156,250 66,667 *
Generation Capital Associates (28) 23,208 * 23,208 0 *
Richard E. Gerzof(29) 1,250 * 1,250 0 *
John Harte(30) 58,333 * 5,000 53,333 *
John W. Hemmer(31) 135,000 * 135,000 0 *
Keith D. Ignotz(32) 200,709 * 200,000 709 *
International Bio-Immune Systems,
Inc.(33) 344,000 1.3% 344,000 0 *
Scott Jernigan(34) 5,000 * 5,000 0 *
Kenneth Jerome & Company, Inc.(35) 200,000 * 200,000 0 *
KSH Strategic Investment Fund I, LP
(36) 237,333 1.0% 20,000 217,333 *
Frances Kehoe(37) 1,234 * 1,234 0 *
Terry F. King(38) 2,500 * 2,500 0 *
Albert F. Kinzinger, Jr.(39) 49,220 * 4,220 45,000 *
Albert F. Kinzinger, Sr., IRA(40) 29,167 * 2,500 26,667 *
Arthur Klansky(41) 14,583 * 1,250 13,333 *
Helen Kohn(42) 139,300 * 139,300 0 *
Patrick N. Kolenik (43) 112,500 * 112,500 0 *
Jason Konior(44) 515 * 515 0 *
Nicole Kregar(45) 1,234 * 1,234 0 *
James H. Levi(46) 14,499 * 2,500 11,999 *
Joe Levine(47) 450 * 450 0 *
Dr. Michael B. Limberg (48) 309,375 1.2% 309,375 0 *
Daniel S. Lipson(49) 250,000 1.0% 250,000 0 *
Randall A. Mackey(50) 475,000 1.6% 475,000 0 *
Douglas A. MacLeod, M.D.(51) 1,418,451 5.6% 1,000,000 418,451 1.6%
Douglas A. MacLeod, M.D. Profit
Sharing Trust(52) 500,000 2.0% 500,000 *
Damian Maggio(53) 515 * 515 0 *
Thomas L. Martin(54) 7,500 * 7,500 0 *
Lewis Mason(55) 3,887 * 3,887 0 *
Frank G. Mauro(56) 153,225 * 153,225 0 *
Mentor Corporation (57) 763,651 3.0% 763,651 0 *
Mid-Lakes Profit Sharing Trust
dated 1/1/66 (58) 29,167 * 2,500 26,667 *
Milan Holdings, Ltd.(59) 900,000 3.5% 900,000 0 *
James McKeever(60) 1,000 * 1,000 0 *
James A. Milgard(61) 218,750 * 18,750 200,000 *
Robert Moulallem(62) 1,000 * 1,000 0 *
Kay Murcer(63) 11,667 * 1,000 10,667 *
Nancy Murdocco(64) 1,234 * 1,234 0 *
Bernard Musmand(65) 450 * 450 0 *
Dr. Joseph R. Nemeth(66) 9,375 * 9,375 0 *
Jules M. Ness, Jr.(67) 39,167 * 2,500 36,667 *
Karen Ann Orlando(68) 1,234 * 1,234 0 *
66
OTATO Limited Partnership(69) 12,500 * 12,500 0 *
Michael Pancer Profit Sharing
Plan(70) 2,500 * 2,500 0 *
Roberto E. Parra(71) 6,500 * 6,500 0 *
Barry Pearl(72) 10,000 * 10,000 0 *
Perceptive Life Sciences Master
Fund (73) 64,132 * 20,000 44,132 *
David Peterson(74) 3,750 * 1,250 2,500 *
John Petrucco(75) 1,320 * 1,320 0 *
Victor Polakof(76) 2,500 * 2,500 0 *
Polycore Optical Pte., Ltd. (77) 694,816 2.7% 694,816 0 *
Sal Vatore Ponzo(78) 4,500 * 4,500 0 *
Charles S. Pritchard(79) 10,103 * 10,103 0 *
ProMed Partners, L.P.(80) 283,728 1.1% 23,035 260,693 1.0%
ProMed Partners I (81) 24,440 * 24,440 0 *
ProMed Partners II (82) 29,517 * 2,530 26,987 *
Dr. Soleiman Rabanipour(83) 14,583 * 1,250 13,333 *
Dr. Sheldon Rabin, IRA(84) 5,000 * 5,000 0 *
Delbert D. Reichardt(85) 7,888 * 7,888 0 *
Marsha and Barry Reiss(86) 5,833 * 500 5,333 *
Rodman & Renshaw, Inc.(87) 35,000 * 35,000 0 *
Edwin W. and Cheryl S.
Richardson(88) 29,167 2,500 26,667 *
St. Mark's Eye Institute(89) 250,000 1.0% 250,000 0 *
Joel Schoenfeld, IRA(90) 29,167 * 2,500 26,667 *
Judy Shapiro Trust dated
5/15/01(91) 58,333 * 5,000 53,333 *
Shadow Capital LLC (92) 58,333 * 5,000 53,333 *
Dr. David M. Silver(93) 491,666 1.6% 475,000 16,666 *
Richard C. Siskey(94) 47,766 * 10,000 37,766 *
Mary Ellen Spedale(95) 1,234 * 1,234 0 *
Ronit Sucoff(96) 93,503 * 86,800 6,703 *
Scott Sucoff(97) 5,928 * 5,928 0 *
WEC Asset Management LLC(98) 10,000 * 10,000 0 *
White Living Trust(99) 14,583 * 1,250 13,333 *
Jeffrey A. Wietzman(100) 14,583 * 1,250 13,333 *
James C. Wilson(101) 56,333 * 5,000 51,333 *
Matthew Zagon(102) 2,833 * 2,833 0 *
Class A Warrantholders 1,000,000 3.9% 1,000,000 0 *
---------- ---------- ---------
TOTAL 11,866,710 9,546,437 2,320,273
-----------------
* Less than 1%
(1) Includes the resale of 3,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(2) Includes the resale of 3,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(3) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(4) Includes the resale of 8,346 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(5) Includes the resale of 51,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $.25 per share.
(6) Includes the resale of 3,750 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. The
managing partner of BNB Associates Investments LP is Benjamin Bollag,
who exercises sole voting and investment powers.
(7) Includes the resale of 12,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(8) Includes the resale of 2,604 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(9) Includes the resale of 7,887 shares of common stock issuable upon the
exercise of warrants with an exercise price of $.25 per share.
67
(10) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(11) Includes the resale of 112,500 shares of common stock issuable upon the
exercise of stock options with an exercise price of $4.00 per share.
Mr. Bayern is a former director of the company.
(12) Includes the resale of 541 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(13) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(14) Includes the resale of 3,750 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(15) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(16) Includes the resale of 5,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(17) Includes the resale of 2,604 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(18) Includes the resale of 7,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(19) Includes the resale of 7,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. The
president of Chicago Investments, Inc. is Linda Gallenberger, who
exercises sole voting and investment powers.
(20) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(21) Includes the resale of 237,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share, and
250,000 shares of common stock issuable upon the exercise of warrants
with an exercise price of $3.00 per share. The chairman, director and
50% shareholder of Cyndel & Co., Inc. is Stephen J. Bayern and the
president, director and 50% shareholder of Cyndel is Patrick N.
Kolenik, who together exercise shared voting and investment powers.
Messrs. Bayern and Kolenik are each a former director of the company.
On October 1, 1999 and April 1, 2000, Cyndel entered into consulting
agreements with the company to perform unspecified investment banking
services for the company.
(22) Includes the resale of 1,234 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(23) Includes the resale of 1,287 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(24) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(25) Includes the resale of 467 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(26) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. The
trustee of Henry A. Fredericks Sep. Property Trust is James D. White,
who exercises sole voting and investment powers.
(27) Includes the resale of 156,250 shares of common stock issuable upon the
exercise of stock options with an exercise price of $4.00 per share.
Mr. Frome is a former director of the company.
(28) Includes the resale of 23,208 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. The
general partner of Generation Capital Associates is Frank E. Hart, who
exercises sole voting and investment powers.
(29) Includes the resale of 1,250 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(30) Includes the resale of 5,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(31) Includes the resale of 75,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $7.50 per share, and
60,000 shares of common stock issuable upon the exercise of warrants
with an exercise price of $5.00 per share. Mr. Hemmer is the former
senior vice president of the company.
(32) Includes the resale of 75,000 shares of common stock issuable upon the
exercise of stock options with an exercise price of $4.00 per share and
125,000 shares of common stock issuable upon the exercise of stock
options with an exercise price of $2.75 per share. Mr. Ignotz is a
director of the company.
(33) The president of International Bio-Immune Systems, Inc. is Leslie F.
Stern, who exercises sole voting and investment powers.
(34) Includes the resale of 5,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
68
(35) Includes the resale of 100,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $8.125 per share, and
100,000 shares of common stock issuable upon the exercise of warrants
with an exercise price of $7.50 per share.
(36) Includes the resale of 20,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. The
managing partners of KSH Strategic Investment Fund I, LP are Cary W.
Sucoff and Harvey R. Kohn, who exercise shared voting and investment
powers.
(37) Includes the resale of 1,234 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(38) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(39) Includes the resale of 4,220 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(40) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(41) Includes the resale of 1,250 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(42) Includes the resale of 86,800 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(43) Includes the resale of 112,500 shares of common stock issuable upon the
exercise of stock options with an exercise price of $4.00 per share.
Mr. Kolenik is a former director of the company.
(44) Includes the resale of 515 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(45) Includes the resale of 1,234 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(46) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(47) Includes the resale of 450 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(48) Includes the resale of 100,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share, 50,000
shares of common stock issuable upon the exercise of warrants with an
exercise price of $6.75 per share, 50,000 shares of common stock
issuable upon the exercise of warrants with an exercise price of $4.75
per share, and 100,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. Dr.
Limberg served as a consultant to the company.
(49) Includes the resale of 50,000 shares of common stock issuable upon the
exercise of stock options with an exercise price of $.25 per share.
(50) Includes the resale of 75,000 shares of common stock issuable upon the
exercise of stock options with an exercise price of $6.00 per share,
75,000 shares of common stock issuable upon the exercise of stock
options with an exercise price of $4.00 per share, and 325,000 shares
of common stock issuable upon the exercise of stock options with an
exercise price of $2.75 per share. Mr. Mackey is the chairman of the
board and secretary of the company.
(51) Includes the resale of 200,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $.25 per share.
(52) Includes the resale of 100,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $.25 per share.
(53) Includes the resale of 515 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(54) Includes the resale of 5,000 shares of common stock issuable upon the
exercise of stock options with an exercise price of $5.00 per share,
and 2,500 shares of common stock issuable upon the exercise of options
with an exercise price of $2.75 per share.
(55) Includes the resale of 3,887 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(56) Includes the resale of 141,975 shares of common stock issuable upon the
exercise of warrants with an exercise price of $.25 per share, and
11,250 shares of common stock issuable upon the exercise of warrants
with an exercise price of $4.00 per share.
(57) The senior vice president and chief financial officer of Mentor
Corporation is Adel Michael, who exercises sole voting and investment
powers. On October 24, 1999, Mentor entered into an asset purchase
agreement with the Company to sell Mentor's cataract surgery product
line.
(58) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. The
trustee of the Mid-Lakes Profit Sharing Trust dated 1/1/66 is John
Harte, who exercises sole voting and investment powers.
69
(59) Includes the resale of 180,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $.25 per share.
(60) Includes the resale of 1,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(61) Includes the resale of 18,750 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(62) Includes the resale of 1,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(63) Includes the resale of 1,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(64) Includes the resale of 1,234 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(65) Includes the resale of 450 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(66) Includes the resale of 9,375 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(67) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(68) Includes the resale of 1,234 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(69) Includes the resale of 12,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. The
chief financial officer of OTATO Limited Partnership is James W.
Santori, who exercises sole voting and investment powers.
(70) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(71) Includes the resale of 4,000 shares of common stock issuable upon the
exercise of options with an exercise price of $5.00 per share, and
2,500 shares of common stock issuable upon the exercise of options with
an exercise price of $2.75 per share.
(72) Includes the resale of 10,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(73) Includes the resale of 20,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. The
director of Perceptive Life Sciences Master Fund is Joseph Adelman, who
exercises sole voting and investment powers.
(74) Includes the resale of 1,250 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(75) Includes the resale of 1,320 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(76) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(77) The managing director of Polycore Optical Pte., Ltd. is Sammy Summargo,
who exercises sole voting and investment powers.
(78) Includes the resale of 4,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(79) Includes the resale of 4,103 shares of common stock issuable upon the
exercise of stock options with an exercise price of $5.00 per share,
and 6,000 shares of common stock issuable upon the exercise of stock
options with an exercise price of $2.75 per share.
(80) Includes the resale of 23,035 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. The
managing directors of ProMed Partners, L.P. are Barry Kurokawa and
David B. Muskett, who exercise sole voting and investment powers.
(81) Includes the resale of 24,440shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. The
managing directors of ProMed Partners I are Barry Kurokawa and David B.
Muskett, who exercise shared voting and investment powers.
(82) Includes the resale of 2,530 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. The
managing directors of ProMed Partners II are Barry Kurokawa and David
B. Muskett, who exercise shared voting and investment powers.
(83) Includes the resale of 1,250 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(84) Includes the resale of 5,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(85) Includes the resale of 7,888 shares of common stock issuable upon the
exercise of warrants with an exercise price of $.25 per share.
70
(86) Includes the resale of 500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(87) Includes the resale of 35,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $2.00 per share.
(88) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(89) Includes the resale of 50,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $.25 per share.
(90) Includes the resale of 2,500 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(91) Includes the resale of 5,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. The
trustees of the Judy Shapiro Trust dated 5/15/01 are Alan and Judy
Shapiro, who exercise shared voting and investment powers.
(92) Includes the resale of 5,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. The
manager of Shadow Capital LLC is B. Kent Garlinghouse, who exercises
sole voting and investment powers.
(93) Includes the resale of 75,000 shares of common stock issuable upon the
exercise of stock options with an exercise price of $6.00 per share,
75,000 shares of common stock issuable upon the exercise of stock
options with an exercise price of $4.00 per share, and 325,000 shares
of common stock issuable upon the exercise of stock options with an
exercise price of $2.75 per share. Dr. Silver is a director of the
company.
(94) Includes the resale of 10,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(95) Includes the resale of 1,234 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(96) Includes the resale of 86,800 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(97) Includes the resale of 5,928 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(98) Includes the resale of 10,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. The
managing director of WEC Asset Management LLC is Daniel J. Saks, who
exercises sole voting and investment powers.
(99) Includes the resale of 1,250 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share. The
trustees of the White Living Trust are James and Jean Ann White, who
exercise shared voting and investment powers.
(100) Includes the resale of 1.250 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(101) Includes the resale of 5,000 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
(102) Includes the resale of 2,833 shares of common stock issuable upon the
exercise of warrants with an exercise price of $4.00 per share.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 80,000,000 shares of common
stock, $.001 par value per share, of which 25,764,868 shares were issued and
outstanding as of November 30, 2004, and 5,000,000 shares of undesignated
preferred stock, $.001 par value per share. We have created seven classes of
preferred stock, designated as Series A preferred stock, Series B preferred
stock, Series C convertible preferred stock, Series D convertible preferred
stock, Series E convertible preferred stock, Series F convertible preferred
stock and Series G convertible preferred stock. The following is a summary of
the material terms and provisions of our capital stock and related securities.
