<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1996 Commission File
Number: 0-28498
PARADIGM MEDICAL INDUSTRIES, INC.
---------------------------------
Exact Name of Registrant.
DELAWARE 87-0459536
- -------------------------------- ---------------------
(State or other jurisdiction IRS Identification
of incorporation or organization) Number
1772 West 2300 South, Salt Lake City, Utah 84119
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including Area Code (801) 977-8970
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
YES NO XX
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, net of treasury stock, as of the close of
the period covered by this report.
Class A Common Stock, $.001 par value 2,107,302
- -------------------------------------- -----------------------
Title of Class Number of Shares
Outstanding as of
June 30, 1996
Series A Preferred, $.001 par value 122,764
- ------------------------------------ -----------------------
Title of Class Number of Shares
Outstanding as of
June 30, 1996
Series B Preferred, $.001 par value 499,017
- ------------------------------------- ------------------------
Title of Class Number of Shares
Outstanding as of
June 30, 1996
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
FORM 10Q
QUARTER ENDED JUNE 30, 1996
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
Page No.
--------
<S> <C>
Item 1. Financial Statements
- -------
Balance Sheets . . . . . . . . . . . . . . . . . . . 3
Statement of Operations . . . . . . . . . . . . . . . 4
Statements of Changes in Stockholders' Equity . . . . 5 to 6
Statements of Cash Flows. . . . . . . . . . . . . . . 7 to 8
Notes to Financial Statements . . . . . . . . . . . . 9 to 20
</TABLE>
Item 2. Management's Discussion and Analysis of
- ------- Financial Condition and Results of Operations . . . 21 to 23
PART II - OTHER INFORMATION
Other Information . . . . . . . . . . . . . . . . . 24
Signature Page . . . . . . . . . . . . . . . . . . . 25
<PAGE>
<TABLE>
PARADIGM MEDICAL INDUSTRIES, INC.
<CAPTION>
BALANCE SHEETS
------
September 30, June 30,
1995 1996
------------ ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents $ 338,218 $ 204,682
Accounts receivable 104,899 117,375
Inventories 400,900 363,776
Prepaid expenses 21,643 4,680
---------- -----------
Total current assets 865,660 690,513
Property and equipment, net 50,136 102,610
Debt offering costs 25,828
Deferred public offering
costs 230,017
---------- -----------
Total assets $ 915,796 $ 1,048,968
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 304,698 $ 382,804
Accrued expenses 46,081 109,946
Current portion of
long-term debt 21,235 595,005
---------- ----------
Total current
liabilities 372,014 $1,087,755
---------- ----------
Long-term debt,
less current portion 60,247 42,515
---------- ----------
Commitments (Note 8)
Stockholders' equity:
Preferred stock,
Authorized: 10,000,000
no par value shares at
September 30, 1995 and
5,000,000 $.001 par value
shares at March 31, 1996:
Series A, Authorized:
500,000 shares; issued
and outstanding: 116,000
no par value shares at
September 30, 1995 and
122,764 $.001 par value
shares at March 31, 1996
(aggregate liquidation
preference of $122,764
at March 31, 1996) 403,680 123
Series B, Authorized:
500,000 shares; issued
and outstanding: 493,000
no par value shares at
September 30, 1995 and
499,017 $.001 par value
shares at March 31, 1996
(aggregate liquidation
preference of $1,996,068
at March 31, 1996) 1,653,120 499
Series A, committed to be
issued: 6,764 shares 27,056
Series B, committed to be
issued: 6,017 shares 24,068
Additional paid-in capital,
preferred stock 2,107,302
Common stock, Authorized:
20,000,000 shares; issued
and outstanding: 1,985,573
no par value shares at
September 30, 1995 and
2,131,598 $.001 par value
shares at March 31, 1996 980,378 2,132
Additional paid-in capital,
common stock 1,346,860
Treasury stock, 2,600
shares, at cost (3,777) (3,777)
Unearned compensation (104,182)
Accumulated deficit (2,600,990) (3,430,259)
----------- -----------
Total stockholders'
equity 483,535 (81,302)
--------- ----------
Total liabilities
and stockholders'
equity $ 915,796 $ 1,048,968
========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements
3
<PAGE>
<TABLE>
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
------
<CAPTION>
Year ended Nine months ended
September 30, June 30,
------------------------ --------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 467,881 $ 507,584 $ 381,266 $ 291,022
Cost of sales 308,446 266,348 238,897 154,077
---------- ---------- ---------- ---------
Gross profit 159,435 241,236 142,369 136,945
---------- ---------- ---------- ---------
Operating expenses:
Marketing and
selling 350,782 428,265 275,049 164,210
General and
administrative 337,285 407,803 292,903 486,249
Research and
development 207,451 236,043 125,218 100,850
---------- ---------- --------- ---------
Total operating
expenses 895,518 1,072,111 693,170 751,309
---------- ---------- --------- ---------
Operating loss (736,083) (830,875) (550,801) (614,364)
---------- ---------- --------- ---------
Other income
(expense):
Costs associated
with relinquish-
ment of anti-
dilution rights (3,425) (179,000)
Interest income 10,124 4,618 7,633
Interest expense (15,942) (8,381) (6,330) (43,538)
---------- ---------- ---------- ----------
(15,942) (1,682) (1,712) (214,905)
---------- ---------- --------- ----------
Net loss (752,025) (832,557) (552,513) (829,269)
Preferred stock
dividend on 6%
Series A and
12% Series B
Preferred Stock (51,124) (51,124)
----------- ---------- -------- ---------
Net loss attributable
to common
shareholders $ (752,025) $ (883,681) $ (603,637) $ (829,269)
========== ========== ========== ==========
Net loss per
common share $(.32) $(.38) $(.26) $(.35)
========== ========== ========== ==========
Shares used in
computing net loss
per common share 2,329,831 2,352,031 2,352,031 2,352,031
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements
4
<PAGE>
<TABLE>
PARADIGM MEDICAL INDUSTRIES, INC.
