As filed with the Securities and Exchange Commission on September 11, 1998
Commission File No. 333-57711
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
AMENDMENT NO. 2
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 of jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization Classification Code Number) Identification
Number)
1127 West 2320 South, Suite A
Salt Lake City, Utah 84119
(801) 977-8970
(Address and telephone number of registrant's principal executive offices and
principal place of business)
Thomas F. Motter, President
1127 West 2320 South, Suite A
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 & Williams
170 South Main Street, Suite 900
Salt Lake City, Utah 84101-1655
Telephone: (801) 575-5000
Approximate date of proposed sale to the
public: As soon as practicable after the 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. o
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. o
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. o
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Cross Reference Sheet
<TABLE>
<S> <C> <C>
Form SB-2 Item No. and Caption Prospectus Caption
Item 1. Front of Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
Item 2. Inside Front and Outside Back Cover Inside Front and Outside Back Cover Pages
Pages of Prospectus
Item 3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
Item 4. Use of Proceeds Use of Proceeds
Item 5. Determination of Offering Price Not Applicable
Item 6. Dilution Not Applicable
Item 7. Plan of Distribution Outside Front Cover Page; Plan of Distribution
Item 8. Legal Proceedings Business - Legal Proceedings
Item 9. Directors, Executive Officers, Management
Promoters and Control Persons
Item 10. Security Ownership of Certain Principal Shareholders
Beneficial Owners and Management
Item 11. Description of Securities Outside Front Cover Page; Description of Securities
Item 12. Interest of Named Experts and Legal Matters; Experts
Counsel
Item 13. Disclosure of Commission Position Description of Securities; Plan of Distribution
on Indemnification for Securities
Act Liabilities
Item 14. Organization Within the Last Five Certain Transactions
Years
Item 15. Description of Business Business
Item 16. Management's Discussion and Management's Discussion and Analysis or Plan of Operation
Analysis or Plan of Operation
Item 17. Description of Property Business - Properties
Item 18. Certain Relationships and Certain Transactions
Related Transactions
Item 19. Market for Common Equity and Price Range of Common Stock and Class A Warrants and
Related Stockholder Matters Dividend Policy, Description of Securities
Item 20. Executive Compensation Management - Executive Compensation
Item 21. Financial Statements Financial Statements; Selected Financial Data;
Capitalization
Item 22. Changes in and Disagreements Not Applicable
with Accountants on Accounting
and Financial Disclosure
</TABLE>
<PAGE>
PROSPECTUS
PARADIGM MEDICAL INDUSTRIES, INC.
3,770,459 Shares of Common Stock
This Prospectus (this "Prospectus") relates to (i) an aggregate of 1,000,000
shares of Common Stock, $.001 par value ("Common Stock") of Paradigm Medical
Industries, Inc. (the "Company" or "Registrant") issuable upon the exercise of
1,000,000 Class A Warrants (the "Class A Warrants") at $7.50 per share, which
warrants were issued in connection with the Company's public offering in July
1996; (ii) an aggregate of 200,000 shares of Common Stock issuable upon the
exercise of 200,000 warrants issued to Kenneth Jerome & Company, Inc. and its
designees (the "Underwriter's Warrants"), of which 100,000 of such warrants are
exercisable at $7.50 per share and the remaining 100,000 warrants are
exercisable at $8.125 per share; (iii) an aggregate of 291,000 shares of Common
Stock issuable upon the exercise of 291,000 warrants issued to Win Capital Corp.
and its designees (the "Win Capital Warrants") at $3.00 per share; (iv) an
aggregate of 287,500 shares of Common Stock issuable upon the exercise of
287,500 warrants issued to certain investors participating in the Company's
bridge financing (the "Note Holders' Warrants") at $3.33 per share; and (iv) an
aggregate of 25,000 shares of Common Stock issuable upon the exercise of 25,000
warrants granted to the Company's counsel, Mackey Price & Williams (the
"Attorney's Warrants") at $3.33 per share. See "Description of Securities."
The Class A Warrants are subject to redemption by the Company at $.05 per
warrant if the average closing bid price of the Common Stock is at least $8.50
for 30 consecutive trading days ending 15 days prior to the notice of
redemption. The Win Capital Warrants are subject to redemption by the Company at
$.05 per warrant if the average closing bid price of the Common Stock is at
least $5.00 for 20 consecutive days ending one day prior to the notice of
redemption. The Underwriter's, Note Holders' and Attorney's Warrants are subject
to redemption by the Company at $.05 per warrant if the average closing bid
price of the Common Stock is at least $10.00 for 30 consecutive trading days
ending 15 days prior to the notice of redemption. See "Description of
Securities."
This Prospectus also relates to the resale of an aggregate of 1,713,143
shares of Common Stock issuable upon the conversion of 29,980 shares of Series C
Convertible Preferred Stock, $.001 par value, $100 stated value (the "Series C
Preferred Stock"), each share of Series C Preferred Stock convertible into
approximately 57.14 shares of Common Stock at an initial conversion price equal
to $1.75 per share; and the resale of an aggregate of 37,500 shares of Common
Stock issuable upon the conversion of a 12% Convertible, Redeemable Promissory
Note (the "Note") into Common Stock at $2.00 per share. The Series C Preferred
Stock and the Note are automatically converted into Common Stock upon 30 days'
written notice by the Company after the average closing price of the Common
Stock is at least $3.50 per share for the 20-day period ending immediately prior
to the date on which notice of conversion is given by the Company. See
"Description of Securities" and "Shares Eligible for Future Sale."
This Prospectus further relates to the resale of 126,316 shares of Common
Stock. These shares are being registered pursuant to a certain Agreement for
Purchase and Sale of Assets dated July 23, 1998 with Humphrey Systems Division
of Carl Zeiss, Inc. ("Humphrey Systems"). As part of the consideration relating
to the Agreement for Purchase and Sale of Assets, the Company agreed to register
for resale the shares issued to Humphrey Systems and Douglas Adams. This
Prospectus finally relates to the resale of 90,000 shares of Common Stock. These
shares are being registered pursuant to a certain Stock Exchange for
Satisfaction of Debt Agreement dated June 29, 1998 with Zevex International,
Inc. ("Zevex"). As part of the consideration relating to the Stock Purchase for
the Satisfaction of Debt Agreement, the Company agreed to register for resale
the 90,000 shares issued to Zevex.
Of the 3,770,459 shares of Common Stock covered by this Prospectus and
issuable upon the exercise of the Warrants and the conversion of the Series C
Preferred Stock and the Note, 1,512,500 of such shares were previously
registered by the Company and covered by a prospectus dated July 10, 1996 and
the registration statement to which it related. Such registration statement and
prospectus have been superseded in their entirety by this Prospectus and the new
Registration Statement to which it relates.
The Company's Common Stock and Class A Warrants are listed on The Nasdaq
SmallCap Market under the symbols PMED and PMEDW, respectively. On August 31,
1998, the last sales prices for the Common Stock and Class A Warrants as
reported by The Nasdaq SmallCap Market were $3.00 per share and $.469 per
Warrant, respectively. See "Price Range of Common Stock and Class A Warrants and
Dividend Policy."
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
See "Risk Factors."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION AND THE SECURITIES ADMINISTRATOR OF ANY STATE OR HAS THE
COMMISSION OR ANY SUCH ADMINISTRATOR PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Total of Each Class of Underwriting
Security Being Registered Amount of Exercise or Discounts and Proceeds to the
Securities Conversion Price Commissions Company(8)(9)
<S> <C> <C> <C> <C>
Common Stock (1)...................... 1,000,000 $7.50 $ .375 $ 7,125,000
Common Stock (2)...................... 100,000 $7.50 -- $ 750,000
Common Stock (2)...................... 100,000 $8.125 -- $ 812,500
Common Stock (3)...................... 291,000 $3.00 -- $ 873,000
Common Stock (4)...................... 287,500 $3.33 $ .1665 $ 909,506
Common Stock (5)...................... 25,000 $3.33 -- $ 83,250
Common Stock (6)...................... 1,713,143 $1.75 -- --
Common Stock (7)...................... 37,500 $2.00 -- --
Common Stock (8)...................... 216,316 -- -- --
====================================== ======================== =================== ===================== ========================
Total................................. 3,770.459 -- $ 422,869 $ 10,928,256(10)
====================================== ======================== =================== ===================== ========================
(footnotes on following page)
The date of this Prospectus is September 11, 1998.
</TABLE>
<PAGE>
(1) Consists of 1,000,000 shares of Common Stock for resale underlying the
Class A Warrants with an exercise price of $7.50 per share.
(2) Consists of 200,000 shares of Common Stock for resale underlying the
Underwriter's Warrants with exercise prices from $7.50 to $8.125 per share.
(3) Consists of 291,000 shares of Common Stock for resale underlying the Win
Capital Warrants with an exercise price of $3.00 per share.
(4) Consists of 287,500 shares of Common Stock for resale underlying the Note
Holders' Warrants with an exercise price of $3.33 per share.
(5) Consists of 25,000 shares of Common Stock for resale underlying the
Attorney's Warrants with an exercise price of $3.33 per share.
(6) Consists of 1,713,143 shares of Common Stock for resale underlying the
Series C Preferred Stock with a conversion price of $1.75 per share.
(7) Consists of 37,500 shares of Common Stock for resale underlying the Note
with a conversion price of $2.00 per share.
(8) Consists of 126,316 shares of Common Stock for resale pursuant to the
Agreement for Purchase and Sale of Assets and 90,000 shares of Common Stock
for resale pursuant to the Stock Exchange for Satisfaction of Debt
Agreement.
(9) If the exercise of the Class A Warrants or the Note Holders' Warrants is
solicited by a registered or licensed broker- dealer, the Company has
agreed to pay to such broker-dealer a solicitation fee equal to 5% of the
aggregate exercise price of such Warrants. See "Plan of Distribution" for
pricing and selling arrangements regarding the exercise of the Class A
Warrants and the Note Holders' Warrants. The Company does not have any
agreement to pay commissions relating to the exercise of any Underwriter's
Warrants, Win Capital Warrants or Attorney's Warrants or the conversion of
any Series C Preferred Stock or the Note.
(10) All expenses of this Offering are borne by the Company. The Company
estimates that it will incur approximately $47,000 in registration, NASD,
legal, accounting and printing fees in connection with this Offering.
(11) The net proceeds from this Offering to be received by the Company from the
issuance of 1,803,500 shares of Common Stock issuable upon exercise of the
Warrants is estimated to be $10,928,256. There can be no assurance that any
of the Warrants will be exercised, and accordingly, the Company may not
receive any proceeds from this Offering. See "Use of Proceeds."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy and information statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy and information statements and other information filed by the Company can
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
regional offices at Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661-2511, and at 7 World Trade Center, New York, New York
10048. Copies of such material can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549
at prescribed rates. In addition, the Commission maintains a web site at
http:/www.sec.gov containing reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission,
including the Company. The Company's Common Stock and Class A Warrants are
listed on The Nasdaq SmallCap Market and reports, proxy and information
statements and other information concerning the company can also be inspected at
the offices of The Nasdaq Stock Market, Inc., 1735 K Street, N.W., Washington
D.C.
20006-1500.
The Company has filed with the Commission a Registration Statement
(together with all amendments and exhibits, the "Registration Statement") on
Form SB-2 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Common Stock offered pursuant to this Prospectus. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Statements made in this Prospectus as to the
contents of any agreement or other document referred to herein are not
necessarily complete and reference is made to the copy of such agreement or to
the Registration Statement and to the exhibits and schedules filed therewith.
Copies of the material containing this information may be obtained from the
Commission upon payment of the prescribed fee.
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in
its entirety by more detailed information and financial statements and the
related notes thereto appearing elsewhere in this Prospectus (the "Prospectus").
Unless otherwise indicated, all information in this Prospectus assumes (i) no
exercise of the Class A Warrants, the Underwriter's Warrants, the Win Capital
Warrants, the Note Holders' Warrants or the Attorney's Warrants, as those terms
are defined herein, (ii) no conversion of the Series C Preferred Stock or the
Note, as those terms are defined herein, or (iii) no exercise of the outstanding
options that have been granted under the Company's 1995 Option Plan. The
Securities offered hereby involve a high degree of risk. See "Risk Factors"
below.
The Company
The Company develops, manufactures, sources, markets and sells ophthalmic
surgical and diagnostic equipment, instrumentation and related accessories,
including disposable products. The Company's surgical equipment is designed for
minimally invasive cataract treatment. The Company markets two ultrasonic
cataract surgery systems with related instruments, accessories and disposable
products. One of the ultrasound systems, the Precisionist Thirty Thousand(TM),
is manufactured as the base surgery system for the Company's Precisionist Thirty
Thousand(TM) Ophthalmic Surgical Workstation(TM) (the "Workstation(TM)"). The
Company is currently developing a laser cataract surgery system as an adjunct to
its ultrasound cataract surgery equipment. This product is currently undergoing
investigational trials in the United States. If successfully developed and
approved for medical uses, the Company plans to market the laser system as a
plug-in module for its Workstation(TM). The Company's diagnostic product is the
Blood Flow Analyzer(TM). This product is a portable computerized system for
which the Company has secured a license granting it the right to market the
product in the United States. This product is designed for diagnosis of ocular
blood flow volume for detection and treatment of glaucoma. The Company is
currently developing additional test applications for its diagnostic product.
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 2 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.
The Company manufacturers and sells two phaco systems with instruments,
accessories and disposable products. The Precisionist 3000 Plus(TM) system was
introduced in 1992 and is a low-cost portable system intended primarily for the
international market. The Precisionist Thirty Thousand(TM) Ocular Surgery
Workstation(TM) is the Company's newest generation system which is the base for
the Company's expandable surgical "workstation" platform. The Company believes
current phaco systems can be difficult for many ophthalmic surgeons to master
and are limited in their ability to be the most minimally invasive method
possible. The Company is developing its proprietary Photon(TM) laser system and
unique patented probe for laser cataract removal which the Company believes can
address the difficulties associated with phaco systems. The Company intends to
make the Photon(TM) laser system a plug-in module for its Workstation(TM) if and
when cleared for market by the Food and Drug Administration (the "FDA"). The
development of the laser cataract system is being done in cooperation with
ophthalmic surgeons in the United States and through research and development
work being conducted by the Company's engineering group, and under contract with
the Dixon Medical Laser Laboratory at the University of Utah in Salt Lake City.
The Company believes that in certain surgical conditions, its laser system
will be easier to use and safer than present phaco systems. The probe will be
smaller than typical probes employing ultrasonic needle technology and will
deliver laser energy directly to the desired tissue area by means of a smooth
blunt end. The laser probe has been shown to eliminate high-frequency vibrations
in the eye and to significantly reduce heat build-up which are complications
associated with the phaco method. In 1996, the Company received FDA approval to
conduct clinical trials in the United States with the Photon(TM) laser system.
During these Phase I clinical trials the Company discovered that the Photon(TM)
laser system was effective in removing softer grade cataracts. The Company
completed its Phase I clinical trials in 1997, and has received FDA approval to
proceed to an expanded Phase II clinical to provide the statistical data
required to approve the Photon(TM) laser system for laser cataract removal.
There is no assurance however that the Company will successfully complete the
Phase II clinical trials or that additional disadvantages or problems unique to
the Photon(TM) laser system will not be discovered during the Phase II clinical
trials or following FDA approval of the system.
- --------------------------------------------------------------------------------
In addition to cataract surgery, the Company believes that its Photon(TM)
laser system is capable of being configured with specialty probes for use in
other ophthalmic surgical procedures. these potential applications could
represent substantial growth opportunities including additional sales of
equipment, instruments, accessories and disposables. However, there can be no
assurance that these applications will be developed or approved. Further there
is no guarantee that the laser will be accepted by the ophthalmic surgery market
in this capacity.
In June 1997, the Company received FDA clearance to market the Blood Flow
Analyzer(TM) for detection of glaucoma and other retina related diseases. The
device measures not only intraocular pressure but also pulsatile ocular blood
flow, the reduction of which may cause nerve fiber bundle death through oxygen
deprivation thus resulting in visual field loss associated with glaucoma. The
Company's Blood Flow Analyzer(TM) is a portable automated in-office system that
presents an affordable method for ocular blood flow testing for the ophthalmic
and optometric practitioner. The Company has secured a license granting it the
exclusive right to private label, package and market the product in the United
States, with full international marketing rights.
On June 26, 1998, the Company entered into a Co-Distribution Agreement
(the "Co-Distribution Agreement") with Pharmacia Upjohn Company ("Pharmacia
Upjohn") and Natural Healthcare Manufacturing Corporation ("Natural
Healthcare"), which provides for the marketing and sale of comprehensive
packaging of ophthalmic products to cataract surgeons, including the
Precisionist Thirty Thousand(TM). On July 23, 1998, the Company entered into an
Agreement for Purchase and Sale of Assets of Humphrey Systems Division of Carl
Zeiss, Inc. ("Humphrey Systems") to acquire the ownership and manufacturing
rights of certain assets of Humphrey Systems used in the manufacturing the
marketing of an ultrasonic microscopic based-line of ophthalmic diagnostic
instruments. See "Business - General."
The Company's business originated with Paradigm Medical, Inc., a California
corporation ("PMI") formed in October 1989. In May 1993, PMI entered into a
merger agreement with the Company wherein PMI merged with and into the Company.
At the time of the merger, the Company was a dormant public shell existing under
the name French Bar Industries, Inc. As part of the merger, the Company changed
its name to Paradigm Medical Industries, Inc. and PMI's management assumed
control of the Company. The Company was incorporated in California in 1970 and
redomesticated to Delaware in February 1996 as part of a corporate
reorganization. The Company's executive offices are located at 1127 West 2320
South, Suite A, Salt Lake City, Utah 84119 and its telephone number is (801)
977-8970.
The Offering
Securities Offered ....................... 3,770,459 shares of Common Stock,
consisting of 1,803,500 shares of
Common Stock issuable upon the
exercise of the Class A Warrants,
Underwriter's Warrants, Win Capital
Warrants, Note Holders' Warrants and
Attorney's Warrants, the resale of
1,750,643 shares of Common Stock
issuable upon the conversion of the
Series C Preferred Stock and the
Note, and the resale of 216,316
shares of Common Stock consisting of
the resale of 90,000 shares for
satisfaction of debt pursuant to the
Stock Exchange for Satisfaction of
Debt Agreement and 126,316 shares
for purchase of assets pursuant to
the Agreement for Purchase and Sale
of Assets. Each Class A Warrant
entitles the holder to purchase one
share of Common Stock at an exercise
price of $7.50 per share. Each
Underwriter's Warrant entitles the
holder to purchase one share of
Common Stock at an exercise price of
$7.50 to $8.125 per share. Each Win
Capital Warrant entitles the holder
to purchase one share of Common
Stock at an exercise price of $3.00
per share. Each of the Note Holders'
and Attorney's Warrants entitles the
holder to purchase one share of
Common Stock at an exercise price of
$3.33 per share. Each share of
Series C Preferred Stock is
convertible at a conversion price of
$1.75 per share. The Note is
convertible at a conversion price of
$2.00 per share. The Class A,
Underwriter's, Win Capital, Note
Holders' and Attorney's Warrants are
subject in certain circumstances to
earlier redemption by the Company.
The Series C Preferred Stock and the
Note are subject in certain
circumstances to mandatory
conversion. See "Description of
Securities."
Common Stock outstanding prior to the
offering ................................. 3,922,128 shares.
Common Stock outstanding after the offering 7,692,587 shares.
(1).......................................
Use of Proceeds........................... All funds received by the Company
upon the exercise of the Warrants
will be used for general corporate
purposes. The Company will not
receive any proceeds from the
conversion of the Series C Preferred
Stock or the Note. See "Use of
Proceeds."
Risk Factors/Dilution..................... The offering involves a high degree
of risk. See "Risk Factors."
Nasdaq Symbols
Common Stock......................... PMED
Class A Warrants..................... PMEDW
- ----------------------
(1) Assumes exercise of all Warrants, of which there can be no assurance.
- ------------------------------------------
<TABLE>
<CAPTION>
Summary Financial Information
For the For the
year ended year ended For the six months ended
September 30, December 31, June 30
1996 1997 1997 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
Statement of Operations Data:
<S> <C> <C> <C> <C>
Sales ...................................... $ 252,134 $ 464,062 $ 360,407 $ 977,536
Costs of sales ............................. 180,010 333,156 219,375 515,060
Operating expenses ......................... 1,328,173 2,933,327 1,540,722 1,216,715
Operating loss ............................. (1,256,049) (2,802,421) (1,399,690) (754,239)
Other income (expense) ..................... (192,970) 207,573 41,532 13,941
Net loss ................................... (1,449,019) (3,099,994) (1,358,158) (740,298)
Net loss attributable to common shareholders
after non-cash preferred dividend ....... (1,448,171) (3,099,994) (1,358,158) (5,610,321)
Net loss per common share .................. (0.66) (0.82) (0.39) (1.45)
Shares used in computing net loss per share 2,193,000 3,663,000 3,465,000 3,850,000
Cash dividends per share ................... None None None None
</TABLE>
<TABLE>
<CAPTION>
As of As of
December 31, June 30,
1997 1998
------------- ----------
(Unaudited)
Balance Sheet Data:
<S> <C> <C>
Current assets............................................. $ 1,857,128 $ 2,891,732
Current liabilities........................................ 1,055,223 369,758
Working capital............................................ 801,905 2,521,974
Total assets............................................... 2,712,827 3,273,676
Long-term debt, less current portion....................... 1,081,996 85,244
Accumulated deficit........................................ (8,258,406) (13,868,728)
Stockholders' equity ...................................... 575,608 2,818,673
- -------------------------------------------------------------
</TABLE>
-1-
<PAGE>
RISK FACTORS
The securities offered hereby are highly speculative in nature and involve
a high degree of risk. Prospective investors should carefully consider, along
with other information in this Prospectus, the following considerations and
risks in evaluating an investment in the Company. No investment in the
securities offered hereby should be made by any person who is not in a position
to lose the entire amount of such investment.
Emphasis of Matter in Auditor's Report. The opinion rendered by Tanner &
Co., the Company's independent auditors, on the financial statements of the
Company states as of December 31, 1997 the Company incurred a net loss of
$3,009,994 and $740,298 for the six month period ended June 30, 1998. The
Company had an accumulated deficit of $8,023,006 at December 31, 1997.
Limited Working Capital; Limited Operating History; Accumulated Deficit;
Anticipated Losses. As of June 30, 1998, the Company had limited working capital
of $2,521,974. The Company also has a limited operating history, primarily
related to sales of the Precisionist 3000 Plus, the Company's phaco machine, and
has an accumulated deficit of $8,258,406 as of December 31, 1997 and $13,868,728
as of June 30, 1998. Such losses have resulted principally from costs incurred
in connection with research and development of the Photon(TM) LaserPhaco(TM) and
the Workstation(TM) as well as clinical trials for the Photon(TM)
LaserPhaco(TM). No sales of medical products occurred until late 1992. Further,
the Company's ability to achieve profitability will depend, in part, on its
ability to develop successfully clinical applications and obtain regulatory
approvals for its products, including the Photon(TM) LaserPhaco(TM), and to
develop the capacity to effectively market such products. The likelihood of
success of the Company must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection with
the development of new products and the competitive environments in the industry
in which the Company will operate. There can be no assurance that the Company
will ever achieve profitability. In addition, there can be no assurance that the
Company will not encounter substantial delays and unexpected expenses related to
research, development, production, marketing, and regulatory matters or other
unforeseen difficulties.
Possible Future Delisting of Securities from The Nasdaq SmallCap Market and
Market Illiquidity. The Company received a letter from the Nasdaq staff, dated
January 7, 1998, notifying the Company that its securities would be delisted
from The Nasdaq SmallCap Market at the close of business on January 15, 1998
because it failed to demonstrate compliance with all the requirements for
continued listing. The Company requested a review of the staff's findings and
conclusions. A hearing to review the staff's findings and conclusions was held
on February 19, 1998. The Company was determined to be in compliance with the
requirements for continued listing on The Nasdaq SmallCap Market as a result of
the proceeds the Company had received from sale of 20,030 shares of Series C
Preferred Stock and the exchange of 12% Convertible, Redeemable Promissory Notes
for 9,950 shares of Series C Preferred Stock. In order to remain eligible for
quotation on Nasdaq, the Company must maintain $2,000,000 in net tangible
assets, a $500,000 market value of the public float (excluding shares held
directly or indirectly by officers, directors and controlling stockholders), and
at least 300 round lot holders of the Company's Common Stock. In addition,
continued inclusion requires two market-makers and a minimum bid price of $1.00
per share. If the Company is unable to comply with these new listing
requirements in the future, its securities would be delisted from The Nasdaq
SmallCap Market. There is no assurance that as a result of continuing losses
from operations that the Company will be able to maintain sufficient net worth
to be able to continue to be listed on Nasdaq. If delisted from Nasdaq, trading,
if any, in the Company's securities may then continue to be conducted on the OTC
Electronic Bulletin Board or in the over-the-counter market in the so-called
"pink sheets." As a result, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the market value of, the Company's
securities, and the prices for the Company's securities may be lower than might
otherwise be obtained.
Disclosures Relating to Low Priced Stocks; Possible Restrictions on Resales
of Low Priced Stocks and on Broker- Dealer Sales; Possible Adverse Effect of
"Penny Stock" Rules on Liquidity for the Company's Securities. If the Company's
securities were to be delisted from Nasdaq (see "Risk Factors--Possible
Delisting of Securities from The Nasdaq SmallCap Market and Possible Market
Illiquidity" above), they may become subject to Rule 15g-9 (the "Rule")
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which imposes additional sales practice requirements on broker-dealers
that sell securities governed by the Rule 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 transactions covered by the Rule,
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the broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently, the Rule may have an adverse effect on the ability
of broker-dealers to sell the Company's securities and may affect the ability of
purchasers in the Offering to sell the Company's securities in the secondary
market and otherwise affect the trading market in the Company's securities.
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 Exchange
Act 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. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stocks.
The foregoing penny stock restrictions will not apply to the Company's
securities if such securities are listed on Nasdaq and have certain price and
volume information provided on a current and continuing basis or if the Company
meets certain minimum net tangible asset or average revenue criteria. There can
be no assurance that the Company's securities will qualify for exemption from
these restrictions. In any event, even if the Company's securities were exempt
from such restrictions, they would remain subject to Section 15(b)(6) of the
Exchange Act, which gives the Commission the authority to prohibit any person
that is engaged in unlawful conduct while participating in a distribution of a
penny stock from associating with a broker-dealer or participating in a
distribution of a penny stock, if the Commission finds that such a restriction
would be in the public interest. If the Company's securities were subject to the
rules on penny stocks, the market liquidity for the Company's securities could
be materially adversely affected.
Future Capital Needs and Uncertainty of Additional Funding. The Company may
require substantial funds in addition to the net proceeds of this Offering, if
any, to continue research and development relating to the application of its
technology to additional medical products and the application of its existing
products to additional applications, to conduct expanded clinical trials, to
complete the FDA approval process for its products, including the Photon(TM)
LaserPhaco(TM), and to manufacture and market its existing products. See "Risk
Factors -- Government Regulation; Uncertainty of FDA Approval." In the short
term, based on historic operational and cash flow needs and on its currently
planned programs, the Company anticipates that the net proceeds of this Offering
and the interest earned thereon, together with funds generated from future
product sales, should be adequate, even if at the minimum level, to satisfy its
capital requirements for approximately 12 months. This estimate is based upon
certain assumptions and there can be no assurance that the net proceeds of this
Offering will be sufficient to satisfy the Company's capital requirements for 12
months. Even if this offering is successful, the Company will need to seek
additional capital, possibly through public or private sales of its securities,
in order to fund its activities on a long-term basis. Adequate funds, whether
through financial markets or collaborative or other arrangements with strategic
partners or from other sources, may not be available when needed or on terms
acceptable to the Company. Insufficient funds may require the Company to delay,
scale back or eliminate certain or all of its research and development programs
or to license third parties to commercialize products or technologies that the
Company would otherwise seek to develop itself, which may materially adversely
affect the ability of the Company to continue to operate.
Technological Uncertainty and Early Stage of Product Development. The
science and technology of medical products, including lasers, is rapidly
evolving. The Company's medical systems may require significant further
research, development, testing and regulatory clearances and are 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 technologies or unsafe, or
otherwise fail to receive necessary regulatory clearances; that the proposed
products, although effective, are uneconomical to market; that third parties
hold proprietary rights that preclude the Company from marketing such products;
or that third parties market superior or equivalent products. Accordingly, the
Company is unable to predict whether its research and development activities
will result in any commercially viable products. Further, due to the extended
testing and regulatory review process required before marketing clearance can be
obtained for its laser systems, the Company cannot predict with certainty when
or if the Company will be able to sell its current and proposed laser cataract
system products. There is also no guarantee that the Company will be able to
develop and sell a glaucoma surgery system. See "Business."
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Government Regulation; Uncertainty of FDA Approval. The Company is subject
to substantial regulation by the FDA and other federal and state regulatory
agencies. FDA regulations require the Company to obtain either a 510(k)
clearance or pre-marketing approval ("PMA") prior to marketing a product in the
United States. The Company is also subject to foreign regulation and is
dependent on the receipt of various types of approvals from certain foreign
government agencies prior to the sale of products in those countries. The
clearance and approval processes for both the FDA and foreign regulatory
authorities are costly, time consuming and uncertain. In addition, the Company
is required to obtain FDA approval before exporting a device which has not
received FDA marketing clearance or approval. The Company is dependent on its
ability to obtain these clearances and PMAs and there can be no assurance when
the Company will receive such clearances or PMAs, if at all, or that the Company
will have sufficient resources to complete the PMA process. See "Risk
Factors--Future Capital Needs and Uncertainty of Additional Funding." Delays in
obtaining such clearances or PMAs would have a material adverse effect on the
Company while changes in existing requirements could also have a material
adverse effect on the Company. The Company has received a 510(k) clearance from
the FDA for its Precisionist 3000 Plus(TM) as well as its Precisionist Thirty
Thousand(TM) system, thereby allowing the Company to sell both devices in the
United States. The Company has also received 510(k) clearance to market an
ocular blood flow analyzer manufactured by O.B.F. Labs, Ltd. ("O.B.F. Labs"). In
May 1995, the Company was granted an investigational device exemption for its
Photon(TM) LaserPhaco(TM) System allowing the Company to conduct clinical
studies in support of its application with the FDA to obtain approval to market
the same. The Company has completed the authorized clinical studies and has
requested authorization for expanded clinical studies. The Company has also
received FDA approval to manufacture and export the Photon(TM) LaserPhaco(TM)
System internationally. However, the Company has not yet obtained approval from
some foreign countries to market the laser product where approval is necessary.