Because it is a summary, it does not include all of the information that is
included in our certificate of incorporation. The text of our certificate of
incorporation, which is attached as an exhibit to this registration statement,
is incorporated into this section by reference.
Common Stock
Voting Rights. The holders of our common stock will have one vote per
share and are not entitled to vote cumulatively for the election of directors.
Generally, all matters to be voted on by stockholders must be approved by a
majority or, in the case of election of directors, by plurality of the votes
cast at a meeting at which a quorum is present and voting together as single
class, subject to any voting rights granted to the holders of any then
outstanding preferred stock.
Dividends. Holders of common stock are entitled to receive any
dividends declared by our board of directors, subject to the preferential rights
of any preferred stock then outstanding. Dividends consisting of shares of
common stock may be paid to holders of shares of common stock.
71
Other Rights. Upon our liquidation, dissolution or winding up, the
holders of common stock are entitled preferential to share ratably in any assets
available for distribution to holders of shares of common stock. No holders of
shares are subject to redemption or have preemptive rights to purchase
additional shares of common stock.
Preferred Stock
Our certificate of incorporation provides that 5,000,000 shares of
preferred stock may be issued from time to time in one or more series. Our board
of directors is authorized to fix the voting rights, if any, designations,
powers, preferences, qualifications, limitations and restrictions, applicable to
the shares of each series. Our board of directors may, without stockholder
approval, issue preferred stock with voting and other rights that could
adversely affect the voting power and other rights of the holders of the common
stock and could have anti-takeover effects, including preferred stock or rights
to acquire preferred stock in connection with implementing a stockholder rights
plan. The ability of our board of directors to issue preferred stock without
stockholder approval could have the effect of delaying, deferring or preventing
a change of control with respect to our company or the removal of existing
management. As of November 30, 2004, we have created and issued shares of seven
classes of preferred stock.
Series A, B, C, D, E, F and G Preferred Stock.
The Board of Directors has authorized the issuance of 500,000 shares of
Series A Preferred Stock, 500,000 shares of Series B Preferred Stock, 30,000
shares of Series C Preferred Stock, 1,140,000 shares of Series D Preferred
Stock, 50,000 shares of Series E Preferred Stock, 50,000 shares of Series F
Preferred Stock, and 2,000,000 shares of Series G Preferred Stock. Each of the
shares of preferred stock are convertible into shares of common stock at a
different conversion price. As of November 30, 2004, there were issued and
outstanding 5,627 shares of Series A Preferred Stock convertible into 6,753
shares of our common stock; 8,986 shares of Series B Preferred Stock convertible
into 10,783 shares of our common stock; no shares of Series C Preferred Stock;
5,000 shares of Series D Preferred Stock; 1,000 shares of Series E Preferred
Stock convertible into 53,333 shares of common stock; 4,598.75 shares of Series
F Preferred Stock convertible into 245,267 shares of our common stock; and
1,726,560 shares of Series G Preferred Stock convertible into 1,726,560 shares
of our common stock The voting rights, dividends, conversion rights, redemption
rights, and liquidation rights of the Series A, Series B, Series C, Series D,
Series E, Series F and Series G Preferred Stock are more fully described below.
Series A Preferred Stock
Voting Rights. Except as provided by applicable law, the Series A
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series A preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series A preferred stock is entitled to non-cumulative
preferred dividends at $.24 per share per annum payable, at our option, in cash
from surplus earnings.
Conversion. At any time the Series A preferred stockholder may convert
each share of Series A preferred stock into 1.2 shares of our common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock.
Other Rights. Upon our liquidation, dissolution, or sale of
substantially all of our assets, the Series A preferred stockholders are
entitled to distributions equal to $1.00 per share, plus accrued and unpaid
dividends. The shares of Series A preferred stock are subject to redemption but
have no preemptive rights to purchase additional shares of Series A preferred
stock or our common stock.
Series B Preferred Stock
Voting Rights. Except as provided by applicable law, the Series B
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series B preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series B preferred stock is entitled to non-cumulative
preferred dividends at $.24 per share per annum payable, at our option, in cash
from surplus earnings.
Conversion. At any time the Series B preferred stockholder may convert
each share of Series B preferred stock into 1.2 shares of our common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock.
72
Other Rights. Upon our liquidation, dissolution, or sale of
substantially all of our assets, the Series B preferred stockholders are
entitled to distributions equal to $4.00 per share, plus accrued and unpaid
dividends. The Series B preferred stockholders are entitled to preferential
distributions over all other classes of capital stock, other than Series A
preferred stock. The shares of Series B preferred stock are subject to
redemption but have no preemptive rights to purchase additional shares of Series
B preferred stock or our common stock.
Series C Preferred Stock
Voting Rights. Except as provided by applicable law, the Series C
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series C preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series C preferred stock is entitled to 12%
non-cumulative preferred dividends payable, at our option, in common stock or
cash from surplus earnings.
Conversion. At any time the Series C preferred stockholder may convert
each share of Series C preferred stock into 57.14 shares of common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock. Any shares of Series C
preferred stock outstanding after January 1, 2002, are automatically converted
into our shares to common stock at the conversion price then in effect.
Other Rights. Upon our liquidation, dissolution or sale of
substantially all of our assets, the Series C preferred stockholders are
entitled to distributions equal to the greater of (i) the amount of
distributions such shares would have received had such holders converted the
Series C preferred stock into common stock immediately prior to liquidation, or
(ii) the stated value of $100.00 per share, plus declared but unpaid dividends.
The Series C preferred stockholders are entitled to preferential distributions
over all other classes of capital stock, other than Series A and Series B
preferred stock. No shares of Series C preferred stock are subject to redemption
or have preemptive rights to purchase additional shares of Series C preferred
stock or our common stock.
Series D Preferred Stock
Voting Rights. Except as provided by applicable law, the Series D
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series D preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series D preferred stock is entitled to 8%
non-cumulative preferred dividends payable, at our option, in common stock or
cash from surplus earnings.
Conversion. At any time the Series D preferred stockholder may convert
each share of Series D preferred stock into one share of common stock, subject
to adjustment for stock splits, stock dividends, recapitalizations and similar
transactions involving our common stock. Any shares of Series D preferred stock
outstanding after January 1, 2002, are automatically converted into our shares
of common stock at the conversion price then in effect.
Other Rights. Upon our liquidation, dissolution or sale of
substantially all of our assets, the Series D preferred stockholders are
entitled to distributions equal to the greater of (i) the amount of
distributions such shares would have received had such holders converted the
Series D preferred stock into common stock immediately prior to liquidation, or
(ii) the stated value of $1.75 per share, plus declared but unpaid dividends.
The Series D preferred stockholders are entitled to preferential distributions
over all other classes of capital stock, other than Series A, Series B and
Series C preferred stock. No shares of Series D preferred stock are subject to
redemption or have preemptive rights to purchase additional shares of Series D
preferred stock or our common stock.
Series E Preferred Stock
Voting Rights. Except as provided by applicable law, the Series E
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series E preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series E preferred stock is entitled to 8%
non-cumulative preferred dividends payable, at our option, in common stock or
cash from surplus earnings.
73
Conversion. At any time the Series E preferred stockholder may convert
each share of Series E preferred stock into 53.33 shares of common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock. Any shares of Series E
preferred stock outstanding are automatically converted into shares of our
common stock (i) after January 1, 2005, or (ii) after a registration statement
registering our common shares issuable upon conversion has been effective for a
least 30 days and the average closing price of our common stock for the 20-day
period is at least $3.50 per share.
Other Rights. Upon our liquidation, dissolution or sale of
substantially all of our assets, the Series E preferred stockholders are
entitled to distributions equal to the greater of (i) the amount of
distributions such shares would have received had such holders converted the
Series E preferred stock into common stock immediately prior to liquidation, or
(ii) the stated value of $100.00 per share, plus declared but unpaid dividends.
The Series E preferred stockholders are entitled to preferential distributions
over all other classes of capital stock, other than Series A, Series B, Series C
and Series D preferred stock. No shares of Series E preferred stock are subject
to redemption or have preemptive rights to purchase additional shares of Series
E preferred stock or our common stock.
Series F Preferred Stock
Voting Rights. Except as provided by applicable law, the Series F
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series F preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series F preferred stock is entitled to 8%
non-cumulative preferred dividends payable, at our option, in common stock or
cash from surplus earnings.
Conversion. At any time the Series F preferred stockholder may convert
each share of Series F preferred stock into 53.33 shares of common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock. Any shares of Series F
preferred stock outstanding are automatically converted into shares of our
common stock (i) after January 1, 2005, or (ii) after a registration statement
registering our common shares issuable upon conversion has been effective for a
least 30 days and the average closing price of our common stock for the 20-day
period is at least $3.50 per share.
Other Rights. Upon our liquidation, dissolution or sale of
substantially all of our assets, the Series F preferred stockholders are
entitled to the greater of (i) the amount of distributions such shares would
have received had such holders converted the Series F preferred stock into
common stock immediately prior to liquidation, or (ii) the stated value of $1.00
per share, plus declared but unpaid dividends. The Series F preferred
stockholders are entitled to preferential distributions over all other classes
of capital stock, other than Series A, Series B, Series C, Series D and Series E
preferred stock. No shares of Series F preferred stock are subject to redemption
or have preemptive rights to purchase additional shares of Series F preferred
stock or our common stock.
Series G Preferred Stock
Voting Rights. Except as provided by applicable law, the Series G
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series G preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series G preferred stock is entitled to 8%
non-cumulative preferred dividends payable, at our option, in common stock or
cash from surplus earnings.
Conversion. At any time the Series G preferred stockholder may convert
each share of Series G preferred stock into one share of common stock, subject
to adjustment for stock splits, stock dividends, recapitalizations and similar
transactions involving our common stock. Any shares of Series G preferred stock
outstanding are automatically converted into shares of our common stock (i)
after August 1, 2005, or (ii) after a registration statement registering our
common shares issuable upon conversion has been effective for a least 30 days
and the average closing price of our common stock for the 20-day period is at
least $.50 per share.
Other Rights. Upon our liquidation, dissolution or sale of
substantially all of our assets, the Series G preferred stockholders are
entitled to the greater of (i) the amount of distributions such shares would
have received had such holders converted the Series G preferred stock into
common stock immediately prior to liquidation, or (ii) the stated value of $.25
per share, plus declared but unpaid dividends. The Series G preferred
stockholders are entitled to preferential distributions over all other classes
of capital stock, other than Series A, Series B, Series C, Series D, Series E
and Series F preferred stock. No shares of Series G preferred stock are subject
to redemption or have preemptive rights to purchase additional shares of Series
G preferred stock or our common stock.
74
Warrants
Between June 10, 1997 and November 30, 2004, we issued warrants to
individuals and entities to purchase a total of 4,584,182 shares of our common
stock at exercise prices ranging from $.15 per share to $8.125 per share. The
warrants all contain provisions that protect the holders against dilution by
adjustment of the exercise price per share and the number of shares issuable
upon exercise thereof upon the occurrence of certain events, including stock
splits, stock dividends, mergers, and the sale of substantially all of our
assets. We are not required to issue fractional shares of common stock, and in
lieu thereof we will make a cash payment based upon the current market value of
such fractional shares. A holder of these warrants will not possess any rights
as a shareholder unless and until the holder exercises the warrants.
The warrants that are currently issued and have not been exercised, and
the exercise price and expiration date of such warrants are as follows:
o Class A Warrants to purchase 1,000,000 shares of common stock at an
exercise price of $7.50 per share, exercisable through July 10, 2005.
o Warrants issued to Series E preferred stockholders to purchase 241,095
shares of common stock at an exercise price of $4.00 per share,
exercisable through May 23, 2006.
o Warrants issued to Series F preferred stockholders to purchase 251,114
shares of common stock at an exercise price of $4.00 per share,
exercisable through August 20, 2006.
o Warrants issued to Kenneth Jerome & Company, Inc. to purchase 200,000
shares of common stock at exercise prices ranging from $7.50 to $8.125
per share, exercisable through July 10, 2005.
o Warrants issued to Cyndel & Company, Inc. to purchase 475,000 shares of
common stock at exercise prices ranging from $3.00 to $4.00 per share,
exercisable during the period from August 10, 2005 to February 7, 2006.
o Warrants issued to Dr. Michael B. Lindberg to purchase 300,000 shares
of common stock at exercise prices ranging from $4.00 to $6.75 per
share, exercisable during the period of from December 1, 2008 through
June 1, 2011.
o Warrants issued to John W. Hemmer to purchase 75,000 shares of common
stock at an exercise price of $7.50 per share, exercisable through
January 24, 2005.
o Warrants issued to Helen Kohn and Ronit Sucoff to purchase 50,000
shares each of common stock at an exercise price of $4.00 per share,
exercisable through February 7, 2006.
o Warrants issued to Rodman & Renshaw to purchase 35,000 shares of common
stock at an exercise price of $2.00 per share, exercisable through May
13, 2006.
o Warrants issued to Innovative Optics, Inc, to purchase 250,000 shares
of common stock at an exercise price of $5.00 per share, exercisable
through January 31, 2005.
o Warrants issued to Paul L. Archanbeau, M.D., John H. Banzhaf, Daniel S.
Lipson, Douglas A. MacLeod, M.D., Douglas A. MacLeod, M.D. Profit
Sharing Trust, St. Mark's Eye Institute, Milan Holdings, Inc., Frank G.
Mauro, and Delbert G. Reichardt to purchase an aggregate of 788,750
shares of common stock at an exercise price of $.25 per share,
exercisable through September 6, 2005.
o Warrants issued to certain investors in a private placement transaction
to purchase an aggregate of 422,634 shares of common stock at an
exercise price of $.75 per share, exerciseable through June 25, 2005.
o Warrants issued to Series G Preferred warrantholders to purchase
470,589 shares of common stock at an exercise price of $.50 per share,
exercisable through September 1, 2006.
o Warrants issued to Alpha Advisory Services, Inc. to purchase 25,000
shares of common stock at an exercise price of $.15 per share,
exerciseable through September 28, 2007.
75
Certain Provisions of Certificate of Incorporation. Our Certificate of
Incorporation provides that to the fullest extent permitted by Delaware law, our
directors shall not be liable to us and our stockholders. The Certificate of
Incorporation also contains provisions entitling the officers and directors to
indemnification by us to the fullest extent permitted by the Delaware General
Corporation Law.
Indemnification Agreements. We have entered into indemnification
agreements with our officers and directors. Such indemnification agreements
provide that we will indemnify its officers and directors against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
arising out of threatened, pending or completed legal action against any officer
or director to the fullest extent permitted by the Delaware General Corporate
Law.
Transfer and Warrant Agent. Our transfer agent and registrar for our
common stock and the Warrant Agent for the Class A warrants is Continental Stock
Transfer & Trust Company, New York, New York.