<CAPTION>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------
Preferred Stock
-----------------------------------------------
Series A Series B
--------------------- --------------------
No. of
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at
September 30, 1993
Issuance of 6%
Series A Preferred Stock
(net of offering costs
of $60,320) 116,000 $ 403,680
Issuance of 12%
Series B Preferred Stock
(net of offering costs
of $59,530) 60,750 $183,470
-------- --------- ------- ---------
Balance at September
30, 1994 116,000 403,680 60,750 183,470
Issuance of 12% Series
B Preferred Stock
(net of offering costs
of $259,350) 432,250 1,469,650
6% Series A Preferred
Stock committed to
be issued as a stock
dividend
12% Series B Preferred
Stock committed to
be issued as a stock
dividend --------- ---------- -------- ----------
Balance at September
30, 1995 116,000 403,680 493,000 1,653,120
Issuance of 6% Series
A Preferred Stock
dividend (unaudited) 6,764 27,056
Issuance of 12% Series
B Preferred Stock dividend
(unaudited) 6,017 24,068
Conversion of no par
value preferred shares
to $.001 par value
preferred shares upon
reincorporation in Delaware
(unaudited) (430,613) (1,676,689)
--------- --------- ------- ----------
Balance at June 30,
1996 (unaudited) 122,764 $ 123 499,017 $ 499
========= ======== ======= ==========
</TABLE>
<PAGE>
<TABLE>
PARADIGM MEDICAL INDUSTRIES, INC.
<CAPTION>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
--------
Preferred Stock
-----------------------------------------------------------
Series A Series B
Committed Committed
to be issued to be issued
------------------ ---------------- Additional
No. of No. of Paid in Capital
Shares Amount Shares Amount Preferred Stock
------ ------ ------ ------ ---------------
<S> <C> <C> <C> <C> <C>
Balance at
September 30,
1993
Issuance of 6%
Series A Preferred
Stock (net of
offering costs
of $60,320)
Issuance of 12%
Series B Preferred
Stock (net of
offering costs
of $59,530) ------- --------- ------- ---------
Balance at
September 30, 1994
Issuance of 12%
Series B Preferred
Stock (net of
offering costs of
$259,350)
6% Series A
Preferred Stock
committed to be
issued as a stock
dividend 6,764 $ 27,056
12% Series B
Preferred Stock
committed to
be issued as a
stock dvidend 6,017 $ 24,068
--------- --------- -------- --------
Balance at
September
30, 1995 6,764 27,056 6,017 24,068
Issuance of
6% Series
A Preferred
Stock dividend
(unaudited) (6,764 (27,056)
Issuance of 12%
Series B
Preferred Stock
dividend
(unaudited) (6,017) (24,068)
Conversion of no
par value
preferred shares
to $.001 par
value preferred
shares upon
reincorporation
in Delaware
(unaudited) $2,107,302
--------- --------- ------- --------- ----------
Balance at
June 30,
1996
(unaudited) $ $ $2,107,302
========= ======== ======= ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements
5
<PAGE>
<TABLE>
PARADIGM MEDICAL INDUSTRIES, INC.
<CAPTION>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, Continued
--------
Common Stock Treasury Stock
----------------- -----------------
Additional
Paid-in-
capital, Unearned Accumu-
No. of Common No. of Compen- lated
Shares Amount Stock Shares Amount sation Deficit
------ ------ ------ ------ ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
September
30, 1993 1,942,221 $842,852 2,600 $(3,777) $(965,284)
Issuance of
common stock
for services
and for
preferred
stock offering
costs 19,197 25,876
Issuance of
common stock
for cash 20,730 108,225
1994 net loss (752,025)
------- ------- ------ ------ ------- ---------
Balance at
September
30, 1994 1,982,148 976,953 2,600 (3,777) (1,717,309)
Issuance of
common stock
for relin-
quishment of
anti-dilution
rights 3,425 3,425
1995 net loss (832,557)
Preferred
stock dividend
on 6% Series A
and 12% Series
B Preferred
Stock (51,124)
-------- ------ ------ ------- ------- ---------
Balance at
September
30, 1995 1,985,573 980,378 2,600 (3,777) (2,600,990)
Issuance of
previously
committed
common stock
for services
rendered in
connection
with Series B
Preferred
Stock offering
(unaudited) 25,000 10,251
Issuance of
common stock
for relin-
quishment of
anti-dilution
rights
(unaudited) 20,000 30,000
Transfer of
common stock
from Company
officers
for relin-
quishment of
anti-dilution
rights
(unaudited) $ 149,000
Issuance of
common stock
for future
services
(unaudited) 101,025 151,538 $(151,538)
Amortization
of unearned
compensation
(unaudited) 47,356
Issuance of
warrants in
connection
with private
placement of
notes (net
of offering
costs of
$2,175)
(unaudited) 27,825
Conversion
of no par
value common
shares to
$.001 par
value common
shares upon
reincorporation
in Delaware
(unaudited) (1,170,035) 1,170,035
Net loss
for nine
months ended
June 30,
1996
(unaudited) (829,269)
-------- ----- --------- ----- -------- -------- ---------
Balance at
June 30,
1996
(unaudited)2,131,598 $2,132 $1,346,860 2,600 $(3,777) $(104,182) $(3,430,259)
========= ====== ========== ===== ======== ========= ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements
6
<PAGE>
<TABLE>
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
--------
<CAPTION>
Year ended Nine months ended
September 30, June 30,
-------------------- --------------------
1994 1995 1995 1996
------ ----- ----- ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss $(752,025) $ (832,557) $(552,513) $(829,269)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation 3,172 5,518 3,731 13,173
Equipment transferred
for services 2,177
Issuance of common stock
for services and
relinquishment of anti-
dilution rights 13,047 3,425 179,000
Amortization of
unearned compensation 47,356
Amortization of debt
offering costs 15,497
Issuance of bridge note and
warrants for services 25,000
Increase (decrease) from
changes in:
Accounts receivable (177,555) 86,458 128,233 (12,476)
Inventories 31,466 378,645) (320,531) 37,124
Prepaid expenses 1,198 (6,043) 15,600 16,963
Deferred public
offering costs -0- -0- -0- (80,826)
Accounts payable 82,085 144,091 (37,224) (138,585)
Accrued expenses 1,907 (2,095) (22,672) 74,116
--------- --------- --------- ---------
Net cash used in
operating activities (794,528) (979,848) (785,376) (652,927)
--------- --------- --------- --------
Cash flows from
investing activities:
Purchase of property
and equipment (12,112) (40,681) (11,169) (41,647)
--------- --------- -------- --------
Net cash used in investing
activities (12,112) (40,681) (11,169) (41,647)
--------- --------- -------- --------
Cash flows from
financing activities:
Proceeds from issuance
of promissory notes and
warrants 575,000
Proceeds from long-term debt 20,000 22,549
Principal payments on
long-term debt (12,807) (143,260) (139,027) (13,962)
Proceeds from issuance
of common stock 108,225
Proceeds from issuance
of preferred stock 707,000 1,729,000 1,319,000
Issuance costs -
preferred stock (96,770) (259,350) (206,850)
--------- --------- --------- --------
Net cash provided by
financing activities 725,648 1,348,939 1,033,123 561,038
--------- --------- --------- --------
Net increase (decrease)
in cash and cash equivalents (80,992) 328,410 236,578 (133,536)
Cash and cash equivalents
at beginning of period 90,800 9,808 9,808 338,218
--------- --------- --------- ---------
Cash and cash equivalents
at end of period $ 9,808 $ 338,218 $ 246,386 $ 204,682
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements
7
<PAGE>
<TABLE>
PARADIGM MEDICAL INDUSTRIES, INC.