The Company anticipates that many contemplated applications of the Company's
currently existing and planned products will be subject to the lengthy PMA
regulatory approval process, preclinical studies, clinical trials and extensive
regulatory review and could take many years and require the expenditure of
substantial resources. See "Business--Regulation."
Lack of Operating Experience. The executives of the Company will be relying
upon the experience and skill they have acquired in their professional
occupations. None of the Company's executives has direct experience in managing
a company which incorporates such a high degree of utilization of research and
product development activities and technology. See "Management."
Dependence on Single Line of Products. Although the Company has obtained
510(k) clearance to market an ocular blood flow analyzer, the Company has not
sold any of the devices and is therefore totally dependent upon a single product
line targeted towards minimally invasive cataract surgery devices. If its
products do not reach a level of technical performance or market recognition and
acceptance to make them commercially viable, the Company currently has no other
line of products or services upon which to sustain itself. The Company's first
commercial product, the Precisionist 3000 Plus(TM) System, was introduced to the
marketplace in 1992 and substantially all of the Company's revenues through
February 1997 were derived from sales of that product. The Company recently
commenced sales of its second generation ultrasound system, the Precisionist
Thirty Thousand, as part of the Company's platform Workstation(TM). However, the
Company has discovered that its Precisionist Thirty Thousand(TM) Workstation(TM)
has a vacuum surge similar to that of other competitive phaco systems. The
Company has found at least one method of correcting the vacuum surge and
believes that it can develop a second, more preferred solution to lessen or
eliminate the surge. However, there is no guarantee that the preferred method
will work or can be fully developed. In addition, the first method is protected
by a patent and there is no guarantee that the Company will be able to obtain a
license to use that method at a cost which is not prohibitively expensive. Thus,
although expansion of the Company's product line is desirable, there can be no
assurance that the Company will be able to solve the problems associated with
its second generation cataract removal system and there can be no assurance that
the Company will be successful expanding its product line beyond ultrasound
cataract surgery systems. If the Company is not successful in the expansion of
its product line, revenues from existing products will continue to be highly
dependent on market acceptance of such products. See "Business--Products."
Dependence on Laser Cataract System. The Company is also developing a laser
cataract system for inclusion in its Workstation(TM). Phase I clinical trials to
obtain domestic sales approval from the FDA for the Photon(TM) LaserPhaco(TM)
system have concluded. During the clinical trial, the Company discovered that
the Photon(TM) LaserPhaco(TM) system may not effectively remove viscerous
cataracts. The Company has thus applied to the FDA for clearance to conduct
expanded clinical studies to solve this problem. The Company is highly dependent
on FDA approval of its Photon(TM)
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LaserPhaco(TM) system to generate future revenues. With the recently discovered
possible limitation of the Photon(TM) LaserPhaco(TM), there is no guarantee that
the system will be approved by the FDA. See "Business -- Products."
Potential Obsolescence from Rapid Technological Change. The market for
ophthalmic lasers and ultrasonic systems as well as diagnostic instrumentation
is subject to rapid technological change, including advances in laser and other
technologies and the potential development of alternative surgical or diagnostic
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. Accordingly, the Company will be required
to continue to invest in research and development to maintain and enhance its
existing products and develop new products. Despite such investment, there can
be no assurance that the Company's products or proposed products will be
successfully introduced or that they will not be rendered uncompetitive or
obsolete.
Product and Market Competition. The Company's laser system will potentially
receive competition from other laser systems, such as excimer, holmium (Ho:YAG),
Erbium (Er:YAG), Nd:YLF (Neodymium:Yttium-Lithium-Fluoride) or lasers of other
wave lengths. Competition may also come from other medical devices and other
surgical techniques. Further, the cataract surgical device industry is dominated
by a small number of large competitors that are well established in the
marketplace, have experienced management, are well financed and have a well
recognized trade name related to their product lines. There is no assurance that
the Company will be able to penetrate the existing market and acquire a
sufficient market share to allow it to be profitable or that existing
competitors will not aggressively compete by introducing new products
substantially similar to the Company's products and at a price below that at
which the Company can profitably compete. Should this occur, the Company may not
be able to be successful and profitable. Significant competitive factors which
will affect future sales in the marketplace include regulatory approvals,
performance, pricing, timely product shipment, safety, customer support,
convenience of use and patient and general market acceptance. See
"Business--Competition."
Business Development Risks. 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, all of 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 the one contemplated by the Company,
is substantially dependent upon the capabilities and performance of both
management and sales personnel. Mistakes in judgment or performance can be
costly and, in certain instances, disabling. Therefore, management skill,
experience, character and reliability are of significant importance.
Dependence Upon Key Personnel. The Company's success depends, to a significant
extent, upon a number of key employees. The loss of services of one or more of
these employees could have a material adverse effect on the proposed business
and operations of the Company, including the development and sale of ophthalmic
surgical systems. The Company is especially dependent upon the efforts and
abilities of certain of its senior management, particularly Thomas F. Motter,
Chairman of the Board, President and Chief Executive Officer and Robert W.
Millar, Vice President of Engineering and Manufacturing. Messrs. Motter and
Millar are each employed by the Company under a five-year employment agreement.
The loss of any of the Company's key executives could have a material adverse
effect on the Company and its operations and prospects, although the loss of
either Mr. Motter or Mr. Millar could have a more significant adverse effect on
the Company. The Company has no key man insurance on either Mr. Motter or Mr.
Millar. The Company believes that its future success will also depend, in part,
upon its ability to attract, retain and motivate qualified personnel. There is
no assurance, however, that the Company will be successful in attracting and
retaining such personnel. See "Management."
Production Risks. The 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. 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 the Company's 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
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in production. Moreover, the Company relies on related party suppliers for parts
and equipment and there can be no assurance that the terms under which such
business is conducted will be as favorable as could be obtained from unrelated
third-party suppliers. See "Business."
Lack of Independent Market Testing. The Company's belief that there is
substantial commercial demand in the market for its Photon(TM) laser surgical
system at the proposed price as well as the ocular blood flow analyzer for which
the Company has secured a license to purchase is solely based on the Company's
assessments and experience in the industry and management's evaluation of the
market. 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. See "Business."
No Assurance of Market Acceptance. There can be no assurance that the
Company's products will be accepted in the marketplace. Such acceptance will
depend upon a number of factors including the receipt of regulatory approvals
and the establishment and demonstration in the ophthalmic community of the
clinical safety and efficacy of the Company's products and their advantages over
existing systems and surgical techniques. The Company's Photon(TM) laser surgery
system may never gain market acceptance since the system may not effectively
remove viscerous cataracts. Further, there can be no assurance that the Company
will be able to successfully market its products even if they perform
successfully in clinical applications. The Company's Precisionist
ThirtyThousand(TM) Workstation(TM) may not gain acceptance unless the Company
can reduce or eliminate the vacuum surge and develop additional, complementary
surgical devices for installation in that host system.
Dependence on Patents and the Protection of Proprietary Technology. The
Company depends on its ability to license and obtain patents and on the
adherence to confidentiality agreements executed by employees, consultants and
third-party manufacturers and suppliers in order to maintain the proprietary
nature of its technology and to operate without infringing on the proprietary
rights of third parties. The Company's laser probe is protected by a United
States patent issued in 1987 to Daniel M. Eichenbaum, M.D. The Company owns the
exclusive worldwide rights to this patent. Patents are reported by O.B.F. Labs
to be pending in the United States and Japan and with the European Economic
Community for the ocular blood flow analyzer the Company plans to market. There
can be no assurance that the pending patents will be perfected. There also can
be no assurance that the Company's present or future products will not be found
to infringe upon the patents of others. If the Company's products are found to
infringe upon the patents, or otherwise impermissibly utilize the intellectual
property of others, the Company's development, manufacture and sale of such
products could be severely restricted or prohibited. The Company may be required
to obtain licenses from such third parties or otherwise obtain licenses to
utilize patents or proprietary rights of others. No assurance can be given that
any licenses required under any such patents or proprietary rights could be
obtained on terms acceptable to the Company, if at all. If the Company does not
obtain such licenses, the development, manufacture or sale of products requiring
such licenses would be materially adversely affected. In addition, the Company
could incur substantial costs in defending itself against challenges to its
patents or infringement claims made by third parties or in enforcing any patents
it may obtain. See "Business--Intellectual Property."
Limited Nature of Patent Protection. It is possible that products similar
to the Company's Photon(TM) LaserPhaco(TM) system or the ocular blood flow
analyzer that the Company intends to market will be developed and distributed by
one or more of the Company's competitors before the Company can market either
device. The Company is relying on the protection that it hopes to realize under
the United States and foreign patent laws. See "Business--Intellectual Property
Protection." Even though a United States patent has been obtained on the
hand-held probe design and applications for various foreign patents are either
pending or planned, and patents are reported by O.B.F. Labs to be pending for
the ocular blood flow analyzer, there are inherent limits to the protection
provided by patents. It is possible that similar devices could be designed that,
although not identical and therefore not infringing upon the patent used by the
Company, could function adequately to be distributed into the same market.
Moreover, it is possible that an unpatented but prior existing device or design
may exist that has never been made public and therefore is not known to the
Company or the industry in general. Such a device could be introduced into the
market without infringing upon the Company's current patent. If any such
competing non-infringing devices are produced and distributed, the Company's
profit potential would be seriously limited, which would seriously impair the
Company's viability. See "Business--Competition."
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Limitations on Third-Party Reimbursement. The Company anticipates that its
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 the Company's
medical devices may be used, however, may be determined to be elective in nature
for which third-party reimbursement is not likely to be available. In addition,
third-party payors may deny reimbursement if they determine that the use of the
Company's products was unnecessary, inappropriate, not cost-effective,
experimental or used for a non-approved indication. Even if the Company receives
FDA clearances or PMAs for its products, third-party payors may nevertheless
deny reimbursement. Furthermore, third-party payors are increasingly challenging
the prices charged for medical products and services. There can be no assurance
that reimbursement from third-party payors will be available or if available,
that reimbursement will not be limited when compared with reimbursement
available in connection with competitive procedures, thereby materially
adversely affecting the Company's ability to sell its products on a profitable
basis. The market for the Company's 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 the Company's products to obtain reimbursement from
third-party payors or changes in government and private third-party payors'
policies toward reimbursement for procedures employing the Company's products
would have a material adverse effect on the Company. See "Risk Factors--Proposed
Health Care Reform" and "Business--Marketing and Sales--Third-Party
Reimbursement."
Proposed Health Care Reform. President Clinton's Administration is making
proposals to change aspects of the delivery and financing of health care
services. Other legislation to accomplish the same purpose has or will also be
introduced by members of Congress. It is possible that legislation derived from
one or more of these proposals will be enacted in the near future.
Considerations include means 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. The Company cannot predict what form this
legislation may take or the effect of such legislation on its 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 the Company's business. It is also possible that future
legislation could result in modifications to the nation's public and private
health care insurance systems which will affect reimbursement policies in a
manner adverse to the Company. The Company also cannot predict what other
legislation relating to its 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 its operations.
New Product Quality. The Company's Precisionist ThirtyThousand(TM)
Workstation(TM) is a new computer-based product unproven by day-to-day use in
the marketplace. As is common with other new computer-based products, the
Company has discovered certain circuitry problems and component failures with
the first Workstation(TM) manufactured for the Company. The Company believes
that it has corrected most if not all of these problems. However, there is no
assurance that all of these problems have been detected or corrected. If
customers were to experience significant problems with the Workstation(TM), if
the Company could not fix or correct the problems, or if the Company's customers
were dissatisfied with the functionality or performance of the Workstation(TM),
or product support provided by the Company, the Company would be materially
adversely effected.
Dependence on Outside Suppliers and Manufacturers. The Company currently
purchases all of its components, supplies and contract manufacturing from
third-party suppliers. Substantially all of the Company's current products are
manufactured or assembled by three companies under long-term manufacturing
agreements. See "Business--Marketing and Sales--Manufacturing and Raw
Materials." However, if the Company were required to locate other manufacturers
or suppliers, it could experience increased costs and significant delays in both
locating and switching to new vendors. Further, it would be difficult for the
Company to develop the capacity to manufacture or assemble its products in-house
since the Company has no experience in large-scale manufacturing. In addition,
there is no assurance that the Company would be successful in developing the
necessary facilities or recruiting trained personnel to achieve profitable
manufacturing or assembling capacities.
Minimal Marketing Experience. The Company has commenced a direct sales
program to market its current and proposed products. See "Business--Marketing
and Sales." However, the Company has minimal direct sales experience
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and may need to recruit additional qualified personnel for this purpose. There
can be no assurance that the Company's direct sales program will be successful
or that it will be able to attract and retain qualified distributors on
favorable terms.
Product Liability and Possible Insufficiency of Insurance. The nature of
the Company's business exposes it to risk from product liability claims and
there can be no assurance that the Company can avoid significant product
liability exposure. The Company maintains product liability insurance providing
coverage up to $1,000,000 per claim with an aggregate policy limit of
$1,000,000. There is substantial doubt that this amount of insurance would be
adequate to cover liabilities should the Company face significant claims. A
successful products liability claim brought against the Company could have a
material adverse effect on the Company's business, operating results and
financial condition. Further, product liability insurance is becoming
increasingly expensive, and there can be no assurance that the Company will be
successful in maintaining adequate product liability insurance at acceptable
rates, or at all. Should the Company be unable to maintain adequate product
liability insurance, the Company's ability to market its products would be
significantly impaired. Any losses that the Company may suffer from future
liability claims or a voluntary or involuntary recall of the Company's products
and the damage that any product liability litigation or voluntary or involuntary
recall may do to the reputation and marketability of the Company's products
would have a material adverse effect on the Company's business, operating
results and financial condition.
World Economic, Political and Currency Fluctuations. The Company
anticipates that a significant portion of its future product sales will be made
in foreign countries. Because the Company quotes prices of its products and
accepts payment on sales principally in U.S. dollars, any significant increase
in the value of the U.S. dollar against local currencies may make the Company's
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 the Company's products, or the ability
of potential customers to pay for the procedures for which the Company's
products are used. See "Business--Competition."
Potential Adverse Effects of Future Sales of Stock; Dilution. As of June
30, 1998, approximately 59% or about 2,250,000 of the total 3,830,358 shares of
Common Stock outstanding were "restricted securities" within the meaning of Rule
144 under the 1933 Act. Ordinarily, under Rule 144, a person holding restricted
securities for a period of one year may, every three months, sell in ordinary
transactions, or in transactions directly with a market maker an amount equal to
the greater of one percent of the Company's then outstanding Common Stock or the
average weekly trading volume during the four calendar weeks prior to such sale.
An additional 83,230 shares could immediately be sold in reliance on Rule 144
upon the conversion of the Company's Series A and Series B Preferred Stock
issued and outstanding as of June 30, 1998 for shares of Common Stock. An
additional 33,125 shares could also be immediately sold in reliance upon Rule
144 upon the exercise of the La Jolla Warrants and FAS Warrants and an
additional 510,280 shares could eventually be sold in reliance upon Rule 144
upon the exercise of Stock Options granted to employees and directors of the
Company. Further, 512,500 shares could be sold upon the exercise of warrants
held by Bridge Note investors, the Company's attorneys and underwriters of the
Company's public offering. Finally, 191,000 shares could be sold upon the
exercise of warrants the Company has issued to Win Capital Corp. The Company has
agreed to register the shares of Common Stock issuable upon exercise of Win
Capital Corp's warrant on the same registration statement as the shares of
Common Stock issuable upon conversion of the Shares issued in the Offering and
keep such registration statement current until such time as all shares of Common
Stock issuable upon exercise of the warrant are freely tradeable pursuant to
Rule 144(k) promulgated under the Securities Act, all at the Company's cost and
expense. Sales of such shares would increase the number of shares in the public
float and have an adverse effect on the market price of the Common Stock.
Possible Volatility of Stock Price. The Company's Common Stock and Class A
Warrants are currently traded on The Nasdaq SmallCap Market. Factors such as
announcements by the Company of the regulatory status of products, quarterly
variations in its 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.
Adverse Effects of Board of Director Control of Preferred Stock. The
Company's Certificate of Incorporation authorizes the issuance of shares of
"blank check" preferred stock, which will have such designations, rights and
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preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval
(but subject to applicable government regulatory restrictions), to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
the Company's Common Stock. Those terms and conditions may include preferences
on an equal or prior rank to existing series of 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 the Company. As of June 30, 1998, 36,122 shares of Series A Preferred
Stock, 33,236 shares of Series B Preferred Stock, and 29,980 shares of Series C
Preferred Stock issued, which are immediately convertible, in the aggregate,
into 1,796,373 shares of the Company's Common Stock. See "Description of
Securities--Preferred Stock."
No Dividends on Common Stock. The Company issued a stock dividend on its
Series A Preferred Stock and Series B Preferred Stock on January 8, 1996, to
stockholders of record as of December 31, 1994. The Company has not paid any
cash dividends on its Common Stock and does not expect to declare or pay any
cash or other dividends in the foreseeable future so that it may reinvest
earnings, if any, into the development of the business. The holders of the
Company's Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock are entitled to non-cumulative cash dividends paid out of
surplus earnings. See "Dividend Policy" and "Description of
Securities--Preferred Stock."
Board Discretion as to Use of Proceeds. All of the net proceeds of the
Offering, if any, have been allocated to working capital (and not otherwise
allocated for a specific purpose) and will be used for such purposes as
management may determine in its sole discretion without the need for stockholder
approval with respect to any such allocations. See "Use of Proceeds."
Rescission Offer to Series B Shareholders. The Company 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 its public offering,
the Company is and has provided the Series B Shareholders with a rescission
offer (the "Rescission Offer") to repurchase all Series B Preferred shares (the
"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 the Company's public
offering closed and each rescinding shareholder was paid by the Company. 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 thirty days of receiving the
Rescission Offer. Two shareholders owning a combined total of 32,750 shares
accepted the Rescission Offer. The Rescission Offer was designed to reduce any
type of contingent liability the Company may be subject to in connection with
its private placement of Series B Preferred Stock. However, the Rescission Offer
may not have fully relieved the Company 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,
the Company may have continuing liability in certain states following the
Rescission Offer.
Limited Liability for Officers and Directors and Indemnification Matters.
The Company's Certificate of Incorporation eliminates in certain circumstances
the liability of directors of the Company for monetary damages for breach of
their fiduciary duty as directors. The Company has entered into indemnification
agreements (the "Indemnification Agreements") with certain directors and
officers. Each such Indemnification Agreement provides that the Company will
indemnify the indemnitee against expenses, including reasonable attorneys' fees,
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of his performance of his duties as a
director or officer, other than an action instituted by the director or officer.
The Indemnification Agreements will also require that the Company 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.
See "Management--Limitation of Liability and Indemnification Matters."
-9-
<PAGE>
Dilutionary Possibilities. The Board of Directors has the inherent right
under applicable Delaware law, for whatever value the Board deems adequate, to
issue additional shares of Common Stock 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 it is issued, thereafter generally rank
equally in all aspects of that class of stock, regardless of when issued. The
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 shares of Preferred Stock in a series, to create a new series of
Preferred Stock 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 Stock 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. See "The Offering."
USE OF PROCEEDS
Holders of Class A Warrants, Underwriter's Warrants, Win Capital Warrants,
Note Holders' Warrants and Attorney's Warrants are not obligated to exercise any
of their Warrants. However, assuming exercise of all of the Warrants, the net
proceeds from this Offering to be received by the Company from the issuance of
1,803,500 shares of Common Stock covered by this Prospectus and issuable upon
the exercise of the Class A Warrants, the Underwriter's Warrants, the Win
Capital Warrants, the Note Holders' Warrants and the Attorney's Warrants is
estimated to be $10,928,256. The closing bid price of the Common Stock on The
Nasdaq SmallCap Market was $3.00 on August 31, 1998. Approximately 84% of the
Warrants are exercisable for prices above $3.00. Accordingly, there is no
assurance that any of the Warrants will be exercised and the Company may not
receive any proceeds from this Offering. The Company will not receive any
proceeds from the issuance of shares of Common Stock upon conversion of the
Series C Preferred Stock or the Note.
The Company currently anticipates that it will use the net proceeds of this
Offering, if any, to fund working capital requirements. In the event sufficient
proceeds are not received, the Company's short term plan is to meet cash needs
through external financing sources such as bank financing and private offerings
of debt and/or equity. The Company also expects the cash flow from operations
will provide additional funds to the Company as operating revenues increase.
The cost, timing and the amount of funds required for such uses by the
Company cannot be precisely determined at this time and will be based upon,
among other things, competitive developments, the rate of the Company's progress
in product development, and the availability of alternative methods of
financing. In addition, the Company's Board of Directors has broad discretion in
determining how the proceeds of this Offering received by the Company will be
applied.
PRICE RANGE OF COMMON STOCK AND CLASS A WARRANTS
AND DIVIDEND POLICY
The Company's Common Stock and Class A Warrants trade on The Nasdaq
SmallCap Market under the respective symbols of "PMED" and "PMEDW." Prior to
July 22, 1996, there was no public market for the Common Stock. As of August 31,
1998, the Common Stock and Class A Warrants were $3.00 per share and $.469 per
Warrant, respectively. The following are the high and low sales prices for the
Common Stock and Class A Warrants by quarter as reported by Nasdaq since July
22, 1996.
<TABLE>
<CAPTION>
Common Stock Class A Warrants
Price Range Price Range
Period (Calendar Year) High Low High Low
---------------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
1996
Third Quarter (since July 22, 1996)..... 6 2 1-3/16 1/8
Fourth Quarter.......................... 5-5/8 2-7/8 1-7/16 7/16
1997
First Quarter........................... 6-3/8 3 1-9/16 3/4
Second Quarter.......................... 5-3/4 3 1 1/2
Third Quarter........................... 6 1-9/16 1-3/8 1/8
Fourth Quarter.......................... 4-5/8 2-7/16 7/8 1/4
1998
First Quarter........................... 4-11/16 2-7/8 15/16 1/4
Second Quarter.......................... 6-1/2 3-13/16 1-5/16 1/4
</TABLE>
The Company's Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock are not publicly traded. As of June 30, 1998, there were 591
record holders of Common Stock, 9 record holders of Series A Preferred Stock, 7
holders of Series B Preferred Stock, and 58 record holders of Series C Preferred
Stock.
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future. The Company must pay cash dividends to holders of its Series A
Preferred, Series B Preferred and Series C Preferred Stock before it can pay any
cash dividend to holders of its Common Stock. Dividends paid in cash pursuant to
outstanding shares of the Company's Series A, Series B and Series C Preferred
Stock are only payable from surplus earnings of the Company and are
non-cumulative and therefore, no deficiencies in dividend payments from one year
will be carried forward to the next. The Company currently intends to retain
future earnings, if any, to fund the development and growth of the Company's
proposed business and operations. Any payment of cash dividends in the future on
the Common Stock will be dependent upon the Company's 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 the Company's Board of Directors deems relevant. The Company issued
6,764 shares of its Series A Preferred and 6,017 shares of its Series B
Preferred on January 8, 1996 as a stock dividend to Series A and Series B
shareholders of record as of December 31, 1994. See "Description of
Securities--Preferred Stock."
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1998.
<TABLE>
<CAPTION>
As of
June 30,
1998
<S> <C>
Long-term obligations(1)................................................................. $ 85,244
-----------
Stockholders' Equity:
Series A Preferred Stock, $.001 par value per share;
500,000 shares authorized, 36,122 issued and outstanding............................ 36
Series B Preferred Stock, $.001 par value per share;
500,000 shares authorized, 33,122 issued and outstanding............................ 33
Series C Preferred Stock, $.001 par value per share;
30,000 shares authorized; 29,980 issued and outstanding............................. 30
Common Stock, $.001 par value per share; 20,000,000 shares authorized,
3,922,128 issued and outstanding (7,488,771 issued
and outstanding, as adjusted)(2).................................................... 3,922
Additional paid-in-capital ......................................................... 16,687,157
Treasury Stock, 2,600 shares of common stock..................................... (3,777)
Accumulated deficit................................................................. (13,868,728)
----------
Total stockholders' equity ......................................................... 2,818,673
---------
Total Capitalization..................................................................... $2,903,917
==========
</TABLE>
- -------------------
(1) Excludes current portion of long-term debt.
-10-
<PAGE>
(2) Does not include (i) 21,525 shares issuable upon exercise of the FAS
Warrants; (ii) 13,920 shares of Common Stock issuable upon conversion of
the 11,600 Series A Preferred Stock underlying the La Jolla Warrants; (iii)
86,830 shares of Common Stock issuable upon the conversion of the 36,122
shares of outstanding Series A Preferred Stock and 33,236 shares of
outstanding Series B Preferred Stock; and (iv) shares of Common Stock
issuable upon the exercise of 450,200 options granted under the Company's
1995 Option Plan.
Bridge Financing
During the period beginning on December 26, 1995 and ending on February 21,
1996, the Company sold a total of 23 Units to 14 investors (13 of which were
accredited investors) at a price of $25,000 per Unit primarily to finance its
public offering which was completed in July 1996 (excluding one Unit which was
issued for services). Each Unit consisted of a $25,000 Promissory Note with a
stated interest rate of 12% and Warrants to purchase 12,500 shares of Company's
Common Stock. Each Note bears interest at an imputed interest rate of 18% per
annum and is payable on the earlier of the closing of the Company raising at
least $4,000,000 through a public offering or December 31, 1996, at the $25,000
face amount of the Notes plus accrued interest at the rate of 12% per annum.
Each Warrant is exercisable, beginning on the date the Warrant is issued and
expiring on December 1, 2000, by the holder thereof to purchase one share of the
Company's Common Stock at an exercise price of $3.33 per share. The Company may
redeem the Warrants one year after completion of the offering at a price of $.05
per Warrant at such time as the Company's Common Stock has been trading in The
Nasdaq SmallCap Market or an established exchange at a price equal to or above
$10.00 for a period of 30 consecutive trading days ending within 15 days of the
date of redemption. See "Description of Securities."
Private Placement of 12% Convertible, Redeemable Promissory Notes
During the period from October 24, 1997 to December 8, 1997, the Company
sold a total of 21.4 Units of 12% Convertible, Redeemable Promissory Notes to 23
persons (all of whom were accredited investors) through a private placement at a
price of $50,000 per Unit, each Unit consisting of a $50,000 Unsecured 12%
Convertible, Redeemable Promissory Note. The Company received $1,070,000 in cash
as a result of the private placement transaction and paid $128,400 in
commissions and expenses. The Notes bear interest at 12% per annum, payable
semi-annually on each six month anniversary of the initial closing of the
private placement. The principal amount of the Notes, together with all accrued,
unpaid interest are due and payable on the three year anniversary of the closing
of the private placement. The Notes are redeemable prior to maturity at 112% of
the face value of each Note, plus accrued unpaid interest, upon 30 days written
notice to the holders of the Notes at any time after (i) the 30-day anniversary
of the effective date of the registration statement the Company will undertake
to file with the Securities and Exchange Commission to register the shares of
its Common Stock issuable to the noteholders upon conversion of the Notes, and
(ii) the average closing price of the Company's Common Stock for the 20-day
period immediately prior to the date on which notice of redemption is given to
the Company to the noteholders is at least $3.50 per share. Each Note is
convertible into 25,000 shares of the Company's Common Stock (one share for each
$2.00 principal amount of the Note) at the option of the noteholders until such
time as the Notes have been repaid in full. During the period from February 2,
1998 to March 26, 1998, 22 of the noteholders representing $995,000 of the Notes
elected to exchange their Notes for Series C Convertible Preferred Stock
pursuant to the terms of a Security Exchange Agreement. See "Capitalization --
Private Placement of Series C Convertible Preferred Stock" and "Description of
Securities."
Private Placement of Series C Convertible Preferred Stock
During the period from February 2, 1998 to April 11, 1998, the Company sold
a total of 20,300 shares of Series C Preferred Stock to 58 persons (all of whom
were accredited investors) through a private placement at a price of $100.00 per
share. The Company received $2,003,000 in cash as a result of the private
placement transaction and paid $235,360 in commissions and expenses. The holders
of the shares are entitled to 12% non-cumulative dividends. However, the shares
are entitled to dividends declared on the Company's Common Stock on an as
converted basis, i.e., as if the shares had been converted into Common Stock.
The holders of the shares of Series C Preferred Stock have the option at any
time to convert such shares into the Company's Common Stock at a conversion
price equal to $1.75 per share of the Common Stock, subject to adjustments for
stock splits, stock dividends and certain combinations or
-11-
<PAGE>
recapitalizations in respect to the Common Stock. In addition, the shares will
be automatically converted into Common Stock upon 30 days' written notice by the
Company to the holders of the shares after (i) the 30-day anniversary of the
effective date of the filing of a registration statement on which shares of
Common Stock issuable upon conversion of the shares are 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 conversion is given by the Company to
holders of the shares is at least $3.50 per share. Any shares still outstanding
after January 1, 2002 will be mandatorily converted at such date at the
conversion price then in effect. See "Description of Securities."
SELECTED FINANCIAL DATA
The following table sets forth the Company's selected historical financial
data for the years ended September 30, 1996 and December 31, 1997, the three
months ended December 31, 1995 and 1996 and the three months ended March 31,
1997 and 1998. The selected financial data as of and for the years ended
September 30, 1996 and December 31, 1997 and as of and for the three months
ended December 31, 1996 are derived from the financial statements of the Company
which have been audited by Tanner & Co. The selected financial data as of and
for the three months ended December 31, 1995 and as of and for the six months
ended June 30, 1997 and 1998 are derived from the Company's unaudited quarterly
financial statements. In the opinion of management, the three month financial
data reflect all of the adjustments necessary for a fair presentation of such
data. The results of operations for the first three months of fiscal 1998 are
not necessarily indicative of the results to be expected for the full year. The
Company changed its fiscal year end to December 31, effective December 31, 1996.
The following financial information should be read in conjunction with the
Financial Statements and related notes thereto.