PLAN OF DISTRIBUTION
We may solicit the exercise of Class A warrants through a registered or
licensed broker-dealer. Upon exercise of Class A warrants, Paradigm will pay
such soliciting broker-dealer a fee of 5% of the aggregate exercise price of
Class A warrants exercised, if: (i) the market price of the common stock on the
date the Class A warrant is exercised is greater than the then exercise price of
the Class A warrant; (ii) the exercise of the Class A warrant was solicited by a
member of the National Association of Securities Dealers, Inc.; (iii) the Class
A warrant is not held in a discretionary account; (iv) disclosure of the
compensation arrangements was made by delivery of this prospectus or otherwise)
both at the time of the offering and at the time of exercise of the Class A
warrant; and (v) the solicitation of exercise of the Class A warrant is not in
violation of Regulation M.
In connection with the solicitation of the Class A warrant exercises,
the soliciting broker-dealer will be prohibited from engaging in any
market-making activities with respect to Paradigm's securities for the period
commencing either two or nine business days (depending on the market price of
the common stock) prior to any solicitation activity for the exercise of Class A
warrants until the later of (a) the termination of such solicitation activity,
or (b) the termination (by waiver or otherwise) of any right which the
soliciting broker-dealer may have to receive a fee for the exercise of Class A
warrants following such solicitation. As a result, the soliciting broker-dealer
may be unable to provide a market for Paradigm's securities, should it desire to
do so, during certain periods while the respective Class A warrants are
exercisable.
We do not plan to solicit Series E or Series F preferred stockholders
regarding the conversion of their Series E or Series F preferred shares into
shares of common stock, which have been registered for resale upon conversion.
The resale of the common stock by the Series E and Series F preferred
stockholders that elect to convert their respective shares of Series E and
Series F preferred stock to shares of common stock and the holders of Class A
warrants, Kenneth Jerome warrants, Cyndel warrants and warrants issued to Dr.
Michael B. Limberg, Consulting for Strategic Growth, Ltd., John W. Hemmer, Helen
Kohn, Ronit Sucoff, Barry Kaplan Associates, Rodman & Renshaw, Inc., Paul L.
Archambeau, M.D., John H. Banzhaf, Daniel S. Lipson, Douglas A. MacLeod, M.D.,
Douglas A. MacLeod, M.D. Profit Sharing Trust, St. Mark's Eye Institute, Milan
Holdings, Ltd., Frank G. Mauro and Delbert D. Reichardt that elect to exercise
their respective warrants and purchase common stock (collectively, the "Selling
Securityholders"), may be effected from time to time in transactions (which may
include block transactions by or for the account of the Selling Securityholders)
in the Nasdaq SmallCap Market or in negotiated transactions, a combination of
such methods of sale or otherwise. Sales may be made at fixed prices which may
be changed, at market prices prevailing at the time of sale, or at negotiated
prices.
Selling Securityholders may effect such transactions by selling their
shares of common stock directly to purchasers, through broker-dealers acting as
agents for the Selling Securityholders or to broker-dealers who may purchase
securities as principals and thereafter sell the common stock from time to time
in the over-the-counter market, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers for whom such broker-dealers act as agents or to whom they may sell
as principals or otherwise (which compensation as to a particular broker-dealer
may exceed customary commissions). The Selling Securityholders will pay all
commissions, transfer taxes, and other expenses associated with the sale of
common stock by them.
The Selling Securityholders and broker-dealers, if any, acting in
connection with such sales may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act and any commission received by them and
any profit on the resale of the securities by them might be deemed to be
underwriting discounts and commissions under the Securities Act. We have agreed
to indemnify the Selling Securityholders against certain liabilities under the
Securities Act.
76
The only Selling Securityholders who are affiliates of broker-dealers
are Steven J. Bayern and Patrick N. Kolenik, who are each an officer, a director
and a shareholder of Win Capital Corp. Messrs. Bayern and Kolenik each received
stock options as consideration for services as a director of Paradigm. At no
time has Mr. Bayern or Mr. Kolenik had any agreements or understandings,
directly or indirectly, with any person to distribute the stock options or the
underlying common shares to be issued in connection with the exercise of such
options. From time to time this prospectus will be supplemented and amended as
required by the Securities Act of 1933, as amended. During any time when a
supplement or amendment is so required, the Selling Securityholders are to cease
sales until the prospectus has been supplemented or amended. Pursuant to the
registration rights granted to certain of the Selling Securityholders, we have
agreed to update and maintain the effectiveness of this prospectus. Certain of
the Selling Securityholders also may be entitled to sell their shares without
the use of this prospectus, provided that they comply with the requirements of
Rule 144 promulgated under the Securities Act.
EXPERTS
Our consolidated financial statements for years ended December 31, 2003
and 2002 included in this prospectus have been audited by Tanner + Co.,
independent auditors, as stated in their report appearing herein. We have
included our consolidated financial statements in this prospectus in reliance on
such report given upon their authority as experts in auditing and accounting.
LEGAL MATTERS
The validity of the shares of common stock in this offering will be
passed upon for us by Mackey Price & Thompson, Salt Lake City, Utah. Randall A.
Mackey, the President, a director and a shareholder of the law firm of Mackey
Price & Thompson is our Chairman of the Board and Secretary. Legal fees and
expenses paid to Mackey Price & Thompson for legal services during the fiscal
years ended December 31, 2003 and 2002 totaled $97,000 and $167,000,
respectively. Legal fees and expenses paid to the firm for legal services for
the nine months ended September 30, 2004 totaled $80,000 compared to $61,078 for
the nine months ended September 30, 2003. As of December 31, 2003, we owed the
firm $136,000, which is included in the accounts payable.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, or SEC, a
registration statement on Form SB-2 (including the exhibits and schedules
thereto) under the Securities Act of 1933 and the rules and regulations
promulgated thereunder, for the registration of the common stock offered hereby.
This prospectus is part of the registration statement. This prospectus does not
contain all the information included in the registration statement because we
have omitted certain parts of the registration statement as permitted by the SEC
rules and regulations. For further information about us and our common stock,
you should refer to the registration statement. Statements contained in this
prospectus as to any contract, agreement or other document referred to are not
necessarily complete. Where the contract or other document is an exhibit to the
registration statement, each statement is qualified by the provisions of that
exhibit.
You can inspect and copy the registration statement and the exhibits
and schedules thereto at the public reference facility maintained by the SEC at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
regional offices at 233 Broadway, New York, New York 10279, and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You may call the SEC at
1-800-732-0330 for further information about the operation of the public
reference rooms. Copies of all or any portion of the registration statement can
be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, the registration
statement is publicly available through the SEC's site on the Internet's World
Wide Web, located at http://www.sec.gov.
We also file annual, quarterly and current reports, proxy statements
and other information with the SEC. You can also request copies of these
documents, for a copying fee, by writing to the SEC. Our SEC filings are also
available to the public from the SEC's website at http://www.sec.gov. We furnish
to our stockholders annual reports containing audited financial statements for
each fiscal year.
77
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
September 30, 2004
------------------
ASSETS
Current Assets
Cash & Cash Equivalents $ 188,000
Receivables, Net 726,000
Inventory 770,000
Prepaid Expenses 88,000
------------------
Total Current Assets 1,772,000
Intangibles, Net 679,000
Property and Equipment, Net 135,000
------------------
Total Assets $ 2,586,000
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade Accounts Payable 653,000
Accrued Expenses 990,000
Current Portion of Long-term Debt 53,000
------------------
Total Current Liabilities 1,696,000
Long-term Debt 22,000
------------------
Total Liabilities 1,718,000
==================
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 September 30, 2004 -
Series B
Authorized: 500,000 shares; issued and
outstanding: 8,986 shares at September 30, 2004 -
Series C
Authorized: 30,000 shares; issued and
outstanding: zero shares at September 30, 2004 -
Series D
Authorized: 1,140,000 shares; issued and
outstanding: 5,000 shares at September 30, 2004 -
Series E
Authorized: 50,000; issued and
outstanding: 1,000 at September 30, 2004 -
Series F
Authorized: 50,000; issued and
outstanding: 4,598.75 at September 30, 2004 -
Series G
Authorized: 2,000,000; issued and
outstanding: 1,981,560 at September 30, 2004 2,000
Common Stock, Authorized:
80,000,000 Shares, $.001 par value; issued and
outstanding: 25,509,868 at September 30, 2004 25,000
Additional paid-in-capital 57,470,000
Accumulated Deficit (56,629,000)
------------------
Total Stockholders' Equity 868,000
------------------
Total Liabilities and Stockholders' Equity $ 2,586,000
==================
78
See accompanying notes to condensed financial statements
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine
Months Ended
September 30,
2004 2003
----------------------------
Sales $ 2,288,000 $ 2,225,000
Cost of Sales 859,000 1,237,000
------------ ------------
Gross Profit 1,429,000 988,000
Operating Expenses:
Marketing and Selling 547,000 711,000
General and Administrative 703,000 1,867,000
Research, development and service 543,000 789,000
Impairment of assets - 159,000
------------ ------------
Total Operating Expenses 1,793,000 3,526,000
------------ ------------
Operating Income (Loss) (364,000) (2,538,000)
Other Income and (Expense):
Interest Income - 3,000
Interest Expense (40,000) (17,000)
Other Income (Expense) 592,000 247,000
------------ ------------
Total Other Income and (Expense) 552,000 (233,000)
------------ ------------
Net income (loss) before provision
for income taxes 188,000 (2,305,000)
Income taxes - -
------------ ------------
Net income (loss) $ 188,000 $ (2,305,000)
============ ============
Net income (loss) Per Common Share
- Basic and Diluted $ 0.01 $ (.10)
============ ============
Weighted Average Outstanding
Shares - Basic 25,373,000 22,795,000
============ ============
- Diluted 27,675,000 22,795,000
============ ============
See accompanying notes to condensed financial statements.
79
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
2004 2003
---------------------------------
(Unaudited)
Cash Flows from Operating Activities:
-------------------------------------
Net income (loss) $ 188,000 $ (2,305,000)
Adjustment to Reconcile Net Loss to Net
Cash Used In Operating Activities:
----------------------------------
Depreciation and Amortization 112,000 268,000
Issuance of Stock Option/Warrant for Services - 83,000
Issuance of Common Stock for Settlement
Of potential litigation - 190,000
Increase/decrease in Inventory Reserve (226,000) 382,000
(Recovery of) provision for Losses on Receivables (46,000) 83,000
Impairment of Intangible and other assets - 159,000
Gain on sale of investment (532,000) -
Gain on Settlement of obligations (21,000) (247,000)
Loss on disposal of assets 6,000 -
(Increase) Decrease from Changes in:
Trade Accounts Receivable 28,000 161,000
Inventories 459,000 402,000
Prepaid Expenses 53,000 (215,000)
Increase (Decrease) from Changes in:
Trade Accounts Payable (32,000) (120,000)
Accrued Expenses and Deposits (429,000) 447,000
------------------ -------------
Net Cash Used in Operating Activities (440,000) (712,000)
------------------ -------------
Cash Flow from Investing Activities:
------------------------------------
Purchase of Property and Equipment - (1,000)
Disposal of Property and Equipment 6,000 6,000
Proceeds from the sale of investment 532,000 -
------------------ -------------
Net Cash Provided By Investing Activities 538,000 5,000
------------------ -------------
Cash Flows from Financing Activities:
-------------------------------------
Principal Payments on Notes Payable (42,000) (63,000)
Proceeds from Short-Term Borrowing - 90,000
Sale of stock and exercise of warrants - 429,000
Sale of stock and exercise of warrants Series G - 270,000
------------------ -------------
Net Cash (Used In) Provided By Financing Activities (42,000) 726,000
------------------ -------------
Net increase in Cash and Cash Equivalents 56,000 19,000
Cash and Cash Equivalents at Beginning of Period 132,000 194,000
------------------ -------------
Cash and Cash Equivalents at End of Period $ 188,000 $ 213,000
================== =============
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest $ 9,000 $ 17,000
================== =============
Cash Paid for Income Taxes $ - $ -
================== =============
See accompanying notes to condensed financial statements
80
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO CONDENSED 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 nine months
ended September 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 established
procedures to more efficiently manage inventory purchases, reduced
administrative personnel, and significantly reduced the use of consultants, all
of which has resulted in large decreases in expenses. However, the 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 6,427,000 shares of common stock at September 30, 2004,
were excluded because of the treasury stock method.
The following table is a reconciliation of basic and diluted weighted average
shares for the three and nine month periods ended September 30, 2004 and
September 30, 2003:
81
Nine Months Ended
September 30,
2004 2003
------------ -------------
Basic weighted average shares outstanding 25,373,000 22,795,000
Common stock equivalents-convertible
preferred stock 2,302,000 -
Dilutive effect of stock options - -
--------------------------------------------------------------------------------
Diluted weighted average shares outstanding 27,675,000 22,795,000
============ =============
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 nine months ended September 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 September 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 September 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 nine months ended September 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 nine months ended September 30, 2004, no
shares of Series G Preferred Stock were converted to shares of the Company's
Common stock.
Stock - Based Compensation
--------------------------
For stock options and warrants granted to employees, the Company employs the
footnote disclosure provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 encourages
entities to adopt a fair-value based method of accounting for stock options or
similar equity instruments. However, it also allows an entity to continue
measuring compensation cost for stock-based compensation using the
intrinsic-value method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The
Company has elected to continue to apply the provisions of APB 25 and provide
pro forma footnote disclosures required by SFAS No. 123. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant.
Stock options and warrants granted to non-employees for services are accounted
for in accordance with SFAS 123 which requires expense recognition based on the
fair value of the options/warrants granted. The Company calculates the fair
value of options and warrants granted by use of the Black-Scholes pricing model.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation.
82
Nine Months Ended
September 30,
2004 2003
------------ -------------
Net income (loss) - as reported 188,000 (2,305,000)
Deduct: total stock-based employee
compensation determined under fair value
based method for all awards, net of
related tax effects (266,000) (359,000)
Net income (loss) - pro forma (78,000) (2,651,000)
------------ -------------
Earnings per share:
Basic and diluted - as reported 0.01 (0.10)
Basic and diluted - pro forma (0.00) (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 $80,000 and $61,000 for the nine
months ended September 30, 2004 and 2003, respectively.
Accrued Expenses
----------------
Accrued expenses consist of the following at September 30, 2004:
Accrued consulting and litigation reserve $ 498,000
Accrued payroll and employee benefits 142,000
Sales taxes payable 40,000
Customer deposits 10,000
Accrued royalties 17,000
Deferred revenue 73,000
Warranty and return allowance 154,000
Other accrued expenses 56,000
------------
Total $ 990,000
============
During the second quarter of 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.
Sale of Investment
------------------
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
was recorded as a gain in the quarter ended September 30, 2004.
83
PARADIGM MEDICAL INDUSTRIES, INC.
Financial Statements
December 31, 2003 and 2002
PARADIGM MEDICAL INDUSTRIES, INC.
Index to Financial Statements
--------------------------------------------------------------------------------
Page
----
Report of Tanner + Co. F-2
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-7
--------------------------------------------------------------------------------
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors of
Paradigm Medical Industries, Inc.