<CAPTION>
STATEMENTS OF CASH FLOWS, Continued
--------
Year ended Nine months ended
September 30, June 30,
------------------ ----------------------
1994 1995 1995 1996
------- ------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Supplemental disclosure
of cash flow information:
Cash paid for interest $15,711 $ 8,895 $ 8,981 $ 6,271
Supplemental disclosure
of noncash investing and
financing activities:
Preferred stock dividend
on 6% Series A and 12%
Series B Preferred Stock $51,124 $51,124
Issuance of common stock for
services rendered in connection
with preferred stock offering $12,829 $ 10,251
Liability incurred for services
rendered in connection with
preferred stock offering $10,251
Equipment purchased with
accounts payable $ 24,000
Common stock issued for
future services $151,538
Issuance costs for promissory
notes and warrants financed
with accounts payable $ 43,500
Deferred public offering
costs financed with accounts
payable $149,191
</TABLE>
The accompanying notes are an integral
part of the financial statements
8
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
-----
1. Organization and Significant Accounting Policies:
Organization
Effective May 5, 1993, French Bar Industries, Inc. (French
Bar) entered into a merger agreement with Paradigm Medical, Inc.
(Paradigm) a California Corporation incorporated in October 1989.
The agreement merged French Bar and Paradigm Medical, Inc. into
a single public corporation under the name of Paradigm Medical
Industries, Inc. (the Company). Pursuant to the merger, French
Bar caused a 1-for-7.96 reverse stock split of its shares of
common stock and the former shareholders of French Bar received
a total of 166,431 shares. The value assigned to the 166,431
shares of $343,965 was charged to expense as French Bar had no
net assets at the date of the merger (see Note 1 - Restatement of
1993 Financial Statements). For accounting purposes the merger
has been accounted for as a purchase with Paradigm treated as the
acquirer because the shareholders of Paradigm obtained control of
the Company.
Since its inception in October 1989, the Company has been
engaged in marketing and selling advanced surgical systems for
cataracts, various attachments and disposable accessories. The
Company is in the process of introducing a proprietary
laser-based surgical machine which is expected to become its core
business.
Revenues recognized to date primarily represent revenues
from the sale of the Company's conventional ultrasound cataract
surgery machine (the Precisionist). The Company has recognized
minimal revenue from the sale of its proprietary laser-based
product, the Photon LaserPhaco System (the Photon). In May, 1995
the Company received regulatory approval to manufacture the
Photon in limited quantities and conduct clinical trials in the
U.S. on a limited basis. Clinical trials of the Photon commenced
in April, 1996. The Company's ability to achieve profitability
depends primarily upon its ability to obtain the regulatory
approvals required to manufacture and market the Photon on an
unlimited scale.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
The Company maintains its cash and cash equivalents in three banks
in Salt Lake City, Utah. The Company's deposits with these
institutions may, at times, exceed federally insured limits.
Inventories
Inventories are stated at the lower of cost or market, with
cost determined using the weighted average method. Inventories
consist primarily of components for the Precisionist and the
Photon at September 30, 1995.
Property and Equipment
Property and equipment are recorded at cost. Replacement
and major improvements are capitalized and maintenance and
repairs are charged to expense as incurred. The cost and related
accumulated depreciation of assets sold or otherwise disposed of
are removed from the accounts and any resulting gain or loss is
charged to operations.
Continued
9
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
------
1. Organization and Significant Accounting Policies,
Continued:
Property and Equipment, Continued
Depreciation of property and equipment is computed using
the straight-line method over the estimated useful lives of the
related assets, which range from five to seven years.
Debt Offering Costs
Debt offering costs related to the private placement of
promissory notes (see Note 10) are being amortized on a
straight-line basis (which approximates the interest method) over
the one year term of the notes.
Deferred Public Offering Costs
Costs associated with the Company's proposed public
offering (see Note 10) have been deferred. Such costs will be
netted against the offering proceeds unless the offering is
terminated, at which time they will be charged to expense.
Income Taxes
As discussed in Note 5, the Company follows the liability
method of accounting for income taxes.
Stock Splits
As discussed above, effective May 5, 1993, French Bar
entered into a merger agreement with Paradigm Medical, Inc..
Pursuant to the merger, French Bar caused a 1-for-7.96 reverse
stock split of its shares of common stock. On April 5, 1994, the
Company's Board of Directors declared a one-for-five reverse
stock split of its shares of common stock. All references to
number of shares have been restated to reflect the effects of the
merger and stock split.
Research and Development
Costs incurred in connection with research and development
activities are expensed as incurred. These costs consist of
direct and indirect costs associated with specific projects as
well as fees paid to various entities that perform certain
research on behalf of the Company.
Net Income (Loss) Per Share
Net income (loss) per share is calculated by dividing net
income (loss) by the weighted average shares of common stock and
common stock equivalents outstanding. Pursuant to the rules of
the Securities and Exchange Commission, common stock equivalents
related to common stock, stock options and warrants issued within
one year prior to the proposed initial public offering have been
included as if they were outstanding for all periods presented.
Other common stock equivalents have not been included in loss
years because they are anti-dilutive.