<TABLE>
<CAPTION>
For the For the
year ended year ended Three months ended Six months ended
September 30, December 31, December 31, June 30,
Statement of Operations Data: 1996 1997 1995 1996 1997 1998
- ----------------------------- ---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net sales....................... $ 252,134 $ 464,062 $ 65,405 $ 35,651 $ 360,407 $ 977,536
Net cost of sales............... 180,010 333,156 45,286 21,061 219,375 515,060
Operating expenses.............. 1,328,173 2,933,327 312,891 1,243,984 1,540,722 1,216,715
Operating loss.................. (1,256,049) (2,802,421) (292,772) (1,229,394) 1,399,690 754,239
Other income (expenses)......... (192,970) (207,573) (178,484) 30,991 41,532 13,941
Net loss ....................... (1,449,019) (3,009,994) (471,256) (1,198,403) (1,358,158) (740,298)
Net loss attributable to common
shareholders.................... (1,448,171) (3,009,994) (471,256) (1,198,403) (1,358,158) (5,610,321)
Net loss per common share....... (0.66) (0.82) (0.20) (0.38) (0.39) (1.45)
Shares used in computing net loss
per share....................... 2,193,000 3,663,000 2,352,000 3,183,000 3,465,000 3,850,000
Cash dividends per share........ None None None None None None
</TABLE>
<TABLE>
<CAPTION>
As of As of
Balance Sheet Data: December 31, June 30,
1997 1998
(Unaudited)
<S> <C> <C>
Current assets....................................... $ 1,857,128 $2,791,573
Current liabilities.................................. 1,055,223 369,758
Working capital ..................................... 801,905 2,421,815
Total assets......................................... 2,452,574 3,208,517
Long-term debt, less current portion................. 1,081,996 85,244
Accumulated deficit.................................. (8,023,006) 14,194,140
Stockholder's equity ................................ 315,355 2,753,514
</TABLE>
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
General
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations, which should be read in conjunction with the
Financial Statements (including the notes thereto), contains forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The Company believes that its expectations are based on reasonable
assumptions within the bounds of its knowledge of its business and operations.
The Company's actual results could differ materially from those anticipated in
these forward looking statements as a result of certain factors discussed in
this section. The Company has changed its fiscal year to the period from January
1 to and including December 31.
The Company is engaged in the design, development, manufacture and sale of
high technology eye care products. The Company's surgical equipment is designed
to perform minimally invasive cataract surgery and is comprised of surgical
devices and related instruments and accessories, including disposable products.
The Company's diagnostic instrument is designed to measure intraocular pressure
and ocular blood flow for the detection and treatment of glaucoma. Paradigm's
activities for the six months ended June 30, 1998 include domestic and
international sales of the Precisionist 3000 Plus(TM) and the Precisionist
Thirty Thousand(TM) Ocular Surgery Workstation(TM) cataract surgery systems,
domestic sales of the Blood Flow Analyzer(TM) , and research and development on
the Photon(TM) laser cataract removal system which received FDA approval for
expansion to Phase II Clinical Trials on May 19, 1998. Paradigm's activities for
the six months ended June 30, 1997 include domestic and international sales of
the Precisionist 3000 Plus(TM), the Precisionist ThirtyThousand(TM) and the
Photon(TM) laser cataract system as well as primary research for other new
products and businesses.
Results of Operations
Second Quarter of 1998 Compared to Second Quarter of 1997
Sales increased by $521,862, or 502%, to $625,854 for the three months
ended June 30, 1998 from $103,992 for the same period in 1997. The increase in
sales was a result of the Company launching the Blood Flow Analyzer System(TM)
and increased sales of the Precisionist ThirtyThousand(TM) Ocular Surgery
Workstation(TM). Cost of sales increased $217,419, or 214%, to $319,026 for the
three months ended June 30, 1998 from $101,607 for the same period in 1997 as a
result of the increased sales.
The gross margin for the three months ended June 30, 1998 of 49% is higher
than the gross margin for the same period in 1997 of only 2.3%. If the
amortization of capitalized engineering and design charges of $18,567, a
non-cash expense, is excluded for the three months ended June 30, 1998, the
gross margin was 52%. The poor sales performance for the quarter ended June 30,
1997 was due primarily to the identification of certain software and hardware
revisions on the Precisionist ThirtyThousand(TM) that had to be made before
shipments could be resumed.
Marketing and selling expenses increased by $61,107, or 44%, to $200,707
for the three months ended June 30, 1998 from $139,600 for the same period in
1997. The increase was a result of the Company adding four additional sales
representatives and increasing promotional activities in anticipation of
launching the Blood Flow Analyzer(TM) and of increased sales of the Precisionist
ThirtyThousand(TM) Ocular Surgery Workstation(TM).
General and Administrative expenses decreased by $18,661, or 6%, to
$297,607 for the three months ended June 30, 1998, from $316,268 for the same
period in 1997. This reduction was a result of a restructuring that eliminated
three positions.
Research and development expenses increased by $43,658 or 37%, to $162,939
for the three months ended June 30, 1998 from $119, 281 for the same period in
1997.
-13-
<PAGE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997.
Sales increased by $617,129, or 171%, for the six months ended June 30,
1998 from $360,407 for the same period in 1997. The increase in sales was the
result of the Company launching the Blood Flow Analyzer System(TM) and increased
sales of the Precisionist ThirtyThousand(TM) Ocular Surgery Workstation(TM).
Cost of sales increased $295,685, or 135%, to $515,060 for the six months ended
June 30, 1998 from $219,375 for the same period in 1997.
As a result of increased sales, the gross margin for the six months ended
June 30, 1998 of 47% is higher than the gross margin for the same period in 1997
of 39%. If the amortization of capitalized engineering and design charges for
the first six months of $37,128 as of June 30, 1998 and $24,312 as of June 30,
1997, non-cash expenses, are excluded, the gross margin was 51% and 46%,
respectively. The poor sales performance for the six months ended June 30, 1997
was due primarily to the identification of certain software and hardware
revisions on the Precisionist ThirtyThoussand(TM) that had to be made before
shipments could be resumed.
Marketing and selling expenses increased by $107,118, or 43%, to $358,870
for the six months ended June 30, 1998 from $251,752 for the same period in
1997. The increase was a result of the Company adding four additional sales
representatives and of increased promotional activities in anticipation of
launching the Blood Flow Analyzer(TM) and increased sales of the Precisionist
ThirtyThousand(TM) Ocular Surgery Workstation(TM).
General and administrative expenses decreased by $143,382 or 18% for the
six months ended June 30, 1998 from $775,056 for the same period in 1997. This
reduction was a result of a restructuring that eliminated three positions.
Research and development expenses decreased by $287,743, or 56%, to
$226,171 for the six months ended June 30, 1998 from $513,914 for the same
period in 1997. The principal reason for the decrease in research and
development expenses was the completion of a substantial part of the engineering
and design changes on the Precisionist ThirtyThousand(TM) Ocular Surgery
Workstation(TM).
Upgrades
To garner sales, the Company offers the ultrasonic Precisionist(TM) system
with an unconditional arrangement under which the customer may trade in their
Precisionist(TM) system to upgrade to a Precisionist ThirtyThousand(TM) Ocular
Surgery System(TM) or, upon FDA clearance, a Photon(TM) laser cataract system
when that system becomes available. Under this arrangement, the customer
receives full credit for the trade in purchase price of the Precisionist(TM)
system against the price of the new Precisionist ThirtyThousand(TM) Ocular
Surgery System of Photon(TM) laser cataract system.
In the June 30, 1998 quarter, there were two trade-in sales totaling
$76,000 in which the customer has upgraded a Precisionist(TM) system to the
Precisionist ThirtyThousand(TM) Ocular Surgery System(TM) compared with two
trade-in sales in the quarter ended June 30, 1997.
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended September
30, 1996.
Sales increased by $211,928, or 84%, to $464,062 for the twelve months
ended December 31, 1997 from $252,134 for the twelve months ended September 30,
1996. Sales of product in the surgical equipment market are contingent upon
customer evaluation. Based on the evaluation of the products shipped in the
Company's initial new product launch in 1997, five units were returned and
certain software and hardware revisions were identified and corrected. The
increase in sales in 1997 was a result of the Company launching the Photon
Ocular Surgery System(TM) and the Precisionist Thirty Thousand(TM), the latest
generation of Paradigm products on March 31, 1997.
Cost of sales increased $153,146 or 85%, to $333,156 for the twelve months
ended December 31, 1997 from $180,010 for the twelve months ended September 30,
1996, as a result of the increased sales. The gross margin for the twelve months
ended December 31, 1997 of 28% was slightly lower than the gross margin for the
twelve months ended September 30, 1996 of 29%, primarily as a result of the
amortization of capitalized engineering and design charges of $61,440 in 1997
which reduced the gross margin from 41% to 28%.
-14-
<PAGE>
Marketing and selling expenses increased by $374,813, or 173%, to $590,941
for the twelve months ended December 31, 1997 from $216,128 for the fiscal year
ended September 30, 1996. The increase was a result of the Company adding two
additional sales representatives and increasing promotional activity in
anticipation of launching the Photon Ocular Surgery System(TM) and the
Precisionist Thirty Thousand during the first quarter of 1997, and the resulting
service expenses associated with installing identified software and hardware
revisions.
General and administrative expenses increased by $979,047, or 119%, to
$1,802,238 for the twelve months ended December 31, 1997 from $823,191 for the
twelve months ended September 30, 1996. This was the result of an increase in
personnel and costs associated with pre-production and new product launch
activities.
Research and development expenses increased by $251,294, or 87%, to
$540,148 for the twelve months ended December 31, 1997 from $288,854 for the
twelve months ended September 30, 1996. This was the result of hiring four
additional employees and costs associated with developing new products for the
Company.
Three Months Ended December 31, 1996 Compared to Three Months Ended
December 31, 1995.
Sales decreased by $29,754, or 45%, to $35,651 for the three months ended
December 31, 1996 from $65,405 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 resources on the development of the Photon
Ocular Surgery System(TM) and the Precisionist Thirty Thousand(TM), the next
generation of Paradigm products scheduled for launch in March, 1997. Cost of
sales decreased $24,225, or 53%, to $21,061 for the three months ended December
31, 1996 from $45,286 for the comparable period in 1995, as a result of the
decreased sales. The gross margin for the three months ended December 31, 1996
of 41% is up from the gross margin for the comparable period in 1995 of 31%
because sales in 1995 included more parts and accessories which have a lower
gross margin.
Marketing and selling expenses increased by $76,132, or 82%, to $168,880
for the three months ended December 31, 1996 from $92,748 for the comparable
period in 1995. The increase was a result of the Company adding two additional
sales representatives and increasing promotional activities in anticipation of
launching the Photon Ocular Surgery System(TM) and the Precisionist Thirty
Thousand(TM).
General and administrative expenses increased by $425,041, or 251%, to
$594,520 for the three months ended December 31, 1996 from $169,479 for the
comparable period in 1995. This was the result of an increase in personnel and
costs associated with pre-production activities.
Research and development expenses increased by $429,920, or 849%, to
$480,584 for the three months ended December 31, 1996 from $50,664 for the
comparable period in 1995. This was the result of hiring four additional
employees and costs associated with developing new products.
Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended
September 30, 1995.
Sales decreased by $255,450, or 50%, to $252,134 in fiscal year ended
September 30, 1996 from $507,584 for the comparable period in 1995. This
decrease was a result of a reduction in the sales of the Precisionist Phaco
System resulting from the Company focusing its limited financial resources on
the public offering. Cost of sales decreased $86,338, or 32%, to $180,010 in
fiscal year ended September 30, 1996 from $266,348 for the comparable period in
1995, as a result of the reduced sales. The gross margin in fiscal 1996 of 29%
is down from the gross margin for the comparable period in 1995 of 48% because
sales in 1996 included more parts and accessories which have a lower gross
margin.
Marketing and selling expenses decreased by $212,137, or 50%, to $216,128
in fiscal year ended September 30, 1996 from $428,265 for the comparable period
in 1995. The decrease was a result of the Company focusing its limited financial
resources on the public offering. The Company expects to increase its marketing
and selling activities now that the public offering has been completed.
General and administrative expenses increased by $415,388, or 102%, to
$823,191 in fiscal year ended September 30, 1996 from $407,803 for the
comparable period in 1995. This increase was the result of the increased
administrative
-15-
<PAGE>
costs related to preparation for the 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(TM) laser cataract
system.
Research and development expenses increased by $52,811, or 22%, to $288,854
in fiscal year ended September 30, 1996 from $236,043 for the comparable period
in 1995. The Company expects the amount spent on research and development for
the Photon(TM) laser cataract system and other new products to increase in
fiscal 1997.
In fiscal year ended September 30, 1996, the Company incurred $179,000 of
expenses in connection with obtaining the relinquishment of certain
anti-dilution rights. See "Certain Transactions."
Upgrades
To garner sales, the Company offers the ultrasonic Precisionist(TM) system
with an unconditional arrangement under which the customer may trade in their
Precisionist(TM) system to upgrade to a Precisionist Thirty Thousand(TM) Ocular
Surgery System(TM). Under this arrangement, the customer receives full credit
for the trade in purchase price of the Precisionist(TM) system against the price
of the new Precisionist Thirty Thousand(TM) Ocular Surgery System(TM). As of
December 31, 1997, the Company has distributed approximately 51 Precisionist(TM)
systems under this provision. The gross margin on these original sales was
approximately $295,000 or 32%.
If all of these customers were to exercise their upgrade privilege, the
Company would exchange the Precisionist(TM) system for the Company's new
Precisionist Thirty Thousand(TM) Ocular Surgery System(TM) and refurbish the
ultrasonic Precisionist(TM) systems and sell them in the international market.
Any losses on the sale of the refurbished Precisionist(TM) systems, which are
not expected to be significant, would reduce the gross margin on the
Precisionist Thirty Thousand(TM) Ocular Surgery System(TM) sales. The total
gross margin on the upgrade sales is estimated to be $1,677,000 or 41%. As of
December 31, 1997, there have been two trade in sales in which the customer has
upgraded a Precisionist(TM) system to the Precisionist Thirty Thousand(TM)
Ocular Surgery System(TM).
Liquidity and Capital Resources
The Company's ratio of inventory to annual sales for the twelve months
ended December 31, 1997 was 1.8 as compared to 1.5 for the twelve months ended
September 30, 1996. The ratio of inventory to quarterly sales for the quarter
ended June 30, 1998 was 1.4 as compared to 8 for the same period ended June 30,
1997. The ratio of inventory to quarterly sales for the quarter ended March 31,
1998 was 2.5 as compared to 2.4 for the same period ended March 31, 1997. With
the launching of two new products within the past twelve months, management has
to build inventory in anticipation of sales. As a result, the ratio of inventory
to quarterly sales tends to fluctuate widely depending on the Company's purchase
orders with the manufacturers, the time lags between the purchase order,
delivery and sales, the number of demonstration units in the field, the accuracy
of the sales forecast, and seasonal factors.
The Company used cash in operating activities of $2,623,893 for the twelve
months ended December 31, 1997 compared to $1,215,399 for the twelve months
ended September 30, 1996. The increase of cash used by operating activities in
1997 is primarily attributable to the higher net loss in 1997. The Company
received cash from investing activities of $97,874 for the twelve months ended
December 31, 1997 compared to cash used in investing activities of $590,921 in
fiscal 1996. In 1997 the Company received proceeds of $499,742 from the sale of
marketable debt securities and expended $401,868 on property and equipment and
capitalized engineering and design charges. In 1996 the Company spent $91,179 on
property and equipment and $499,742 on marketable debt securities. The company
received $943,589 from financing activities in 1997, primarily from the issuance
of notes payable. This compares to $4,508,254 in 1996, which resulted from the
issuance of common stock and warrants, offset principal payments on notes
payable.
In May 1997, the Company established a $630,000 line of credit with Merrill
Lynch Business Financial Services, Inc. ("Merrill Lynch") and a $350,000 line of
credit with Bear Stearns Securities Corp. ("Bear Stearns") on a secured basis.
As of December 31, 1997, the Company had liquidated the underlying collateral
and repaid the lines of credit with Merrill Lynch and Bear Stearns.
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As discussed above, the Company incurred a net loss of $3,009,994 and
negative cash flows from operating activities of $2,623,892 for the year ended
December 31, 1997. As of December 31, 1997, the Company had an accumulated
deficit of $8,258,406. In March 1998, the Company completed the private
placement of 20,030 shares of Class C Preferred Stock at $100 per share
resulting in net proceeds of approximately $1,700,000, net of offering expenses.
Management believes that these net proceeds, plus existing working capital, will
be sufficient to assure continuation of the Company's operations through
December 31, 1998. Management projects significant revenues from the successful
re-launch of its new product, sales from additional products and certain
strategic alliances to market their products. However, no assurances can be
given that management's plans will be successful in achieving profitability or
positive cash flows.
The Company will 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 December 31, 1997, the Company had net operating loss carryforwards
(NOLs) of approximately $6,800,000 and research and development tax credit
carryforwards of approximately $64,000. These carryforwards are available to
offset future taxable income, if any, and begin to expire in the year 2005.
Because the Company has yet to recognize significant revenue from the sale of
its Photon(TM) laser cataract system and other products, a 100% valuation
allowance has been provided for these deferred tax assets. The Company's ability
to use its NOLs to offset future income taxes 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 any public 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
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 130 ("SFAS 130"),
"Reporting Comprehensive Income", and SFAS No. 131 ("SFAS 131"), "Disclosures
About Segments of an Enterprise and Related Information". SFAS 130 establishes
standards for reporting and display of comprehensive income in the financial
statements. Comprehensive income is the total of net income and all other
non-owner changes in equity. SFAS 131 requires that companies disclose segment
data based on how management makes decisions about allocating resources to
segments and measuring their performance. In addition, in February 1998 the FASB
issued SFAS No. 132 ("SFAS 132"), "Employers' Disclosures About Pensions and
Other Post Retirement Benefits", concerning employer disclosure about pension
plans and other post retirement benefits. SFAS 130, SFAS 131 and SFAS 132 are
effective for fiscal years beginning after December 15, 1997. Adoption of the
standards is not expected to have an effect on the Company's financial
statements, financial position or results of operations.
The Company has reviewed all other recently issued accounting standards in
order to determine their effects, if any, on the results of operations or
financial position of the Company. Based on that review, the Company believes
that none of these pronouncements will have a significant effect on current or
future earnings or operations.
Year 2000
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Management of the
Company does not anticipate that any significant modification or replacement of
the Company's software will be necessary for its computer systems to properly
utilize dates beyond December 31, 1999 or that the Company will incur
significant operating expenses to make any such computer system improvements.
The Company is not able to determine, however, whether any of its suppliers,
lenders, or service providers will need to make
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any such software modifications or replacements or whether the failure to make
such software corrections will have an effect on the Company's operations or
financial condition.
BUSINESS
General
The Company develops, manufactures, sources, markets and sells ophthalmic
surgical and diagnostic equipment, instrumentation and related accessories,
including disposable products. The Company's surgical equipment is designed for
minimally invasive cataract treatment. The Company markets two ultrasonic
cataract surgery systems with related instruments, accessories and disposable
products. One of the ultrasound systems, the Precisionist Thirty Thousand(TM),
is manufactured as the base surgery system for the Company's Precisionist Thirty
Thousand(TM) Ophthalmic Surgical Workstation(TM). The Company is currently
developing a laser cataract surgery system as an adjunct to its ultrasound
cataract surgery equipment. This product is currently undergoing investigational
trials in the United States. If successfully developed and approved for medical
uses, the Company plans to market the laser system as a plug-in module for its
Workstation(TM). The Company's diagnostic product is the Blood Flow
Analyzer(TM). This product is a portable computerized system for which the
Company has secured a license granting it the right to market the product in the
United States. This product is designed for diagnosis of ocular blood flow
volume for detection and treatment of glaucoma. The Company is currently
developing additional test applications for its diagnostic product.
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 2 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.
The Company manufacturers and sells two phaco systems with instruments,
accessories and disposable products. The Precisionist 3000 Plus(TM) system was
introduced in 1992 and is a low-cost portable system intended primarily for the
international market. The Precisionist Thirty Thousand(TM) Ocular Surgery
Workstation(TM) is the Company's newest generation system which is the base for
the Company's expandable surgical "workstation" platform. The Company believes
current phaco systems can be difficult for many ophthalmic surgeons to master
and are limited in their ability to be the most minimally invasive method
possible. The Company is developing its proprietary patented laser system and
unique patented probe for laser cataract removal which the Company believes can
address the difficulties associated with phaco systems. The Company intends to
make the patented laser system a plug-in module for its Workstation(TM) if and
when cleared for market by the FDA. The development of the laser cataract system
is being done in cooperation with ophthalmic surgeons in the United States and
through research and development work being conducted by the Company's
engineering group, and under contract with the Dixon Medical Laser Laboratory at
the University of Utah in Salt Lake City.
The Company believes that in certain surgical conditions, its laser system
will be easier to use and safer than present phaco systems. The probe will be
smaller than typical probes employing ultrasonic needle technology and will
deliver laser energy directly to the desired tissue area by means of a smooth
blunt end. The laser probe has been shown to eliminate high-frequency vibrations
in the eye and to significantly reduce heat build-up which are complications
associated with the phaco method. In 1996, the Company received FDA approval to
conduct clinical trials in the United States with the Photon(TM) laser system.
During these Phase I clinical trials the Company discovered that the Photon(TM)
laser system was effective in removing softer grade cataracts. The Company
completed its Phase I clinical trials in 1997, and has received FDA approval to
proceed to an expanded Phase II clinical to provide the statistical data
required to approve the Photon(TM) laser system for laser cataract removal.
There is no assurance however that the Company will successfully complete the
Phase II clinical trials or that additional disadvantages or problems unique to
the Photon(TM) laser system will not be discovered during the Phase II clinical
trials or following FDA approval of the system.
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In addition to cataract surgery, the Company believes that its Photon(TM)
laser system is capable of being configured with specialty probes for use in
other ophthalmic surgical procedures. these potential applications could
represent substantial growth opportunities including additional sales of
equipment, instruments, accessories and disposables. However, there can be no
assurance that these applications will be developed or approved. Further there
is no guarantee that the laser will be accepted by the ophthalmic surgery market
in this capacity.
In June 1997, the Company received FDA clearance to market the Blood Flow
Analyzer(TM) for detection of glaucoma and other retina related diseases. The
device measures not only intraocular pressure but also pulsatile ocular blood
flow, the reduction of which may cause nerve fiber bundle death through oxygen
deprivation thus resulting in visual field loss associated with glaucoma. The
Company's Blood Flow Analyzer(TM) is a portable automated in-office system that
presents an affordable method for ocular blood flow testing for the ophthalmic
and optometric practitioner. The Company has secured a license granting it the
exclusive right to private label, package and market the product in the United
States, with full international marketing rights.
On June 26, 1998, the Company entered into a Co-Distribution Agreement with
Pharmacia & Upjohn Company and National Healthcare Manufacturing Corporation
which provides for the marketing and sale of a range of ophthalmic products.
Under the terms of the Co-Distribution Agreement, the Company, Pharmacia &
Upjohn and National Healthcare will offer a comprehensive package of products to
cataract surgeons, including cataract surgical equipment, intraocular lens
implants, intraocular pharmaceuticals, surgical instruments and sterile
procedural packs. The Company will provide the Precisionist ThirtyThousand(TM)
for distribution and sale under the Co-Distribution Agreement. The Pharmacia &
Upjohn products to be distributed as part of the Co-Distribution Agreement
include the Healon(R) and Healong(R) viscoelastic solution and the CeeOn line of
foldable, small intraocular lens implants, designed to replace the natural lens
removed during cataract surgery.
On July 23, 1998, the Company entered into an Agreement for Purchase and
Sale of Assets with the Humphrey Systems Division of Carl Zeiss, Inc. to acquire
the ownership and manufacturing rights to certain assets of Humphrey Systems
that are used in the manufacturing and marketing of an ultrasonic microprocessor
based-line of ophthalmic diagnostic instruments, including the Ultrasonic
Biometer Model 820, the A/B Scan System Model 837, the Ultrasound Pachymeter
Model 855, and the Ultrasound Biomicroscope Model 840, and all accessories,
packaging and end-user collateral materials for each of the product lines for
the sum of $500,000, payable in the form of 78,947 shares of Common Stock which
were issued to Humphrey Systems and 26,316 shares of Common Stock which were
issued to Douglas Adams. However, if the net proceeds received by Humphrey
Systems from the sale of the shares issued pursuant to the Agreement for
Purchase and Sale of Assets is less than $375,000 (after payment of commissions,
transfer taxes and other expenses relating to the sale of such shares), then the
Company is required issue additional shares of Common Stock or pay additional
funds to Humphrey Systems as is necessary to increase Humphrey Systems' net
proceeds from the sale of the assets to $375,000.
The rights to the ophthalmic diagnostic instruments that have been
purchased from Humphrey Systems under the Agreement compliment both the
Company's cataract surgical equipment and its ocular Blood Flow Analyzer(TM).
The Ultrasonic Biometer calculates the prescription for the intraocular lens to
be implanted during cataract surgery. The Ultrasound Pachymeter measures corneal
thickness for the new refractive surgical applications that eliminate the need
for eyeglasses and for optometric applications including contact lense fitting.
The A/B Scan System combines the Ultrasonic Biometer and ultrasound imaging for
advanced diagnostic testing throughout the eye and is a viable tool for retinal
specialists. The Ultrasound Biomicroscope utilizes microscopic digital
ultrasound resolution for detection of tumors and improved glaucoma management.
Background
Corporate History. The Company's business originated with Paradigm Medical,
Inc., a California corporation formed in October 1989 ("PMI"). PMI developed the
Company's present ophthalmic business and was operated by its founders Thomas F.
Motter and Robert W. Millar. In May 1993, PMI merged with and into the Company.
At the time of the merger, the Company was a dormant public shell existing under
the name French Bar Industries, Inc. ("French Bar"). French Bar had operated a
mining and tourist business in Montana. Prior to its merger with PMI in 1993,
French Bar had disposed of its mineral and mining assets in a settlement of
outstanding debt and had returned to the status of a dormant entity. Pursuant to
the merger, the Company caused a 1-for-7.96 reverse stock split of its shares of
Common
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Stock. The Company then acquired all of the issued and outstanding shares of
Common Stock of PMI using shares of its own Common Stock as consideration. As
part of the merger, the Company changed its name from French Bar Industries,
Inc. to Paradigm Medical Industries, Inc. and the management of PMI assumed
control of the Company. In April 1994, the Company caused a 1-for-5 reverse
stock split of its shares of Common Stock. In February 1996, the Company
redomesticated 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 can all contribute to eye disorders. The most
common eye disorders are either pathological or refractive. Many pathological
disorders of the eye can be corrected by surgery. These include cataracts
(clouded lenses), glaucoma (elevated pressure in the eye), corneal disorders
such as scars, defects and irregular surfaces and vitro-retinal disorders such
as the attachment of membrane growths to the retina causing blood leakage within
the eye. All of these disorders can impair vision. Many refractive disorders can
be corrected through the use of eyeglasses and contact lenses. Myopia
(nearsightedness), hyperopia (farsightedness) and presbyopia (inability to
focus) are three of the most common refractive disorders.
Ultrasound Technology. Ultrasound devices have been used in ophthalmology
since the late 1960's for diagnostic and surgical applications when treating or
correcting eye disorders. In diagnostics, ultrasound instruments are used to
measure distances and shapes of various parts of the eye for prescription of
eyeglasses and contact lenses and for calculation of lens implant prescriptions
for cataract surgery treatment. These devices emit sound waves through a
hand-held probe that is placed onto or near the eye with the sound waves emitted
being reflected by the targeted tissue. The reflection "echo" is computed into a
distance value that is presented as a visual image, or cross-section of the eye,
with precise measurements displayed and printed for diagnostic use by the
surgeon.
Surgical use of ultrasound in ophthalmology is limited to treatment of
cataractous lenses in the eye through a procedure called phacoemulsification or
"phaco." A primary objective of cataract surgeries is the removal of the
opacified (cataractous) lens through an incision that is as small as possible.
The opacified lens is then replaced by a new synthetic lens intraocular implant
("IOL"). 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 cataractous 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 lens, 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. Industry sources indicate that
phaco cataract treatment is 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 of
light 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
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choice of wavelength and is an important variable in treating various tissue. In
a surgical laser, light is emitted in either a continuous stream or in a series
of short duration "pulses," thus interacting with the tissue through heat and
shock waves, respectively. Several factors, including the wavelength of the
laser and the frequency and duration of the pulse or exposure, determine the
amount of energy that interacts with the targeted tissue and, thus, the amount
of surgical effect on the tissue.
Lasers are widely accepted in the ophthalmic community for treatment of
certain eye disorders and are popular for surgical applications because of their
relatively 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 was recently
tested in clinical trials for limited use 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 cyclophotocoqulation). Argon, Nd:YAG
and excimer lasers are primarily used for one or two clinical applications each.
In contrast to these conventional laser systems, the Company's Photon(TM) laser
cataract system is designed to be used for multiple ophthalmic applications,
including certain new applications that may be made possible with the Company's
proprietary technology. Such new applications, however, must be tested in
clinical trials and be approved by the FDA.
Products
The Company's principal surgical product is an ultrasonic system for use by
ophthalmologists to perform surgical treatment procedures to remove cataracts.
In 1990, the Company received clearance from the FDA pursuant to Section 510(k)
of the Food, Drug and Cosmetics Act (the "FDC Act") on its Precisionist 3000(TM)
phaco system for cataract surgery, which system was upgraded to the Precisionist
3000 Plus(TM) in 1994. The Company also completed its pre clinical in vitro and
in vivo (animal) testing of its Photon(TM) laser cataract surgical system and
submitted a Section 510(k) Premarket Notification to the FDA for the Photon(TM)
laser cataract system in September 1993, with a follow-up Investigational Device
Exemption ("IDE") application submitted in October 1994 to provide additional
clinical data through human cases to support its earlier filing. The IDE was
approved in May 1995. Phase I clinical trials were begun in April 1996 with
surgeries completed in December 1996. Patient follow-up examinations as mandated
by the FDA study were completed in July 1997, and the Company submitted its
final report to the FDA thereafter. During the Phase I clinical trials the
Company discovered that the Nd:YAG (Neodymium: Yttrium-Aluminum-Garnet) laser
system may not effectively remove harder grade cataracts. The Company is now
requesting FDA approval to conduct expanded or Phase II clinical studies of the
laser system in hopes of refining that system to remove a broader range of
cataracts.