We have audited the balance sheet of Paradigm Medical Industries, Inc. (the
Company) as of December 31, 2003, and the related statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 2003 and
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Paradigm Medical Industries,
Inc. as of December 31, 2003, and the results of its operations and its cash
flows for the years ended December 31, 2003 and 2002, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2, the Company
has incurred significant losses, and has been unable to generate 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.
/s/TANNER + CO.
Salt Lake City, Utah
March 5, 2004
F-2
PARADIGM MEDICAL INDUSTRIES, INC.
Balance Sheet
December 31, 2003
--------------------------------------------------------------------------------
Assets
------
Current assets:
Cash $ 132,000
Receivables, net 708,000
Inventories, net 1,003,000
Prepaid and other current assets 141,000
----------------
Total current assets 1,984,000
Intangibles, net 682,000
Property and equipment, net 256,000
----------------
Total $ 2,922,000
----------------
--------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 706,000
Accrued liabilities 1,419,000
Current portion of capital lease obligations 56,000
----------------
Total current liabilities 2,181,000
----------------
Capital lease obligations, net of current
portion 61,000
----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock $.001 par value,
5,000,000 shares authorized,
2,006,770 shares issued and
outstanding (aggregate liquidation
preference of $1,106,000) 2,000
Common stock, $.001 par value, 80,000,000
shares authorized, 25,372,794, shares
issued and outstanding 25,000
Additional paid-in capital 57,470,000
Accumulated deficit (56,817,000)
----------------
Total stockholders' equity 680,000
----------------
Total liabilities and stockholders' equity $ 2,922,000
----------------
--------------------------------------------------------------------------------
See accompanying notes to financial statements. F-3
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Operations
Years Ended December 31,
-------------------------------------------------------------------------------------------
2003 2002
--------------------------------------
Sales $ 3,059,000 $ 5,368,000
Cost of sales (2,086,000) (4,210,000)
--------------------------------------
Gross profit 973,000 1,158,000
--------------------------------------
Operating expenses:
General and administrative (2,446,000) (3,702,000)
Marketing and selling (920,000) (2,795,000)
Research, development and service (1,033,000) (2,819,000)
Impairment of assets (150,000) (2,961,000)
Gain on settlement of liabilities 436,000 -
--------------------------------------
Operating loss (3,140,000) (11,119,000)
Other income (expense):
Interest income 3,000 10,000
Interest expense (24,000) (46,000)
--------------------------------------
Total other income (expense) 21,000 (36,000)
--------------------------------------
Loss before provision for income taxes (3,161,000) (11,155,000)
Provision for income taxes - -
--------------------------------------
Net loss $ (3,161,000) $ (11,155,000)
Beneficial conversion feature on Series G
preferred stock (217,000) -
Deemed dividend from Series G preferred
detachable warrants (53,000) -
--------------------------------------
Net loss applicable to common shareholders $ (3,431,000) $ (11,155,000)
--------------------------------------
Loss per common share - basic and diluted $ (0.14) $ (0.63)
--------------------------------------
Weighted average common shares - basic and diluted 24,058,000 17,736,000
--------------------------------------
-------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-4
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Stockholders' Equity
Years Ended December 31, 2003 and 2002
-----------------------------------------------------------------------------------------------------------------------------
Preferred Additional Stock
Stock Common Stock Paid-in Subscription Accumulated
(see note 9) Shares Amount Capital Receivable Deficit
----------------------------------------------------------------------------------
Balance, January 1, 2002 $ - 15,072,531 $ 15,000 $ 52,156,000 $ - $ (42,501,000)
Conversion of preferred stock - 3,132,356 3,000 (3,000) - -
Issuance of common stock for:
Cash - 1,262,000 2,000 560,000 - -
Settlement of litigation - 75,000 - 34,000 - -
Services - 167,684 - 183,000 - -
Assets - 1,467,358 2,000 2,626,000 - -
In process research and development - 477,309 - 630,000 - -
Subscription receivable - 300,000 - 294,000 (294,000) -
Issuance of stock warrants in acquisition - - - 295,000 - -
Net loss - - - - - (11,155,000)
----------------------------------------------------------------------------------
Balance, December 31, 2002 - 21,954,238 22,000 56,775,000 (294,000) (53,656,000)
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 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, December 31, 2003 $ 2,000 25,372,794 $ 25,000 $ 57,470,000 $ - $ (56,817,000)
----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-5
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Cash Flows
Years Ended December 31,
-------------------------------------------------------------------------------------------------------------
2003 2002
----------------------------------
Cash flows from operating activities:
Net loss $ (3,161,000) $ (11,155,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 319,000 624,000
Issuance of common stock for services - 183,000
Issuance of common stock for in process research and development - 630,000
Issuance of stock option/warrant for services 35,000 -
Issuance of Series G preferred stock for services - -
Common stock issued for settlement of litigation 259,000 34,000
Allowance for (recovery of) bad debt expense 123,000 (23,000)
Provision for losses on inventory 403,000 1,755,000
Impairment of intangibles and investment 150,000 2,961,000
(Gain) on settlement of liabilities (436,000) -
(Increase) decrease in:
Receivables 113,000 1,473,000
Inventories 1,243,000 952,000
Prepaid and other assets (44,000) 255,000
Increase (decrease) in:
Accounts payable 53,000 (313,000)
Accrued liabilities 236,000 (158,000)
----------------------------------
Net cash used in operating activities (707,000) (2,782,000)
----------------------------------
Cash flows from investing activities:
Purchase of property and equipment (2,000) (28,000)
Increase in intangibles - (103,000)
Proceeds from the disposal of assets - 2,000
Net cash paid in acquisition - (100,000)
----------------------------------
Net cash used in investing activities (2,000) (229,000)
----------------------------------
Cash flows from financing activities:
Proceeds from issuance of Series G preferred stock 270,000 -
Principal payments on capital lease obligations (53,000) (59,000)
Proceeds from the issuance of common stock, including
exercise of common stock warrants and options 430,000 562,000
----------------------------------
Net cash provided by financing activities 647,000 503,000
----------------------------------
Net change in cash (62,000) (2,508,000)
Cash, beginning of year 194,000 2,702,000
----------------------------------
Cash, end of year $ 132,000 $ 194,000
----------------------------------
-------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-6
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------
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.
Inventories
Inventories are stated at the lower of cost or market,
cost is determined using the weighted average method.
Property and Equipment
Property and equipment are recorded at cost, less
accumulated depreciation. Depreciation on property and
equipment is determined using the straight-line method
over the estimated useful lives of the assets or terms
of the lease. Expenditures for maintenance and repairs
are expensed when incurred and betterments are
capitalized. Gains and losses on sale of property and
equipment are reflected in operations.
--------------------------------------------------------------------------------
F-7
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Intangible Assets
and Significant As of December 31, 2003, intangible assets consisted of
Accounting goodwill related to the purchase of Ocular Blood Flow,
Policies Ltd., product rights, capitalized payments to
Continued manufacturers for engineering and design services and
patent costs.
Effective January 1, 2002, the Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets." The
adoption of SFAS No. 142 required an initial impairment
assessment involving a comparison of the fair value of
goodwill and other intangible assets to current carrying
values. The Company performed such impairment test on
its intangible assets as of January 1, 2002. At that
date, the Company's intangible assets consisted of
product and technology rights with a net book value of
approximately $297,000, engineering and design costs
with a net book value of approximately $86,000, patents
with a net book value of approximately $98,000, and
purchase price in excess of net assets acquired (or
goodwill) with a net book value of approximately
$679,000. The Company's initial impairment test
performed on January 1, 2002 consisted of a cash flow
analysis based on estimated future revenues and directly
related costs of products directly associated with the
intangible assets. Based on such cash flow projections,
the initial impairment test did not result in any
impairment of the intangibles. As disclosed in Note 3,
during 2002 the Company acquired the asset of Innovative
Optics, Inc. The acquisition originally resulted in
goodwill and identifiable intangible assets of
$1,949,000. However, due to the Company's inability to
cost effectively develop and manufacture the products
acquired, an estimate of future cash flows shows that
all of the assets acquired, including goodwill and
identifiable intangible assets, were impaired as of
December 31, 2002. Intangible assets determined to have
indefinite useful lives are not amortized. The Company
tests such intangible assets with indefinite useful
lives for impairment annually or more frequently if
events or circumstances indicate that an asset might be
impaired. Intangible assets determined to have definite
lives are amortized on a straight-line basis over their
useful lives. Product rights are being amortized over
five years, capitalized engineering and design costs are
fully amortized as of December 31, 2002, and patents are
being amortized over the life of the patents which is
ten years. 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.
--------------------------------------------------------------------------------
F-8
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Intangible Assets - Continued
and Significant Such conditions may include an economic downturn in a
Accounting geographic market or a change in the assessment of
Policies future operations. Goodwill is not amortized. The
Continued 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, estimates
of sales proceeds and independent appraisals. Where
applicable, an appropriate discount rate is used, based
on the Company's cost of capital rate or
location-specific economic factors.
Evaluation of Other Long-Lived Assets
The Company evaluates the carrying value of the
unamortized balances of other long-lived assets to
determine whether any impairment of these assets has
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.
--------------------------------------------------------------------------------
F-9
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Stock - Based Compensation
and Significant For stock options and warrants granted to employees the
Accounting Company employs the footnote disclosure provisions of
Policies Statement of Financial Accounting Standards (SFAS) No.
Continued 123, Accounting for Stock-Based Compensation. SFAS No.
123 encourages entities to adopt a fair-value based
method of accounting for stock options or similar equity
instruments. However, it also allows an entity to
continue measuring compensation cost for stock-based
compensation using the intrinsic-value method of
accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). The Company has elected to continue
to apply the provisions of APB 25 and provide pro forma
footnote disclosures required by SFAS No. 123. No
stock-based employee compensation cost is reflected in
net income, as all options granted under those plans had
an exercise price equal to or greater than the market
value of the underlying common stock on the date of
grant.
Stock options and warrants granted to non-employees for
services are accounted for in accordance with SFAS 123
which requires expense recognition based on the fair
value of the options/warrants granted. The Company
calculates the fair value of options and warrants
granted by use of the Black-Scholes pricing model.
The following table illustrates the effect on net income
and earnings per share if the company had applied the
fair value recognition provisions of FASB Statement No.
123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation.
Years Ended December 31,
-------------------------------
2003 2002
-------------------------------
Net loss applicable to common shareholders-
as reported $ (3,431,000) $ (11,155,000)
Deduct: total stock-based employee
compen-sation determined under fair value
based method for all awards, net of related (595,000) (618,000)
tax effects
-------------------------------
Net loss applicable to common shareholders-
pro forma $ (4,026,000) $ (11,773,000)
-------------------------------
Earnings per share:
Basic and diluted - as reported $ (.14) $ (.63)
-------------------------------
Basic and diluted - pro forma $ (.17) $ (.66)
-------------------------------
--------------------------------------------------------------------------------
F-10
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Stock - Based Compensation - Continued
and Significant The fair value of each option grant is estimated at the
Accounting date of grant using the Black-Scholes option pricing
Policies model with the following assumptions:
Continued
December 31,
----------------------------------------
2003 2002
----------------------------------------
Expected dividend yield $ - $ -
Expected stock price
volatility 110% - 117% 102%-103%
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 2003 and 2002 are $0.16 and $1.25, respectively.
Stock Issued for Services, Litigation Settlement and
Assets
The Company may issue shares of common stock as payment
for services, settlement of litigation, or purchase of
assets. Stock issued for services and litigation
settlement is valued based on the fair value on the date
the stock is issued or required to be issued under the
contract or settlement agreement. Expense is measured
based on the value of the stock issued. Stock issued for
the purchase of assets is also valued based on the date
the stock is issued or required to be issued per the
purchase agreement. The assets are recorded based on the
value of the stock issued.
Earnings Per Share
The computation of basic earnings per common share is
based on the weighted average number of shares
outstanding during each year.
The computation of diluted earnings per common share is
based on the weighted average number of shares
outstanding during the year plus the common stock
equivalents, which would arise from the exercise of
stock options and warrants outstanding using the
treasury stock method and the average market price per
share during the year. Options and warrants to purchase
6,036,439 and 5,151,557 shares of common stock at prices
ranging from $0.16 to $12.98 per share were outstanding
at December 31, 2003 and 2002, respectively, but were
not included in the diluted earnings per share
calculation because the effect would have been
antidilutive.
Revenue Recognition
Revenues for sales of products that require specific
installation and acceptance by the customer are
recognized upon such installation and acceptance by the
customer. Revenues for sales of other surgical systems,
ultrasound diagnostic devices, and disposable products
are recognized when the product is shipped. A signed
purchase agreement and a deposit or payment in full from
customers is required before a product leaves the
premises. Title passes at time of shipment (F.O.B.
shipping point).
--------------------------------------------------------------------------------
F-11
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Research and Development
and Significant Costs incurred in connection with research and
Accounting development activities are expensed as incurred. These
Policies costs consist of direct and indirect costs associated
Continued with specific projects as well as fees paid to various
entities that perform certain research on behalf of the
Company.
Concentration of Risk
The market for 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, 2003 and 2002, no
single customer represented more than 10 percent of
total net sales.
--------------------------------------------------------------------------------
F-12
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 2002 financial statements have
been reclassified to conform to the presentation of the
current year financial statements.
2. Going The accompanying financial statements have been prepared
Concern on a going concernbasis, 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.
--------------------------------------------------------------------------------
F-13
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
2. Going The Company's continuation as a going concern is
Concern dependent on its ability to generate sufficient income
Continued and cash flow to meet its obligations on a timely basis
and/or obtain additional financing as may be required.
The Company is actively seeking options to obtain
additional capital and financing.
In addition, the Company has taken significant steps to
reduce costs and increase operating efficiencies.
Specifically, during the second quarter of 2002, 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. 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 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.
3. Acquisitions Innovative Optics, Inc.
On January 31, 2002, the Company completed the purchase
of certain assets of Innovative Optics, Inc.
("Innovative Optics"), pursuant to the terms of the
Asset Purchase Agreement (the "Agreement") which the
Company entered into on January 31, 2002 with Innovative
Optics and Barton Dietrich Investments, L.P., the
majority shareholder of Innovative Optics. Innovative
Optics is a Georgia domiciled corporation which
manufactures and sells the Innovatome(TM), a software
driven microkeratome that provides ophthalmic surgeons a
means of cutting a corneal flap in refractive surgery,
and microkeratome blades.
--------------------------------------------------------------------------------
F-14
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
3. Acquisitions Innovative Optics, Inc. - Continued
Continued As consideration for the purchase of certain assets of
Innovative Optics, the Company paid $100,000 and issued
an aggregate of 1,272,825 shares of its common stock,
and warrants to purchase 250,000 shares of the Company's
common stock at $5.00 per share, exercisable over a
period of three years from the closing date. The Company
filed a registration statement with the Securities and
Exchange Commission to register the shares of common
stock for resale that Innovative Optics received as
purchase consideration and the shares that Innovative
Optics will receive upon the exercise of the warrants.