Continued
10
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
-------
1. Organization and Significant Accounting Policies,
Continued:
Unaudited Financial Information
In the opinion of management, the accompanying
unaudited financial statements contain all adjustments
(consisting only of normal recurring items) necessary to present
fairly the financial position of the Company as of June 30, 1996
and the results of its operations and its cash flows for the nine
months ended June 30, 1995 and 1996. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the SEC's
rules and regulations. The results of operations for the periods
presented are not necessarily indicative of the results to be
expected for the full year.
Concentration of Credit Risk
Accounts receivable are due from medical distributors,
surgery centers, hospitals and ophthalmologists located
throughout the U.S. and a number of foreign countries. The
receivables, which are collateralized, are generally due within
thirty days for domestic customers and sixty days for
international customers. Credit losses historically have not
been significant.
Reclassifications
Certain reclassifications have been made to the 1994
financial statements to conform to the 1995 presentation. These
reclassifications had no effect on stockholders' equity or net
loss.
Restatement of 1993 Financial Statements
During May, 1996 the Company determined that the 166,431
shares of common stock issued to the former shareholders of
French Bar were incorrectly assigned no value. The financial
statements for the year ended September 30, 1993 have been
restated to increase common stock and the accumulated deficit by
the estimated fair market value of the shares issued of $343,965.
2. Going Concern:
The financial statements have been presented on a going
concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business.
The Company incurred a net loss of $832,557 during the year ended
September 30, 1995 and as of September 30, 1995 the Company had
an accumulated deficit of $2,600,900. As discussed in Note 1,
the Company's ability to achieve profitability depends primarily
upon its ability to obtain the regulatory approvals required to
manufacture and market the Photon on an unlimited scale.
Obtaining these approvals will require funds which are in excess
of available working capital. As discussed in Note 10, the
Company has decided to provide its holders of Series B Preferred
stock a rescission offer. The offer could obligate the Company
to refund up to $166,000 plus accrued interest of $19,000, an
amount which is in excess of available working capital. These
factors raise substantial doubt about the Company's ability to
continue as a going concern.
Continued
11
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
-------
2. Going Concern, Continued:
Under the current circumstances, the Company's ability to
continue as a going concern depends upon the successful public
offering of the Company's equity securities (see Note 10). If
the public offering is not successful, the Company intends to
issue equity securities in a private placement to accredited
investors (see Note 6). No adjustments have been made to the
accompanying financial statements for this uncertainty.
3. Property and Equipment:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1995 1996
------------ ----------
(Unaudited)
<S> <C> <C>
Automobile $26,099 $ 26,099
Office equipment 9,808 64,408
Furniture and fixtures 6,019 17,066
Computer equipment 17,414 17,414
------- ---------
59,340 124,987
Accumulated depreciation (9,204) (22,377)
------- ---------
$50,136 $102,610
======= =========
</TABLE>
4. Long-term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1995 1996
------------ ----------
(Unaudited)
<S> <C> <C>
Note payable to finance
company, collateralized
by property and equipment,
accounts receivable and
inventories, bearing
interest at prime (8.75%
at September 30, 1995 and
8.25% at June 30, 1996)
plus 4%, payable in
monthly installments of
$1,183, due February, 1998. $ 31,779 $ 24,709
Note payable to finance
company, collateralized
by property and equipment,
accounts receivable and
inventories, bearing
interest at prime (8.75%
at September 30, 1995 and
8.25% at June 30, 1996)
plus 4%, payable in
monthly installments of
$884, due February, 1998. 27,154 22,160
</TABLE>
Continued
12
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
-------
4. Long-term Debt, Continued:
<TABLE>
<CAPTION>
September 30, June 30,
1995 1996
------------ ----------
(Unaudited)
<S> <C> <C>
Note payable to bank,
collateralized by an
automobile, bearing
interest at 9.95%,
payable in monthly
installments of $418,
due September, 2001. $ 22,549 $ 20,651
Promissory notes
payable to individuals,
including $24,106 payable
to an officer of the
Company, bearing interest
at an imputed rate of 18%,
and due the earlier of
the Company raising at
least $4,000,000 through
a public offering or
December 31, 1996 (see
Note 10). 570,000
---------- ---------
81,482 637,520
Current portion of
long-term debt (21,235) (595,005)
---------- ---------
$ 60,247 $ 42,515
========== =========
</TABLE>
<TABLE>
<CAPTION>
The Company's long-term debt has scheduled maturities for years
ending September 30 as follows:
<S> <C>
1996 $21,235
1997 24,017
1998 22,119
1999 5,086
2000 4,305
Thereafter 4,720
-------
$81,482
=======
</TABLE>
5. Income Taxes:
Effective September 1, 1993, the Company adopted the
liability method of accounting for income taxes under Statement
of Financial Accounting Standards (SFAS) No. 109. Under the
liability method specified by SFAS No. 109, deferred tax assets
and liabilities are determined based on the difference between
the financial statement and tax bases of assets and liabilities
as measured by the currently enacted tax rates in effect for the
years in which these differences reverse. Prior to 1993, income
taxes were calculated in accordance with SFAS No. 96. The
adoption of SFAS No. 109 did not have an impact on the Company's
financial position because the deferred tax asset related to the
Company's net operating loss carryforwards was fully offset by a
valuation allowance.
Continued
13
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
-----
5. Income Taxes, Continued:
At September 30, 1995, the Company has net operating loss
carryforwards for income tax purposes of approximately $2,010,000
and research and development tax credit carryforwards of
approximately $33,800. These carryforwards are available to
offset future taxable income, if any, and expire in the years
2005 through 2010. The Company's utilization of these
carryforwards against future taxable income may become subject to
an annual limitation due to a cumulative change in ownership of
the Company of more than 50 percent (see Note 10).
<TABLE>
<CAPTION>
The components of the net deferred tax asset as of
September 30, 1995 are as follows:
<S> <C>
Deferred tax assets:
Net operating
loss carryforwards $ 684,000
Research and development
tax credit carryforwards 33,800
Valuation allowance (717,800)
---------
Net deferred tax asset $ -
=========
</TABLE>
The Company recognized no income tax benefit from the
losses generated in the year ended September 30, 1994 and 1995
and the nine months ended June 30, 1996.