There is no assurance, however, that this limitation can be overcome.
Precisionist 3000 Plus(TM) System. The Precisionist 3000 Plus(TM) system
(the "3000 Plus(TM)") is the Company's first cataract surgery system, having
been developed in 1992 and enhanced in 1994. The system is compact, portable and
simple to operate with a very low operating cost. The primary market for the
3000 Plus(TM) is in foreign countries where phaco technology is emerging and
price-points are relatively low. The 3000 Plus(TM) is also a good replacement or
back-up system. The system features a simple analog presentation of the
ultrasound phaco equipment, irrigation and aspiration fluidics. The 3000
Plus(TM) provides the basic standard features for phaco surgery including:
automated priming and tuning, error detection of ultrasound handpiece and tip
functions, audible vacuum feedback tones, ultrasound energy metering, pneumatic
high-speed anterior vitrectomy and bipolar electrosurgery coagulation. The
system can be ordered with a mobile cart including integrated irrigation support
for a more permanent installation.
Precisionist Thirty Thousand(TM). The Precisionist Thirty Thousand(TM) (the
"Thirty Thousand(TM)") is the Company's core phaco surgical technology and the
base system for its Precisionist Thirty Thousand(TM) Ocular Surgery
Workstation(TM) platform. The Thirty Thousand(TM) was placed into production and
sale in 1997. As a phaco cataract surgery system, the Company believes the
Thirty Thousand(TM) is equal or superior to the present competitive systems in
the United States. The system features a graphic color display and unique
proprietary on-board computer and graphic user interface linked to 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
Thirty Thousand(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 Thirty
Thousand(TM) features the Company's third generation SmartPump(TM) technology
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which utilizes the micro-processing capabilities of the system to monitor all
activities of the vacuum aspiration and irrigation system and to sense
automatically a vacuum surge and adjust the internal vacuum level of the system
to normalize the in-line fluidics and stabilize the eye during surgery without
surgeon intervention. 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. The Company is now under development of a
Generation II version of its surgical fluidics system which it intends to offer
as a feature enhancement for advanced techniques and in anticipation of the
expanded potential of the Photon(TM) laser system.
Photon(TM) Workstation(TM). The Percisionist Thirty Thousand(TM) Ocular
Surgery Workstation(TM) which comprises the base system for the Precisionist
Thirty Thousand(TM) is the first system known by the Company 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 computer developed for the Company. The
computer is controlled by a proprietary software system developed by the Company
that interfaces with all components of the system: ultrasound, fluidics
(irrigation), aspiration, venting, coagulation and anterior vitrectomy
(pneumatic). 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 hardware such as the Company's Photon(TM) laser
system, when approved by the FDA, 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 market place.
Photon(TM) Laser System. The Photon(TM) laser cataract system, which is
still subject to FDA approval, is designed to be installed as a seamless plug-in
upgrade or add-on to the Company's Precisionist Thirty Thousand(TM) Ocular
Surgery Workstation(TM). The plug-in platform concept is unique in the
ophthalmic surgical market for systems of this magnitude and presents a unique
market opportunity for the Company. The main elements of the laser system are
the Nd:YAG laser module, Photon(TM) laser software package and interchangeable
disposable hand-held fiber optic laser Photofragmentation Probe(TM) (the
"LCP(TM)"). The Photon(TM) laser utilizes the on-board microprocessor computer
of the Workstation(TM) to generate short pulse laser energy developed through
the patented LCP(TM) to targeted cataract tissue inside the eye, while
simultaneously irrigating the eye and aspirating the diseased cataract tissue
from the eye. The probe is smaller in diameter than conventional ultrasound
phaco needles and presents no damaging vibration or heat build-up in the eye.
The Company's Phase I clinical trials demonstrated that this probe can 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 which 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. The Company intends to refine
the laser delivery system and laser cataract surgical technique through expanded
research and clinical studies. As far as the Company can determine, no
integrated single laser photofragmenting probe is presently available on the
market that uses laser energy directly, contained in an enclosed probe, to
plasmatize cataract tissue at a precise location inside the eye while
simultaneously irrigating and aspirating the site.
The Company's laser system is based upon the concept that pulsed laser
energy produced with the 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 present risk of complication both during and after
surgery. In contrast, the Company's laser system, which utilizes short
centralized energy bursts, should permit the delivery of the laser beam with
less trauma to adjacent tissue. Therefore, unlike ultrasonic systems, whose
vibrations and shock waves affect (and can damage) non-cataractous tissues
within the eye, the Company's Photon(TM) laser cataract system should only
affect tissues it comes into direct contact with.
Surgical Instruments, Accessories and Disposables. In addition to the
cataract surgery equipment, the Company is aggressively pursuing development and
product introductions for a range of cataract surgery instruments and
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accessories that will be sold with its surgical systems and to fit other
competitive systems. In January 1998, the Company received FDA 510(k) clearance
for a line of proprietary titanium ultrasonic phaco needles it manufactures in
its Salt Lake City facility. The needles were released for sale in May 1998 in a
sterile Phaco PAK(TM). In May 1998, the Company received FDA 510(k) clearance
for a line of irrigation/aspiration probes and tips. Product release is targeted
for October 1998. These products and additional instruments were previously
sourced from third-party vendors. The Company believes that by developing its
own instruments and accessories it can improve product performance, introduce
innovative differentiation and improve sales margins. The Company's surgical
systems utilize or will utilize accessory instruments and disposables, some of
which are proprietary to the Company. These include replacement ultrasound tips,
sleeves, tubing sets and fluidics packs, instrument drapes and laser cataract
probes. The Company intends to expand its disposable accessories as it further
penetrates the cataract surgery market and expands the treatment applications
for its Workstation(TM).
Diagnostic Eyecare Products. Glaucoma is a leading cause of 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 complete cause and mechanism of the glaucoma
pathology is not completely understood. Present detection methods focus on the
measurement of intraocular pressure in the eye 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. Several companies produce color
Doppler equipment in the $150,000 price range intended to provide measurement of
ocular blood flow activity in order to diagnose and treat glaucoma at an earlier
stage.
In June 1997, the Company received FDA clearance to market the Blood Flow
Analyzer(TM) for early detection and treatment management of glaucoma and other
retina related diseases. The device measures not only intraocular pressure but
also pulsatile ocular blood flow, the reduction of which may cause nerve fiber
bundle death through oxygen deprivation thus resulting in visual field loss
associated with glaucoma. The Company's Blood Flow Analyzer(TM) is a portable
automated in-office system that presents an affordable method for ocular blood
flow testing for the ophthalmic and optometric practitioner. The Company has
secured a license granting it the exclusive right to private label, package and
market the product in the United States, with full international marketing
rights.
Blood Flow Analyzer(TM). This is the Company's first diagnostic eyecare
device. The device is manufactured for the Company and will be marketed by the
Company pursuant to a license agreement. The device is a portable desktop system
that utilizes a proprietary patented pneumatic Air Membrane Applanation
Probe(TM) (the "AMAP(TM)") which is 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 wave form profile which can
be correlated to blood flow volume within the eye. The blood flow volume is
calculated by a proprietary software algorithm developed by Company director
David M. Silver, Ph.D. The device presents a numerical intraocular pressure
reading and blood flow analysis rating in a concise printout which is affixed to
the patient history file. In addition, the data generated by the device can be
downloaded to a personal computer system for advanced database development and
management. The Company markets the Blood Flow Analyzer(TM) as a stand-alone
Model 100 SE unit, and packaged with a custom built computer system as the Model
100 LE. The Blood Flow Analyzer(TM) utilizes a single-use disposable cover for
its AMAP(TM) corneal probe which is shipped in sterile packages. The AMAP(TM)
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 is patent pending in the United States and Japan. The FDA cleared
the Blood Flow Analyzer(TM) for marketing in June 1997 and the Company commenced
selling the system in September 1997. This diagnostic product will permit the
Company to expand its market to approximately 35,000 optometric practitioners in
the United States in addition to the approximately 18,000 ophthalmic
practitioners who currently perform eye surgeries and are candidates for the
Company's surgical systems. International sales of the Blood Flow Analyzer(TM)
will be developed in 1998.
Diagnostic Instruments Accessories and Disposables. In addition to its
diagnostic equipment, the Company is aggressively pursuing development and
product introductions for a range of instruments and accessories that will be
sold with its Blood Flow Analyzer(TM). While limited in scope at present, the
Company's Blood Flow Analyzer(TM) system utilizes or will utilize accessory
instruments and disposables, some of which are proprietary to the Company. These
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include replacement AMAP(TM) probe sleeves, slit-lamp probe arms, upgrades to
the Model 100 LE database system, computer accessories and ongoing upgrade
software diagnostic packages.
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 they can offer this procedure to their
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 uncertainty and 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. As of June 30, 1998, the Company
had distributed over 60 Precisionist 3000 and 3000 Plus(TM) phaco systems since
the introduction of the systems, nine of the new Precisionist Thirty
Thousand(TM) Workstation(TM)s and six Photon(TM) Laser Phaco(TM)
Workstation(TM). The principal purchasers have been ophthalmologists and clinics
in many countries throughout the world. The Company believes that the market for
its products is being driven by: (i) the aging of the population, which is
evidenced by the domestic and international cataract surgery volume growth trend
over the past ten years, (ii) the entry by emerging countries (including China,
Russia, and other countries in Asia, Eastern Europe and Africa) into advanced
technology medical care for their populations, (iii) increased awareness
worldwide of the benefits of the minimally invasive phaco cataract procedure and
(iv) the introduction of technology improvements such as the Company's laser
system.
Marketing Organization. The Company markets its products internationally
through a network of dealers and domestically through direct sales
representatives and manufacturer's representatives. As of June 30, 1998, the
Company had six direct domestic sales representatives and one manufacturer's
representative in the United States and 21 foreign dealers. All of these sales
representatives are assigned exclusive territories and have entered into
contracts with the Company that contain performance quotas. The Company also
plans to continue to market its products by identifying customers through
internal market research, trade shows and direct marketing programs. The Company
also utilizes a Clinical Advisory Board comprised of leading ophthalmic surgeons
in the United States and Europe who speak at conventions, train ophthalmologists
and visit foreign doctors and dealers to promote the Company's products.
The Company when marketing its surgical Workstation(TM) will emphasize the
expandable features of the Workstation(TM). The Company's marketing approach
will be to focus on the upgradeability of the Workstation(TM) and to develop the
image of the Workstation(TM) as the most versatile, upgradeable and cost
effective surgical equipment available. The Company will continue to focus its
sales efforts towards ophthalmic hospital and surgical center facilities
specializing in cataract surgery. However, as systems are installed, the Company
will expand its focus to provide additional ophthalmic and non-ophthalmic
surgical applications as part of its Workstation(TM). Additional surgical
applications will expand the market for the Workstation(TM) as well as
associated sales of disposable surgical products.
The Company disseminated the innovative capabilities of its products
through advertisement and printed materials at the Company's annual exhibition
at the annual meeting of the American Academy of Ophthalmology in San Francisco,
California in October 1997. The theme of the Company's advertisement for its
Ocular Surgery Workstation(TM) was "The Future of Phaco is the Future of
Ophthalmic Surgery." The Company will expand upon the concept of the
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"Workstation(TM)" with additional advanced laser and surgical capabilities. The
Company has also launched a campaign for the Blood Flow Analyzer. The product
was introduced to the ophthalmic marketplace at the American Academy of
Ophthalmology meeting in October 1997 and to the Optometric marketplace at the
California Optometric Association and Vision Expo Easy New York meetings. The
theme of the Company's advertisement for its Blood Flow Analyzer was "Don't Miss
Half of Your Glaucoma Patients... A Fast, Clinically Proven Test For Ocular
Blood Flow" See "Business--Products."
Product advertising is focused in the three industry trade newspapers,
Ocular Surgery News, Ophthalmology Times and the American Optometric Association
News. Most of the ophthalmologists or optometrists in the United States receive
one or more of these magazines through professional subscription programs. The
media has shown strong interest in the Company's technology and products, as
evidenced by several recent front page articles in these publications.
Manufacturing and Raw Materials. Currently, the Company has a small
manufacturing and warehousing facility located in Salt Lake City. All components
and the finished surgical systems are manufactured under subcontracting
arrangements. None of these companies manufactures products that compete with
the Company's products. All component and systems manufacturing is performed
under a system of quality control and testing. As a condition to such
contracting, each subcontractor's manufacturing facilities and personnel must
comply with the Good Manufacturing Practices (GMP) guidelines established by the
FDA, as well as similar guidelines established by foreign governments, including
CE Mark and 1S0-9001.
The Company currently subcontracts the manufacture of its Precisionist
Thirty Thousand(TM) system to one of its stockholders, Zevex International, Inc.
("Zevex"), which is located in Salt Lake City, Utah. The remaining operating
elements of the Photon(TM) laser cataract system are resident in the
Precisionist Thirty Thousand(TM) system supplied by Zevex. Although substantial
reliance is currently placed with Zevex and Sunrise, the Company believes it
would be able to find alternative manufacturers for its products currently
manufactured by these two sources, including in-house manufacturing by the
Company. The Company also believes that there are multiple sources of raw
materials that are used or could be used in its products. See "Certain
Transactions."
The laser cavity, optical train and power source for the Photon(TM) laser
cataract system are supplied by Sunrise Technologies, Inc. in Fremont,
California ("Sunrise"). The Company has established an internal laser cataract
probe manufacturing facility and plans to have all probe production take place
in Salt Lake City. The remaining operating elements of the Photon(TM) laser
cataract system, the computer controller, fluidics and ancillary surgical
modalities, are developed through Zevex. Although substantial reliance is
currently placed with Zevex and Sunrise, the Company believes it would be able
to find alternative manufacturers for its products currently manufactured by
these two sources. The Company also believes that there are multiple sources of
raw materials that are used or could be used in its products.
See "Certain Transactions."
The Company subcontracts the manufacturing of some of its ancillary
instruments, accessories and disposables through specified vendors in the United
States. These products are contracted in quantities and at costs consistent with
the Company's financial purchasing capabilities and pricing needs. The Company
manufactures the LCP(TM) laser cataract probe and some of its surgical
instruments, accessories and fluidics surgical tubing sets at its facility in
Salt Lake City.
The Blood Flow Analyzer(TM) is manufactured by OBF Labs. The analyzer may
be repackaged by the Company using a module cover designed by the Company and
may also be marketed under the Company's trade name and mark regardless of
whether it is repackaged. The Company's License and Manufacturing Agreement with
OBF Labs continues through December 31, 2000 and is automatically renewable for
successive one year additional terms, unless either party gives written notice
to the other party at least 90 days prior to the expiration of the term. Service
for the Company's products is overseen from its Salt Lake City, Utah
headquarters and is augmented by its international dealer network, which dealers
also provide technical service and repair. Installation, on-site training and a
12 to 18 month warranty are included as the standard terms of sale. The Company
provides distributors with replacement parts at no charge during the warranty
period. To date, the Company has incurred minimal expenses under this warranty
program. International distributors are responsible for installation, repair and
other customer service to installed systems in their territory. All system parts
are modular sub-components that are easily removed and replaced. The Company
maintains an adequate parts inventory and provides 24 hour replacement parts
shipment to its dealers. After the warranty period
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expires, the Company offers one year service contracts to its domestic customers
and will continue to sell parts to international dealers who in turn create
their own service plans with their customers. As of June 30, 1998, the Company
has not sold any one year service contracts.
Product Service and Support. Service for the Company's products is
overseen from its Salt Lake City, Utah headquarters and is augmented by its
international dealer network who provide technical service and repair.
Installation, on-site training and a limited product warrant are included as the
standard terms of sale. The Company provides distributors with replacement parts
at no charge during the warranty period. To date, the Company has incurred
minimal expenses under this warranty program. International distributors are
responsible for installation, repair and other customer service to installed
systems in their territory. All systems parts are modular sub-components that
are easily removed and replaced. The Company maintains an adequate parts
inventory and provides overnight replacement parts shipment to its dealers.
After the warranty period expires, the Company offers one year and three year
service contracts to its domestic customers and will continue to sell parts to
international dealers who in turn create their own service plans with their
customers. As of June 30, 1998, the Company has not sold any service contracts.
Third-Party Reimbursement. It is expected that the Company's laser systems
and diagnostic system will generally be purchased by ophthalmologists and
hospitals as well as optometrists who will then bill various third-party payors
for the health care services provided to their patients. These payors include
Medicare, Medicaid and private insurers. Government agencies generally reimburse
at a fixed rate based on the procedure performed. Some of the potential
procedures for which the Photon(TM) laser cataract systems may be used, may be
determined to be elective in nature, and third-party reimbursement may not be
available for such procedures, even if approved by the FDA. In addition,
third-party payors may deny reimbursement if they determine that the procedure
was unnecessary, inappropriate, not cost-effective, experimental or used for a
non-approved indication. There can be no assurance that reimbursement from
third-party payors will be available, or if available, that reimbursement will
not be limited, thereby having a material adverse effect on the Company's
ability to develop new products on a profitable basis, its operating results and
financial condition.
Co-Distribution Agreement with Pharmacia & Upjohn Company and National
Healthcare Manufacturing Corporation. The Company has entered into a
Co-Distribution Agreement as of June 26, 1998 with Pharmacia & Upjohn Company
and National Healthcare Manufacturing Corporation, which provides for the
marketing and sale of a range of ophthalmic products. Under the terms of the
Co-Distribution Agreement, the Company, Pharmacia & Upjohn and National
Healthcare will offer a comprehensive package of products to cataract surgeons,
including cataract surgical equipment, intraocular lens implants, intraocular
pharmaceuticals, surgical instruments and sterile procedural packs. The Company
will provide the Precisionist ThirtyThousand(TM) for distribution and sale under
the Co-Distribution Agreement. The Pharmacia & Upjohn products to be distributed
as part of the Co-Distribution Agreement include Healon(R) and Healongv(R)
viscoelastic solution and the CeeOn line of foldable, small intraocular lens
implants, designed to replace the natural lens removed during cataract surgery.
Research and Development
The Company's primary market for its surgical products is the cataract
surgery market. However, the Company believes that its laser systems may
potentially have broader ophthalmic applications. Consequently, the Company
believes that a strong research and development capability is important for the
Company's future. The Company has enlisted several recognized and respected
consultants and other technical personnel to act in technical and medical
advisory capacities. Several of these consultants serve on the Company's
Clinical Advisory Board to provide expert and technical support for current and
proposed products, programs and services of the Company. In addition, the
Company is conducting an extensive research program in conjunction with the
Dixon Medical Laser Lab at the University of Utah. The research is aimed at
improving the laser system performance for cataract surgery and exploring
additional surgical applications.
The Company believes its research and development capabilities provide it
with the ability to respond to regulatory developments, including new products,
new product features devised from its users and new applications for its
products on a timely and proprietary basis. The Company intends to continue
investing in research and development and to strengthen its ability to enhance
existing products and develop new products. The Company spent $288,854 on
research
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development in fiscal year ended September 30, 1996, $480,584 in the three
months ended December 31, 1996 and $540,148 in fiscal year ended December 31,
1997.
Competition
General. The Company is subject to competition in the cataract and the
glaucoma surgery markets, and the glaucoma diagnostic market 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 used from treatment. The surgical equipment industry is
dominated by 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. The Company believes that the combined sales of five
entities account for over 90% of the ophthalmic surgery market. The remaining
market is fragmented among emerging smaller companies, some of which are
foreign. The ophthalmic diagnostic market has a similar composition.
Most major competitors either entered or expanded into the cataract or
glaucoma markets through the acquisition of smaller, entrepreneurial
high-technology manufacturing companies. Therefore, because existing competitors
or other entities desiring to enter the market could conceivably acquire current
entrepreneurial enterprises with small market activity, any and all competitors
must be considered to be formidable.
The Cataract Surgical System Industry. Presently, products currently in
use are offered by the major manufacturers utilizing ultrasonic technology.
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, the Company anticipates that manufacturers of ultrasound equipment
will continue to develop and enhance their present ultrasound products in order
to protect their investments in system and cassette technology and to protect
their profits from sales of these cassettes and accessories. The Company's
Precisionist Thirty Thousand(TM) ultrasonic phaco system has the ability to use
either reusable or single-use disposable components. The Photon(TM) laser
cataract system will utilize probes and cassette packs designed for single-use
and semi-disposable instruments priced at a level consistent with the demands of
health care cost containment. This will allow the health care providers a
substantial measure of cost containment, while providing the Company with the
quality control and income capability of cassette sales.
The typical list price of a competitive advanced ultrasonic system ranges
from approximately $60,000 to $100,000. Lower cost models generally have a list
price ranging from approximately $30,000 to $60,000. The list price for the
Company's Precisionist 3000 Plus(TM) System, which is comparable to advanced
ultrasonic systems, is $45,500. The list price for the Precisionist Thirty
Thousand(TM) ocular surgery system is $89,900. The Company's Photon(TM) Laser
Phaco(TM) will be sold at a price of approximately $119,000. 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 has provided a niche for the emerging smaller
companies discussed above.
Ultrasound Equipment Manufacturers. As a relatively recent entrant into
the cataract surgical equipment market with a newer equipment line, the Company
is establishing itself and, as yet, does not hold a significant share of the
market. The Company currently recognizes Bausch & Lombe, Alcon Laboratories, and
Allergan Medical Optics as its primary competitors in the ultrasound phaco
cataract equipment market.
Laser Equipment Manufacturers. To the Company's knowledge, there are
several other companies attempting to develop laser equipment for cataract
surgery. Based on the information currently available to the Company, these
competitive laser companies appear to offer a less viable means of treating
cataracts using laser technology. The Company believes that there is presently
no directly competing Nd:YAG laser-assisted cataract surgical system available
in the market. The Company also believes that its product is sufficiently
distinctive and, if properly marketed, can capture a significant share of the
cataract surgical device market. However, there are substantial risks in
undertaking a new venture in an established and already highly competitive
industry. In the short-term, the Company is seeking to exploit these
opportunities. Depending upon further developments, the Company may ultimately
exploit those
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opportunities through a merger with a stronger entity already established or one
that desires to enter the medical industry.
The Company believes that its ability to compete successfully will depend
on its capability to create and maintain advanced technology, develop
proprietary products, attract and retain scientific personnel, obtain patent or
other proprietary protection for its products and technologies, obtain required
regulatory approvals and manufacture, assemble and successfully market products
either alone or through third parties.
The Retinal Diagnostic Market. The Glaucoma Research Foundation suggests
that with the aging of the so-called baby boom generation, there will be an
increase of macular degeneration and glaucoma in the United States, the leading
causes of adult blindness worldwide. The damage caused by these diseases is
irreversible. The preconditions for the onset of macular degeneration or
glaucoma are low ocular blood flow and 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 near sighted. The Glaucoma Research Foundation recommends
that these high risk individuals be tested once every two years for glaucoma.
According to the U.S. Census Bureau, in 1995 there were over 30 million adults
65 years of age and older and 8 million African Americans 45 years of age and
older. The Glaucoma Research Foundation reports that glaucoma currently accounts
for more than 7 million visits to physicians annually.
The Company is subject to intense competition in the ophthalmic diagnostic
market from well-financed, established companies with recognizable trade names
and product lines and new and developing technologies. The industry is dominated
by several large entities which the Company believes account for the majority of
diagnostic equipment sales. The Company expects to derive revenues initially
from the sale of its blood flow analyzer and later through the sale of
disposable accessories for that device. The device is designed to detect
glaucoma in an earlier stage than is presently possible. In addition, the device
performs tonometry and blood flow analysis. The Company anticipates that the
blood flow analyzer will have a list price ranging from approximately $13,500
and $20,000. Other ophthalmic diagnostic devices which do not detect glaucoma in
the early stages of the disease as does the Company's analyzer retail at
comparable prices. The Company thus believes that it can compete in the
diagnostic market place based upon the lower price and improved diagnostic
functions of the analyzer.
The Glaucoma Surgery Market. The glaucoma surgery market is similar in
composition to the retinal diagnostic market. The market is dominated by several
large companies. Because there are existing glaucoma and laser surgery products
in the market, the Company hopes to be able to enter the market relatively
quickly through FDA Section 510(k) clearance of its new systems and products.
The Company believes that it can compete in this established marketplace since
it will be offering its glaucoma surgery system as an add-on to its
Workstation(TM). The Company believes that its Workstation(TM) will give the
Company a competitive advantage to gain a position in the marketplace.
Intellectual Property Protection
The Company's cataract surgical products are proprietary in design,
engineering and performance. The Company's ultrasonic products have not been
patented to date because the primary technology for ultrasonic tissue
fragmentation, as available to all competitors in the market, is mainly in the
public domain.
The Photon(TM) laser cataract system is protected under a United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. and subsequently assigned by
Photomed International, Inc. ("Photomed") and a Japanese patent issued in 1997
to the Company for the utility and methods of laser ablation, aspiration and
irrigation of tissue through a hand-held probe of a unique design. The Company
secured the exclusive worldwide right to this patent shortly after its issue,
and to the international patents pending, from Photomed by means of a license
agreement (the "License Agreement"). 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 sub-specialties other than
ophthalmology for which the Company would receive royalty payments equal to 1%
of the proceeds from the net sales of products utilizing the patent. See
"Management" and "Certain Relationships and Related Transactions."
OBF Labs, the manufacturer of the Blood Flow Analyzer(TM) that the Company
markets in the United States under a non-exclusive license agreement, has been
granted a patent in the European Economic Community and has patents pending in
the United States and Japan.
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Although the Company's trademarks are important to its business, it is not
the Company's policy to pursue trademark registrations for its trademarks
associated with its products. Consequently, the Company relies on common law
trademark rights to protect its unregistered trademarks, although common law
trademark rights do not provide the Company with the same level of protection as
would U.S. federal registered trademarks. Common law trademark rights only
extend to the geographical area in which the trademark is actually used while
U.S. federal registration prohibits the use of the trademark by any party
anywhere in the United States.
The Company also relies on trade secret law to protect some aspects of its
intellectual property. All of the Company's key employees, consultants and
advisors are required to enter into a confidentiality agreement with the
Company. Most of the Company's third-party manufacturers and formulators are
also bound by confidentiality agreements with the Company.
Regulation
The Company's surgical and diagnostic systems are regulated as medical
devices by the FDA under the FDC Act. As such, these devices require Premarket
clearance or approval by the FDA prior to their marketing and sale. Such
clearance or approval is premised on the production of evidence sufficient for
the Company to show reasonable assurance of safety and effectiveness regarding
its products. Pursuant to the FDC Act, the FDA regulates the manufacture,
distribution and production of medical devices in the United States and the
export of medical devices from the United States. Noncompliance with applicable
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, denial of
Premarket clearance or approval for devices, recommendations by the FDA that the
Company not be allowed to enter into government contracts, and criminal
prosecution.
Following the enactment of the Medical Device Amendments to the FDC 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, Premarket notification and
adherence to the FDA's Good Manufacturing Practice ("GMP") 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 Premarket approval by the FDA to ensure
their safety and effectiveness. Generally, Class III devices are limited to
life-sustaining, life-supporting or implantable devices, or to new devices that
have been found not to be substantially equivalent to legally marketed devices.
There are two principal methods by which FDA approval may be obtained. One
method is to seek FDA approval through a Premarket notification filing under
Section 510(k) of the FDC 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 premarketing approval
("PMA"), the manufacturer or distributor may seek FDA Section 510(k) Premarket
clearance for the device by filing a Section 510(k) Premarket 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
("IDE") 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
Premarket clearance for the device. There can be no assurance that the Company
will obtain Section 510(k) Premarket clearance for any of the future devices for
which the Company seeks such clearance including the Photon(TM) Laser.
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 PMA, and allow the proposed device to be
marketed in the United States. The FDA may determine, however, that the proposed
device is not substantially equivalent, or may require further information, such
as additional test data, before the FDA is able to make a determination
regarding substantial equivalence. A "not substantially equivalent"
determination or a request for additional information could delay the Company's
market introduction of its products and could have a material adverse effect on
the Company's business, operating results and financial condition.
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The alternate method to seek approval is to obtain Premarket 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 Premarket
approval for the proposed device. A PMA 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 IDE
application with the FDA prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and mechanical testing. If the IDE 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 IDE clinical
trial can be divided into several parts or Phases. Sometimes, a company will
conduct a feasibility study to confirm that a device functions according to its
design and operating parameters. This is 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
PMA 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 IDE, the Premarket approval procedure is
more complex and time consuming.
Upon receipt of the PMA application, the FDA makes a threshold
determination whether the application is sufficiently complete to permit a
substantive review. If the FDA determines that the PMA 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 GMP requirements prior to approval of a PMA.
While the FDA has responded to PMA applications within the allotted time period,
PMA reviews generally take approximately 12 to 18 months or more from the date
of filing to approval. The PMA process is lengthy and expensive, and there can
be no assurance that such approval will be obtained for any of the Company's
products determined to be subject to such requirements. A number of devices for
which PMA approval has been sought by other companies have never been approved
for marketing.
Any products manufactured or distributed by the Company pursuant to a
premarket clearance notification or PMA are or will be subject to pervasive and
continuing regulation by the FDA. The FDC Act also requires that the Company's
products be manufactured in registered establishments and in accordance with GMP
regulations. Labeling, advertising and promotional activities are subject to
scrutiny by the FDA and, in certain instances, by the Federal Trade Commission.
The export of medical devices is also subject to regulation in certain
instances. In addition, the use of the Company's products may be regulated by
various state agencies.
All lasers manufactured for the Company are subject to the Radiation
Control for Health and Safety Act administered by the Center for Devices and
Radiological Health of the FDA. The law requires laser manufacturers to file new
product and annual reports and to maintain quality control, product testing and
sales records, to incorporate certain design and operating features in lasers
sold to end users pursuant to specific performance standards, and to comply with
labeling and certification requirements. Various warning labels must be affixed
to the laser, depending on the class of the product, as established by the
performance standards.
Although the Company believes that it and its manufacturers 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
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<PAGE>
effect, will not materially adversely affect the Company. In addition to the
foregoing, the Company is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of potentially
hazardous substance. There can be no assurance that the Company will not be
required to incur significant costs to comply with such laws and regulations and
that such compliance will not have a material adverse effect upon the Company's
ability to conduct business.