The assets purchased included but were not limited to
patents, inventory, work in process and finished goods
relating to the Innovatome(TM), a microkeratome, and
microkeratome blades. Of the 1,272,825 shares of the
Company's common stock issued to Innovative Optics at
closing, one-half the number of these shares, or 636,412
shares, were placed in an escrow account maintained at
the law firm of Mackey Price & Thompson (the "Disbursing
Agent") pursuant to the terms of an Escrow Agreement.
In connection with this acquisition, the Company
recorded the following:
Inventory $ 225,000
Property, plant and equipment 35,000
Intangibles:
Patents, rights, trade name 530,000
Goodwill 1,419,000
Equity:
Common stock issued (1,814,000)
Warrants issued (295,000)
----------------
Net cash paid $ 100,000
----------------
The Company was required to use its best efforts to
implement, within 90 days of the closing, Phase I of a
Blade Price Reduction Program as prepared by a
consultant. Immediately after such 90 day period, the
Disbursing Agent was to distribute three-fourths of the
shares held in escrow, or 477,309 shares, to Innovative
Optics, unless the Company had certified that it had
implemented Phase I of the Blade Price Reduction
Program.
--------------------------------------------------------------------------------
F-15
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
3. Acquisitions Innovative Optics, Inc. - Continued
Continued Despite best efforts, the Company was unable to
manufacture microkeratome blades at a targeted materials
cost per blade. If the Company certified that
implementation of Phase I of the Blade Price Reduction
Program resulted in materials cost that exceeded the
target cost per blade and such certification was not
disputed by Innovative Optics, the number of escrow
shares disbursed to Innovative Optics was to be reduced
by 300 shares for every cent that the materials cost per
blade exceeded the target cost. The Company was not
successful in achieving the blade price reduction.
Innovative Optics requested that the total number of
shares associated with Phase I be issued to them stating
that the Company did not use its best efforts to achieve
the target cost and that proper notification was not
delivered to them. In August 2002, the Company issued
477,309 shares of common stock, which were held in
escrow to Innovative Optics.
The shares were valued at $630,000, based upon the
market price per share at the date of issue. The
transaction amount was recorded as in-process research
and development costs and charged to expense in 2002.
The Company was also required to use its best efforts to
implement, within six months after closing, Phase II of
the Blade Price Reduction Program. Immediately after
such six month period, the Disbursing Agent was to
disburse the remaining shares in escrow to Innovative
Optics unless the Company certified that it had
implemented Phase II of the Blade Price Reduction
Program and, despite best efforts, was unable to
manufacture the microkeratome blades at a second
targeted materials cost or less per blade. If Paradigm
certified that implementation of Phase II of the Blade
Price Reduction Program resulted in a materials cost
that exceeded the second target cost per blade and such
certification was not disputed by Innovative Optics, the
number of escrow shares disbursed to Innovative Optics
was to be reduced by 300 shares for every cent that the
materials cost per blade exceeded the second target
cost. If Innovative Optics disputes the Company's
certification, the dispute will be resolved by
arbitration by submitting the matter for resolution to
the accounting firm of KPMG LLP. The Company did not
implement Phase II of the Blade Price Reduction Project
due to the lack of success experienced in Phase I. Also,
the Company has not issued the remaining shares, which
remain in escrow.
--------------------------------------------------------------------------------
F-16
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
3. Acquisitions Innovative Optics, Inc. - Continued
Continued The Company determined that it could not manufacture the
blades to support its customer base at an economical
cost. There are no blades in inventory at this time. The
Company has attempted to sell the product and related
intangibles, but has not been successful in such
efforts. Accordingly, due to the lack of projected
future cash flows, during 2002 the Company recorded an
impairment expense of $2,082,000 for the remaining book
value of property and equipment and intangible assets
purchased from Innovative Optics.
International Bioimmune Systems, Inc.
During 2002, the Company acquired 2,663,254, or 19.9%,
of the outstanding shares of International Bioimmune
Systems, Inc. (IBS) and warrants to purchase 1,200,000
shares of common stock of IBS at $2.50 per share for a
period of two years, through the exchange and issuance
of 736,945 shares of Paradigm common stock, the lending
of 300,000 shares of Paradigm common stock to IBS, and
the payment of certain expenses of IBS through the
issuance of an aggregate of 94,000 shares of Paradigm
common stock to IBS and its counsel.
The issuance of 736,945 and 94,000 shares were valued
based on the market price of Paradigm's common stock on
the date of the transaction and resulted in an
investment in IBS of $814,000, which combined with a
cash investment of $65,000 made in 2000, resulted in a
total investment of $879,000. The 300,000 shares were
also valued at the market price on the date of issuance
and were recorded as a stock subscription receivable of
$294,000 because it was anticipated that such shares
will either be paid for or returned in the future.
Due to the uncertainty of future cash flows and the fact
that the products have not been approved by the FDA, the
Company determined that the likelihood of recovery of
its investment was remote and recorded an impairment
expense for the investment of $879,000 in 2002. In 2003,
due to the decline in value of the Company's common
stock and the Company's inability to collect the
subscription receivable, the Company wrote-off the
subscription receivable of $294,000 against additional
paid-in capital.
--------------------------------------------------------------------------------
F-17
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
4. Detail of
Certain
Balance
Sheet
Accounts
Receivables:
Trade receivables $ 1,178,000
Allowance for Doubtful accounts (470,000)
------------------
$ 708,000
------------------
Inventories:
Finished goods $ 703,000
Raw materials 1,942,000
Reserve for obsolescence (1,642,000)
------------------
$ 1,003,000
------------------
Accrued liabilities:
Payroll and employee benefits $ 540,000
Warranty and return allowance 413,000
Customer deposits 207,000
Consulting and other 108,000
Deferred revenue 90,000
Royalties 61,000
------------------
$ 1,419,000
------------------
5. Intangible Intangible assets consist of the following at December
Assets 31, 2003:
Goodwill, net of accumulated
amortization of $120,000 $ 679,000
Other intangible assets:
Product and technology rights 700,000
Engineering and design costs 482,000
Patents 92,000
------------------
1,274,000
Accumulated amortization (1,271,000)
------------------
Total other intangible assets 3,000
------------------
Net intangible assets $ 682,000
------------------
Amortization expense for the years ended December 31,
2003 and 2002 was $79,000 and $248,000, respectively.
--------------------------------------------------------------------------------
F-18
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
5. Intangible During the year ended December 31, 2003, the Company
Assets evaluated the carrying value of its unissued patent
Continued 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 and $69,000 related
to patents and product and technology rights,
respectively.
6. Property and Property and equipment consists of the following:
Equipment
Office equipment $ 750,000
Computer equipment 658,000
Automobile 53,000
Furniture and fixtures 264,000
Leasehold improvements 166,000
-----------------
1,891,000
Accumulated depreciation and
amortization (1,635,000)
-----------------
$ 256,000
-----------------
7. Lease During the years ended December 31, 2003 and 2002, 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 (177,000)
------------------
$ 114,000
------------------
Amortization expense on assets under capital leases
during the years ended December 31, 2003 and 2002 was
$56,000 and $46,000, respectively.
--------------------------------------------------------------------------------
F-19
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. 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:
2004 $ 72,000
2005 54,000
2006 14,000
-----------------
140,000
Less amount representing interest (33,000)
-----------------
Present value of future minimum lease payments 117,000
Less current portion (56,000)
-----------------
Long-term portion $ 61,000
-----------------
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, 2003 are approximately as follows:
Year Ending December 31, Amount
------------------
2004 $ 115,000
2005 118,000
------------------
Total future minimum
rental payments $ 233,000
------------------
Rent expense related to noncancelable operating leases
was approximately $159,000 and $437,000 for the years
ended December 31, 2003 and 2002, respectively.
--------------------------------------------------------------------------------
F-20
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. 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,
-----------------------------------
2003 2002
-----------------------------------
Income tax benefit at
statutory rate $ 1,170,000 $ 4,127,000
Expiration of research and
development tax credit
carryforwards - (25,000)
Meals and entertainment (7,000) (33,000)
Other 2,000 1,000
Change in valuation allowance (1,165,000) (4,070,000)
-----------------------------------
$ - $ -
-----------------------------------
Deferred tax assets (liabilities) are comprised of the
following:
Net operating loss carryforward $ 16,384,000
Depreciation, amortization, and impairment 883,000
Allowance and reserves 1,122,000
Impairment of investment in IBS 325,000
Research and development tax credit
carryforwards 34,000
-----------------
18,748,000
Valuation allowance (18,748,000)
-----------------
$ -
-----------------
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-21
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Income At December 31, 2003, the Company had net operating loss
Taxes carryforwards of approximately $44 million and research
Continued and development tax credit carryforwards of
approximately $34,000. These carryforwards are available
to offset future taxable income and expire in 2004
through 2020. The utilization of the net operating loss
carryforwards is dependent upon the tax laws in effect
at the time the net operating loss carryforwards can be
utilized. The Tax Reform Act of 1986 significantly
limits the annual amount that can be utilized for
certain of these carryforwards as a result of the change
in ownership.
9. Capital The Company has established a series of preferred stock
Stock with a total of 5,000,000 authorized shares and a par
value of $.001, and one series of common stock with a
par value of $.001 and a total of 40,000,000 authorized
shares.
Series A Preferred Stock
On September 1, 1993, the Company established a series
of non-voting preferred shares designated as the 6%
Series A Preferred Stock, consisting of 500,000 shares
with $.001 par value. The Series A Preferred Stock has
the following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of twenty-four cents ($.24)
per share per annum, payable in cash only from
surplus earnings of the Company or in additional
shares of Series A Preferred Stock. The dividends
are non-cumulative and therefore deficiencies in
dividend payments from one year are not carried
forward to the next year.
2. Upon the liquidation of the Company, the holders
of the Series A Preferred Stock are entitled to
receive, prior to any distribution of any assets
or surplus funds to the holders of shares of
common stock or any other stock, an amount equal
to $1.00 per share, plus any accrued and unpaid
dividends related to the fiscal year in which such
liquidation occurs. Total liquidation preference
at December 31, 2003 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-22
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Capital 5. The Company may, at its option, redeem all of the
Stock then outstanding shares of the Series A Preferred
Continued 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, 2003
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-23
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. 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,
2003 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.
--------------------------------------------------------------------------------
F-24
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Capital Series D Preferred Stock
Stock In January 1999, the Company's Board of Directors
Continued authorized the issuance of a total of 1,140,000 shares
of Series D Preferred Stock $.001 par value, $1.75
stated value. The Series D Preferred Stock has the
following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of 10% per share per annum
of the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in
dividend payments from one year are not carried
forward to the next year.
2. Upon the liquidation of the Company, the holders
of the Series D Preferred Stock are entitled to
receive an amount per share equal to the greater
of (a) the amount they would have received had
they converted the shares into Common Stock
immediately prior to such liquidation plus all
declared but unpaid dividends; or (b) the stated
value, subject to adjustment. Total liquidation
preference at December 31, 2003 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.
--------------------------------------------------------------------------------
F-25
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Capital Series E Preferred Stock
Stock In May 2001, the Company authorized the issuance of a
Continued total of 50,000 shares of Series E Preferred Stock $.001
par value, $100 stated value. The Series E Preferred
Stock has the following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of 8% per share per annum of
the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in
dividend payments from one year are not carried
forward to the next year.
2. Upon the liquidation of the Company, the holders
of the Series E Preferred Stock are entitled to
receive an amount per share equal to the greater
of (a) the amount they would have received had
they converted the shares into Common Stock
immediately prior to such liquidation plus all
declared but unpaid dividends; or (b) the stated
value, subject to adjustment. Total liquidation
preference at December 31, 2003 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.
--------------------------------------------------------------------------------
F-26
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Capital Series E Preferred Stock - Continued
Stock
Continued 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.
2. Upon the liquidation of the Company, the holders
of the Series F Preferred Stock are entitled to
receive an amount per share equal to the greater
of (a) the amount they would have received had
they converted the shares into Common Stock
immediately prior to such liquidation plus all
declared but unpaid dividends; or (b) the stated
value, subject to adjustment. Total liquidation
preference at December 31, 2003 was $460,000.
--------------------------------------------------------------------------------
F-27
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Capital Series F Preferred Stock - Continued
Stock
Continued 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-28
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Capital 2. Upon the liquidation of the Company, the holders
Stock of the Series G Preferred Stock are entitled to
Continued 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, 2003 was $495,000.
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.
During 2003, the Company recorded $217,000 as a
beneficial conversion feature related to the
difference between the conversion price of the
preferred stock and the market value of the common
stock. The Company also recorded $53,000 as a
deemed dividend due to the value allocated to the
detachable warrants sold in connection with the
Series G Preferred Stock
4. The holders of the shares have no voting rights.
--------------------------------------------------------------------------------
F-29
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Capital The following table summarizes preferred stock activity
Stock during the years ended December 31, 2003 and 2002:
Continued
Series A Series B Series C Series D Series E Series F
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------------------------------
Balance at January
1, 2002 5,747 $ - 8,986 $ - - $ - 10,000 $ - 19,300 $ - 47,359 $ -
Conversion of
preferred stock (120) - - - - - (5,000) - (17,800) - (41,087) -
------------------------------------------------------------------------------------------------------------
Balance at December
31, 2002 5,627 - 8,986 - - - 5,000 - 1,500 - 6,272 -
Issuance of Series
G preferred stock
for cash - - - - - - - - - - - -
Issuance of Series
G preferred stock
for commissions - - - - - - - - - - - -
Conversion of
preferred stock - - - - - - - - (500) - (1,675) -
------------------------------------------------------------------------------------------------------------
Balance at December
31, 2003 5,627 $ - 8,986 $ - - $ - 5,000 $ - 1,000 $ - 4,597 $ -
------------------------------------------------------------------------------------------------------------
Authorized 500,000 - 500,000 - 30,000 - 1,140,000 - 50,000 - 50,000 -
------------------------------------------------------------------------------------------------------------
Liquidation
preference - $ 6,000 $36,000 $ - $9,000 $ 100,000 $ 460,000
------------------------------------------------------------------------------------------------------------
Series G
Shares Amount
--------------------------
Balance at January
1, 2002 - $ -
Conversion of
preferred stock - -
-------------------------
Balance at December
31, 2002 - -
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 - -
-------------------------
Balance at December
31, 2003 1,981,560 $ 2,000
-------------------------
Authorized 2,000,000 -
------------------------
Liquidation
preference $ 495,000
--------------------------
--------------------------------------------------------------------------------
F-30
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. 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.
Options were issued to employees and directors of the
Company during 2003 for 2,145,000 shares of common stock
with vesting periods ranging from 3 to 7 years. The
exercise price of the options ranges from $0.16 to $0.25
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-31
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Stock Option During 2002, in connection with the Innovative Optics
Plan and acquisition (see note 3), Plan and the Company granted
Warrants warrants to purchase 250,000 shares of common stock at
Continued an Warrants exercise price of $5.00 per share. These
warrants were nonforfeitable, vested Continued and fully
exercisable at the time of grant. The exercise prices of
these options were not issued at a discount to the then
market price of the common stock. The options and
warrants were valued according to the Black-Scholes
pricing model. As a result of these warrants, the
Company included approximately $295,000 in the purchase
price relating to the acquisition of the assets from
Innovative Optics, Inc.