The valuation allowance increased by $272,000 during fiscal
1994 and $309,800 during fiscal 1995 primarily as a result of the
increase in deferred tax assets related to net operating losses.
SFAS No. 109 requires that a valuation allowance be provided if
it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The Company's ability to
realize the benefit of its deferred tax asset will depend on the
generation of future taxable income. Because the Company has yet
to recognize significant revenue from the sale of its laser-based
Photon, the Company believes that a full valuation allowance
should be provided.
6. Preferred Stock:
On September 1, 1993 the Company established a series of
non-voting preferred shares designated as the 6% Series A
Preferred Stock, consisting of 500,000 shares with no par value,
of which 116,000 shares were issued and outstanding as of
September 30, 1995 and 122,764 issued and outstanding as of June
30, 1996. This series is part of the Company's 5,000,000
authorized shares (10,000,000 authorized shares as of September
30, 1995) of non-voting preferred stock (see Note 10). The
Series A Preferred Stock has the following rights and privileges:
1. The holders of the shares are entitled to dividends
at the rate of twenty-four cents ($.24) per share per annum,
payable in cash only from surplus earnings of the Company or in
additional shares of Series A Preferred Stock, and because
dividends are non-cumulative, no deficiencies in dividend
payments from one year can be carried forward to the next.
Continued
14
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
6. Preferred Stock, Continued:
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.
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.
5. The Company may, at its option, redeem all of the
then outstanding shares of the Series A Preferred Stock at a
price of $4.50 per share, plus accrued and unpaid dividends
related to the fiscal year in which such redemption occurs.
In connection with the private placement of the Company's
Series A Preferred Stock, the Company committed to grant the
placement agent warrants to purchase 11,600 shares of its Series
A Preferred Stock at a price of $4.00 per share. Certain
provisions governing these warrants, such as the exercise period,
have not been established.
On April 21, 1995, the Company declared a 6% preferred
stock dividend in the amount of $27,056 to all shareholders of
record as of December 31, 1994, which was paid through the
issuance of 6,764 shares of Series A Preferred Stock on January
8, 1996.
On May 9, 1994, the Company established a series of
non-voting preferred shares designated as the 12% Series B
Preferred Stock, consisting of 500,000 shares with no par value,
of which 493,000 shares were issued and outstanding as of
September 30, 1995 and 499,017 issued and outstanding as of June
30, 1996. This series is also part of the Company's 5,000,000
authorized shares (10,000,000 authorized shares as of September
30, 1995) of non-voting preferred stock (see Note 10). The Series
B Preferred Stock have the following rights and privileges:
1. The holders of the shares are entitled to dividends
at the rate of forty-eight cents ($.48) per share per annum,
payable in cash only from surplus earnings of the Company or in
additional shares of Series B Preferred Stock, and because
dividends are non-cumulative, no deficiencies in dividend
payments from one year can be carried forward to the next.
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 right of the holders of Series A
Preferred Stock to receive an amount equal to $1.00 per share
plus accrued and unpaid dividends.
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.
Continued
15
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
-------
6. Preferred Stock, Continued:
5. The Company may, at its option, redeem all of the
then outstanding shares 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.
In connection with the private placement of the Company's
Series B Preferred Stock, the Company granted the placement agent
warrants to purchase 21,525 shares of its common stock at $3.00
per share and granted an individual 25,000 shares of common
stock. These warrants expire on December 31, 1999.
On April 21, 1995, the Company declared a 12% preferred
stock dividend in the amount of $24,068 to all shareholders of
record as of December 31, 1994, which was paid through the
issuance of 6,017 shares of Series B Preferred Stock on January
8, 1996.
7. Related Party Transactions:
The Company has subcontracted the manufacturing of its
Precisionist and Photon LaserPhaco systems to a company that is
a shareholder under an exclusive contract, which expires July 17,
1997. This contract prohibits the shareholder company from
manufacturing complete ultrasound or laser surgical systems for
any other company, without permission from the Company. During
fiscal 1994 and 1995, the Company purchased design and
manufacturing services from this company in the amount of
$158,897 and $509,837, respectively, and as of September 30,
1995, owed this company $203,020, which is included in accounts
payable.
The Company has contracted with a company, of which one of
the Company's directors serves as Chief Executive Officer, to
purchase certain components for the Photon. During fiscal 1995,
the Company purchased $263,000 of materials from this company.
In 1988, the Company signed an exclusive patent license
agreement with a company which owns the patent for the
laser-based Photon machine. This company is owned by a
shareholder of the Company. The agreement provides for the
payment of a 1% royalty on all sales proceeds related directly or
indirectly, to the Photon machine. The agreement terminates on
July 7, 2003. Through June 30, 1996, no significant royalties
have been earned under this agreement. The Company has also
entered into a consulting agreement with this individual which
provides for annual consulting fees of $25,000 through July 7,
2003.
A law firm, of which a director of the Company is a
partner, has rendered legal services to the Company since
February 1995. During fiscal 1995, the Company paid this firm
$45,300 for legal services.
Continued
16
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
-----
8. Commitments:
Leases
<TABLE>
<CAPTION>
The Company leases certain office equipment under operating
lease agreements with minimum terms in excess of one year. The
future minimum lease payments for the years ended September 30
are as follows:
<S> <C>
1996 $1,772
1997 1,181
------
Total minimum lease payments $2,953
======
</TABLE>
Total lease expense for fiscal 1994 and 1995 was $15,984
and $22,880, respectively. In November 1995, the Company renewed
its lease for office space through November 30, 1996 at a monthly
rent of $1,436.
9. Export Sales
<TABLE>
<CAPTION>
Total sales for fiscal 1994 and 1995 include the following
export sales by major geographic area:
<S> <C> <C>
Geographic Area 1994 1995
--------------- ---- ----
Europe $151,852 105,142
Far East 99,637 122,032
Middle East 16,144 56,690
-------- -------
$267,633 $283,864
======== ========
</TABLE>
10. Subsequent Events:
Change of State of Incorporation
In November, 1995, the Company obtained the necessary
director and shareholder approvals to reincorporate in Delaware.