The Company and the manufacturers of the Company's products may be
inspected on a routine basis by both the FDA and individual states for
compliance with current GMP regulations and other requirements.
Congress has considered several comprehensive federal health care programs
designed to broaden coverage and reduce the costs of existing government and
private insurance programs. These programs have been the subject of criticism
within Congress and the health care industry, and many alternative programs and
features of programs have been proposed and discussed. Therefore, the Company
cannot predict the content of any federal health care program, if any is passed
by Congress, or its effect on Company and its business. Some measures that have
been suggested as possible elements of a new program, such as government price
ceilings on nonreimbursable procedures and spending limitations on hospitals and
other healthcare providers for new equipment, could have an adverse effect on
the Company's business, operating results or financial condition. Uncertainty
concerning the features of any health care program considered by the Congress,
its adoption by the Congress and the effect of the program on the Company's
business could result in volatility of the market price of the Company's Common
Stock.
Furthermore, the introduction of the Company's products in foreign
countries may require the Company to obtain foreign regulatory clearances. The
Company believes that only a limited number of foreign countries have extensive
regulatory requirements, including France, Germany, Korea and Japan. The time
involved for regulatory approval in foreign countries varies and can take a
number of years. During the period in which the Company will be attempting to
obtain the necessary regulatory approvals in order to market its products on a
limited basis in certain European, Latin American and Asian countries where its
products satisfy applicable regulatory standards. There is no assurance that the
Company's products will be approved by the FDA or other governmental agencies
for intended applications in the United States and targeted foreign markets, nor
is there any assurance that the FDA will approve the export of the Company's
products, which approval is required on a country-by-country basis for
applications not yet approved in the United States.
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 PMA, Section 510(k) or approved
IDE from the FDA is tantamount to approval in those countries. These countries
and most developing countries have simply deferred direct discretion to licensed
practicing surgeons to determine the nature of devices that they will use in
medical procedures. The Company's two ultrasound systems, the Photon(TM) laser
cataract system the Company is developing and the ocular blood flow analyzer are
all devices which require FDA approval. Therefore, a significant aspect of the
acceptance of the devices in the market is the effectiveness of the Company in
obtaining the necessary approvals. Having an approved IDE allows the Company to
export a product to qualified investigational sites.
Regulatory Status of Products
The Precisionist 3000 Plus(TM) and the Precisionist Thirty Thousand(TM)
Systems. Pursuant to Section 510(k) of the FDC Act, the FDA granted market
clearance for the commercialization of the Precisionist 3000 Plus(TM) system in
1990 and the Precisionist Thirty Thousand(TM) system in 1995, thereby allowing
the Company to sell these devices in the United States for their intended use as
cataract surgical systems. That clearance, in turn, has allowed for similar
approvals in several foreign countries, allowing sales to be undertaken in all
of those countries. Because no approvals are required in many developing
countries, including several countries in the Middle East and Latin America,
those areas are potentially viable markets.
Applications for approval in other western countries, including Germany
and France, are currently pending. Under present circumstances, although there
is no assurance, approval of the German application is expected. Because France
places substantial credence in German approvals, it is expected that approval in
France will follow sometime thereafter.
-31-
<PAGE>
In Japan and Korea, the Company has provided the Precisionist(TM) system to
established dealers that have applied for approval in those respective
countries.
The Photon(TM) Laser Cataract System. The Company acquired permission from
the FDA to manufacture the device and approval to export it to qualified
investigator sites outside the United States under an open IDE granted by the
FDA in May 1995. Although the Photon(TM) laser cataract system is uniquely
configured in an original and proprietary manner, the laser system, a Nd:YAG
laser, is not proprietary to the device or the Company and is widely used in the
medical industry and other industries as well. Of particular significance is the
fact that this particular component has received previous market clearance from
the FDA for other ophthalmic and medical applications. Also of significance is
the Company's belief that the surgical treatment method used with the Photon(TM)
laser cataract is similar to the current ultrasound cataract treatment employed
by ophthalmologists. The Company thus believes that it can obtain Section 510(k)
clearance for the Photon(TM) laser cataract system sometime in 1998.
The Company submitted its Premarket Notification under Section 510(k) of
the FDC Act for the Photon(TM) laser cataract system in September 1993. The FDA
requested clinical support data for claims made in the Section 510(k) Premarket
Notification, and in October 1994 the Company submitted an IDE 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 IDE in May 1995. The Company began human clinical trials in April 1996 and
completed the clinical surgeries in December 1996. Through the clinical trials
the Company discovered that the Photon(TM) laser cataract system may not
effectively remove harder grade cataracts. The Company thus requested and
received FDA approval to conduct Phase II clinical studies at seven sites in
hopes of refining the laser system and surgical method to remove such cataracts.
There is no guarantee, however, that the Company will be successful in improving
the laser system to remove harder grade cataracts.
Blood Flow Analyzer(TM) (Paradigm BFA(TM)). The FDA granted market
clearance pursuant to Section 510(k) of the FDC Act, for the commercial sale of
the Paradigm Blood Flow Analyzer in June 1997 for the intended use and claims of
applanation tonometry and blood flow analysis. The clearance allows immediate
marketing in the United States for this new product and allows the Company to
expand its product base into the ophthalmic office and optometric office with a
diagnostic system.
Employees
As of August 31, 1998, the Company had 18 full-time employees. This number
does not include the Company's manufacturer's representatives who are
independent contractors rather than employees of the Company. The Company also
utilizes several consultants and advisors. There can be no assurance that the
Company will be successful in recruiting or retaining key personnel. None of the
Company's employees is a member of a labor union and the Company has never
experienced any business interruption as a result of any labor disputes.
Facilities
The Company's executive offices are currently located at 1127 West 2320
South, Suite A, Salt Lake City, Utah. This facility consists of approximately
4,397 square feet of leased office space under a three year lease that will
expire on December 31, 2000 with an additional three year renewal option. The
facility is leased from Eden Roc, a California partnership, at a base monthly
rate of $3,315 plus a monthly common maintenance area fee. The base monthly rent
increases to $3,415 and $3,518 for the second and third years of the lease,
respectively. Pursuant to the lease, the Company pays all real estate and
personal property taxes and the insurance costs on the premises. The Company
believes that this facility is adequate and satisfies its needs for the
foreseeable future.
Legal Proceedings
The Company is not a party to any legal proceedings and is not aware of
any threatened legal proceedings which may be brought against it.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The executive officers and directors of the Company, their ages and their
positions are set forth below:
Name Age Position
<TABLE>
<S> <C> <C>
Thomas F. Motter 50 Chairman of the Board, President and
Chief Executive Officer
Michael W. Stelzer 50 Vice President of Operations,
Chief Operating Officer, Secretary and Director
Robert W. Millar 41 Vice President of Engineering and
Manufacturing, and Director
John W. Hemmer 71 Vice President of Finance, Treasurer,
Chief Financial Officer and Director
Roy E. Moser 51 Vice President of Corporate Development
Patrick M. Kolenik 46 Director
Robert L. Frome 57 Director
</TABLE>
The directors are elected for one year terms which 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.
Thomas F. Motter has served as Chairman of the Board of the Company since
April 1993. Since December 12, 1997 and from May 1994 to August 1997, he has
served as President and Chief Executive Officer of the Company. From June 1989
to April 1993, Mr. Motter served as Chief Executive Officer of Paradigm Medical,
Inc. which merged with the Company in May 1994. From September 1990 to April
1992, he was employed by HGM Medical Laser Systems as general manager of their
International Division. From October 1978 to June 1989, Mr. Motter was employed
by SmithKline Beckman's Humphrey Instruments Division, which developed and
manufactured advanced ophthalmic diagnostic instruments, serving last as
National Sales Manager overseeing all domestic sales in its ophthalmic computer
division. Mr. Motter received a B.A. degree in English from Stephen's College in
1970 and an M.B.A. degree from Pepperdine University in 1975.
Michael W. Stelzer has served as Vice President of Operations and Chief
Operating Officer of the Company since December 12, 1997 and its Secretary since
July 30, 1998. From August 8, 1997 to December 12, 1997, he served as President
and Chief Executive Officer of the Company. Mr. Stelzer joined the Company's
Board of Directors in April 1993. From June 1989 to April 1993, he served as a
General Counsel and a director of Paradigm Medical, Inc. which merged with the
Company in May 1994. From January 1995 to August 1997, Mr. Stelzer served as the
Executive Vice President and Chief Financial Officer of Rhino Marketing, Inc., a
sports related holding company, and was President of one of its subsidiaries.
Prior to joining Rhino, Mr. Stelzer was President and General Counsel for
MarDec, Inc., a golf accessory marketing company, from 1993 to 1995. Mr. Stelzer
is a licensed attorney with the state of California and has practiced law in
California since 1980. From March 1972 to January 1980, Mr. Stelzer was
controller of Ponderosa Telephone Company. Mr. Stelzer received a B.S. degree in
business administration from the University of California, Davis in 1970 and a
Juris Doctorate from Humphreys College of Law in 1979.
Robert W. Millar has served as Vice President of Engineering and
Manufacturing of the Company since December 12, 1997 and as a director of the
Company since April 1993. From April 1995 to December 12, 1997, Mr. Millar
served as Executive Vice President of the Company. From January 1991 to April
1993, he was employed as President by Paradigm Medical, Inc., which merged with
the Company in May 1994. From January 1990 to January 1991, Mr. Millar was
employed by HGM Medical Laser Systems, serving as Director of Marketing and
Product Management for all ophthalmic and surgical markets. From October 1988 to
December 1989, Mr. Millar was employed as Group Products Manager for the
Customer Products Division of Esselte Pendaflex Corporation, a manufacturer and
distributor of office supply products. From July 1986 to February 1988, Mr.
Millar was employed by TechnaVision Inc., a company engaged in the manufacture
of ophthalmic diagnostic and other eyecare equipment. From February
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<PAGE>
1980 to July 1986, he was employed by Pogue McJunkin & Associates, a
professional industrial design firm. Mr. Millar received a B.S. degree in
industrial design from the College of Design in Detroit, Michigan in 1979.
John W. Hemmer, C.F.A., has served as Vice President of Finance, Treasurer
and Chief Financial Officer of the Company and as a director since November
1995. Since October 1989, Mr. Hemmer has served as a director and consultant for
Sea Pride Industries, Inc. and its subsidiaries in Gulf Breeze, Florida, which
developed the first offshore marine production system licensed and permitted for
use in the Gulf of Mexico. From March 1992 to July 1994, Mr. Hemmer was employed
as the Secretary and Vice President of Finance of Advance Electronics, Inc.,
which is engaged in the retail distribution of health and beauty products. From
November 1991 to December 1994, Mr. Hemmer was Secretary and Treasurer of Agro
Industrial Development, Ltd., which established a Free Trade Zone in Belize for
the production and export of seafood. He was the President and Chief Executive
Officer of John W. Hemmer, Inc., a registered broker/dealer firm from May 1987
to May 1989, which subsequently changed its name to Westfalia Investments Inc.,
but retained his registered representative status until March 1995. Prior
thereto, he was Vice President of Bankers Trust Company in charge of venture
capital and a member of the research and investment management committees. Mr.
Hemmer was Vice President of Corporate Finance at Dempsey, Tegler & Company,
Inc., a Senior Analyst at Lazard Freres & Company and an Investment Officer of
The Chase Manhattan Bank. Since February 1997, Mr. Hemmer has also been a
director of International Heritage, Inc., a distribution of jewelry and fine
collectables. Mr. Hemmer received a B. A. degree in Economics from Queens
College in 1951 and an M.S. degree in Banking and Finance from Columbia
University Graduate School of Business in 1952.
Roy E. Moser has been Vice President of Corporate Development of the
Company since January 1998. From June 1997 to January 1998, he served as Vice
President of Sales of the Company. Prior to joining Paradigm, he served from
1995 to 1997 as General Manager for Medical Development Research Inc. From 1990
to 1995, Mr. Moser was Vice President, Sales and Marketing in the international
operations of Surgidev Corporation. Mr. Moser worked for Inamed Corporation from
1989 to 1990 as Manager, International Operations. From 1987 to 1989, he served
as Director of Operations for Surgidev. Mr. Moser was also employed from 1982 to
1987 at Allergan Corporation and from 1975 to 1982 at Baxter Health Care. Mr.
Moser received an M.B.A. degree from National University in 1973 and a Bachelor
of Science degree from California State University in 1983.
Patrick M. Kolenik has been a director of the Company since November 1997.
Mr. Kolenik has been Special Assistant to the President of International
Heritage, Inc. since 1996 and President and Co-Founder of Cyn Del & Co., Inc.
since 1992. He was a co-founder and director of Win Capital Corp., an investment
banking firm, but resigned as a director in 1996. As of July 1, 1998, Mr.
Kolenik resumed an affiliation with Win Capital Corp. From 1969 to 1989, Mr.
Kolenik held various positions at Sherwood Securities Corp., a securities firm,
including President and Chief Executive Officer, Executive Vice President of
Trading, Executive Vice President of Corporate Syndicate and Vice President of
Corporate Finance. He also served as a director of Sherwood Securities Corp. Mr.
Kolenik attended Baruch College where he majored in finance.
Robert L. Frome, Esq. has been a director of the Company since September 3,
1998. He has been a Senior Partner at the Olshan Grundman Frome & Rosenzweig law
firm in New York City for over twenty years. He serves as a director of
HealthCare Services Group, Inc., the nation's largest provider of housekeeping,
linen and laundry services to long term care facilities, and of NUCO(2), the
nation's largest provider of bulk carbon dioxide to restaurant, fast food
outlets and convenience stores. Mr. Frome is a trustee of Daytop Village
Foundation and The Hospital for Joint Diseases of New York University Medical
Center. He received an LL.B. from the Harvard Law School in 1961 and LL.M. and
B.S. degrees from New York University in 1962 and 1958, respectively.
Technical and Medical Advisory Personnel
The Company utilizes an informal Clinical Advisory Board of recognized
practicing ophthalmic surgeons in technical and medical advisory capacities.
Outside consultants are generally used on an ad hoc basis and such individuals
do not meet together as a group and are not compensated. The Members of the
Company's Clinical Advisory Board are as follows:
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<PAGE>
Paul L. Archambeau, M.D. -- Dr. Archambeau is an ophthalmologist in Santa
Rosa, California and a faculty member at the University of California at San
Francisco. He received his medical degree at the University of Buffalo Medical
School in 1959 and performed his residency at the Mayo Clinic in Rochester,
Minnesota.
Daniele S. Aron-Rosa, Ph.D, M.D. -- Dr. Aron-Rosa is a faculty member at
the Rothschild Eye Institute in Paris, France. She received a doctorate degree
in physics from the University of Paris in 1957 and received her medical degree
there in 1962 and performed her residency at the University of Paris Hospital.
David C. Brown, III, M.D. -- Dr. Brown is an ophthalmologist in Fort Myers,
Florida. He received his medical degree at the University of Florida in 1963 and
also performed his residency at that facility.
Alan S. Crandall, M.D. -- Dr. Crandall is an ophthalmologist in Salt Lake
City, Utah. He received his medical degree at the University of Utah in 1973 and
performed his residency at the University of Pennsylvania
I. Howard Fine, M.D. -- Dr. Fine is an ophthalmologist practicing in
Eugene, Oregon and a member of the Oregon Health Sciences University faculty.
Dr. Fine received his medical degree at Boston University in 1966 and also
performed his residency at that facility.
Stephane P. Ganem, M.D. - -- Dr. Ganem is chairman of the ophthalmology
department at the Rothschild Eye Institute in Paris, France.
Frederic B. Kremer, M.D. - Dr. Kremer is an ophthalmologist in Radnor,
Pennsylvania. He received his medical degree at the Jefferson Medical Center in
1976 and performed his residency at the Wills Eye Hospital in Philadelphia,
Pennsylvania.
Francis A. L'Esperance, M.D. -- Dr. L'Esperance is President of the
American Board of Laser Surgery and a faculty member at the Columbia College of
Physicians and Surgeons. He received his medical degree from Harvard Medical
School in 1956 and performed his residency at the Massachusetts Eye and Ear
Infirmary.
Michael B. Limberg, M.D. -- Dr. Limberg is an ophthalmologist practicing
in San Luis Obispo, California. He received his medical degree at the University
of Utah Medical School in 1982 and performed his residency at Louisiana State
University.
Marc A. Michelson M.D. -- Dr. Michelson is an ophthalmologist in
Birmingham, Alabama. He received his medical degree at the University of Alabama
in 1975, and performed his residency at the Eye Foundation Hospital in
Birmingham, Alabama.
Lawrence E. Noble M.D. -- Dr. Noble is an ophthalmologist in Provo, Utah.
He received his medical degree at the University of Oregon in 1964, and
performed his residency at the Good Samaritan Hospital.
Jaswant Singh Pannu, M.D. -- Dr. Pannu is an ophthalmologist in Lauderdale
Lakes, Florida. He received his medical degree at the University of Miami in
1967 and performed his residency at the Milwaukee, Wisconsin Veterans
Administration Hospital and at Evanston Hospital in Evanston, Illinois.
David M. Schneider, M.D. -- Dr. Schneider is an ophthalmologist in
Cincinnati, Ohio. He received his medical degree at the University of Cincinnati
in 1975, and performed his residency at the University of Cincinnati.
Jeffrey G. Straus, M.D. -- Dr. Straus is an ophthalmologist in Metairie,
Louisiana. He received his medical degree at State University of New York at
Buffalo in 1984 and performed his residency at Ochsner Foundation Hospital and
Clinic in New Orleans, Louisiana.
Gerald Zelman, M.D. -- Dr. Zelman is a Ophthalmologist in Manhasset, New
York. He received his medical degree at the University of Lausanne in 1964, and
performed his residency at the Brooklyn Eye and Ear facility in Brooklyn, New
York.
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<PAGE>
Board Meetings and Committees
The Board of Directors held a total of five meetings during the fiscal
year ended December 31, 1997. The Audit Committee of the Board of Directors
consists of directors Michael W. Stelzer, Robert L. Frome and Patrick M.
Kolenik. The Audit Committee last met on December 12, 1997. The Audit Committee
is primarily responsible for reviewing the services performed by the Company's
independent public accountants and internal audit department and evaluating the
Company's accounting principles and its system of internal accounting controls.
The Compensation Committee of the Board of Directors consists of directors
Robert M. Millar, John W. Hemmer and Patrick M. Kolenik. The Compensation
Committee also last met on June 9, 1997. The Compensation Committee is primarily
responsible for reviewing compensation of executive officers and overseeing the
granting of stock options. No director attended fewer than 75% of all meetings
of the Board of Directors during the 1997 fiscal year.
Pursuant to Nasdaq corporate governance requirements recently made
applicable to Nasdaq SmallCap Market companies, the Company must have (i) a
minimum of two independent directors; (ii) an audit committee with a majority of
independent directors; and (iii) an annual stockholders meeting. The Company has
and can presently satisfy each of these requirements. Messrs. Fitzhugh, Kolenik,
and Silver qualify as independent directors.
Executive Compensation
The following table sets forth, for each of the last three fiscal years
and for the three month period ended December 31, 1996, the compensation
received by Thomas F. Motter, the Company's Chairman of the Board, President and
Chief Executive Officer, and all other executive officers (collectively, the
"Named Executive Officers") at December 31, 1997 whose salary and bonus for all
services in all capacities exceed $100,000 for the fiscal year ended December
31, 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards Payouts
Other Securities
Annual Restricted Underlying Long-term All Other
Name and Compensa- Stock Options/ Incentive Compensa-
Principal Position Period Salary($) Bonus($) tion($)(6) Awards($) SARs(#) Payout($) tion ($)(5)
- ------------------ ------ --------- -------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas F. Motter, 1997(1) $129,584 0 $5,250 0 0 0 0
Chairman of the 1996(2) 33,750 0 0 0 0 0 0
Board, President 1996(3) 111,042 $1,000 3,600 0 0 0 $6,000
and Chief 1995(4) 72,000 300 0 0 106,000(6) 0 0
Executive Officer
Michael W. 1997(1) 50,625 0 1,500 0 20,000(6) 0 0
Stelzer, Vice
President of
Operations and
Chief Operating
Officer
Robert W. Millar, 1997(1) 114,675 0 5,250 0 0 0 0
Vice President of 1996(2) 31,250 0 0 0 0 0 0
Engineering and 1996(3) 99,792 1,000 3,600 0 0 0 6,000
Manufacturing 1995(4) 60,265 300 0 0 84,000(6) 0 0
John W. Hemmer, 1997(1) 112,670 0 5,250 0 0 0 0
Treasurer, Chief 1996(2) 30,000 0 0 0 0 0 0
Financial Officer 1996(3) 80,000 0 3,600(7) 0 20,000(6) 0 4,000
and Director 1995(4) 20,000 0 0 0 0 0 0
- ----------------
</TABLE>
(1) For the fiscal year ended December 31, 1997.
(2) For the three month period ended December 31, 1996.
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<PAGE>
(3) For the fiscal year ended September 30, 1996.
(4) For the fiscal year ended September 30, 1995.
(5) The amounts indicated under "Other Annual Compensation" for 1996 and 1997
consist of payments related to the operation of automobiles by the named
executive.
(6) On February 16, 1996, the Company granted Mr. Motter and Mr. Millar
options to purchase 106,000 and 84,000 shares, respectively, of the
Company's Common Stock at an exercise price of $5.00 per share. These
options expire on February 15, 2001. On January 31, 1996, the Company
granted Mr. Hemmer options to purchase 20,000 shares of the Company's
Common Stock at an exercise price of $5.00 per share. These options expire
January 30, 2001. On June 9, 1997, the Company granted Mr. Stelzer options
to purchase 20,000 shares of the Company's Common Stock at an exercise
price of $5.00 per share. These options expire June 8, 2002.
(7) On November 30, 1995, the Company issued Mr. Hemmer 50,513 shares of the
Company's Common Stock as part of his compensation for past and future
services.
The following table sets forth information concerning the exercise of
options to acquire shares of the Company's Common Stock by the Named Executive
Officers during the fiscal year ended December 31, 1997, as well as the
aggregate number and value of unexercised options held by the Named Executive
Officers on December 31, 1997.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs In-the-Money Options/SARs at
at December 31, 1997(#) December 31, 1997($)
--------------------------------------------------------------
Shares Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas F. Motter -0- -0- 106,000 -0- -0- -0-
Robert W. Millar -0- -0- 84,000 -0- -0- -0-
John W. Hemmer -0- -0- 20,000 -0- -0- -0-
Michael W. Stelzer -0- -0- 20,000 -0- -0- -0-
Director Compensation
</TABLE>
Outside directors receive cash compensation in the amount of a $5,000
annual retainer, an additional $1,250 for each quarterly meeting they attend and
an additional $500 for each committee meeting they attend. Outside directors are
also reimbursed for their expenses in attending Board and committee meetings.
Directors are not precluded from serving the Company in any other capacity and
receiving compensation therefor.
Employee 401(k) Plan
In October 1996, the Company's Board of Directors adopted a 401(k)
Retirement Savings Plan. Under the terms of the 401(k) plan, effective as of
November 1, 1996, the Company may make discretionary employer matching
contributions to its employees who choose to participate in the plan. The plan
allows the Board to determine the amount of the contribution at the beginning of
each year. The Board adopted a contribution formula specifying that such
discretionary employer matching contributions would equal 100% of the
participating employee's contribution to the plan up to a maximum discretionary
employee contribution of 3% of a participating employee's compensation, as
defined by the plan. All persons who have completed at least six months' service
with the Company and satisfy other plan requirements are eligible to participate
in the 401(k) plan.
1995 Stock Option Plan
The Company adopted a 1995 Stock Option Plan (the "Plan"), for officers,
employees, directors and consultants of the Company on November 7, 1995. The
Plan authorized the granting of stock options ("Plan Options") to purchase an
aggregate of not more than 300,000 shares of the Company's Common Stock. On
February 16, 1996, options for substantially all 300,000 shares were granted. On
June 9, 1997, the Company's shareholders approved an amendment to the Plan to
increase the number of shares of Common Stock reserved from issuance thereunder
by an aggregate of 300,000 shares. That same day, 20,000 options were granted to
the Company's Chief Financial Officer and five outside
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<PAGE>
directors, one of whom (Michael W. Stelzer) is now the Vice President of
Operations and Chief Operating Officer of the Company. There are presently
outstanding options to purchase 450,200 shares of the Company's Common Stock
that have been granted under the Plan. No such options have been exercised.
The Plan is administered by the Board of Directors or a Compensation
Committee of not less than two disinterested members of the Board of Directors.
In general, the Board of Directors or the Compensation Committee, as the case
may be, 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 Board of Directors or the
Compensation Committee, as the case may be.
Options under the Plan may be either incentive stock options ("ISOs"), as
such term is defined in the Internal Revenue Code of 1986, as amended, or
non-ISOs. ISOs may only be granted to persons who are employees of the Company.
Non-ISOs may be granted to any person, including, but not limited to, employees
of the Company, independent agents, consultants, as the Board of Directors or
the Compensation Committee, as the case may be, believes has contributed, or
will contribute, to the success of the Company. The Board of Directors or the
Compensation Committee as the case may be, shall determine the exercise price of
options granted under the Plan, provided that, in the case of ISOs, such price
may not be less than 100% (110% in the case of ISOs granted to holders of 10% of
voting power of the Company's 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 ISOs
become exercisable for the first time in any year cannot exceed $100,000.
The term of each option shall not be more than 10 years (five years in the
case of ISOs granted to holders of 10% of the voting power of the Company's
stock) from the date of grant. The Board of Directors has a right to amend,
suspend or terminate the Plan at any time; provided, however, that unless
ratified by the Company's stockholders, no amendment or change in the Plan will
be effective which would increase the total number of shares which may be issued
under the Plan, materially increase the benefits accruing to persons granted
under the Plan or materially modify the requirements as to eligibility and
participation in the Plan. No amendment, supervision or termination of the Plan
shall, without the consent of an employee to whom an option shall heretofore
have been granted, affect the rights of such employee under such option.
Employment Agreements
The Company entered into employment agreements with each of Thomas F.
Motter, Robert W. Millar and John W. Hemmer, which commenced on February 1, 1996
and expire on February 1, 2001. The agreements require each employee to devote
substantially all of his working time to the Company, provide that each of them
may be terminated for "cause" (as provided in the agreements) and prohibit each
of them from competing with the Company for two years following the termination
of his employment agreement. The agreements provide for the payment of an
initial base salary of $135,000 to Mr. Motter, $125,000 to Mr. Millar and
$120,000 to Mr. Hemmer, and became effective upon the closing of the Company's
public offering on July 25, 1996. Messrs. Motter, Millar and Hemmer also each
received a grant by the Company of Employee incentive stock options to purchase
106,000, 84,000 and 20,000 shares respectively, of the Company's Common Stock at
a price of $5.00 per share under the Company's Option Plan. The agreements
provide for salary increases and bonuses as shall be determined at the
discretion of the Board of Directors.
Profit Sharing Plan
On February 16, 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 funding
will be paid to the Company's officers and key employees as follows: Thomas W.
Motter, Chairman of the Board, President and Chief Executive Officer--30%;
Robert W. Millar, Vice President of Engineering and Manufacturing--25%; John W.
Hemmer, Chief Financial Officer and Treasurer--20%; and a pool of 25% to be
allocated among the other officers and key employees as determined by the
Compensation Committee and approved by the Board of Directors. This funding 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 December 31, 2001. If the
Company's pretax profits reach $10,000,000 for any fiscal year, the entire
pretax profits for that year will qualify for the funding. The plan expires at
the end of its fifth fiscal year on December 31, 2001, when all funds held will
be disbursed.
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<PAGE>
Limitation of Liability and Indemnification
The Company 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. The Company
believes 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. The Company's Certificate of Incorporation limits the
liability of directors to the maximum extent permitted by Delaware law. This
provision is intended to allow the Company's directors the benefit of Delaware
General Corporation Law which 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. The Company's Bylaws provide that the Company shall
indemnify its officers and directors to the fullest extent provided by Delaware
law. The Bylaws authorize the use of indemnification agreements and the Company
has entered into such agreements with each of its directors and executive
officers.
There is no pending litigation or proceeding involving a director,
officer, employee or other agent of the Company as to which indemnification is
being sought, nor is the Company 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 Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
The information set forth herein describes certain transactions between
the Company and certain affiliated parties. Future transactions, if any, will be
approved by a majority of the disinterested members of the Company and will be
on terms no less favorable to the Company than those that could be obtained from
unaffiliated parties.
The Company subcontracts the manufacture of its Precisionist 3000 Plus(TM)
and Precisionist Thirty Thousand(TM) Workstation(TM) to one of its shareholders,
Zevex, Inc. ("Zevex") which is located in Salt Lake City, Utah. On September 23,
1996, the Company entered into a Design, Engineering and Manufacturing Agreement
with Zevex for the engineering and manufacture of the Workstation(TM) and
Precisionist Thirty Thousand(TM). As of December 31, 1997, Zevex has
manufactured and delivered 39 systems to the Company. However, the agreement can
be terminated at any time by the Company if Zevex fails for two consecutive
quarters to timely fulfill the Company's purchase orders, or by Zevex if the
Company fails to timely make the payments required by the agreement after having
received a 20 day notice from Zevex demanding payment. Zevex is also under an
exclusive contract with the Company, which expires September 23, 1999, that
prohibits Zevex from manufacturing complete ultrasound or laser surgical systems
for any other company, without permission from the Company. For the fiscal years
ended September 30, 1996, the three month period ended December 31, 1996 and the
fiscal year ended December 31, 1997, the Company purchased design and
manufacturing services in the amounts of $353,949, $30,386 and $1,070,000,
respectively, from Zevex.
On January 8, 1997, the Company subcontracted the subassembly of the laser
module piece of the Photon(TM) Laser Phaco(TM) from Sunrise Technologies, Inc.
("Sunrise"). During the 12 month period ending December 31, 1997, the Company
purchased 10 laser module subassemblies for a total purchase price of $160,000,
from Sunrise whose president was a member of the Company's Board of Directors at
the time the manufacturing agreement was signed.