A schedule of the options and warrants is as follows:
Number of Exercise
------------------------------ Price Per
Options Warrants Share
------------------------------------------------
Outstanding at
January 1, 2002 3,906,776 2,315,022 $ 2.00 - 12.98
Granted 70,000 250,000 2.00 - 5.00
Exercised - - -
Expired (115,479) - 5.00
Forfeited (1,374,762) - 2.31 - 5.00
-----------------------------------------------
Outstanding at
December 31, 2002 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 $ 0.16 - 12.98
------------------------------------------------
--------------------------------------------------------------------------------
F-32
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Stock Option The following table summarizes information about stock
Plan and options and warrants outstanding at December 31, 2003:
Warrants
Continued
Outstanding Exercisable
-------------------------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
--------------------------------------------------- ------------------------
$ 0.16 - 0.75 3,474,986 4.23 $ 0.25 2,661,653 $ 0.32
2.00 - 5.00 2,660,570 2.89 3.32 2,599,154 3.75
6.00 - 8.13 275,000 1.46 3.27 275,000 6.55
12.98 25,883 N/A 12.98 25,883 12.98
--------------------------------------------------- ------------------------
$ 0.16 - 12.98 6,436,439 3.5 $ 1.71 5,561,689 $ 2.29
--------------------------------------------------- ------------------------
11. Gain on Due to the Company's ongoing cash flow difficulties,
Settlement of during 2003 most vendors and suppliers were contacted
Liabilities 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 $436,000.
12. Related Party Thomas F. Motter, former Chairman of the Board and Chief
Transactions Executive Officer of the Company, leased his former
residence to the Company for $2,500 per month. The
primary use of the residential property was for housing
accommodations for the Company's employees living
outside of Utah while they were working at the Company's
corporate headquarters in Salt Lake City. The Company
obtained an appraisal from an independent appraiser,
which had concluded that the monthly rate of $2,500
represents the fair market rate for leasing the
residential property. The Company paid $2,500 and
$14,000 in rent during 2003 and 2002. This agreement was
terminated on January 31, 2003.
The Company entered into a consulting agreement with a
former executive officer of the Company commencing in
September 2002 and ending February 2003. The Company
paid approximately $1,000 and $15,000 under this
agreement during 2003 and 2002, respectively, and had an
accrual of approximately $14,000 and $5,000 as of
December 31, 2003 and 2002, respectively.
--------------------------------------------------------------------------------
F-33
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
12. Related Party A law firm, of which the chairman of the board of
Transactions directors of the Company is a shareholder, has rendered
Continued legal services to the Company. The Company paid this
firm $97,000 and $167,000, for the years ended December
31, 2003 and 2002, respectively. As of December 31,
2003, the Company owed this firm $136,000, which is
included in accounts payable.
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.
o Incurred an obligation of approximately $46,000 for
the settlement of accrued liabilities of
approximately $83,000 and recorded a corresponding
gain of $37,000.
o Reduced subscription receivable and additional
paid-in capital for $294,000.
--------------------------------------------------------------------------------
F-34
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
13. Supplemental During the year ended December 31, 2002, the Company:
Cash Flow
Information o Acquired certain assets of Innovative Optics, Inc.
Continued in a purchase transaction (see note 3). The
transaction required the payment of $100,000 and a
potential issuance of 1,272,000 shares of common
stock. In connection with this acquisition, the
Company recorded the following:
Inventory $ 225,000
Property, and equipment 35,000
Intangibles:
Patents, rights, trade name 530,000
Goodwill 1,419,000
Equity:
Common stock issued (1,814,000)
Warrants issued (295,000)
----------------
Net cash paid $ 100,000
----------------
o Acquired 2,663,254, or 19.9%, of the outstanding
shares of International Bioimmune Systems, Inc.
(IBS) and warrants to purchase 1,200,000 shares of
common stock of IBS at $2.50 per share for a period
of two years, through the exchange and issuance of
736,945 shares of Paradigm common stock, the lending
of 300,000 shares of Paradigm common stock to IBS,
and the payment of certain expenses of IBS through
the issuance of an aggregate of 94,000 shares of
Paradigm common stock to IBS and its counsel.
Actual amounts paid for interest and income taxes are as
follows:
Years Ended
December 31,
--------------------------------
2003 2002
--------------------------------
Interest $ 24,000 $ 46,000
--------------------------------
Income taxes $ - $ -
--------------------------------
--------------------------------------------------------------------------------
F-35
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
14. Export Total sales include export sales by major geographic
Sales area as follows:
Years Ended
----------------------------------------------
December 31,
----------------------------------------------
Geographic Area 2003 2002
----------------------------------------------
Far East $ 272,000 $ 1,171,000
South America 9,000 308,000
Middle East 228,000 337,000
Europe 363,000 505,000
Canada 62,000 121,000
Mexico 9,000 61,000
----------------------------------------------
$ 943,000 $ 2,503,000
----------------------------------------------
15. Savings Plan In November 1996, the Company established a 401(k)
Retirement Savings Plan for the Company's officers and
employees. The Plan provisions include eligibility after
six months of service, a three year vesting provision
and matching contributions at the Company's discretion.
During the years ended December 31, 2003 and 2002, the
Company contributed approximately $1,000 and $64,000 to
the Plan, respectively.
16. Commitments Consulting Agreements During the year ended December 31,
and 1999 the Company entered a consulting agreement with a
Contingencies former officer of the Company, which expires in 2004 and
requires annual payments of $25,000 through 2003 and a
payment of $12,500 in 2004.
During the year ended December 31, 2000, in connection
with the acquisition of OBF, the Company entered a
consulting agreement with the former owner of OBF, which
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 15).
--------------------------------------------------------------------------------
F-36
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation
and An action was brought against the Company in March 2000
Contingencies by George Wiseman, a former employee, in the Third
Continued District Court of Salt Lake County, State of Utah. The
complaint alleges that the Company owes Mr. Wiseman
6,370 shares of common stock plus costs, attorney's fees
and a wage penalty (equal to 1,960 additional shares of
our common stock) pursuant to Utah law. The action is
based upon an extension of a written employment
agreement. We dispute the amount allegedly owed and
intend to vigorously defend against the action.
An action was brought against us on March 7, 2000 in the
Third District Court of Salt Lake County, State of Utah,
by the Merrill Corporation that alleges that we owe the
Merrill Corporation approximately $20,000 together with
interest thereon at the rate of 10% per annum from
August 30, 1999, plus costs and attorney's fees. The
complaint alleges a breach of contract relative to
printing services. We filed an answer to the complaint.
On August 12, 2003, the court dismissed the action
without prejudice.
An action was brought against us 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. Discovery has taken place and we have paid
royalties of $14,736 to bring all payments up to date
through June 30, 2001. We have been working with
PhotoMed 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.
--------------------------------------------------------------------------------
F-37
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and It is anticipated that once the parties can agree on the
Contingencies correct calculations on the royalties, the legal action
Continued will be dismissed. The issue in dispute concerning the
method of calculating royalties is whether royalties
should be paid on returned equipment. Since July 1,
2001, only one Photon(TM) laser system has been sold and
no systems returned. Thus, the amount of royalties due,
according to our calculations, is $600. We intend to
make payment of this amount to PhotoMed 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, we would lose our right to
manufacture and sell the Photon(TM) laser system.
We 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. Our records show that we 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
us because they had never been ordered. On August 14,
2003, we agreed to make a $13,650 payment to Danlin
Corp. in settlement of the dispute. We have since made
the $13,650 payment to Danlin Corp.
We received a demand letter dated December 30, 2002 from
counsel for Thomas F. Motter, our former Chairman and
Chief Executive Officer. Mr. Motter claims in the letter
that he was entitled to certain stock options that had
not been issued to him in a timely manner. By the time
the options were actually issued to him, however, they
had expired. Mr. Motter contends that if the options had
been issued in a timely manner, he would have exercised
them in a manner that would have given him a substantial
benefit. Mr. Motter requests restitution for the loss of
the financial opportunity. Mr. Motter also claims that
he was defrauded by us by not being given an extended
employment agreement when he terminated the change of
control agreement that he had entered into with us.
--------------------------------------------------------------------------------
F-38
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and Mr. Motter is further claiming payment for accrued
Contingencies vacation time during the 13 years he had been employed
Continued by the Company, asserting that he only had a total of
four weeks of vacation during that period. Finally, Mr.
Motter is threatening a shareholder derivative action
against us because of the board of directors' alleged
failure to conduct an investigation into conversations
that took place in a chat room on Yahoo. Mr. Motter
asserts that certain individuals participating in the
conversations were our officers or directors whose
interests were in conflict with the interest of the
shareholders. We believe that Mr. Motter's claims and
assertions are without merit and intend to vigorously
defend against any legal action that Mr. Motter may
bring.
On January 24, 2003, an action was brought by Dr. John
Charles Casebeer against us in the Montana Second
Judicial District Court, Silver Bow County, State of
Montana (Civil No. DU-0326). The complaint alleges that
Dr. Casebeer entered into a personal services contract
with us memorialized by a letter dated April 20, 2002,
with it being alleged that Dr. Casebeer fully performed
his obligations. Dr. Casebeer asserts that he is
entitled to $43,750 per quarter for consultant time and
as an incentive to be granted each quarter $5,000 in
options issued at the fair market value. An additional
purported incentive was $50,000 in shares of stock being
issued at the time a formalized contract was to be
signed by the parties. In the letter it is provided that
at its election, we may pay the consideration in the
form of stock or cash and that stock would be issued
within 30 days of the close of the quarter. Prior to the
litigation, we issued 43,684 shares to Dr. Casebeer. The
referenced letter provides that termination may be made
by either party upon giving 90 days written notice.
Notice was given by us in early November 2002. We
recently filed its answer in defense of the action.
Issues include whether or not Dr. Casebeer fully
performed as asserted. The case has been settled through
the issuance of 300,000 additional shares of our common
stock to Dr. Casebeer.
--------------------------------------------------------------------------------
F-39
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and On May 14, 2003, a complaint was filed in the United
Contingencies States District Court, District of Utah, captioned
Continued Richard Meyer, individually and on behalf of all others
similarly suited v. Paradigm Medical Industries, Inc.,
Thomas Motter, Mark Miehle and John Hemmer, Case No.
2:03 CV00448TC. The complaint also indicates that it is
a "Class Action Complaint for Violations of Federal
Securities Law and Plaintiffs Demand a Trial by Jury."
We have 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 we falsely
stated in our Securities and Exchange Commission filings
and press releases that we had received authorization to
use an insurance reimbursement CPT code from the CPT
Code Research and Development Division of the American
Medical Association in connection with the Blood Flow
Analyzer(TM), adding that the CPT code provides for a
reimbursement to doctors of $57.00 per patient for use
of the Blood Flow Analyzer(TM). The complaint also
alleges that on July 11, 2002, we issued a press release
falsely announcing that we had received a purchase order
from Valdespino Associates Enterprises and Westland
Financial Corporation for 200 sets of our 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. As
a result of these statements, the complaint contends
that the price of our shares of common stock was
artificially inflated during the period from April 25,
2001 through May 14, 2003, and the persons who purchased
our common shares during that period suffered
substantial damages. The complaint requests judgment for
unspecified damages, together with interest and
attorney's fees.
--------------------------------------------------------------------------------
F-40
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and We dispute having issued false and misleading statements
Contingencies concerning the Blood Analyzer(TM) and a purchase order
Continued from Valdespino Associates Enterprises and Westland
Financial Corporation. On April 25, 2001, we issued a
press release that stated we had received authorization
to use common procedure terminology or CPT code number
92120 for our Blood Flow Analyzer(TM). This press
release was based on a letter we received from the CPT
Editorial Research and Development Department of the
American Medical Association authorizing use of common
procedure terminology or CPT code number 92120 for our
Blood Flow Analyzer(TM), for reimbursement purposes for
doctors using the device.
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. We are endeavoring to
obtain reimbursement by insurance payors in other states
where there is currently no reimbursement being made. We
believe we have continued to correctly represent in our
Securities and Exchange Commission filings that we have
received authorization from the CPT Editorial Research
and Development Department of the American Medical
Association to use CPT code number 92120 for our Blood
Flow Analyzer(TM), for reimbursement purposes for
doctors using the device.
--------------------------------------------------------------------------------
F-41
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and On July 11, 2002, we issued a press release that stated
Contingencies we received a purchase order from Valdespino Associates
Continued Enterprises and Westland Financial Corporation for 200
complete sets of our 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 we entered into
with Westland Financial Corporation for the sale of 200
complete sets of our surgical and diagnostic equipment
to Mexican ophthalmic practitioners. The press release
also stated that the initial order was for $70 million
of our 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 our 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 our product sales
to the Mexican ophthalmic practitioners. In that press
release the board stated that we had been in discussions
for the prior nine months with Westland Financial
Corporation, aimed at supplying our medical device
products to the Mexican market. In the past, we have 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, we 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 our medical device products in
Mexico, but we could not, at the time, predict or
provide any assurance that any transactions would
result.
--------------------------------------------------------------------------------
F-42
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and On June 2, 2003, a complaint was filed in the United
Contingencies States District Court captioned Michael Marrone v.
Continued Paradigm Medical Industries, Inc., Thomas Motter, Mark
Miehle and John Hemmer, Case No. 2:03 CV00513 PGC. On or
about June 11, 2003, a complaint was filed in the same
United States District Court captioned Milian v.
Paradigm Medical Industries, Inc., Thomas Motter, Mark
Miehle and John Hemmer, Case No. 2:03 CV00617PGC. Both
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 Valdespino Associates
Enterprises and Westland Financial Corporation, the
price of our common stock was artificially inflated and
the persons who purchased our common shares during the
class period suffered substantial damages. The cases
request judgment for unspecified damages, together with
interest and attorneys' fees. These cases have now been
consolidated with the Meyer case into a single action.
We believe the consolidated cases are without merit and
intend to vigorously defend and protect our interests in
the said cases.
We were 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
our application for insurance.
--------------------------------------------------------------------------------
F-43
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and We have not paid any amounts toward satisfaction of any
Contingencies part of the $250,000 retention that is applicable to the
Continued consolidated cases. We have advised U.S. Fire that we
cannot pay the $250,000 retention due to our current
financial circumstances. As a consequence, on January 8,
2004, we entered into a non-waiver agreement with U.S.
Fire in which U.S. Fire agreed to fund and advance our
retention obligation in consideration for which we have
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, we are 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.
In the event U.S. Fire determines that we 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 we be
declared in default under the non-waiver agreement, then
we agree to pay U.S. Fire, on demand, the full amount of
all costs advanced by U.S. Fire, except for those
amounts that we may have reimbursed to U.S. Fire
pursuant to the monthly payments due under the
non-waiver agreement.
We will be in default under the non-waiver agreement if
we fail 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
we are not successful in defending and protecting our
interests in the cases, resulting in a judgment against
us for substantial damages, we would not be able to pay
such liability and, as a result, would be forced to seek
bankruptcy protection.