In conjunction with the re-incorporation, which was finalized in
February, 1996, the Company established three series of preferred
stock with a total of 5,000,000 authorized shares with a par
value of $.001, including two series with rights and privileges
similar to the previously issued Series A and B preferred stock,
and one series of common stock with a par value of $.001 and a
total of 20,000,000 authorized shares. All outstanding shares of
the Company were converted on a one-for-one basis into shares in
the new Delaware Corporation.
Continued
17
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
------
10. Subsequent Events, Continued:
Common Stock Grants
On November 30, 1995, the Company granted 50,512 and 50,513
shares of common stock to two individuals who are officers and
directors of the Company. The shares will be forfeited in the
event either individual resigns or is removed for cause as an
officer and director of the Company within two years from the
date of grant. The value assigned by the Company's investment
banker of $1.50 per share will be charged to compensation expense
ratably over two years.
1995 Stock Option Plan
In November, 1995, the Company's Board of Directors and
shareholders approved the Company's 1995 Stock Option Plan (the
Option Plan) which authorized the granting of stock options to
purchase an aggregate of not more than 300,000 shares of the
Company's common stock. On February 16, 1996, 300,000 options to
purchase shares of the Company's common stock at $5.00 per share
were granted, of which 2,000 were returned to the Company on May
20, 1996. As of June 10, 1996, no options have been exercised or
have expired.
The Option Plan provides for the grant of incentive stock
options within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended, and non-qualified stock options to
employees and non-employee 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.
Private Placement
In December 1995, the Company began a private placement of
up to $600,000 of units. Each unit consists of a $25,000
promissory note with a stated rate of 12% and warrants to
purchase 12,500 shares of the Company's common stock at a price
of $3.33 per share. The value assigned by the Company's
investment banker to the warrants was $.10 per warrant. The
notes bear interest at an imputed rate of 18% and are due the
earlier of the Company raising at least $4,000,000 through a
public offering or December 31, 1996. The warrants are
exercisable beginning on the date the note is issued and expiring
on December 1, 2000, and are redeemable by the Company under
certain conditions at a price of $.05 per warrant. Through March
31 , 1996, the Company had sold 23 units for cash proceeds of
$575,000. An additional $25,000 unit was issued for services,
which amount is included in operating expenses for the six months
ended March 31, 1996.
Public Offering
In November 1995, the Company entered into a firm letter of intent
with an underwriter, Kenneth, Jerome and Company, Inc., for an initial public
offering. Pursuant to the letter of intent, the Company has registered with
the Securities and Exchange Commission an initial public offering consisting
of 1,000,000 Units for sale to the public at a minimum price of $6.25 per
Unit. Each Unit consists of one share of the Company's Common Stock, and
one Class A Warrant. Each Class A Warrant entitles the holder to purchase
one share of the Company's Common Stock at an exercise price of $7.50 per
share beginning one year from the effective date of the prospectus for a
period of five years. The Class A Warrants are subject to redemption by the
Company beginning one year from the date of the prospectus at a price of
$.05 per Warrant if the closing bid price of the Company's Common Stock
as reported by NASDAQ SmallCap Market averages in excess of $8.50 per
share for 30 consecutive business days ending within 15 days of the date
of redemption. The public offering became effective on July 10, 1996 at a
price of $6.25 per Unit with proceeds to the Company totaling $5,625,000
before deducting expenses of the offering estimated at $475,000 including
the Underwriter's non-accountable expense allowance, all of which are
payable by the Company.
Continued
18
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
-----
10. Subsequent Events, Continued:
Termination of Anti-Dilution Rights
On December 19, 1995, the Company entered into an agreement
with a significant shareholder which terminated certain
previously granted anti-dilution rights which provided this
shareholder a 5% fixed equity position in the Company. Under the
terms of the agreement, two of the Company's officers sold a
total of 100,000 shares of their common stock to this shareholder
for $1,000 and the Company issued 20,000 shares to this
shareholder. Based on the value assigned by the Company's
investment banker of $1.50 per share, the Company recognized
$30,000 of expense for the 20,000 shares issued by the Company
and $149,000 of expense and additional paid-in-capital for the
100,000 shares sold by the officers. In the agreement the
Company has represented that a public offering of the Company's
securities will be completed by July 15, 1996. If a public
offering is not completed by July 15, 1996, this shareholder
could attempt to terminate the agreement in order to have his
anti-dilution rights restored to the same position as existed
prior to the execution of such agreement.
Employment Agreements
Effective February 1, 1996, the Company entered into
employee agreements with three officers which expire on February
1, 2001. The agreements provide for aggregate annual
compensation of $380,000 effective upon completion of the
offering. On February 16, 1996 the officers were granted options
to acquire 190,000 shares of common stock at a price of $5.00
under the Company's Option Plan.
Offer of Rescission
As discussed in Note 6, the Company raised $1,972,000 by
offering Series B Preferred Stock to investors. In structuring
and proceeding with this private offering, the Company may not
have complied with certain aspects of California corporate law
and federal and state securities laws. The Company has decided
that, in order to effectively proceed with its proposed public
offering, it will provide its holders of Series B Preferred Stock
a rescission offer. The rescission offer is designed to reduce
any type of contingent liability the Company may be subject to in
connection with the sale of the Series B Preferred Stock. The
rescission offer, however, may not fully relieve the Company from
exposure to contingent liability under federal or state
securities laws. As of June 10, 1996, shareholders who had
invested $1,806,000 had rejected the rescission offer or the
offer to such shareholders had expired. If the remaining holders
of Series B Preferred Stock all accept this rescission offer,
the Company will have to refund $166,000 plus accrued interest of
$19,000 (at rates ranging from 6% to 10% per year) to such shareholders.
Any amounts paid in excess of net proceeds originally received from
such shareholders (a maximum of $46,000) will increase the net
loss and accumulated deficit. The Company currently does not
have adequate funds available to make such a refund and is
dependent on the proceeds from the proposed public offering to
proceed with the rescission offer.
Profit Sharing Plan
In February 1996, the Company adopted a profit sharing plan
pursuant to which an amount equal to 10% of the pretax profits of
the Company will be set aside for the benefit of the Company's
officers and key employees. This amount will only be paid if the
Company's qualified pretax profits exceed $10,000,000 for any
fiscal year beginning October 1, 1996 and ending September 30,
2001.