On December 19, 1995, the Company entered into a settlement and release
agreement (the "Settlement Agreement") with Douglas A. MacLeod, a significant
shareholder of the Company. Pursuant to this agreement, Mr. MacLeod agreed to
terminate certain anti-dilution rights granted to him by the Company. Under the
terms of this Settlement Agreement, Mr. MacLeod agreed to terminate his
anti-dilution rights in consideration for the following: (i) Mr. Motter agreeing
to sell to Mr. MacLeod from his personal holdings 61,111 shares of the Company's
Common Stock at a purchase price of $611.11, (ii) Mr. Millar agreeing to sell to
Mr. MacLeod from his personal holdings 38,889 shares
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<PAGE>
of the Company's Common Stock at a purchase price of $388.89, and (iii) the
Company agreeing to issue to MacLeod an additional 20,000 shares of Common
Stock. Based on the value assigned by the Company's investment banker, Kenneth
Jerome & Company, Inc., 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 Mr. Motter and Mr.
Millar. The Company represented in the Settlement Agreement that a public
offering of the Company's securities would be completed by June 1, 1996. On May
24, 1996, the Company and Mr. MacLeod amended the Settlement Agreement to
indicate that a public offering of the Company's securities would be completed
by July 15, 1996. By order dated July 10, 1996, the Securities and Exchange
Commission declared the Company's Registration Statement to be effective and
following the sale of the Company's securities, the closing of the public
offering occurred on July 25, 1996.
The Photon(TM) LaserPhaco(TM) system is protected under a United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. (U.S. Patent Number
4,694,828) for the utility and methods of laser ablation, aspiration and
irrigation of tissue through a hand-held probe of a unique design and assigned
to Photomed, a corporation owned in part by Dr. Eichenbaum. The Company secured
the exclusive worldwide right to this patent shortly after its issue, and to the
international patents pending, from Photomed by means of a License Agreement
that entitled Dr. Eichenbaum to royalty payments equal to 1% of the proceeds
from the net commercial sales of the Photon(TM) LaserPhaco(TM) system and
accessories in all medical specialties. The License Agreement terminates July 7,
2003. 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 sub-specialties other than ophthalmology for which the Company
would receive royalty payments equal to 1% of the proceeds from the net sales of
products utilizing the patent.
Mr. Mackey, a director of the Company from September 1995 to September 3,
1998, is President and a shareholder of the law firm of Mackey Price & Williams,
which has rendered legal services to the Company since February 1995 in
connection with this public stock offering and other corporate matters. Legal
fees and expenses paid to Mackey Price & Williams for the fiscal year ended
December 31, 1997, the three month period ended December 31, 1996 and the fiscal
year ended September 30, 1996 totaled $118,765, $25,468 and $234,504,
respectively. The Company also granted Mackey Price & Williams warrants to
purchase 25,000 shares of Common Stock at $3.33 per share in partial payment for
legal services relating to the public stock offering.
Mr. Kolenik, a director of the Company since November 1997, is a former
director of Win Capital Corp. ("Win"), the Placement Agent for the Series C
Convertible Preferred Stock offering. Under the terms of an agency agreement
with Win, the Company agreed to pay to Win a commission equal to 9% of the
aggregate purchase price of the Shares sold, or $269,820. Win was also paid a
non-accountable expense allowance equal to 3% of the aggregate purchase price of
the Shares sold. The Company has also entered into an agreement with Win dated
August 20, 1997, wherein Win agreed to perform unspecified investment banking
services for the Company for a two year period, for which the Company agreed to
pay Win a monthly retainer of $2,000 for the first six months of the agreement,
$4,000 per month for the second six months, and $6,000 per month for the
remainder of the agreement. In addition, the Company issued Win Warrants to
purchase 191,000 shares of Common Stock at $3.00 per share in connection with
the investment banking agreement and additional warrants to purchase 100,000
shares of Common Stock at $3.00 per share for services rendered in the private
placement of Series C Convertible Preferred Stock.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of July 31, 1998 for (i)
each executive officer of the Company (ii) each director of the Company (iii)
each person known to the Company to be the beneficial owner of more than 5% of
the outstanding shares, and (iv) all directors and officers as a group.
<TABLE>
<CAPTION>
Name and Address(1) Number of Shares Percent of Ownership(2)
- ------------------- ---------------- --------------------
<S> <C> <C>
Thomas F. Motter(3)(6) 557,056 14.7%
Douglas MacLeod 418,451 11.0%
Robert W. Millar(4)(6) 374,605 9.9%
Michael W. Stelzer(5)(6) 62,935 1.7%
John W. Hemmer(5)(6) 50,513 1.3%
Robert L. Frome(7) 14,000 *
Patrick M. Kolenik(8) 1,007 *
Executive officers and
directors as a group (6
persons) 1,060,116 27.0%
- ---------------
</TABLE>
* Less than 1%.
(1) The address for Mr. Motter, Mr. Millar and Mr. Stelzer is c/o Paradigm
Medical Industries, Inc., 1127 West 2320 South, Suite A, Salt Lake City,
Utah 84119. The address for Mr. MacLeod is 1002 South 10th Street, Tacoma,
Washington 98405. The address for Mr. Hemmer is 88 Meadow Road, Briarcliff
Manor, New York 10510. The address for Mr. Frome is 505 Park Avenue, 16th
Floor, New York, New York 10022. The address for Mr. Kolenik is 35
Elizabeth Drive, Laurel Hollow, New York 11791.
(2) Assumes no exercise of the Class A Warrants, the Bridge Warrants and the
Attorney's Warrants and no conversion of outstanding shares of the
Company's Series A, Series B and Series C Preferred Stock into Common
Stock.
(3) Does not include 106,000 options granted to Mr. Motter under the Company's
1995 Option Plan.
(4) Includes 2,000 shares held by William E. Millar, Mr. Millar's father,
1,000 shares held by Michael S. Millar, Mr. Millar's brother; and 100
shares to Nathan Glynn, Mr. Millar's nephew. Mr. Millar disclaims
beneficial ownership of these 3,100 shares. Does not include 84,000
options granted to Mr. Millar under the Company's 1995 Option Plan.
(5) Does not include 20,000 options granted to each of the two directors under
the Company's 1995 Option Plan.
(6) Does not include 250 shares of Series C Convertible Preferred Stock held
by each of the four management directors.
(7) Does not include 750 shares of Series C Convertible Preferred Stock held
by Mr. Frome.
(8) Does not include 2,000 shares of Series C Convertible Preferred Stock held
by Mr. Kolenik.
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<PAGE>
STOCKHOLDERS REGISTERING SHARES
The following table sets forth information as of August 31, 1998, to
reflect the registration of shares by Series C Preferred Stockholders (the
"Registering Stockholders") entitled to register shares of Common Stock assuming
each of the Registering Stockholders elects to exercise his conversion rights to
convert the Series C Preferred shares (the Series C Shares") into shares of
Common Stock, assuming each share of Series C Preferred Stock is converted into
shares of Common Stock at a conversion price equal to $1.75 per share of Common
Stock, and then to register such shares of Common Stock for resale upon
conversion.
<TABLE>
<CAPTION>
Beneficial Beneficial Ownership Following
Ownership of Series C the Offering and Conversion of
Shares Prior to Offering Series C Shares to Common Stock
Number of Shares
to be Issued Following the Shares to be
Number of Conversion of Series C Registered for
Stockholders Series C Shares Shares to Common Stock Resale in Offering
------------ --------------- ------------------------ ------------------
<S> <C> <C> <C>
Robert M. Ball 125 7,143 7,143
Robert J. Braig 100 5,714 5,714
Thomas W. Brake 150 8,572 8,572
Craig S. Brewer 250 14,286 14,286
Consolidated Management Services, Inc. 200 11,429 11,429
Michael Demayo 200 11,429 11,429
C. Richard Dobson 125 7,143 7,143
Robert L. Frome 750 42,857 42,857
Steven F. Gallop and Karen M. Gallop, JTWROS 100 5,714 5,714
William A. Gantz and Carol A. Gantz, JTWROS 100 5,714 5,714
John A. Grue 100 5,714 5,714
Edward G. Hammond 250 14,286 14,286
Hi-Tel Group, Inc. 750 42,857 42,857
Rommie L. Honeycutt 100 5,714 5,714
Roy Lee Hounshell 100 5,714 5,714
Samuel C. Houser 100 5,714 5,714
Randy N. Humphrey 100 5,714 5,714
Jerry R. King 200 11,429 11,429
Terry F. King 200 11,429 11,429
Shannon E. Miller and Shannon S. Miller, JTWROS 100 5,714 5,714
Joseph R. Nemeth 1,000 57,143 57,143
Dr. Joseph Nemeth, IRA 1,000 57,143 57,143
Christopher C. Northey 100 5,714 5,714
Eileen M. O'Dea 750 42,857 42,857
Laurence Leon Olive 100 5,714 5,714
John D. Phillips, Jr. 200 11,429 11,429
Richard D. Poling 100 5,714 5,714
Feliciano Sergio Sabates, III 150 8,572 8,572
Claude W. Savage and Jean G. Savage JTWROS 100 5,714 5,714
Gregg Stokes 100 5,714 5,714
TSP Associates, Inc. 1,000 57,143 57,143
William E. Webb, III 130 7,428 7,428
Artas Corporation 500 28,571 28,571
United Growth Fund, Inc. Profit Sharing Plan 500 28,571 28,571
Sterling Capital LLC 250 14,286 14,286
John W. Hemmer and Barbara Bean Hemmer, JTWROS 250 14,286 14,286
Gregory J. Lavin 250 14,286 14,286
Robert W. Millar 250 14,286 14,286
Thomas F. Motter 250 14,285 14,285
Marc N. Rubin 500 28,571 28,571
Thomas R. Wolf and Erica P. Wolf, JTWROS 300 17,143 17,143
Dr. Thomas R. Wolf, SEP IRA 250 14,286 14,286
Canadian Advantage Limited Partnership 2,500 142,857 142,857
Paul N. Davis 300 17,143 17,143
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
RF Lafferty & Co. Profit Sharing Plan FBO Henry Hackel 2,000 114,286 114,286
Roger Newman 500 28,571 28,571
Samuel Richman 250 14,286 14,286
Jeffrey Zarry Schwartz 250 14,286 14,286
Richard C. Siskey 500 28,571 28,571
Jeffrey G. Straus 250 14,286 14,286
Wight Investment 500 28,571 28,571
Michael W. Stelzer and Paula J. Stelzer, JTWROS 250 14,286 14,286
Patrick Kolenik - IRA 500 28,571 28,571
Patrick Kolenik and Delores Kolenik, JTWROS 500 28,571 28,571
Roger C. Husted 250 14,286 14,286
Lincoln Trust Company FBO Michael B. Limberg, M.D. 1,000 57,143 57,143
Charles F. Trapp 350 20,000 20,000
BCN Associates 500 28,571 28,571
Charles Thompson 250 14,286 14,286
Continental Stock Transfer & Trust Co. 500 28,571 28,571
Ronald A. and Karen A. Ballsin, JTWROS 1,000 57,143 57,143
Michael Associates 1,000 57,143 57,143
Mark S. Richardson 250 14,286 14,286
Mark and Lori Cozens 150 8,572 8,572
Michael L. Salamone 250 14,286 14,286
Premier Alliance Group, Inc. 350 20,000 20,000
Gary Hammond 250 14,286 14,286
Jeffrey A. and Penny Strack 250 14,286 14,286
J. Michael Smith 250 14,286 14,286
Irwin Messer and Alexandra S. Urdang, JTWROS 200 11,429 11,429
Sheila Sandman 250 14,286 14,286
Joseph Aufrino 500 28,571 28,571
Ted Levine 500 28,571 28,571
B. Michael Pisani 250 14,286 14,286
Alfred J. Ricciardi and Joseph Ricciardi, JTWROS 500 28,571 28,571
Rose W. Zee 500 28,571 28,571
Patrick and Linda Vetere, JTWROS 250 14,286 14,286
--- ------ ------
TOTAL 29,980 1,713,143 1,713,143
</TABLE>
The Company is also registering for resale the 37,500 shares of Common
Stock issuable upon the conversion of a $75,000 12% Convertible, Redeemable
Promissory Note which is held by Bill L. Trahan.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, $.001 par value per share, and 5,000,000 shares of Preferred
Stock, $.001 par value per share. The Company has created three classes of
Preferred Stock, designated as Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock.
Common Stock. The holders of Common Stock are entitled to one vote for
each share held of record on all matters to be voted on by stockholders. The
holders of Common Stock are entitled to receive such dividends, if any, as may
be declared from time to time by the Board of Directors in its discretion from
funds legally available therefor. Upon liquidation or dissolution of the
Company, the holders of Common Stock are entitled to receive, pro rata, assets
remaining available for distribution to stockholders. The Common Stock has no
cumulative voting, preemptive or subscription rights and is not subject to any
future calls. There are no conversion rights or redemption or sinking fund
provisions applicable to the shares of Common Stock. All the outstanding shares
of Common Stock are fully paid and nonassessable.
Preferred Stock. The Company's Board of Directors is authorized, without
further action by the stockholders, to issue, from time to time, up to 5,000,000
shares of Preferred Stock in one or more classes or series, and to fix or alter
the designations, power and preferences, and relative participating, option or
other rights, if any, and qualifications, limitations or restrictions thereof,
including, without limitation, dividend rights (and whether dividends are
cumulative), conversion rights, if any, voting rights (including the number of
votes, if any, per share), redemption rights (including sinking fund
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<PAGE>
provisions, if any), and liquidation preferences of any unissued shares or
wholly unissued series of Preferred Stock, and the number of shares constituting
any such class or series and the designation thereof and to increase or decrease
the number of such class or series subsequent to the issuance of shares of such
class or series, but not below the number of shares of such class or series then
outstanding. The issuance of any series of Preferred Stock under certain
circumstances could have the effect of delaying, deferring or preventing a
change in control of the Company and could adversely affect the rights of the
holders of the Common Stock. As of the date of this Memorandum, the Company has
created and issued shares of two classes of preferred stock more fully discussed
below.
Series A Preferred Stock. The Company's Board of Directors has authorized
the issuance of a total of 500,000 shares of Series A Preferred Stock. Each
share of Series A Preferred Stock is convertible into shares of Common Stock at
a rate of 1.2 shares of Common Stock for each share of Series A Preferred Stock.
The Company may, at its sole option, at any time, redeem all of the
then-outstanding shares of Series A Preferred Stock at a price of $4.50 per
share, plus accrued and unpaid dividends, if any. The holders of shares of
Series A Preferred Stock are entitled to non-cumulative preferred dividends at
the rate of $0.24 per share of Series A Preferred Stock per annum, payable in
cash on or before December 31 of each year, commencing December 31, 1995. Such
dividends, however, can only be paid from surplus earnings of the Company and
further, because these dividends are non-cumulative, no deficiencies in dividend
payments from any calendar year can be carried forward to the next calendar
year. The Series A Preferred Stock will have priority rights to dividends over
the Common Stock, but will not participate in any dividends payable to the
holders of shares of Common Stock. No dividends will be paid to holders of
shares of Common Stock unless and until all dividends on shares of the Company's
Preferred Stock have been paid in full for the same period. Except upon the
redemption of the Series A Preferred Stock or before the payment of dividends on
any shares of capital stock that are on par with or junior or subordinate to the
Series A Preferred Stock as to dividends (e.g., the Series B Preferred Stock),
or upon the liquidation, dissolution or winding-up of the Company, the payment
of dividend from surplus earnings was not mandatory prior to December 31, 1995.
In the event of any liquidation, dissolution or winding-up of the Company, the
holders of shares of Series A Preferred Stock are entitled to receive, prior and
in preference to, any distribution of any of the assets or surplus funds of the
Company to the holders of shares of Common Stock or any other stock of the
Company (e.g., the Series B Preferred Stock) ranking on liquidation junior or
subordinate to the Series A Preferred Stock, an amount equal to $1.00 per share,
plus accrued and unpaid dividends, if any. Holders of shares of Series A
Preferred Stock have no voting rights, except in those instances required by
Delaware law.
As of June 30, 1998, there were a total of 36,122 shares of Series A
Preferred Stock issued and outstanding. A total of 43,346 shares of the
Company's Common Stock has been set aside and reserved in the event that the
holders of shares of Series A Preferred Stock elect to convert those shares into
shares of Common Stock. As of June 30, 1998, 86,642 shares of Series A Preferred
Stock have been converted into 103,970 shares of Common Stock.
Series B Preferred Stock. The Company's Board of Directors has authorized
the issuance of a total of 500,000 shares of Series B Preferred Stock. Each
share of the Series B Preferred Stock is convertible into shares of Common Stock
at a rate of 1.2 shares of Common Stock for each share of Series B Preferred
Stock. The Company may, at its sole option, at any time, redeem all of the
then-outstanding shares of Series B Preferred Stock at a price of $4.50 per
share, plus accrued and unpaid dividends, if any. Except upon the redemption of
the Series B Preferred Stock or before the payment of dividends on any shares of
capital stock that are on par with or junior or subordinate to the Series B
Preferred Stock as to dividends, or upon the liquidation, dissolution or
winding-up of the Company, the payment of dividends from surplus earnings was
not mandatory prior to December 31, 1995. In the event of any liquidation,
dissolution or winding-up of the Company, the holders of shares of Series B
Preferred Stock are entitled to receive, prior and in preference to, any
distribution of any of the assets or surplus funds of the Company to the holders
of shares of Common Stock or any other stock of the Company ranking on
liquidation junior or subordinate to the Series B Preferred Stock, an amount
equal to $4.00 per share, plus accrued and unpaid dividends, if any. Holders of
shares of Series B Preferred Stock have no voting rights, except in those
instances required by Delaware law.
As of June 30, 1998, there were a total of 33,236 shares of Series B
Preferred Stock issued and outstanding. A total of 39,883 shares of the
Company's Common Stock have been set aside and reserved in the event that the
holders of shares of Series B Preferred Stock elect to convert those shares into
shares of Common Stock. As of June 30, 1998, 459,764 shares of Series B
Preferred Stock have been converted into 551,717 shares of Common Stock.
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<PAGE>
Series C Preferred Stock. The Company's Board of Directors has authorized
the issuance of a total of 30,000 shares of Series C Preferred Stock. Each Share
of Series C Preferred Stock is convertible into shares of Common Stock at an
initial Conversion Price equal to $1.75 per share of Common Stock, subject to
adjustments for stock splits, stock dividends and certain combinations or
recapitalizations in respect of the Common Stock. The Shares are also
automatically converted into Common Stock upon 30 days' written notice by the
Company to the holders of the Shares after (i) the 30- day anniversary of the
effective date of the filing of a registration statement in which shares of
Common Stock issuable upon conversion of the Shares were registered and (ii) the
average closing price of the Common Stock for the 20-day period immediately
prior to the date in which notice of conversion is given by the Company to the
holders of the Shares is at least $3.50 per shares. Any Shares still outstanding
after January 1, 2002 shall be mandatorily converted at such date at the
Conversion Price then in effect. Holders of the shares have no redemption
rights. The holders of shares of Series C Preferred Stock are entitled to 12%
non-cumulative preferred dividends. However, the Shares shall be entitled to
dividends declared on the Company's Common Stock on an as-converted basis. Such
dividends shall accrue from the date of issuance or the last preferred dividend
record date and be payable in cash or shares of Common Stock. Such dividends,
however, can only be paid at the Company's sole option from surplus earnings of
the Company and further, because these dividends are non-cumulative, no
deficiencies in dividend payments from any calendar year can be carried forward
to the next calendar year. In the event of any liquidation, dissolution, sale of
all or substantially all of the assets or merger or consolidation of the Company
(and, in case of a merger or consolidation, the Company is not the surviving
entity), the holders of Series C Preferred Stock shall be entitled to receive,
in preference to the holders of all other classes of the Company's Capital
stock, whether now existing or hereinafter created (other than Series A
Preferred Stock and Series B Preferred Stock with which Series C Preferred Stock
shall, for purposes of a liquidation, rank junior), an amount per share equal to
the greater of (A) the amount such shares would have received had such holders
converted the Series C Preferred Stock into Common Stock immediately prior to
such liquidation, plus declared or unpaid dividends or (B) or the Stated Value,
$100 per share, subject to such liquidation plus declared but unpaid dividends.
Holders of shares of Series C Preferred Stock shall have no voting rights,
except in those instances required by Delaware law.
As of June 30, 1998, there were a total of 29,980 shares of Series C
Preferred Stock issued and outstanding. A total of 1,713,143 shares of the
Company's Common Stock has been set aside and reserved in the event that the
holders of the Series C Preferred Stock elect to convert those shares into
shares of Common Stock. As of June 30, 1998, no shares of Series C Preferred
Stock have been converted into shares of Common Stock.
Rescission Offer to Series B Preferred Stockholders. The 493,000 shares of
Series B Preferred Stock issued to the Company's Series B Stockholders (the
"Series B Stockholders") may not have been sold in compliance with certain
aspects of California corporate law and federal and state securities laws.
Concurrently with its public offering, the Company provided the Series B
Stockholders with a rescission offer (the "Rescission Offer") to repurchase all
Series B Preferred shares (the "Rescission Shares") owned by the Series B
Stockholders. The Series B Stockholders 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 10% per
annum from the date the Rescission Shares were purchased to July 25, 1996, the
date the Company's public offering closed and each rescinding shareholder was
paid by the Company. The original purchasers of approximately 93% of the Series
B Shares (460,250 shares) rejected the Rescission Offer. Two shareholders owning
a combined total of 32,750 shares have accepted the Rescission Offer.
Although the Company was not instructed by any regulatory body to actually
conduct the Rescission Offer, the Company decided to go forward with the
Rescission Offer to reduce any type of potential contingent liability it may be
exposed to in connection with its private placement of Series B Preferred Stock.
The Rescission Offer is designed to reduce such contingent liability by placing
the Series B Stockholders on notice of possible defects and presenting them with
an opportunity to avoid or mitigate damages. The Rescission Offer, however, may
not fully relieve the Company from exposure to contingent liability under
federal or state securities laws. See "Risk Factors -- Rescission Offer to
Series B Stockholders."
Class A Warrants. Each Class A Warrant entitles the holder to purchase one
share of Common Stock at an exercise price of $7.50 per share. Class A Warrants
are exercisable through July 10, 2001 provided that at the time of exercise a
current prospectus relating to the Common Stock is then in effect and the Common
Stock is qualified for sale or exempt from qualification under applicable state
securities laws. The Class A Warrants are subject to redemption by the Company
commencing July 10, 1997, upon 30 days' written notice, at a price of $.05 per
Class A Warrant if the average closing bid price of the Common Stock for any 30
consecutive business days ending within 15 days of the date of which the notice
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of redemption is given shall have exceeded $8.50 per share. Holders of Class A
Warrants automatically forfeit their rights to purchase the shares of Common
Stock issuable upon exercise of such Warrants unless the Warrants are exercised
before the close of business on the business day immediately prior to the date
set for redemption. All outstanding Class A Warrants must be redeemed if any
Class A Warrants are redeemed. A notice of redemption shall be mailed to each of
the registered holders of the Class A Warrants by First Class mail, postage
prepaid, 30 days before the date fixed for redemption. The notice of redemption
shall specify the redemption price, the date fixed for redemption, the place
where the Class A Warrant certificates shall be delivered and the redemption
price to be paid, and that the right to exercise a Class A Warrant shall
terminate at 5:00 p.m. (Salt Lake City time) on the business day immediately
preceding the date fixed for redemption.
The Class A Warrants may be exercised upon surrender of the certificate(s)
therefore on or prior to the expiration or the redemption date at the offices of
Continental Stock Transfer & Trust Company, the Company's warrant agent (the
"Warrant Agent") with the subscription form on the reverse side of the
certificate(s) completed and executed as indicated, accomplished by payment (in
the form of a certified or cashier's check payable to the order of the Company)
of the full exercise price for the number of warrants being exercised.
The Class A Warrants contain provisions that protect the holders thereof
against dissolution by adjustment of the exercise price per share and the number
of shares issuable upon exercise thereof upon the occurrence of certain events
including issuances of Common Stock (or securities convertible, exchangeable or
exercisable into Common Stock) at less than market value, stock dividends, stock
splits, mergers, sale of substantially all of the Company's assets, and for
other extraordinary events; provided, however, that no such adjustment shall be
made upon, among other things (i) the issuance or exercise of options or other
securities under employee benefit plans (ii) the sale or exercise of outstanding
options or warrants or the Class A Warrants, or (iii) the conversion of shares
of the Company's Preferred Stock to Common Stock.
The Company is not required to issue fractional shares of Common Stock,
and in lieu thereof will make a cash payment based upon the current market value
of such fractional shares. The holder of Class A Warrants will not possess any
right as a shareholder of the Company unless or until he or she exercises the
Class A Warrants. As of June 30, 1998, no Class A Warrants have been exercised.
Underwriter's Warrants. In connection with its public offering, the
Company issued and sold to the underwriters of that offering, warrants to
purchase 100,000 shares of Common Stock at $8.125 per share commencing July 10,
1998 and continuing to be exercisable until July 10, 2001, and an additional
100,000 shares of Common Stock at a price of $7.50 per share exercisable for the
same period of time. During the exercise period, holders of the Underwriter's
Warrants are entitled to certain demand and incidental registration rights with
respect to the securities issuable upon exercise of the Underwriter's Warrants.
The number of shares covered by the Underwriter's Warrants are subject to
adjustment in certain events to prevent dissolution. The Company may redeem the
Underwriter's Warrants beginning July 10, 1998 at a price of $.05 per warrant at
such time as the Company's Common Stock has been trading on The Nasdaq SmallCap
Market or an established exchange at a price equal to or above $10.00 per share
for a period of 30 consecutive business days ending within 15 days of the date
of redemption. Prior to July 10, 1998, the Underwriter's Warrants are not
transferrable except to officers and directors of the representative,
co-underwriters, selling group members and their officers or partners. As of
June 30, 1998, no Underwriter's Warrants have been exercised.
Win Warrants. In connection with a letter agreement dated August 20, 1997,
wherein Win agreed to perform unspecified investment banking services, the
Company issued Win Warrants to purchase 191,000 shares of Common Stock at any
time not later than August 19, 2000. The Company issued additional Warrants to
Win to purchase 100,000 shares of Common Stock at anytime no later than February
24, 2001 for services rendered in the private placement of Series C Preferred
Stock. Each of the Win Warrants entitles the holder to purchase one share of
Common Stock at an exercise price of $3.00 per share. The Win Warrants may be
exercised upon surrender of the certificate(s) therefor on or prior to the
expiration or the redemption date (as explained above) at the offices of the
Company's Warrant agent with the subscription form on the reverse side of the
certificate(s) completed and executed as indicated, accomplished by payment (in
the form of a certified or cashier's check payable to the order of the Company)
of the full exercise price for the number of Warrants being exercised. The
Company may redeem the Win Warrants at a price of $.05 per Warrant at such time
as the Company's Common Stock has been trading in the over-the-counter market as
reported on The Nasdaq SmallCap Market at a price equal to or above $5.00 for a
period of 20 consecutive trading days ending within 20 days of the date of
redemption. The Win Warrants contain provisions that protect the holders thereof
against dilution by adjustment of the
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exercise price per share and the number of shares issuable upon exercise thereof
upon the occurrence of certain events, including stock dividends, stock splits,
mergers and the sale of substantially all of the Company's assets. The Company
is not required to issue fractional shares of Common Stock, and in lieu thereof
will make a cash payment based upon the current market value of such fractional
shares. The holder of the Win Warrants will not possess any rights as a
shareholder of the Company unless and until the holder exercises the Warrants.
As of June 30, 1998, no Win Warrants have been exercised.
Note Holders' and Attorney's Warrants. In connection with certain Bridge
Financing, the Company issued Warrants to purchase 300,000 shares of Common
Stock to investors. Pursuant to a warrant agreement between the Company and
Mackey Price & Williams ("MP&W"), the Company issued Warrants to purchase 25,000
shares of Common Stock to MP&W. Each Warrant entitles the holder to purchase one
share of Common Stock at an exercise price of $3.33 per share. The Note Holders'
and Attorney's Warrants are exercisable through December 1, 2000. The Note
Holders' and Attorney's Warrants may be exercised upon surrender of the
certificate(s) therefor on or prior to the expiration or the redemption date at
the offices of the Company's warrant agent with the subscription form on the
reverse side of the certificate(s) completed and executed as indicated,
accomplished by payment (in the form of a certified or cashier's check payable
to the order of the Company) of the full exercise price for the number of
Warrants being exercised. The Company may redeem the Note Holders' and
Attorney's Warrants at a price of $.05 per Warrant at such time as the Company's
Common Stock has been trading in the over-the-counter market as reported on The
Nasdaq SmallCap Market at a price equal to or above $10.00 for a period of 30
consecutive trading days ending within 15 days of the date of redemption. The
Note Holders' and Attorney's Warrants contain provisions that protect the
holders thereof 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 dividends, stock splits, mergers and the sale of
substantially all of the Company's assets. The Company is not required to issue
fractional shares of Common Stock, and in lieu thereof will make a cash payment
based upon the current market value of such fractional shares. The holder of the
Note Holders' and Attorney's Warrants will not possess any rights as a
shareholder of the Company unless and until the holder exercises the Warrants.
As of June 30, 1998, 12,500 Note Holders' Warrants have been exercised to
purchase 12,500 shares of Common Stock. No Attorney's Warrants have been
exercised as of that date.
La Jolla Warrants. In connection with its Series A Preferred private
placement, the Company has issued La Jolla Securities Corporation ("La Jolla")
Warrants to purchase 11,600 shares of the Company's Series A Preferred. Each
warrant entitles La Jolla to purchase one share of Series A Preferred at a price
of $4.00 per share at any time prior to May 8, 1999. These warrants are subject
to redemption by the Company beginning on July 10, 1998 at a price of $0.05 per
warrant, if the Company's common stock has been trading at a price equal to or
above $7.50 per share for 20 consecutive business days ending within 15 days of
the date of redemption.
FAS Warrants. In connection with its Series B Preferred private placement,
the Company issued First Associated Securities Group, Inc. ("FAS") Warrants to
purchase 21,525 shares of the Company's Common Stock. Each warrant entitles FAS
to purchase one share of Common Stock at a price of $3.00 per share. These
warrants are currently exercisable and expire on December 31, 1999.