--------------------------------------------------------------------------------
F-44
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and On July 10, 2003, an action was filed in the United
Contingencies States District Court, District of Utah, by Innovative
Continued 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 us on January 31, 2002,
in which we agreed to purchase all the assets of
Innovative in consideration for the issuance of
1,310,000 shares of the Company's common stock to
Innovative. The complaint claims we breached the asset
purchase agreement. The complaint also claims that we
allegedly made false and misleading statements
pertaining to the Blood Flow Analyzer(TM) and concerning
a purchase order from Valdespino Associates Enterprises
and Westland Financial Corporation. The purpose of these
statements, according to the complaint, was to induce
Innovative to sell its assets and purchase the shares of
our common stock at artificially inflated prices while
simultaneously deceiving Innovative and Barton into
believing that the Company's shares were worth more than
they actually were. Had Innovative and Barton known the
truth, the complaint contends, they would not have sold
Innovative to us, would not have purchased our 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 these
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 we
also did not file a registration statement with the
Securities and Exchange Commission within five months of
the closing date of the asset purchase transaction. As a
result, the complaint alleges that the value of the
shares of our common stock issued to Innovative in the
transaction declined, and Innovative and Barton suffered
damages in an amount to be proven at trial. We filed an
answer to the complaint and also filed counterclaims
against Innovative and Barton for breach of contract. We
believe the complaint is without merit and intend to
vigorously defend and protect our interests in the
action.
--------------------------------------------------------------------------------
F-45
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and If we are not successful in defending and protecting our
Contingencies interests in this action, resulting in a judgment
Continued against us for substantial damages, and U.S. Fire denies
coverage in the litigation under the Directors and
Officers Liability and Company Reimbursement Policy, we
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." We have 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 we falsely
stated in Securities and Exchange Commission filings and
press releases that we had received authorization to use
an insurance reimbursement CPT code from the CPT Code
Research and Development Division of the American
Medical Association in connection with the Blood Flow
Analyzer(TM), adding that the CPT code provides for a
reimbursement to doctors of $57.00 per patient for the
Blood Flow Analyzer(TM).
--------------------------------------------------------------------------------
F-46
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and The purpose of these statements, according to the
Contingencies complaint, was to induce investors to purchase shares of
Continued our 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 our Series E
preferred stock in the private offering suffered
substantial damages to be proven at trial. The complaint
also alleges that we 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. We filed an
answer to the complaint. We believe the complaint is
without merit and intend to vigorously defend our
interests in the action. If we are not successful in
defending and protecting our interests in the action,
resulting in a judgment against us for substantial
damages, and U.S. Fire denies coverage in the litigation
under the Directors and Officers Liability and Company
Reimbursement Policy, we would not be able 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 our Salt
Lake City facilities on or about April of 2000. The
action also seeks an award of attorney's fees and costs
incurred in the collection. We dispute the amounts
allegedly owed, asserting that the equipment we returned
to the leasing company did not work properly. A
responsive pleading has not yet been filed. We are
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 we had entered into a lease agreement for
the lease of certain equipment for which payment is due.
It is claimed that there is due and owing approximately
$89,988 after accruing late fees, interest, repossession
costs, collection costs and attorneys' fees. On August
28, 2003, we 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.
--------------------------------------------------------------------------------
F-47
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and We received demand letters and dated July 18, 2003,
Contingencies September 26, 2003 and November Contingencies 10, 2003
Continued from counsel for Douglas A. MacLeod, M.D., Continued 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 our common stock and warrants to
purchase 1,192,500 shares of our 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. We believe 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 our common stock or any additional warrants under the
terms of the mutual release. We intend to vigorously
defend against any legal action that Dr. MacLeod may
bring.
On August 3, 2003, a complaint was filed against us by
Corinne Powell, a former employee, in the Third Judicial
District Court, Salt Lake County, State of Utah (Civil
No. 030918364). Defendants consist of the Company and
Randall A. Mackey, Dr. David M. Silver and Keith D.
Ignotz, directors of the company. The complaint alleges
that at the time we laid off Ms. Powell on March 25,
2003, she was owed $2,030 for business expenses, $11,063
for accrued vacation days, $12,818 for unpaid
commissions, the fair market value of 50,000 stock
options exercisable at $5.00 per share that she claims
she was prevented from exercising, attorney's fees and a
continuing wage penalty under Utah law. We dispute the
amounts allegedly owed and intend to vigorously defend
and protect our interests in the action.
--------------------------------------------------------------------------------
F-48
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and On September 10, 2003, an action was filed against us by
Contingencies Larry Hicks in the Third Judicial District Court, Salt
Continued 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 we
have paid Mr. Hicks prior to such termination, plus
costs, attorney's fees and a wage penalty pursuant to
Utah law. We dispute the amount allegedly owed and
intend to vigorously defend against such action.
We are not a party to any other material legal
proceedings outside the ordinary course of its business
or to any other legal proceedings which, if adversely
determined, would have a material adverse effect on our
financial condition or results of operations.
The Company may become or is subject to other
investigations, claims or lawsuits ensuing out of
conduct of its business, including those related to
environmental safety and health, product liability,
commercial transactions etc. The Company is currently
not aware of any other such items, which it believes
could have a material adverse effect on the financial
statements.
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.
During 2003, a settlement was reached with the president
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.
--------------------------------------------------------------------------------
F-49
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Royalty Agreements - Continued
and The Company has a royalty agreement with another company
Contingencies that developed a promotional CD for the Company. Through
Continued 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 November 2002, the EITF reached a consensus on Issue
Accounting No.00-21, Revenue Arrangements with Multiple
Pronouncements Deliverables. EITF Issue No. 00-21 provides guidance on
how to account for certain arrangements that involve the
delivery or performance of multiple products, services
and/or rights to use assets. The provisions of EITF
Issue No. 00-21 will apply to revenue arrangements
entered into in fiscal periods beginning after June 15,
2003. The adoption of EITF Issue No. 00-21 did not have
a material impact on operating results or financial
condition of the Company as the Company followed the
provisions of Statement of Position ("SOP") 97-2,
Software Revenue Recognition, as modified by SOP 98-9,
Modification of SOP 97-2 with Respect to Certain
Transactions, which provide guidance for revenue
recognition of arrangements with multiple deliverables.
--------------------------------------------------------------------------------
F-50
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
18. Recent In December 2003, the FASB issued Interpretation No. 46
Accounting ("FIN 46R") (revised December 2003), Consolidation of
Pronouncements Variable Interest Entities, an Interpretation of
Continued 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
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 April 2003, FASB issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities. SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging
activities under SFAS 133, Accounting for Derivatives
and Hedging Activities. SFAS 149 is generally effective
for derivative instruments, including derivative
instruments embedded in certain contracts, entered into
or modified after June 30, 2003. The adoption of SFAS
149 did not have a material impact on the operating
results or financial condition of the Company.
--------------------------------------------------------------------------------
F-51
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
18. Recent In May 2003, the FASB issued SFAS 150, Accounting for
Accounting Certain Financial Instruments with Characteristics of
Pronouncements Both Liabilities and Equity. SFAS 150 clarifies the
Continued accounting for certain financial instruments with
characteristics of both liabilities and equity and
requires that those instruments be classified as
liabilities in statements of financial position.
Previously, many of those financial instruments were
classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May
31, 2003 and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003.
On November 7, 2003, FASB Staff Position 150-3 was
issued, which indefinitely deferred the effective date
of SFAS 150 for certain mandatory redeemable
non-controlling interests. As the Company does not have
any of these financial instruments, the adoption of SFAS
150 did not have any impact on the Company's
consolidated financial statements.
In December 2003, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition. SAB 104 revises or rescinds
portions of the interpretive guidance included in Topic
13 of the codification of staff accounting bulletins in
order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance
and SEC rules and regulations. The adoption of SAB 104
did not have a material effect on the Company's results
of operations or financial position.
--------------------------------------------------------------------------------
F-52
No dealer, salesperson or other person
is authorized to give any information or
to represent anything not contained in
this prospectus. This prospectus is an
offer to sell only the shares offered
hereby, but only under circumstances and 9,546,437 Shares of Common Stock
in jurisdictions where it is lawful to
do so. The information contained in this
prospectus is current only as of its
date.
---------------------
PARADIGM MEDICAL INDUSTRIES, INC.
TABLE OF CONTENTS
-----------------
Page
PROSPECTUS
Prospectus Summary......................
Risk Factors .......................... -----------------
Use of Proceeds.........................
Dividend Policy.........................
Capitalization..........................
Market for Common Equity and
Related Shareholder Matters..........
Selected Financial Data.................
Management's Discussion and Analysis
of Plan of Operation................. December __, 2004
Business ...............................
Management .............................
Security Ownership of Certain
Beneficial Owners and Management ....
Certain Transactions....................
Selling Securityholders.................
Description of Securities...............
Plan of Distribution....................
Experts.................................
Legal Matters...........................
Where You Can Find More Information.....
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
(the "Delaware Law") empowers a Delaware corporation to indemnify any person who
is, or is threatened to be made, a party to any threatened, pending or completed
legal action, suit or proceedings, whether civil, criminal, administrative or
investigative (other than action by or in the right of such corporation), by
reason of the fact that such person was an officer or director of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the corporation's best interests, and, for criminal
proceedings, had no reasonable cause to believe his or her conduct was illegal.
A Delaware corporation may indemnify officers and directors in an action by or
in the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation in the performance of his
or her duty. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses which such officer or director
actually and reasonably incurred.
In accordance with the Delaware Law, the Certificate of Incorporation
of the Company contains a provision to limit the personal liability of the
directors of the Company for violations of their fiduciary duty. This provision
eliminates each director's liability to the Registrant or its stockholders for
monetary damages except (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit. The effect of this provision is to eliminate the personal liability of
directors for monetary damages for actions involving a breach of their fiduciary
duty of care, including any such actions involving gross negligence.
The Company may not indemnify an individual unless authorized and a
determination is made in the specific case that indemnification of the
individual is permissible in the circumstances because his or her conduct was in
good faith, he or she reasonably believed that his or her conduct was in, or not
opposed to, the Company's best interests and, in the case of any criminal
proceeding, he or she had no reasonable cause to believe his or her conduct was
unlawful. The Company may not advance expenses to an individual to whom the
Company may ultimately be responsible for indemnification unless authorized in
the specific case after the individual furnishes the following to the Company: a
written affirmation of his or her good faith belief that his or her conduct was
in good faith, that he or she reasonably believed that his or her conduct was
in, or not opposed to, the Company's best interests and, in the case of any
criminal proceeding, he or she had no reasonable cause to believe his or her
conduct was unlawful and (2) the individual furnishes to the Company a written
undertaking, executed personally or on his or her behalf, to repay the advance
if it is ultimately determined that he or she did not meet the standard of
conduct referenced in part (1) of this sentence. In addition to the individual
furnishing the aforementioned written affirmation and undertaking, in order for
the Company to advance expenses, a determination must also be made that the
facts then- known to those making the determination would not preclude
indemnification.
All determinations relative to indemnification must be made as follows:
(1) by the Board of Directors of the Company by a majority vote of those present
at a meeting at which a quorum is present, and only those directors not parties
to the proceeding shall be counted in satisfying the quorum requirement; or (2)
if a quorum cannot be obtained as contemplated in part (1) of this sentence, by
a majority vote of a committee of the Board of Directors designated by the Board
of Directors of the Company, which committee shall consist of two or more
directors not parties to the proceeding, except that directors who are parties
to the proceeding may participate in the designation of directors for the
committee; or (3) by special legal counsel selected by the Board of Directors or
its committee in the manner prescribed in part (1) or part (2) of this sentence
(however, if a quorum of the Board of Directors cannot be obtained under part
(1) of this sentence and a committee cannot be designated under part (2) of this
sentence, then a special legal counsel shall be selected by a majority vote of
the full board of directors, in which selection directors who are parties to the
proceeding may participate); or (4) by the shareholders, by a majority of the
votes entitled to be cast by holders of qualified shares present in person or by
proxy at a meeting.
The Company has also entered into Indemnification Agreements with its
executive officers and directors. These Indemnification Agreements are
substantially similar in effect to the Bylaws and the provisions of our
Certificate of Incorporation relative to providing indemnification to the
maximum extent and in the manner permitted by the Delaware General Corporation
Law. Additionally, such Indemnification Agreements contractually bind the
Company with respect to indemnification and contain certain exceptions to
indemnification, but do not limit the indemnification available pursuant to our
Bylaws, our Certificate of Incorporation or the Delaware General Corporation
Law.
II-1
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the expenses payable by the Company in
connection with the issuance and distribution of the securities being registered
(all amounts except the Securities and Exchange Commission filing fee are
estimated):
Filing fee -- Securities and Exchange Commission........... $ 0
Printing and engraving expenses............................ 250
Legal fees and disbursements............................... 5,000
Accounting fees and disbursements.......................... 3,000
Blue Sky fees and expenses (including legal fees).......... 0
Transfer agent and registrar fees and expenses............. 250
Miscellaneous 500
--------
Total expenses $ 9,000
Item 26. Recent Sales of Unregistered Securities
The following information is furnished with regard to all issuances of
unregistered shares of our common stock during the past three years. These
shares were issued, unless otherwise indicated, without registration in reliance
upon the exemption provided by Section 4(2) of the Securities Act of 1933, as
amended or, in the case of the exercise of warrants, the shares were registered
pursuant to a registration statement in effect at the time of the warrant
exercise.
I. Common Stock
On July 14, 2000, the Company issued 75,758 shares of common stock to
Triton West Group, Inc., an accredited investor, as defined in Section 2(15) of
the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a cash
investment in the amount of $300,000, or a purchase price of $3.96 per share.
These shares were issued without registration in reliance upon Section 4(2) of
the Securities Act of 1933 and Rule 506 of Regulation D thereunder.
On July 20, 2000, the Company issued 12,350 shares of common stock to
John W. Hemmer for a cash investment in the amount of $61,750 pursuant to the
exercise of warrants at an exercise price of $5.00 per share.
On July 24, 2000, the Company issued 300 shares of common stock to
Gabriel Plaut for a cash investment in the amount of $807 pursuant to the
exercise of warrants at an exercise price of $2.69 per share.
On August 30, 2000, the Company sold a total of 500,000 shares of
common stock to 34 accredited investors, as defined in section 2 (15) of the
Securities Act of 1933 and Rule 501 of Regulation D thereunder, through a
private placement under Section 4(2) of the Securities Act of 1933 and Rule 506
of Regulation D thereunder at a price of $3.625 per share. The Company received
$1,812,500 in cash as a result of the private placement transaction and paid
$133,125 in commissions and expenses.
On August 31, 2000, the Company issued 85,175 shares of common stock to
Triton West Group, Inc., an accredited investor, as defined in Section 2(15) of
the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a cash
investment in the amount of $308,759, or at a purchase price of $3.625 per
share. These shares were issued without registration in reliance upon Section
4(2) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder.
On September 6, 2000, the Company issued 5,384 shares of common stock
to Randall A. Mackey for services as a director of the Company from July 10,
1996 to September 3, 1998.