Continued
19
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
-----
10. Subsequent Events, Continued:
Attorney's Warrants
On March 15, 1996, the Company granted warrants to purchase
25,000 shares of the Company's common stock at a price of $3.33
per share to a law firm, of which a director of the Company is a
partner. The warrants are exercisable beginning March 15, 1997
and expire on December 1, 2000, and are redeemable by the Company
under certain conditions at a price of $.05 per warrant.
Legal Proceedings
On March 31, 1995, the Company entered into an agreement
with an investment banking company to obtain capitalization
through a public offering. The agreement was deemed terminated
if the required capitalization was not obtained by December 31,
1995. On April 17, 1996, the investment banking company
requested 100,000 shares of the Company's common stock, along
with monthly payments of $3,000 for three years, as compensation
under the agreement. It is the Company's position that the
agreement is not enforceable as it was terminated and is no
longer in effect. If the investment banking company brings a
lawsuit against the Company and the Company does not prevail in
its defenses, the lawsuit could have an unfavorable impact on the
Company's financial position and could result in dilution to the
Company's shareholders.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with
the Cummary and Selected Financial Information, the Financial Statements
(including the notes thereto), and the other information included
elsewhere in this Report. The Company's fiscal year runs from
October 1 to and including September 30.
General
The Company is engaged in the development, manufacture and sale
of ophthalmic surgical devices designed to perform minimally invasive
cataract removal surgery. Paradigm's activities for fiscal years ending
September 30, 1994 and September 30, 1995 and the six months ended
June 30, 1995 and 1996 include international and domestic sales of the
Precisionist Phaco system, research and development for the Photon
(trademark) LaserPhaco (trademark) System and primary research for
other new products and businesses.
Results of Operations
Nine Months Ended June 30, 1996 Compared to Nine Months Ended
June 30, 1995.
Sales decreased by $90,244, or 24%, to $291,022 for the nine
months ended June 30, 1996 from $381,266 for the comparable period in
1995. This decrease was a result of decreased sales of the Precisionist
Phaco System resulting from the Company focusing its limited financial
resources on the private placement of Bridge Notes and the planned public
offering. Cost of sales decreased $84,820, or 36%, to $154,077 for the
nine months ended June 30, 1996 from $238,897 for the comparable period
in 1995, as a result of the decreased sales. The gross margin for the
nine months ended June 30, 1996 of 47% is up from the gross margin for
the comparable period in 1995 of 37% because sales in 1995 included more
parts and accessories which have a lower gross margin.
Marketing and selling expenses decreased by $110,839, or 40%, to
164,210 for the nine months ended June 30, 1996 from $275,049 for the
comparable period in 1995. The decrease was a result of the Company
focusing its limited financial resources on the private placement of
Bridge Notes and the planned public offering. The Company expects to
increase its marketing and selling activities upon completion of the
offering. See "Use of Proceeds."
General and administrative expenses increased by $244,295, or
85%, to $532,580 for the nine months ended June 30, 1996 from $288,285
for the comparable period in 1995. This increase was the result of the
increased administrative costs related to preparation for the planned
public offering of the Company's common stock. The Company expects to
increase its staff significantly to support the activities associated
with the introduction of the Photon LaserPhaco system. See "Use of
Proceeds."
Research and development expenses decreased by $24,368, or 19%, to
$100,850 for the nine months ended June 30, 1996 from $125,218 for the
comparable period in 1995. The Company expects the amount spent on
research and development for the Photon LaserPhaco System and other
new products to substantially increase following the completion of the
public offering. See "Use of Proceeds."
During the nine months ended June 30, 1996, the Company incurred
$179,000 of expenses in connection with obtaining the relinquishment
of certain anti-dilution rights. See "Settlement Agreement Concerning
Anti-Dilution Rights."
Fiscal Year Ended September 30, 1995 Compared to Fiscal Year Ended
September 30, 1994.
Sales increased by $39,703, or 8%, to $507,584 in fiscal 1995 from
$467,881 in fiscal 1994. This increase was primarily due to increased
sales of the Company's Precisionist Phaco System and the sale of one
prototype Photon (trademark) LaserPhaco (trademark) System. Cost of sales
decreased as a percentage of net revenues to 52% in 1995 as compared to
66% in 1994. The decrease in cost of sales as a percentage of net
revenues was the result of increased unit sales in 1995 at higher retail
21
<PAGE>
prices through a sirect sales force in the United States and a reduction
in cost of sales on a per unit basis resulting from lower component and
accessory prices in 1995.
Marketing and selling expenses increased by $77,483, or 22%, to
$428,265 in fiscal 1995 from $350,782 in fiscal 1994. This increase
was primarily due to expanded marketing, advertising and publicity
activities related to the FDA approval of the laser-ready Precisionist
Thirty Thousand phaco system, the Company's laser upgrade sales program,
expanded convention activities including symposiums, live demonstrations
of the laser system, expanded training courses and attendance at the
European Society of Cataract and Refractive Surgery meeting to expand
international distribution and backlog. The Company expects to increase
its sales and marketing activities upon completion of the offering. See
"Use of Proceeds."
General and administrative expenses increased by $70,518, or 21%,
to $407,803 in fiscal 1995 from $337,285 in fiscal 1994. This increase
was the result of increased administrative costs related to preparation
for the planned public offering of the Company's Common Stock and the
expansion of sales activities. The Company anticipates increasing its
staff significantly to support the activities associated with the
introduction of the Photon (trademark) LaserPhaco (trademark) system.
See "Use of Proceeds."
Research and development expenses increased by $28,592, or 14%,
to $236,043 in fiscal 1995 from $207,451 in fiscal 1994. This increase
was due to the continued development of the Photon (trademark) LaserPhaco
(trademark) System, including costs associated with development,
submission and management of the premarket notification and investigational
clinical trial plan through the FDA. The Company expects the amount spent
on research and development for the Photon (trademark) LaserPhaco
(trademark) System, and new products to substantially increase following
completion of the offering. See "Use of Proceeds."
Interest expense decreased by $7,561, or 47%, to $8,381 in fiscal
1995, from $15,942 in fiscal 1994. This decrease is related to the
Company's paying off a $125,000 promissory note originally issued to
the Company by the Zions First National BankCorporation in October 1992.