Certain Provisions of Certificate of Incorporation. The Company's
Certificate of Incorporation provides that to the fullest extent permitted by
Delaware law, its directors shall not be liable to the Company and its
stockholders. The Company's Certificate of Incorporation also contains
provisions entitling the officers and directors of the Company to
indemnification by the Company to the fullest extent permitted by the Delaware
General Corporation Law.
Indemnification Agreements. The Company has entered into Indemnification
Agreements with its officers and directors. Such Indemnification Agreements
provide that the Company will indemnify officers and directors of the Company
("Indemnitee") against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement arising out of threatened, pending or completed
legal action against any Indemnitee to the fullest extent permitted by the
Delaware General Corporate Law.
Transfer and Warrant Agent. The Company's transfer agent and registrar for
its Common Stock and the Warrant Agent for the Class A Warrants is Continental
Stock Transfer & Trust Company, New York, New York.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and assuming the exercise of all of Class
A Warrants, Underwriter's Warrants, Win Capital Warrants, Note Holders' Warrants
and Attorney's Warrants and the conversion of all of the Series C Preferred
Stock and the Note, the Company will have 7,384,501 shares of Common Stock
outstanding, assuming no exercise of the outstanding options or the other
warrants and no conversion of the Company's Shares of Series A or Series B
Preferred Stock. All 1,803,500 shares of Common Stock registered in the Offering
to be issued upon the exercise of the Warrants will be freely transferable
without restriction or further registration under the Securities Act of 1933
(the "Securities Act") except for any shares purchased by any person who is or
thereby becomes an "affiliate" of the Company, which shares will be subject to
the resale limitations contained in Rule 144 promulgated under the Securities
Act as described below. All 1,750,643 shares of Common Stock issuable upon
conversion of the Series C Preferred Stock and the Note will be restricted
securities but are registered for resale in this Offering and can be sold
provided a current registration statement is in effect and a current prospectus
is delivered to the purchaser.
Rule 144 Restrictions. Of the 3,830,358 shares of Common Stock currently
outstanding, approximately 1,580,358 are freely tradable or could be freely
traded pursuant to Rule 144(k). The remaining approximately 2,250,000 shares of
Common Stock are "restricted securities" within the meaning of Rule 144 under
the Securities Act and, in general, if held for at least one year, will be
eligible for sale without registration upon reliance of the exemption contained
in Rule 144. An additional 83,230 shares could eventually be sold in reliance on
Rule 144 upon the conversion of the Company's issued and outstanding Series A
and Series B Preferred Stock for shares of Common Stock. Further, an additional
35,445 shares could also eventually be sold in reliance on Rule 144 upon
exercise of the La Jolla Warrants and FAS Warrants.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three month period, the number of shares
beneficially owned for at least one year that does not exceed the greater of (i)
one percent of the number of the then outstanding shares of Common Stock, or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and the availability of
current public information about the Company. Furthermore, a person who is not
deemed to have been an affiliate of the Company during the ninety days preceding
a sale by such person and who has beneficially owned such shares for at least
two years is entitled to sell such shares without regard to the volume, manner
of sale or notice requirement.
In addition, Rule 701 under the Securities Act provides an exemption from
the registration requirements of the Act for offers and sales of securities
issued pursuant to certain compensatory benefit plans or written contracts of a
company not subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act. Securities issued pursuant to Rule 701 are defined as restricted
securities for purposes of Rule 144. However, 90 days after the issuer becomes
subject to the reporting provisions of the Exchange Act, the Rule 144 resale
restrictions, except for the broker's transaction requirements, are inapplicable
for nonaffiliates. Affiliates are subject to all Rule 144 restrictions after
this 90-day period, but without the Rule 144 holding period requirement.
Following the offering, no predictions can be made of the effect, if any,
of future public sales of restricted shares or the availability of restricted
shares for sale in the public market. Moreover, the Company cannot predict the
number of shares of Common Stock that may be sold in the future pursuant to Rule
144 or Rule 701 because such sales will depend on, among other factors, the
market price of the Common Stock and the individual circumstances of the holders
thereof. The availability for sale of substantial amounts of Common Stock
acquired through the exercise of Class A Warrants, Underwriter's Warrants, Win
Capital Warrants, Note Holders' Warrants or Attorney's Warrants or upon
conversion of the Company's Series A Preferred, Series B Preferred, Series C
Preferred or the Note could adversely affect prevailing market prices for the
Company's securities.
PLAN OF DISTRIBUTION
The Company may solicit the exercise of Class A Warrants and Note Holders'
Warrants through a registered or licensed broker-dealer. Upon exercise of Class
A Warrants or Note Holders' Warrants, the Company will pay such soliciting
broker-dealer a fee of 5% of the aggregate exercise price of Class A Warrants
and Note Holders' Warrants exercised, if: (i) the market price of the Common
Stock on the date the Class A Warrant or the Note Holders' Warrant is
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exercised is greater than the then exercise price of the Class A Warrant or the
Note Holders' Warrant, respectively; (ii) the exercise of the Class A Warrant or
the Note Holders' Warrant was solicited by a member of the National Association
of Securities Dealers, Inc.; (iii) the Class A Warrant or the Note Holders'
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 or the Note Holders' Warrant; and (v) the solicitation of exercise of
the Class A Warrant or the Note Holders' Warrant is not in violation of
Regulation M.
In connection with the solicitation of the Class A Warrant or the Note
Holders' Warrant exercises, the soliciting broker-dealer will be prohibited from
engaging in any market-making activities with respect to the Company'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 or Note Holders' Warrants until the later of
(i) the termination of such solicitation activity, or (ii) 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 or Note Holders' Warrants
following such solicitation. As a result, the soliciting broker-dealer may be
unable to provide a market for the Company's securities, should it desire to do
so, during certain periods while the respective Class A Warrants or Note
Holders' Warrants are exercisable.
The Company does not plan to solicit Series C Preferred Stockholders
regarding the conversion of their Series C Preferred Shares into shares of
Common Stock which have been registered for resale upon conversion.
The resale of the Common Stock by the Series C Preferred stockholders that
elect to convert their shares of Series C Preferred Stock to shares of Common
Stock and the holders of Class A Warrants, Underwriter's Warrants, Win Capital
Warrants, Note Holder's Warrants and Attorney's Warrants that elect to exercise
their respective warrants and purchase Company 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. The Company has
agreed to indemnify the Selling Securityholders against certain liabilities
under the Securities Act.
From time to time this Prospectus will be supplemented and amended as
required by the Securities Act. 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, the Company has 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.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
and certain other legal matters in connection have been passed upon for the
Company by Mackey Price & Williams, Salt Lake City, Utah. The Company
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granted Mackey Price & Williams, the Company's counsel, Warrants to purchase
25,000 shares of Common Stock at $3.33 per share in partial payment for legal
services in connection with the Company's public offering which was completed in
July 1996. See "Description of Securities -- Bridge and Attorneys' Warrants."
INDEPENDENT AUDITORS
The financial statements of the Company included in this Prospectus, to
the extent and for the periods indicated in their reports, have been audited by
Tanner & Co., independent auditors, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in auditing and accounting.
DEFINITIONS
Unless the context indicates otherwise, the following words and terms, as
used in this Prospectus, shall have the following meanings:
Ablation. To surgically remove with laser energy breaking down the tissue.
Acuity. The ability to se objects in focus. Perfect visual acuity is
referred to as 20/20 vision or emmetropia.
Anterior Chamber. The front section of the eye containing the cornea, lens
and Iris, which refract and focuses light images onto the retina.
Aspiration. Removal of tissue and fluids from the eye through suction.
Cataract. Hardened opaque lens of the eye. Generally an age elated
pathology. Cataracts become harder and more opaque over time, which
reduces visual ability to the point of complete blindness. Cataracts can
also be caused by genetic disorders and accidental trauma.
Common Stock. The shares of voting Common Stock of the Company. See "Terms
of the Offering - Common Stock."
The Company. Paradigm Medical Industries, Inc., a Delaware corporation,
and its predecessors.
Cornea. The clear front exterior surface of the eye. Its domed curvature
refracts images through the and to the retina. Its posterior surface
inside the eye is the endothelium that is sensitive to shock or vibration.
ECCE. Acronym for extracapsular cataract extraction. A cataract removal
method using steel surgical instruments requiring a larger incision that
is more invasive than phaco surgery.
Emmetropia. Normal visual acuity, 20/20 vision.
Exchange Act. The Securities Exchange Act of 1934, as amended.
Fiber Optic. A small, flexible quartz strand that transmits concentrated
laser light energy for precise delivery to tissue in surgery.
FDA. The United States Food and Drug Administration.
IOL. Acronym for intra-ocular lens. A clear plastic prosthetic implant
that replaces the natural human lens after cataract removal surgery to
restore sight.
Internal Revenue Service. The United States Internal Revenue Service, the
governmental agency that is responsible for administering the federal tax
laws of the United States government.
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Intraocular Pressure. The pressure within the orbit of the eye usually
expressed in millimeters mercury ("MM/Hg") abnormally high and low
pressures of which are used as indicators of ocular pathologies.
Investor Questionnaire and Subscription Agreement. The Investor
Questionnaire and Subscription Agreement attached hereto as Exhibit "B".
Investors. Those persons or entities acquiring the Notes in the Offering.
In Vitro. Refers to studies and/or phenomena that take place outside the
body (for example, in test tubes).
In Vivo. Refers to studies and/or phenomena that take place in animals or
humans.
Laser. An acronym for "Light Amplification by Stimulated Emission of
Radiation." Lasers emit light in a highly intense beam of energy that
radiates at a single wave length. Laser light energy can be selectively
directed for a specific effect on body tissue and pin-pointed to a
specific location through a small fiber optic for a wide variety of
surgical purposes.
Lens. The clear crystalline substance in the anterior chamber of the eye
that accommodates focusing of images on the retina for visual acuity.
Nasdaq. Abbreviation and registered service mark of The Nasdaq Stock
Market, Inc.
Note. The Company's 12% Convertible, Redeemable Promissory Note.
Phaco. Contraction of phacoemulsification. Ophthalmic medical term for the
microsurgical cataract removal procedure and related surgical devises
(i.e., to perform a phaco surgery, or to use a phaco instrument).
Phacoemulsification. Minimally invasive surgical procedure for removing a
hardened cataract from the eye. The process involves using an ultrasonic
probe with a hollow vibrating needle that fragments the hardened cataract,
while in the eye, and aspirates the unwanted cataract tissue from the eye.
Generally considered a superior, less invasive alternative to ECCE.
Posterior Chamber. The rear section of the eye containing the retina,
vitreous and optic nerve, responsible for receiving light images from the
anterior chamber and processing these into visual information to the
brain.
Pulsatile Intraocular Blood Flow. A measurement of blood reaching the
retina derived from readings of intraocular pressure over a fixed period
of time which is one determinate of the condition of the retina.
Retina. Rear surface of the posterior chamber responsible for receiving
and processing visual images.
Round lot holder. A holder of 100 shares or more of a normal unit of
trading.
Section 510(k). Section 510(k) of the FDA Act providing medical device
manufacturers premarket notification to facilitate sales of a device that
is new to the manufacturer, but "substantially equivalent" to a device
already legally marketed.
Series A Preferred. The Company's Series A 6% Convertible Redeemable
Preferred Stock, $.001 par value per share.
Series B Preferred. The Company's Series B 12% Convertible Redeemable
Preferred Stock, $.001 par value per share.
Series C Preferred. The Company's Series C Convertible Preferred Stock,
$.001 par value per share, $100 stated value. Securities Act. The
Securities Act of 1933, as amended.
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Vitreous. Optically clear, fibrous gel-like fluid medium located in the
posterior chamber that comprises the majority of the volume in the eye,
and serves to give the eye its shape.
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PARADIGM MEDICAL INDUSTRIES, INC.
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Index to Financial Statements
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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-9
Notes to Financial Statements F-10
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F-1
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PARADIGM MEDICAL INDUSTRIES, INC.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Paradigm Medical Industries, Inc.
We have audited the balance sheet of Paradigm Medical Industries, Inc. (the
Company) as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for the year ended December 31,
1997, the three-month period ended December 31, 1996, and the year ended
September 30, 1996. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the results of its operations and its
cash flows for the year ended December 31, 1997, the three-month period ended
December 31, 1996, and the year ended September 30, 1996, in conformity with
generally accepted accounting principles.
The financial statements referred to above were previously audited by other
auditors and included an unqualified report dated April 10, 1998. The 1997
financial statements included with this report contain changes when compared to
the financial statements attached to the April 10, 1998 report. Note 19
summaries these changes as well as the basis for the changes.
TANNER + CO.
Salt Lake City, Utah
July 14, 1998
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See accompanying notes to financial statements.
F-2
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<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Balance Sheets
December 31,
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June 30, 1998 December 31,
--------------------------------------------
Assets (Unaudited) 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,324,885 $ 886,558 $ 2,468,988
Marketable securities -- -- 509,411
Accounts receivable 638,639 120,853 18,228
Inventories 892,483 833,930 241,746
Prepaid expenses 35,770 15,787 24,093
--------------------------------------------
Total current assets 2,891,732 1,857,128 3,262,466
Debt offering costs, net -- 425,029 --
Capitalized engineering and design charges, net 272,268 309,396 --
Property and equipment, net 109,676 121,274 129,494
--------------------------------------------
Total assets $ 3,273,676 $ 2,712,827 $ 3,391,960
--------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Payables 93,314 $ 701,673 $ 235,767
Accrued liabilities 262,325 349,930 277,473
Deposits 10,500 -- --
Current portion of long-term debt 3,620 3,620 3,278
--------------------------------------------
Total current liabilities 369,759 1,055,223 516,518
--------------------------------------------
Long-term debt 85,244 1,081,996 15,605
--------------------------------------------
Commitments -- -- --
Stockholders' equity:
Preferred stock, $.001 par value:
Series A, 500,000 shares authorized, 50,122 and
121,704 shares issued and outstanding,
respectively, (aggregate liquidation preference of
$50,122 at December 31, 1997) 36 50 122
Series B, 500,000 shares authorized; 45,383 and
448,398 shares issued and outstanding, respectively,
(aggregate liquidation preference of $181,532 at
December 31, 1997) 33 45 448
Series C, 30,000 shares authorized; 29,980, -0-, and
-0- shares issued and outstanding, respectively 30 - -
Common stock, $.001 par value, 20,000,000 shares
authorized; 3,798,931 and 3,194,061 shares issued
and outstanding, respectively 3,922 3,799 3,194
Additional paid-in capital 16,687,157 8,833,897 8,161,734
Treasury stock, at cost (3,777) (3,777) (3,777)
Unearned compensation -- -- (63,141)
Accumulated deficit (13,868,728) (8,258,406) (5,248,412)
Unrealized gain on marketable securities -- -- 9,669
--------------------------------------------
Total stockholders' equity 2,818,673 575,608 2,859,837
--------------------------------------------
Total liabilities and stockholders' equity $ 3,273,676 $ 2,712,827 $ 3,391,960
--------------------------------------------
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Operations
- ----------------------------------------------------------------------------------------------------------
Three Months
Six Months Year Three Months Year Ended
Ended June 30, Ended Ended Ended December 31,
----------------------
1998 1997 December 31, December 31, September 30, 1995
(Unaudited)(Unaudited) 1997 1996 1996 (Unaudited)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 977,536 $ 360,407 $ 464,062 $ 35,651 $ 252,134 $ 65,405
----------------------------------------------------------------------------
Operating expenses:
Cost of sales 515,060 219,375 333,156 21,061 180,010 45,286
Marketing and selling 358,870 251,752 590,941 168,880 216,128 92,748
General and administrative 631,674 775,056 1,802,238 594,520 823,191 169,479
Research and development 226,171 513,914 540,148 480,584 288,854 50,664
----------------------------------------------------------------------------
Total operating
expenses 1,731,775 1,760,097 3,266,483 1,265,045 1,508,183 358,177
----------------------------------------------------------------------------
Operating loss (754,239) (1,399,690) (2,802,421) (1,229,394) (1,256,049) (292,772)
----------------------------------------------------------------------------
Other income (expense):
Cost associated with
relinquishment of
anti-dilution rights - - - - (179,000) (179,000)
Interest income 43,829 42,438 57,303 31,474 42,859 2,720
Interest expense (29,888) (906) (264,876) (483) (56,829) (2,204)
----------------------------------------------------------------------------
13,941 41,532 (207,573) 30,991 (192,970) (178,484)
----------------------------------------------------------------------------
Loss before provision for
income taxes (740,298) (1,358,158) (3,009,994) (1,198,403) (1,449,019) (471,256)
Provision for income taxes - - - - - -
----------------------------------------------------------------------------
Net loss $(740,298) $(1,358,158) $(3,009,994) $(1,198,403) $(1,449,019) $(471,256)
----------------------------------------------------------------------------
Return of stock dividend on 12%
Series B Preferred Stock - - - - 848 -
----------------------------------------------------------------------------
Net loss applicable to common
sto$k $(740,298) $(1,358,158) $(3,009,994) $(1,198,403) $(1,448,171) $(471,256)
----------------------------------------------------------------------------
Basic and diluted loss per
common share $ (.19) $ (.39) $ (.82) $ (.38) $ (.66) $ (.20)
----------------------------------------------------------------------------
Weighted average shares
outstanding 3,850,000 3,465,000 3,663,000 3,183,000 2,193,000 2,352,000
----------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------------------------------
Series A Series B Series C Common Stock
--------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1995 122,764 $ 430,735 499,017 $ 1,677,188 - $ 1,985,573 $ 980,378
Conversion of no par
value preferred shares
and common shares to
$.001 par value shares
upon reincorporation in
Delaware - (430,612) - (1,676,689) - - - (1,170,035)
Redemption of rescission
offer of Series B
Preferred Stock - - (32,962) (33) - - - -
Issuance of common
stock for:
Previously accrued
services - - - - - - 25,000 10,251
Relinquishment of
anti-dilution rights - - - - - - 20,000 30,000
Services - - - - - - 40,000 40
Future services - - - - - - 101,025 151,538
Cash - - - - - - 1,000,000 1,000
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss)
Additional Unearned Accum- on
Paid-In Treasury Stock Compen- ulated Marketable
------------------
Capital Shares Amount sation Deficit Securities
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1995 $ - 2,600 $ (3,777) $ - $ (2,600,990) $ -
Conversion of no par
value preferred shares
and common shares to
$.001 par value shares
upon reincorporation in
Delaware 3,277,336 - - - - -
Redemption of rescission
offer of Series B
Preferred Stock (131,815) - - - - -
Issuance of common
stock for:
Previously accrued
services - - - - - -
Relinquishment of
anti-dilution rights - - - - - -
Services 99,960 - - - - -
Future services - - - (151,538) - -
Cash 4,739,431 - - - - -
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------------------------------
Series A Series B Series C Common Stock
--------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Transfer of common
stock from Company
officers for
relinquishment of anti-
dilution rights - - - - - - - -
Amortization of unearned
compensation - - - - - - - -
Issuance of warrants in
connection with private
placement of notes - - - - - - - -
Unrealized loss on
marketable securities - - - - - - - -
Net loss - - - - - - - -
--------------------------------------------------------------------------------------
Balance at
September 30, 1996 122,764 123 466,055 466 - - 3,171,598 3,172
Conversion of preferred
stock to common stock (1,060) (1) (17,657) (18) - - 22,463 22
Amortization of unearned
compensation - - - - - - - -
Net change in unrealized
gain (loss) on marketable
securities - - - - - - - -
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss)
Additional Unearned Accum- on
Paid-In Treasury Stock Compen- ulated Marketable
------------------
Capital Shares Amount sation Deficit Securities
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Transfer of common
stock from Company
officers for
relinquishment of anti-
dilution rights 149,000 - - - - -
Amortization of unearned
compensation - - - 69,455 - -
Issuance of warrants in
connection with private
placement of notes 27,825 - - - - -
Unrealized loss on
marketable securities - - - - - (13,703)
Net loss - - - - (1,449,019) -
------------------------------------------------------------------------
Balance at
September 30, 1996 8,161,737 2,600 (3,777) (82,083) (4,050,009) (13,703)
Conversion of preferred
stock to common stock (3) - - - - -
Amortization of unearned
compensation - - - 18,942 - -
Net change in unrealized
gain (loss) on marketable
securities - - - - - 23,372
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------------------------------
Series A Series B Series C Common Stock
--------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss - - - - - - -
--------------------------------------------------------------------------------------
Balance at
December 31, 1996 121,704 122 448,398 448 - - 3,194,061
Conversion of preferred
stock to common stock (71,582) (72) (403,015) (403) - - 569,518
Issuance of common
stock for compensation - - - - - - 22,852
Warrants exercised for
common stock - - - - - - 12,500
Issuance of warrants in
connection with the
issuance of debt - - - - - - -
Amortization of unearned
compensation - - - - - - -
Difference between the
convertible notes payable
conversion price and
common stock fair value - - - - - - -
Net change in unrealized
gain (loss) on marketable
securities - - - - - - -
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss)
Additional Unearned Accum- on
Paid-In Treasury Stock Compen- ulated Marketable
------------------
Capital Shares Amount sation Deficit Securities
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net loss - - - - (1,198,403) -
------------------------------------------------------------------------
Balance at
December 31, 1996 8,161,734 2,600 (3,777) (63,141) (5,248,412) 9,669
Conversion of preferred
stock to common stock (95) - - - - -
Issuance of common
stock for compensation 78,179 - - - - -
Warrants exercised for
common stock 41,619 - - - - -
Issuance of warrants in
connection with the
issuance of debt 317,060 - - - - -
Amortization of unearned
compensation - - - 63,141 - -
Difference between the
convertible notes payable
conversion price and
common stock fair value 235,400 - - - - -
Net change in unrealized
gain (loss) on marketable
securities - - - - - (9,669)
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------------------------------
Series A Series B Series C Common Stock
--------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss - - - - - - - -
--------------------------------------------------------------------------------------
Balance at
December 31, 1997 50,122 50 45,383 45 - - 3,798,931 3,799
Conversion of preferred
stock to common
stock (unaudited) (14,000) (14) (12,147) (12) - - 31,376 31
Deft offering costs
(unaudited) - - - - - - - -
Issuance of preferred
stock (unaudited) - - - - 20,030 20 - -
Issuance of common stock
for (unaudited):
Debt - - - - 9,950 10 90,000 90
Services - - - - - - 2,000 2
Difference between the
convertible preferred stock
conversion price and
common stock fair value
(unaudited) - - - - - - - -
Net loss (unaudited) - - - - - - - -
--------------------------------------------------------------------------------------
Balance at June 30, 1998
(unaudited) 36,122 $ 36 33,236 $ 33 29,980 $ 30 3,922,307 $ 3,922
--------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss)
Additional Unearned Accum- on
Paid-In Treasury Stock Compen- ulated Marketable
------------------
Capital Shares Amount sation Deficit Securities
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net loss - - - - (3,009,994) -
------------------------------------------------------------------------
Balance at
December 31, 1997 8,833,897 2,600 (3,777) - (8,258,406) -
Conversion of preferred
stock (unaudited) to
common stock (5) - - - - -
Deft offering costs
(unaudited) (164,776) - - - - -
Issuance of preferred
stock (unaudited) 1,746,640 - - - - -
Issuance of common stock
for:
Debt 1,393,879 - - - - -
Services (unaudited) 7,498 - - - - -
Difference between the
convertible preferred stock
conversion price and
common stock fair value
(unaudited) 4,870,024 - - - (4,870,024) -
Net loss (unaudited) - - - - (740,298) -
------------------------------------------------------------------------
Balance at June 30, 1998
(unaudited) $16,687,157 2,600 $ (3,777)$ - $(13,868,728) $ -
------------------------------------------------------------------------
F-8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------
Three Three Months
Six Months Year Months Year Ended
Ended June 30, Ended Ended Ended December 31,
-------------------------
1998 1997 December 31, December 31,September 30, 1995
(Unaudited) (Unaudited) 1997 1996 1996 (Unaudited)
-----------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C> <C> <C> <C>
Net loss $ (740,298) $ (1,358,158) $(3,009,994) $(1,198,403) $(1,449,019) $ (471,256)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 52,300 18,281 208,789 25,147 128,551 13,113
Loss on disposal of equipment - - 11,851 - - -
Issuance of common stock for
compensation, services, payable
and relinquishment of anti-
dilution rights 406,500 60,760 78,201 - 279,000 179,000
Interest expense on common stock
warrants - - 235,400 - - -
Issuance of bridge note and
warrants for services - - - - 25,000 -
(Increase) decrease in:
Accounts receivable (517,786) (135,878) (102,625) 37,226 49,445 52,656
Inventories (58,507) (299,342) (592,184) 127,299 31,855 12,372
Prepaid expenses (19,983) (3,325) 8,306 94,267 (96,718) 11,396
Debt financing costs 164,776 - - - - -
Increase (decrease) in:
Payables (608,359) (83,962) 465,906 197,111 (266,042) (4,788)
Accrued liabilities 18,368 (144,769) 72,457 159,114 82,529 108
-----------------------------------------------------------------------------
Net cash used in
operating activities (1,302,989) (1,946,393) (2,623,893) (558,239) (1,215,399) (207,399)
-----------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (3,572) (11,216) (31,868) (12,155) (91,179) (10,600)
Capitalized engineering and design
charges - (340,925) (370,000) - - -
Proceeds from the sale of marketable
securities - - 499,742 - - -
Purchase of marketable securities - (258) - - (499,742) -
-----------------------------------------------------------------------------
Net cash provided by
(used in) investing
activities (3,572 (352,399) 97,874 (12,155) (590,921) (10,600)
-----------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from lines of credit - 980,000 980,000 - - -
Payment on lines of credit - - (980,000) - - -
Proceeds from issuance of promissory
notes and warrants - - - - 531,500 75,000
Proceeds from exercise of warrants - 41,632 41,632 - - -
Payment of debt offering costs - - (164,776) - (41,325) -
Proceeds from issuance of notes payable - - 1,070,000 - - -
Principal payments on long-term debt (1,752) (1,598) (3,267) (770) (590,504) (2,765)
Proceeds from issuance of common stock - - - - 4,740,431 -
Payments for rescission offer of
Series B preferred stock - - - - (131,848) -
Proceeds from issuance of series C
preferred stock 1,746,640 - - - - -
Restricted cash - (715,464) - - - -
-----------------------------------------------------------------------------
Net cash provided by
(used in) financing
activities 1,744,888 304,570 943,589 (770) 4,508,254 72,235
-----------------------------------------------------------------------------
Net increase (decrease) in cash 438,327 (1,994,222) (1,582,430) (571,164) 2,701,934 (145,764)
Cash, beginning of period 886,558 2,468,988 2,468,988 3,040,152 338,218 338,218
-----------------------------------------------------------------------------
Cash, end of period $ 1,324,885 $ 474,766 $ 886,558 $ 2,468,988 $ 3,040,152 $ 192,454
-----------------------------------------------------------------------------
</TABLE>
F-9
<PAGE>
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). For accounting purposes the merger was
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 and diagnostic equipment and instrumentation. The Company
is in the process of introducing a proprietary laser-based surgical machine
which is expected to become its core business.
The Company is primarily dependent upon a single product line targeted towards
minimally invasive cataract surgery devices. Revenues recognized to date
primarily represent revenues from the sale of the Company's conventional
ultrasound cataract surgery machine (the Precisionist) and related accessory
instruments. The Company has recognized minimal revenue from the sale of its
proprietary laser-based product, the Photon LaserPhaco System (the Photon). The
Company's surgical and diagnostic systems are regulated as medical devices by
the FDA under the FDC Act. 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. The Company is currently conducting clinical
studies. The Company's ability to achieve profitability depends upon its ability
to obtain the regulatory approvals required to manufacture and market the Photon
on an unlimited scale.
- --------------------------------------------------------------------------------
F-10
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Continued
The Company incurred a net loss of $3,009,994 and negative cash flows from
operating activities of $2,623,893 for the year ended December 31, 1997. As of
December 31, 1997, the Company had an accumulated deficit of $8,258,406. In
March 1998, the Company completed the private placement of 20,030 shares of
Class C Preferred Stock at $100 per share (see Note 9), resulting in net
proceeds of approximately $1,700,000, net of offering expenses. Management
believes that these net proceeds, plus existing working capital will be
sufficient to assure continuation of the Company's operations through December
31, 1998. Management projects significant revenues from the successful re-launch
of its new product, sales from additional products and certain strategic
alliances to market their products. However, no assurances can be given that
management's plans will be successful in achieving profitability to positive
cash flows.
Change in Fiscal Year
In August 1996, the Company changed its fiscal year from September 30 to
December 31 beginning with the period ended December 31, 1996.
Unaudited Information
In the opinion of management, the accompanying unaudited financial statements
for the three month period ended December 31, 1995 contain all adjustments
(consisting only of normal recurring items) necessary to present fairly the
results of operations and cash flows of the Company for the three month period
ended December 31, 1995.
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.
- --------------------------------------------------------------------------------
F-11
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Continued
Marketable Securities
The Company classifies its marketable debt and equity securities as "held to
maturity" if it has the positive intent and ability to hold the securities to
maturity. All other marketable debt and equity securities are classified as
"available for sale." Securities classified as "available for sale" are carried
in the financial statements at fair value. Realized gains and losses, determined
using the specific identification method, are included in earnings; unrealized
holding gains and losses are reported as a separate component of stockholders'
equity. Securities classified as held to maturity are carried at amortized cost.
For both categories of securities, declines in fair value below amortized cost
that are other than temporary are included in earnings.
Inventories
Inventories are stated at the lower of cost or market, cost determined using the
weighted average method. Inventories consist primarily of finished goods.
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.
Debt Offering Costs
Debt offering costs are capitalized and amortized to interest expense using the
effective interest method over the life of the related debt.
Capitalized Engineering and Design Charges
The capitalized portion of payments to a manufacturer for engineering and design
services are being amortized using the straight line method over a five year
period. At December 31, 1997, the accumulated amortization and amortization
expense was $60,604.
Income Taxes
Deferred income taxes are provided in amounts sufficient to give effect to
temporary differences between financial and tax reporting, principally related
to depreciation and accrued liabilities.
- --------------------------------------------------------------------------------
F-12
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Continued
Loss Per Share
Basic and diluted earnings per share are computed in accordance with Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share (EPS). The
reported loss per share for 1996 has been restated to conform to SFAS No. 128.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution from securities or
contracts to issue common stock. Common equivalent shares are excluded from the
computation of diluted EPS when their effect is antidilutive.