On September 6, 2000, the Company issued 200,000 shares of common stock
to two accredited investors, as defined in Section 2(15) of the Securities Act
of 1933 and Rule 501 of Regulation D thereunder, through a private placement
under Section 4(2) under the Securities Act of 1933 and Rule 506 of Regulation D
thereunder at a price of $3.625 per share. The Company received $725,000 in cash
as a result of the private placement transaction and paid $65,250 in commissions
and expenses.
II-2
On September 9, 2000, the Company issued 19,000 shares of common stock
to the Estate of Albert J. Barbara for a cash investment in the amount of
$57,000 pursuant to the exercise of warrants at an exercise price of $3.00 per
share.
On September 25, 2000, the Company issued 1,115 shares of common stock
to Christopher Brothers pursuant to the cashless exercise of warrants.
On October 18, 2000, the Company issued 83,000 shares of common stock
to Triton West Group, Inc., an accredited investor, as defined in Section 2(15)
of the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a
cash investment in the amount of $260,205, or at a purchase price of $3.14 per
share. These shares were issued without registration in reliance upon Section
4(2) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder.
On November 28, 2000, the Company issued 1,870 shares of common stock
to Michael P. Fenten pursuant to the cashless exercise of warrants.
On February 20, 2001, the Company issued 150,000 shares of common stock
to Triton West Group, Inc., an accredited investor as defined in Section 2(15)
of the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a
cash investment in the amount of $300,000, or at a purchase price of $2.00 per
share. These shares were issued without registration in reliance upon Section
4(2) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder.
On March 14, 2001, the Company issued 49,716 shares of common stock to
Triton West Group, Inc., an accredited investor as defined in Section 2(15) of
the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a cash
investment in the amount of $87,500, or at a purchase price of $1.76 per share.
These shares were issued without registration in reliance upon Section 4(2) of
the Securities Act of 1933 and Rules 506 of Regulation D thereunder.
On May 22, 2001, the Company issued 40,440 shares of common stock to
Triton West Group, Inc., an accredited investor as defined in Section 2(15) of
the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a cash
investment in the amount of $100,000, or at a purchase price of $2.47 per share.
These shares were issued without registration in reliance upon Section 4(2) of
the Securities Act of 1933 and Rules 506 of Regulation D thereunder.
On May 30, 2001, the Company issued 37,381 shares of Common stock to
Triton West Group, Inc., an accredited investor as defined in Section 2(15) of
the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a cash
investment in the amount of $100,000, or at a purchase price of $1.95 per share.
These shares were issued without registration in reliance upon Section 4(2) of
the Securities Act of 1933 and Rules 506 of Regulation D thereunder.
On June 26, 2001, the Company issued 51,188 shares of common stock to
Triton West Group, Inc., an accredited investor as defined in Section 2(15) of
the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a cash
investment in the amount of $100,000, or at a purchase price of $1.95 per share.
These shares were issued without registration in reliance upon Section 4(2) of
the Securities Act of 1933 and Rules 506 of Regulation D thereunder.
On August 22, 2001, the Company issued 350,000 shares of common stock
to Mentor Corporation pursuant to a settlement agreement dated July 2, 2001
regarding the settlement of a dispute between the Company and Mentor
Corporation. The dispute involved whether the 485,751 shares of the Company's
common stock issued to Mentor Corporation pursuant to an asset purchase
transaction were required to have been registered in the Company's registration
statement declared effective on January 5, 2000. This settlement resulted in a
litigation settlement expense of $812,000 based on the market price of the
Company's common stock on the date of settlement.
On January 31, 2002, the Company issued 1,272,825 shares of common
stock and warrants to purchase 250,000 shares of the Company's Common Stock at
$5.00 per share to Innovative Optics, Inc. as consideration pursuant to the
completion of a transaction involving the purchase of all of the assets of
Innovative Optics, Inc. One-half of these common shares, or 636,412 shares, were
delivered to Innovative Optics at closing, and the other half were held in
escrow pending completion of the blade cost reduction project. On August 2,
2002, 477,309 of the shares held in escrow were delivered to Innovative Optics.
The remainder of the shares, or 159,103 shares, remains in escrow because phase
2 of the blade cost reduction project has not been completed. The assets
purchased from Innovative Optics included raw materials, work in process,
finished goods inventories, equipment, patents, rights, trade name and goodwill,
which were recorded as $2,209,000 on the financial statements of the Company.
On January 31, 2002, the Company issued 50,000 shares of common stock
to Dr. Scott S. Bair as consideration pursuant to the completion of a
transaction involving the purchase of all the assets of Innovative Optics, Inc.
II-3
On June 19, 2002, the Company issued 17,007 shares of common stock to
John Charles Casebeer, M.D. for services rendered to the Company under a
consulting agreement. The shares represent the payment of $50,000 in common
stock in consideration for assisting the Company to develop and promote its
Innovatome(TM) microkeratome during the period from April 1, 2002 to June 30,
2002.
On July 9, 2002, the Company issued 35,000 shares of common stock to
Michael W. Stelzer pursuant to the Severance Agreement and General Release,
which the Company entered into with Mr. Stelzer on January 21, 2000.
On July 29, 2002, the Company issued 26,677 shares of common stock to
John Charles Casebeer, M.D. for services rendered to the Company under a
consulting agreement. The shares represent the payment of $50,000 in common
stock in consideration for assisting the Company to develop and promote the
Innovatome(TM) microkeratome during the period from July 1, 2002 to September
30, 2002.
On July 30, 2002, the Company issued 50,000 shares of common stock to
each of Peter Kristensen and F. Briton McConkie for services rendered to the
Company under a Major Account Facilitator Contract in which Messrs. McConkie and
Kristensen served as intermediaries between the Company and an international
agent in an effort to sell 150 Photon(TM) laser systems in Asia.
On August 2, 2002, the Company issued 48,000 shares of common stock to
Michael B. Lindberg, M.D. for services rendered under a consulting agreement
(24,000 shares for services rendered in 2001 and 24,000 shares for services
rendered in 2002). The shares issued to Dr. Lindberg represent the payment for
assisting the Company in evaluating new technologies and instruments during the
period from December 1, 2000 to November 30, 2002.
On September 26, 2002, the Company issued a total of 736,945 shares of
its on stock to 34 shareholders of International Bio-Immune Systems, Inc. or IBS
in connection with a transaction with IBS to acquire 19.9% of the outstanding
shares of IBS common stock through the exchange and issuance of the 736,945
shares of its common stock for 2,663,254 shares of common stock of IBS. In
addition, as part of the transaction, the Company lent 300,000 shares of its
common stock to IBS and, as consideration for the payment of certain expenses of
IBS in the transaction, issued 44,000 shares of its common stock to IBS and
50,000 shares of its common stock to Joseph S. Anile, II. These shares were
issued without registration in reliance upon Section 4(2) of the Securities Act
of 1933 and Rule 506 of Regulation D thereunder.
On September 30, 2002, the Company issued 40,000 shares of common stock
to Michael W. Stelzer pursuant to a Severance Agreement and General Release,
which the Company entered into with Mr. Stelzer on September 27, 2002.
On January 22, 2003, the Company issued a total of 2,524,000 shares of
common stock to six accredited investors, as defined in Section 2(15) of the
Securities Act of 1933 and Rule 501 of Regulation D thereunder, through a
private placement under Section 4(2) of the Securities Act of 1933 and Rule 506
of Regulation D thereunder at a price of $.25 per share. The Company received a
total of $631,000 in cash in the private placement transaction and paid $69,410
in commissions and expenses. In addition, the Company issued warrants to
purchase 157,750 shares of common stock at an exercise price of $.25 per share
for commissions and expenses. The accredited investors also received warrants to
purchase a total of 631,000 shares of common stock at an exercise price of $.25
per share.
On March 26, 2003, the Company issued 695,991 shares of common stock to
Triton West Group, Inc., an accredited investor, as defined in Section 2(15) of
the Securities Act of 1933 and Rule 501 of Regulation D thereunder, for a cash
investment in the amount of $85,746, or at a purchase price of $.12 per share.
These shares were issued without registration in reliance upon Section 4(2) of
the Securities Act of 1933 and Rule 506 of Regulation D thereunder.
On June 13, 2003, the Company issued 50,000 shares of common stock to
Frank G. Mauro for a cash investment of $12,500 pursuant to the exercise of
warrants at an exercise price of $.25 per share.
On June 13, 2003, the Company issued 7,888 shares of common stock to
Delbert G. Reichardt for a cash investment in the amount of $1,972 pursuant to
the exercise of warrants at an exercise price of $.25 per share.
On June 13, 2003, the Company issued 7,887 shares of common stock to
John H. Banzhaf for a cash investment in the amount of $1,971.25 pursuant to the
exercise of warrants at an exercise price of $.25 per share.
On June 26, 2003, the Company issued 51,000 shares of common stock to
Paul L. Archambeau, M.D. for a cash investment in the amount of $12,750 pursuant
to the exercise of warrants at an exercise price of $.25 per share.
II-4
On June 30, 2003, the Company completed the sale of 845,266 shares of
common stock to 14 accredited investors, as defined in Section 2(15) of the
Securities Act of 1933 and Rule 501 of Regulation D thereunder, through a
private placement under Section 4(2) of the Securities Act of 1933 and Rule 506
of Regulation D thereunder at a price of $.375 per share. The Company received a
total of $316,975 in cash in the private placement transaction and issued 82,526
shares of common stock in commissions and expenses. The accredited investors
also received warrants to purchase 422,634 shares of common stock at an exercise
price of $.75 per share.
On October 9, 2003, the Company issued 300,000 shares of common stock
to John Charles Casebeer, M.D. in settlement of a lawsuit that Dr. Casebeer
brought against the Company for services performed under a personal services
contract.
II. Series E Preferred Stock
During the period from May 31, 2001 to August 20, 2001, the Company
sold a total of 46,219 shares of Series E convertible preferred Stock to 44
accredited investors, as defined in Section 2(15) of the Securities Act of 1933
and Rule 501 of Regulation D thereunder, through a private placement under
Regulation D promulgated under the Securities Act of 1933 at a price of $100.00
per share. The Company received $4,621,900 in cash as a result of the private
placement transaction and paid $369,752 in commissions and expenses. The Series
E convertible preferred stock is convertible into shares of common stock at a
conversion price of $1.875 per share of common stock. The accredited investors
also received warrants to purchase a total of 231,095 shares of common stock at
an exercise price of $4.00 per share. These shares were issued without
registration in reliance upon Section 4(2) of the Securities Act of 1933 and
Rule 506 of Regulation D promulgated thereunder.
III. Series F Preferred
During the period from August 20, 2001 to November 21, 2001, the
Company sold a total of 48,597.20 shares of Series F convertible preferred stock
to 58 accredited investors, as defined in Section 2(15) of the Securities Act of
1933 and Rule 501 of Regulation D thereunder, through a private placement under
Regulation D promulgated under the Securities Act of 1933 at a price of $100.00
per share. The Company received $4,859,720 in cash as a result of the private
placement transaction and paid $388,788 in commissions and expenses. The Series
F convertible preferred stock is convertible into shares of common stock at a
conversion price equal to $1.875 per share of common stock. The accredited
investors also received warrants to purchase a total of 242,986 shares of common
stock at an exercise price of $4.00 per share. These shares were issued without
registration in reliance upon Section 4(2) of the Securities Act of 1933 and
Rule 506 of Regulation D promulgated thereunder.
IV. Series G Preferred
During the period from August 24, 2003 to September 15, 2003, the
Company sold a total of 1,981,560 shares of Series G convertible preferred stock
to two accredited investors, as defined in Section 2(15) of the Securities Act
of 1933 and Rule 501 of Regulation D thereunder, through a private placement
under Regulation D promulgated under the Securities Act of 1933 at a price of
$.17 per share. The Company received $300,000 in cash as a result of the private
placement transaction and paid $30,000 in commissions and expenses. In addition,
the Company issued warrants to purchase 88,236 shares of common stock at an
exercise price of $.50 per share for commissions and expenses. The Series G
convertible preferred stock is convertible into shares of common stock at a
conversion price equal to $.17 per share of common stock. The accredited
investors also received warrants to purchase a total of 382,353 shares of common
stock at an exercise price of $.50 per share. These shares were issued without
registration in reliance upon Section 4(2) of the Securities Act of 1933 and
Rule 506 of Regulation D promulgated thereunder.
Item 27. Exhibits
(a) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-B or are incorporated by reference to previous filings.
Exhibit
No. Document Description
------- --------------------
2.1 Amended Agreement and Plan of Merger between Paradigm Medical
Industries, Inc., a California corporation and Paradigm Medical
Industries, Inc., a Delaware corporation(1)
3.1 Certificate of Incorporation(1)
3.2 Amended Certificate of Incorporation(10)
3.3 Bylaws(1)
4.1 Warrant Agency Agreement with Continental Stock Transfer & Trust
Company(3)
4.2 Specimen Common Stock Certificate(2)
II-5
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)
5.1 Opinion of Mackey Price & Thompson
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 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)
23.1 Consent of Mackey Price & Thompson
23.2 Consent of Tanner & Co.
-----------------
(1) Incorporated by reference from Registration Statement on Form
SB-2, as filed on March 19, 1996.
(2) Incorporated by reference from Amendment No. 1 to Registration
Statement on Form SB-2, as filed on May 14, 1996.
(3) Incorporated by reference from Amendment No. 2 to Registration
Statement on Form SB-2, as filed on June 13, 1996.
(4) Incorporated by reference from Annual Report on Form 10-KSB, as
filed on April 16, 1998.
(5) Incorporated by reference from Quarterly 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 Quarterly Report on Form 10-QSB,
as filed on August 16, 2000.
II-6
(8) Incorporated by reference from Quarterly Report on Form 10-QSB,
as filed on November 1, 2000.
(9) Incorporated by reference from Quarterly 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 Quarterly 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 Quarterly 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 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.
(b) Reports on Form 8-K
No reports were filed by the Company during the quarter ended September
30, 2004.
Item 28. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post -effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(iii) To include any additional or changed material
information on the plan of distribution.
(2) That, for determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
preceding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
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The undersigned registrant also undertakes that:
(1) For purposes of determining any liability under the Securities
Act, treat the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1), or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the
Securities Act, treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
registration statement, and the offering of the securities at that time as the
initial bona fide offering of those securities.
II-8
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, in Salt Lake City,
State of Utah, this 20th day of December, 2004.
PARADIGM MEDICAL INDUSTRIES, INC.
By:/s/ John Y. Yoon
------------------------------------------
John Y. Yoon
Its: President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ John Y. Yoon President and December 20, 2004
------------------------ Chief Executive Officer
John Y. Yoon (Principal Executive
Officer)
/s/ Randall A. Mackey Chairman of the Board December 20, 2004
------------------------ and Secretary
Randall A. Mackey
/s/ David M. Silver* Director December 20, 2004
------------------------
David M. Silver
/s/ Keith D. Ignotz* Director December 20, 2004
------------------------
Keith D. Ignotz
/s/ John C. Pingree Director December 20, 2004
------------------------
John C. Pingree
/s/ Luis A. Mostacero Controller (Principal December 20, 2004
------------------------ Financial and
Luis A. Mostacero Accounting Officer)
*By: /s/ John Y. Yoon
-------------------
John Y. Yoon as
Attorney-in-Fact
II-9