Liquidity and Capital Resources
The Company used cash in operating activities of $652,927 for the
nine months ended June 30, 1996 compared to $785,376 for the comparable
period in 1995. The Company used cash in investing activities of
$41,647 for the nine months ended June 30, 1996 compared to $11,169
for the comparable period in 1995. These operating and investing cash
outflows were financed primarily from the proceeds of private placements
of the Company's preferred stock and Bridge Notes.
The Company generated $575,000 from the private placement of Bridge
Notes during the nine months ended June 30, 1996. During the nine months
ended June 30, 1996 the Company made $13,962 in principal payments on
long-term debt. During the nine months ended June 30, 1995, the Company
received proceeds from the private placement of its Sries B Convertible
Preferred Stock of $1,319,000 before deducting commissions and expenses
totalling $166,332. During the nine months ended June 30, 1995, the
Company made $139,027 in principal payments on long-term debt.
The Company used cash in operating activities of $979,848 in fiscal
1995, compared to cash used in operating activities of $794,528 in fiscal
1994. The increase in cash used in the first quarter of fiscal 1996 and
fiscal 1995 is a direct result of the incrase in operating expenses,
which was only partially offset by increased gross profit from product
sales. The Company used cash in investing activities of $40,681 in fiscal
1995, compared to cash used in investing activities of $12,112 in fiscal
1994. The increase in cash used in fiscal 1995 is primarily a result
of the Company's purchase of an automobile using proceeds from a bank
loan. These operating and investing cash outflows were financed primarily
from the proceeds of private placements of the Company's preferred and
common stock.
From May 1994 to September 1995 the Company raised a total of
$1,972,000 from a private placement of its Series B Convertible Preferred
Stock. In fiscal 1994 the net proceeds of the offering were approximately
$183,470 after deducting commissions and expenses totaling $59,530, and
in fiscal 1995 the net proceeds were $1,469,650 after
22
<PAGE>
deducting commissions and expenses totaling $259,350. Through April 1994
the Company raised a total of $464,000 from a private placement of its
Series A Convertible Preferred Stock. The net proceeds of the
offering were $403,680 after deducting commissions and expenses
totaling $60,320. During fiscal 1994 the Company also raised
$108,225 from the issuance of its common stock. Such proceeds were
for working capital purposes, including general and administrative
expenses, research and development related to the Company's present
and new products and to repay $12,807 of long-term debt in fiscal 1994
and $143,260 of long-term debt in fiscal 1995. In March 1993, the
Company obtained a loan from the Utah Technology Finance Corporation
("UTFC") in the amount of $50,000. The loan bears interest at a rate
of 4% above the prime rate per annum. In September 1993, the Company
obtained a second loan from UTFC in the amount of $40,000. The loan
bears interest at a rate of 4% above the prime rate per annum. The
proceeds from both loans were used for working capital purposes, including
general and administrative expenses and research and development related
to the Company's present and new products. In September 1995, the
Company obtained a 9.95% loan from a bank to purchase an automobile.
The Company expects that the net proceeds of the offering will
enable the Company to meet its liquidity and capital requirements for
approximately 12 months frollowing the completion of the offering. If
the public offering is not successful, the Company intends to issue
equity securities in a private placement to accredited investors.
Without the proceeds from the offering the Company will be forced to
significantly curtail its operations, until such time as additional funds
can be obtained. Although many of the holders of Series B Preferred
Stock have rejected the Company's Rescission Offer (see "Risk Factor --
Rescission Offer to Sries B Shareholders" and Note 10 to financial
statements), the accepted Rescission Offers and any offers which are
accepted in the future will reduce the funds available to the Company
and could force the Company to scale back or curtail certain operations.
There can be no assurance that the Company can generate sufficient
revenues from product sales to satisfy its working capital requirements
after such time. The Company's working capital requirements will
depend upon numerous factors, including progress of the Company's
research and development program for the development of new products
and new applications for its present core product, the success of its
regulatory programs with domestic and foreign agencies for its new
products, the levels of resources devoted by the Company to the
development of manufacturing and marketing capabilities, technological
advances, the status of competitors and the success or lack thereof of
the Company's marketing efforts. To meet its short-term and long-
term requirements, including research and development activities, the
Company may be required to obtain additional financing. The Company
currently has no credit facility with a bank or other financial
institution. The Company may seek funding to meet its working capital
requirements through collaborative arrangements and strategic alliances,
additional public offerings and/or private placements of its securities,
or bank borrowings. There can be no assurance, however, that additional
funds, if required, will be available from any of the foregoing or
other sources on favorable terms, if at all.
At September 30, 1995 the Company had net operating loss carry-
forwards (NOLs) of approximately $2,010,000 and research and
development tax credit carryforwards of approximately $33,800. These
carryforwards are available to offset future taxable income, if any,
and expire in the years 2005 through 2010. Because the Company has yet
to recognize significant revenue from the sale of its Photon (trademark)
LaserPhaco (trademark) System, a valuation allowance has been provided
in full for these deferred tax assets. The Company's ability to use
its NOLs to offset future income may be subject to restrictions
enacted in the United States Internal Revenue Code of 1986, as amended.
These restrictions could limit the Company's future use of its NOLs if
there is a cumulative ownership change of more than 50%, which would
include the changes of ownership related to the offering.
Effect of Inflation and Foreign Currency Exchange
The Company has not realized a reduction in the selling price of
the Precisionist Phaco System as a result of domestic inflation. Nor
has the Company experienced unfavorable profit reductions due to
currency exchange fluctuations or inflation with its foreign customers.
Impact of New Accounting Pronouncements
The Company intends to adopt the disclosure approach provided for
in Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock Based Compensation, with respect to options and warrants granted
to employees. Because the Company has only a minimal investment in long-
lived assets, the adoption of SFAS 121, Impairment of Long-Lived Assets
and Long-Lived Assets To Be Disposed Of, and which will occur October 1,
1996, is not expected to have an impact on the Company.
<PAGE>
Part II Other Information
Item 1. Legal Proceedings
NONE
Item 2. Changes in Securities
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to Vote of Security Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
NONE
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
REGISTRANT
PARADIGM MEDICAL INDUSTRIES, INC.
---------------------------------
Registrant
DATED: August __, 1996 By: Thomas F. Motter
President and Chief Executive Officer
(Principal Executive Officer)
DATED: August __, 1996 By: John W. Hemmer
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer)
25