Revenue Recognition
Revenues for sales of the Photon product, are recognized upon installation and
acceptance by the customer. Revenues for sales of the Precisionist are
recognized when the product is shipped.
The Company offers the Precisionist with an unconditional arrangement under
which the customer may trade in their Precisionist to upgrade to other systems,
such as the Photon. Under this agreement, the customer will receive full credit
for the purchase price of the Precisionist against the price of the other
system.
Research and Development
Costs incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects as well as fees paid to various entities that
perform certain research on behalf of the Company.
Concentration of Risk
The market for 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.
- --------------------------------------------------------------------------------
F-13
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Continued
Concentration of Risk - Continued
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. Substantially all of the Company's current
products are manufactured and assembled by two companies who are related parties
(see Note 12). 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. A change in supplier or manufacturer, however, could
cause a delay in manufacturing and a possible loss of sales, which would affect
operating results adversely. In addition, since the supplier and manufacturer
are related parties, there can be no assurance that comparable terms could be
obtained.
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 $1 million. Any losses
that the Company many suffer from any product liability litigation could have a
material adverse effect on the Company.
A significant portion of the Company's product sales are in foreign counties.
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.
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 are generally due within thirty days for
domestic customers and sixty days for international customers. Credit losses
historically have not been significant.
- --------------------------------------------------------------------------------
F-14
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Continued
Use of Estimates in the Preparation of Financial Statements The preparation of
financial statements in conformity with generally accepted accounting principles
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.
2. Detail of Certain Balance Sheet Accounts
December 31,
------------------------------------
1997 1996
------------------------------------
Payables:
Accounts payable $ 243,206 $ 35,767
Related party payables 458,467 200,000
------------------------------------
$ 701,673 $ 235,767
------------------------------------
3. Marketable Securities
The Company's investment in marketable securities at December 31, 1996 was
classified as available-for-sale and was carried at market value, with an
unrealized gain reflected as a separate component of stockholders' equity. The
Company sold all of the available-for-sale securities during 1997.
The Company's marketable securities, classified as available-for-sale consists
of the following at December 31, 1996:
Marketable securities, at amortized costs $ 499,742
Gross unrealized holding gain 9,669
-----------------
Marketable securities, at fair value $ 509,411
-----------------
- --------------------------------------------------------------------------------
F-15
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Marketable Securities
Continued
Changes in the unrealized holding gain on marketable securities
available-for-sale and reported as a separate component of stockholders' equity
are as follows:
December 31,
-----------------------------------
1997 1996
-----------------------------------
Balance, beginning of period $ 9,669 $ (13,703)
Unrealized holding (loss) gain (9,669) 23,372
-----------------------------------
Balance, end of period $ - $ 9,669
-----------------------------------
4. Property and Equipment
Property and equipment consists of the following:
December 31,
-----------------------------------
1997 1996
-----------------------------------
Automobile $ 26,099 $ 26,099
Office equipment 100,388 83,541
Furniture and fixtures 17,185 16,280
Computer equipment 39,019 36,754
-----------------------------------
182,691 162,674
Accumulated depreciation (61,417) (33,180)
-----------------------------------
$ 121,274 $ 129,494
-----------------------------------
- --------------------------------------------------------------------------------
F-16
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Long-Term Debt
Long-term debt consists of the following:
December 31,
------------------------------------
1997 1996
------------------------------------
Note payable to a bank, collateralized
by an automobile, bearing interest at
9.95%, payable in monthly installments
of $418, final payment due September
2001 $ 15,616 $ 18,883
Unsecured 12% convertible,
redeemable notes payable 1,070,000 -
------------------------------------
1,085,616 18,883
Less current portion (3,620) (3,278)
------------------------------------
$ 1,081,996 $ 15,605
------------------------------------
In December 1997, the Company sold 21.4 Units in a private placement, each Unit
consisting of a $50,000 unsecured 12% convertible, redeemable promissory note
(Notes), for a total consideration of $1,070,000. The Company incurred $164,776
in debt offering costs associated with the private placement. The Notes are
redeemable at 112% of the face value of each Note and are also convertible into
shares of common stock (one share for each $2.00 principal amount of the Note)
and mature in December 2000. Interest is due and payable semiannually. Principal
is due and payable at the maturity date. The Company is restricted from
declaring or making any dividend payments at any time so long as the Notes are
outstanding.
In March 1998, Notes totaling $995,000 were exchanged for 9,950 shares of Series
C preferred stock (see Note 9).
- --------------------------------------------------------------------------------
F-17
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Long-Term
Debt
Continued
Future maturities are as follows:
Year Ending December 31, Amount
-----------------
1998 $ 3,620
1999 3,997
2000 79,413
2001 3,586
-----------------
$ 90,616
-----------------
Rates currently available to the Company for loans with similar terms and
maturities are used to estimate the fair value of notes payable. At December 31,
1997 and 1996, the carrying value of the notes payable approximates fair value.
6. Lines of
Credit
In May 1997, the Company established a $630,000 line of credit with a financial
institution which bears interest at 2.4% above the 30-day commercial paper rate.
The line of credit expired on June 30, 1998. The line of credit was
collateralized by cash and investments held by the institution. As of December
31, 1997, there were no borrowings outstanding on the line of credit.
Also, in May 1997, the Company established a $350,000 line of credit with a
financial institution which bears interest at .25% above the Broker's Daily Call
Money Rate as quoted by Bear Stearns Securities Corp. The line of credit expired
on June 30, 1998. The line of credit was collateralized by cash and investments
held by the institution. As of December 31, 1997, there were no borrowings
outstanding on the line of credit.
Due to the collateral requirements of these lines of credit, any borrowings
would be limited to cash and investments restricted for this purpose.
- --------------------------------------------------------------------------------
F-18
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Income Taxes
The provision for income taxes is different than amounts which would be provided
by applying the statutory federal income tax rate to loss before provision for
income taxes for the following reasons:
Year Three Months Year
Ended Ended Ended
December 31, December 31, September 30,
1997 1996 1996
--------------------------------------------------
Federal income tax
benefit at statutory
rate $ 1,174,000 $ 467,000 $ 565,000
Change in valuation
allowance (1,174,000) (467,000) (565,000)
--------------------------------------------------
$ - $ - $ -
--------------------------------------------------
Deferred tax assets (liabilities) are comprised of the following:
December 31,
----------------------------------
1997 1996
----------------------------------
Net operating loss carryforward $ 2,534,000 $ 1,406,000
Research and development tax
credit carryforwards 64,000 5,000
Other 72,000 85,000
----------------------------------
2,670,000 1,496,000
Valuation allowance (2,670,000) (1,496,000)
----------------------------------
$ - $ -
----------------------------------
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $6,800,000 and research and development tax credit carryforwards
of approximately $64,000. These carryforwards are available to offset future
taxable income and begin to expire in 2005. The utilization of the net operating
loss carryforwards is dependent upon the tax laws in effect at the time the net
operating loss carryfowards 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.
- --------------------------------------------------------------------------------
F-19
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Capital Stock
In November 1995, the Company obtained the necessary director and shareholder
approvals to reincorporate in Delaware. In conjunction with the reincorporation,
which was finalized in February 1996, the Company established two series of
preferred stock with a total of 5,000,000 authorized shares and a par value of
$.001, the series included certain 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.
In November 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 value
assigned by the Company's investment banker of $1.50 per share was charged to
compensation expense ratably over two years.
During fiscal year 1996, the Company participated in a private placement of
$600,000 of units of its securities. Each unit consisted 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 were 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. The Company 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. These notes were paid in July 1996 upon the
Company raising $4.7 million through their public offering.
- --------------------------------------------------------------------------------
F-20
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Capital Stock Continued
In December 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 July 1996, the Company closed an initial public offer (the Offering) of their
securities selling 1,000,000 units at a price of $6.25 per unit. Each unit
consists of one share of common stock and one warrant to purchase one share of
common stock (see Note 10). The net proceeds to the Company from the Offering
were approximately $4.7 million.
In August 1996, the Company granted 40,000 restricted shares of common stock to
a consultant as compensation for services and patent licensing rights. The
shares were valued at the trading price at date of commitment and charged to
compensation expense.
In August 1997, the Company entered into an investment banking agreement with
Win Capital Corp. (Win Capital) for a two year period which may be extended an
additional year. The Company pays a retainer to Win Capital of $2,000 per month
for the first six months, $4,000 per month for the second six months and $6,000
per month for the remainder of the contract. The Company also issued a warrant
to Win Capital (see Note 10).
- --------------------------------------------------------------------------------
F-21
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Preferred Stock
Series A
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 $.001 par value. This series is part of the Company's 5,000,000
authorized shares of non-voting preferred stock. The Series A Preferred Stock
has the following rights and privileges:
1. The holders of the shares are entitled to dividends at the rate of
twenty-four cents ($.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.
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 share 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.
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
- --------------------------------------------------------------------------------
F-22
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Preferred Stock Continued
Series B
On May 9, 1994, the Company established a series of non-voting preferred shares
designated at 12% Series B Preferred Stock, consisting of 500,000 shares with
$.001 par value..This series is also part of the Company's 5,000,000 authorized
shares of non-voting preferred stock. The Series B Preferred Stock have the
following rights and privileges:
1. The holders of the shares are entitled to dividends at the rate of
forty-eight cents ($.48) per share per annum, payable in cash only from
surplus earnings of the Company or in additional shares of Series B
Preferred Stock. 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 right of
the holders of Series A Preferred Stock to receive a distribution of
$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.
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.
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.
- --------------------------------------------------------------------------------
F-23
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Preferred Stock
Continued
In structuring and proceeding with the private offering of Series B Preferred
Stock, the Company may not have complied with certain aspects of California
corporate law and federal and state securities laws. The Company decided that,
in order to effectively proceed with its initial public offering, it would
provide its holders of Series B Preferred Stock a rescission offer. The
rescission offer was designed to reduce any type of contingent liability the
Company may be subject to in connection with the sale of exposure to contingent
liability under federal or state securities laws. Two shareholders owning a
combined total of 32,750 shares accepted the rescission offer. These
shareholders were paid $4.00 per share plus interest from the date the
rescission shares were purchased to July 26, 1996, the date these shareholders
were paid. In addition, the shareholders returned 212 shares which had been
issued due to the 12% preferred stock dividend.
Series C
In January 1998, the Company's Board of Directors authorized the issuance of a
total of 30,000 shares of non-voting Class C Preferred Stock, $.001 par value,
$100 stated value. Each share is convertible 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. Holders of the shares of
Series C Preferred stock are entitled to 12% non-cumulative dividends. However,
the shares shall be entitled to dividends declared on the Company's common stock
on an as-converted basis.
In March 1998, the Company closed a private placement of Series C Preferred
Stock, selling 20,030 shares at a price of $100 per share. The net proceeds to
the Company from the private placement were approximately $1.7 million.
In January 1998, the Company offered to the holders of the Notes (see note 5),
through an exchange offer, the right to exchange their Notes for shares of
Series C Preferred Stock. In March 1998, Notes totaling $995,000 were exchanged
for 9,950 shares of Series C Preferred Stock, at $100 per share, totaling
$995,000. The exchange offer has now expired.
- --------------------------------------------------------------------------------
F-24
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Stock Option Plan and Warrants
In November 1995, the Company's Board of Directors and shareholders approved the
Company's 1995 Stock Option Plan (the Option Plan) which reserved 300,000 shares
of the Company's authorized but unissued common stock for the granting of stock
options. In June 1997, the Company's shareholders approved an amendment to the
Plan to increase the number of shares of common stock reserved for issuance
thereunder by an aggregate of 300,000 shares.
The Option Plan provides for the grant of incentive stock options 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.
In addition, the Company has granted warrants to purchase the Company's common
stock to various entities as follows:
o In connection with an investment banking agreement (see Note 8),
the Company issued a warrant to Win Capital to purchase up to
191,000 shares of common stock at a purchase price of $3.00 per
share. The warrant is currently exercisable and expires on
August 19, 2000. The fair value of the warrant of $317,060 has been
recorded as debt offering costs and is being amortized over the term
of the debt. In March 1998, the Company issued to Win Capital a
warrant to purchase 100,000 shares of the Company's common
stock at a price of $3.00 per share. The warrant expires in March
2000.
o In conjunction with the Offering (see Note 8), the Company issued
Class A warrants to purchase 1,000,000 shares of the Company's
common stock at a price of $7.50 per share. These warrants are
currently exercisable and expire on July 10, 2001. These warrants
are subject to redemption by the Company beginning May 17, 1997
at a price of $.05 per warrant, if the closing bid price of the
Company's common stock averages in excess of $8.50 per share for
30 consecutive business days ending within 15 days of the date of
redemption.
- --------------------------------------------------------------------------------
F-25
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Stock Option Plan and Warrants
Continued
o The Company issued to the Underwriters of the Offering warrants to purchase
100,000 shares of the Company's common stock at a price of $7.50 per share,
and an additional 100,000 shares at a price of $8.13 per share. These
warrants are exercisable on or after July 10, 1998 and expire on July 10,
2001. These warrants are subject to redemption by the Company beginning on
July 10, 1998 at a price of $.05 per warrant, if the Company's common stock
has been trading at a price equal to or above $10.00 per share for 30
consecutive business days ending within 15 days of the date of redemption.
o The Company, in conjunction with the $600,000 private placement (see Note
8), issued warrants to purchase 300,000 shares of the company's common
stock at a price of $3.33 per share. These warrants are exercisable and
expire on December 1, 2000, and are redeemable by the Company under certain
conditions at a price of $.05 per warrant. During 1997, warrants were
exercised for 12,500 shares of common stock.
o The Company issued 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 shareholder, as consideration for legal
services. The warrants are exercisable beginning March 15, 1997, expire on
December 1, 2000, and are redeemable by the Company under certain
conditions at a price of $.05 per warrant.
o In connection with its Series B Preferred private placement, the Company
issued warrants to purchase 21,525 shares of the Company's common stock at
a price of $3.00 per share. These warrants are currently exercisable and
expire on December 31, 1999.
o In conjunction with its Series A Preferred private placement, the Company
issued warrants to purchase 11,600 shares of the Company's Series A
Preferred Stock at a price of $4.00 per share at any time prior to May 8,
1999. These warrants are subject to redemption by the Company beginning on
July 9, 1997 at a price of $.05 per warrant if the Company redeems all of
the then outstanding shares of Series A stock or the Company's common stock
has been trading at a price equal to or above $7.50 per share for 20
consecutive business days ending within 15 days of the date of redemption.
- --------------------------------------------------------------------------------
F-26
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Stock Option Plan and Warrants
Continued
A schedule of the options and warrants is as follows:
Exercise
Number of Price Per
----------------------------
Options Warrants Share
------------------------------------------
Outstanding at October 1, 1995 - 33,125 $ 3.00 - 4.00
Granted 340,160 1,525,000 3.33 - 8.13
Exercised - - -
Forfeited (2,500) - 5.00
------------------------------------------
Outstanding at September 30,
1996 337,660 1,558,125 3.00 - 8.13
Granted 41,280 - 5.00
Exercised - - -
Forfeited - - -
------------------------------------------
Outstanding at December 31,
1996 378,940 1,558,125 3.00 - 8.13
Granted 135,000 191,000 3.00 - 5.00
Exercised - (12,500) 3.33
Forfeited (63,740) - 5.00
------------------------------------------
Outstanding at December 31,
1997 450,200 1,736,625 $ 3.00 - 8.13
------------------------------------------
- --------------------------------------------------------------------------------
F-27
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Stock-Based Compensation
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123) which established financial accounting and reporting standards for
stock-based compensation. The new standard defines a fair value method of
accounting for an employee stock option or similar equity instrument. This
statement gives entities the choice between adopting the fair value method or
continuing to use the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 with footnote disclosures of the pro forma effects if the
fair value method had been adopted. The Company has opted for the latter
approach. Accordingly, no compensation expense has been recognized for the stock
option plan. Had compensation expense for the Company's stock option plan been
determined based on the fair value at the grant date for awards consistent with
the provisions of SFAS No. 123, the Company's results of operations would have
been reduced to the pro forma amounts indicated below:
Year Three Months Year
Ended Ended Ended
December 31, December 31, September 30,
1997 1996 1996
-----------------------------------------------------
Net loss - as reported $ (3,009,994) $ (1,198,403) $ (1,449,019)
Net loss - pro forma $ (3,163,132) $ (1,266,458) $ (2,098,771)
Loss per share -
as reported $ (.82) $ (.38) (.66)
Loss per share - pro forma $ (.86) $ (.40) (.96)
-----------------------------------------------------
- --------------------------------------------------------------------------------
F-28
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Stock-Based Compensation
Continued
The fair value of each option grant is estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions:
December 31,
-----------------------------------
1997 1996
-----------------------------------
Expected dividend yield $ $ - -
Expected stock price volatility 102% 102%
Risk-free interest rate 5.5% 4.5%
Expected life of options 5 years 5 years
-----------------------------------
The weighted average fair value of options granted during the years ended
December 31, 1997, September 30, 1996, and the three months ended December 31,
1996 are $3.31, $2.42, and $2.35, respectively.
The following table summarizes information about stock options and warrants
outstanding at December 31, 1997:
Outstanding Exercisable
------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 12/31/97 (Years) Price 12/31/97 Price
- --------------------------------------------------------------------------------
$ 3.00 to 4.00 536,625 2.8 3.21 536,625 $ 3.21
5.00 to 8.13 1,650,200 3.5 6.86 1,323,400 6.89
- --------------------------------------------------------------------------------
$ 3.00 to 8.13 2,186,825 2.7 4.94 1,860,025 $ 4.97
- --------------------------------------------------------------------------------
12. Related Party Transactions
In September 1996, the Company entered into an exclusive three year design,
engineering and manufacturing agreement (the Agreement) for its Photon laser
cataract system with a company that is a shareholder (the Manufacturer). Under
the provisions of the Agreement, the Company agreed to pay a total of $1,000,000
to the Manufacturer at various milestone dates through approximately March 1997
for engineering and design services. $630,000 of this amount was charged to
expense as research and development; the balance was recorded as capitalized
engineering and design charges.
- --------------------------------------------------------------------------------
F-29
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Related Party Transactions
Continued
In addition, the Company will pay the actual cost of tooling, plus a two percent
mark-up, which is not expected to be significant. All items for tooling purposes
will belong to the Company. The Agreement establishes the purchase price of the
systems at the lessor of a fixed purchase price or the actual cost of
manufacturing plus a markup. Through December 31, 1997, the Company had
purchased 39 systems under the Agreement. At December 31, 1997, $458,467 remains
payable to the manufacturer under the Agreement. At December 31, 1997, the
Company has a purchase commitment with the manufacturer for delivering of
additional systems for approximately $1,150,000.
The Company purchased research and development services, design and
manufacturing services and systems from the Manufacturer in the amount of
approximately $1,070,000, $310,000 and $350,000, during the year ended December
31, 1997, the three month period ended December 31, 1996 and year ended
September 30, 1996, respectively.
The Agreement prohibits the manufacturer from participating in any activities,
including manufacturing, related to laser surgical systems for any other company
for a period of two years beyond the term of any renewed term of the Agreement.
The Agreement includes certain termination provisions, which include the event
that the Company is unable to obtain governmental or regulatory approvals. The
Agreement is renewable for successive one year additional terms.
The Company has contracted with a company, of which one of the Company's
directors served as President and Chief Executive Officer at the time the
agreement was signed, to purchase certain components for the Photon. The Company
purchase $160,617, $16,097, and $5,284 for the year ended December 31, 1997, the
three month period ended December 31, 1996 and the year ended September 30,
1996, respectively, of components from this company.
In 1997, the Company signed an amended 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 December 31,
1997, no significant royalties have been paid 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.
- --------------------------------------------------------------------------------
F-30
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Related Party Transactions
Continued
A law firm, of which a director of the Company is a shareholder, has rendered
legal services to the Company. The Company paid this firm $118,765, $25,468, and
$234,504 for the year ended December 31, 1997, the three month period ended
December 31, 1996 and the year ended September 30, 1996, respectively. As of
December 31, 1997, the Company owed this firm $22,849, which is included in
accounts payable.
13. Supplemental Cash Flow Information
During the year ended December 31, 1997, the Company issued warrants valued at
$317,060 in exchange for services.
During the year ended September 30, 1996:
o The Company issued no par value common stock in exchange for future
services of $151,538.
o The Company issued common stock and decreased accrued liabilities by
$10,251 due to services previously accrued.
During the three month period ended December 31, 1995 (unaudited):
o The Company issued common stock and decreased accrued liabilities by
$10,251 due to services previously accrued.
o The Company issued no par value common stock in exchange for future
services of $151,538.
Actual amounts paid for interest and income taxes are as follows:
Three Months
Year Three Months Year Ended
Ended Ended Ended December 31,
December 31, December 31, September 30, 1995
1997 1996 1996 (Unaudited)
-------------------------------------------------------------------
Interest $ 21,537 $ 483 $ 56,829 $ 2,107
-------------------------------------------------------------------
Income taxes $ - $ - $ - $ -
-------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-31
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
14. Lease Obligation
In December 1997, the Company entered into a lease agreement for office space at
a monthly rent of $3,316. The base rent increases to $3,415 and $3,518 for the
second and third years of the lease, respectively. The lease term expires on
December 31, 2000 with an additional three year renewal option. Total lease
expense for the year ended December 31, 1997, the three month period ended
December 31, 1996 and the year ended September 30, 1996 was $553,204, $11,066,
and $28,954, respectively.
Future minimum lease payments at December 31, 1997 are as follows:
Year Ending December 31, Amount
------------------
1998 $ 57,972
1999 40,982
2000 42,211
------------------
$ 141,165
------------------
15. Export Sales
Total sales include export sales by major geographic area as follows:
Year Three Months Year
Ended Ended Ended
December 31, December 31, September 30,
Geographic Area 1997 1996 1996
-----------------------------------------------------
Europe $ 37,596 $ 17,151 $ 107,161
Far East 18,328 - 46,270
Middle East 2,150 - 72,691
-----------------------------------------------------
$ 58,074 $ 17,151 $ 226,122
-----------------------------------------------------
16. Employment Agreements
Effective February 1, 1996, the Company entered into employment agreements with
three officers which expire on February 1, 2001. The agreements provide for
aggregate annual compensation of $380,000.
- --------------------------------------------------------------------------------
F-32
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
17. 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.
18. Savings Plan
In November 1996, the Company established a 401(k) Retirement Savings Plan for
the Company's officers and employees. The Plan provisions include eligibility
after six months of service, a three year vesting provision and 100% matching
contribution by the Company up to 3% of a participant's compensation. During the
year ended December 31, 1997, the Company contributed $36,136 to the Plan.
19. Restatement of the 1997 Financial Statements
The Company had previously issued financial statements for the year ended
December 31, 1997. The accompanying revised 1997 financial statements reflect an
adjustment due to correction of an error. The adjustment to the financial
statements arises from the expense recognition for the difference between the
conversion price and the fair value of the common stock into which the security
is convertible.
The following schedule summarizes the adjustment leading to the restatement of
the 1997 financial statements:
As Originally
Category Reported Restated
- ------------------------------------------------------------------------------
Net loss $ (2,774,594) $ (3,009,994)
Interest expense $ 29,476 $ 264,876
The revised net loss reflects a change involving the recognition of a non-cash
expense for the difference between the convertible notes payable (see Note 5)
conversion price and the fair value of the common stock, on the debt issuance
date and has been recorded in interest expense for the year ended December 31,
1997. This adjustment resulted in an increase to the net loss and interest
expense of $235,400.
F-33
- --------------------------------------------------------------------------------
-54-
<PAGE>
No dealer, salesman or any other
person has been authorized to give
information or to make any
representations other than those
contained in this Prospectus, and, if
given or made, such information or
representations must not be relied upon 3,770,459 Shares of Common Stock
as having been authorized by the Company Issuable Upon Exercise of Warrants
or the Underwriter. This Prospectus does and Conversion of Series C Preferred
not constitute an offer to sell or a Stock and Note
solicitation of any offer to buy any of
the securities offered hereby by anyone
in any jurisdiction in which such offer
or solicitation is not authorized or in
which the person making such offer or
solicitation is not qualified to do so
or to anyone to whom it is unlawful to
make such offer or solicitation. Neither
the delivery of this Prospectus nor any
sale made hereunder shall, under any
circumstances, create any implication
that there has been no change in the
affairs of the Company since the date
hereof. PARADIGM MEDICAL INDUSTRIES, INC.
---------------------
TABLE OF CONTENTS
Page
Prospectus Summary.........................
Risk Factors .............................
Use of Proceeds............................
Price of Common Stock and Class A -----------------
Warrants and Dividend Policy.............
Capitalization............................. PROSPECTUS
Selected Financial Data....................
Management's Discussion and Analysis ...... -----------------
Business ..................................
Management.................................
Certain Transactions.......................
Principal Shareholders.....................
Stockholders Registering Shares............
Description of Securities .................
Shares Eligible for Future Sale............
Plan of Distribution.......................
Legal Matters..............................
Experts....................................
Definitions................................
September 11, 1998
-55-
<PAGE>
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 Registrant 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
II-1
<PAGE>
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 the
Company's 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
the Company's Bylaws, the Company's Certificate of Incorporation or the Delaware
General Corporation Law.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the expenses payable by the Company in
connection with the issuance and distribution of the securities being
registered, other than underwriting discount (all amounts except the Securities
and Exchange Commission filing fee and the NASD fee are estimated):
Filing fee--Securities and Exchange Commission....... $ 1,400
NASD fee............................................. 2,000
Printing and engraving expenses...................... 7,500
Legal fees and disbursements......................... 15,000
Accounting fees and disbursements.................... 10,000
Blue Sky fees and expenses (including legal fees).... 10,000
Miscellaneous........................................ 1,100
---------
Total expenses....................................... $ 47,000
=========
Item 26. Recent Sales of Unregistered Securities
The following information is furnished with regard to all issuances of
unregistered shares of the Company's securities during the past three years.
Each of the following transactions was exempt from under the Securities Act by
virtue of the provisions of Section 4(2) of the Securities Act and, where
indicated, by either Rule 504 or 505 of Regulation D promulgated under the
Securities Act.
None of the following transactions involved a distribution or public
offering. All share and per share information presented below have been adjusted
to give retroactive effect to a 1-for-7.96 reverse stock split, which was
approved in April 1993 and a 1-for-5 reverse stock split, which was approved in
April 1994.
(8) Series B Preferred Stock
During the period from May 27, 1994 to September 18, 1995, the Company sold
a total of 493,000 shares of its Series B Preferred Stock to 43 persons (all of
whom were accredited investors), through a private placement under Rule 505 of
Regulation D promulgated under the Securities Act at a price of $4.00 per share.
The Company received $1,972,000 in cash as a result of the private placement
transaction and paid $318,880 in commissions and expenses. The persons
purchasing shares of Series B Preferred Stock during the past three years
through the private placement are identified below in this Part I of Item 26,
"Recent Sales of Unregistered Securities."
A. On or about September 18, 1995, the Company issued 40,000 shares of
Series B Preferred Stock to Jaswant Singh and Debra B. Pannu, accredited
investors, in consideration for a $160,000 cash investment. The Company
subsequently
II-2
<PAGE>
provided Jaswant Singh and Debra B. Pannu with a rescission offer to repurchase
all of their Series B Preferred Shares at a price of $4.00 per share plus
interest from the date the shares were purchased. The Company relied upon a
state exemption and federal registration in connection with the rescission offer
to Mr. Singh and Ms. Pannu. See "Risk Factors - Rescission Offer to Series B
Preferred Shareholders."
B. The Company issued 6,017 shares of its Series B Preferred on January 8,
1996 as a stock dividend to Series B Shareholders of record as of December 31,
1994.
C. The Company also issued the individual broker/dealers of First
Associated Securities Group, Inc. warrants to purchase 21,525 shares of the
Company's Common Stock in partial compensation for their services in connection
with the private placement of Series B Preferred Stock.
II. Bridge Notes and Warrants
During the period from December 1995 to February 21, 1996, the Company sold
a total of 23 Units to the 14 investors identified below in this Part II of Item
26, "Recent Sales of Unregistered Securities" (13 of whom were accredited
investors; the only non-accredited investor was Barbara Bean Hemmer, the wife of
John W. Hemmer, Vice President of Finance, Treasurer, Chief Financial Officer
and a director of the Company) and issued one Unit to Win Capital Corp. ("Win"),
an accredited investor, for services through a private placement transaction
under Section 4(2) of the Securities Act, each Unit consisting of a $25,000
promissory note and Warrants to purchase 12,500 shares of Common Stock at $3.33
per share. The Company received $575,000 in cash as a result of this private
placement transaction.
A. Effective as of December 28, 1995, the Company issued one Unit to Ronald
S. Aronson for a cash investment of $25,000.
B. Effective as of December 28, 1995 and January 8, 1996, respectively, the
Company issued two Units to Barbara Bean Hemmer, the wife of one of the
Company's directors, for a cash investment of $50,000.
C. Effective as of December 28, 1996 and February 1, 1996, respectively,
the Company issued two Units to How- Mar, Inc. for a cash investment of $50,000.
D. Effective as of January 8, 1995, the Company issued two Units to Hyman
L. Federman for a cash investment of $50,000.
E. Effective as of January 10, 1996, the Company issued one Unit to H.
Douglas Barclay for a cash investment of $25,000.
F. Effective as of January 12, 1996, the Company issued six Units to Hi
Chicago Trust, Burton W. Kanter, Trustee, for a cash investment of $150,000.
G. Effective as of January 25, 1996, the Company issued one Unit to Win
Capital Corp. in consideration for investment banking services that Win
performed for the Company and for Win's relinquishment of its contractual rights
concerning the performance of certain additional services for the Company.
H. Effective as of February 1, 1996, the Company issued one Unit to Gregory
Lavin for a cash investment of $25,000.
I. Effective as of February 6, 1996, the Company issued one Unit to Miles
and Elayne Federman for a cash investment of $25,000.
II-3
<PAGE>
J. Effective as of February 6 and 20, 1996, respectively, the Company
issued a total of two Units to David Feinsilver for a total cash investment of
$50,000.
K. Effective as of February 7, 1996, the Company issued one Unit to Michael
C. Smatt for a cash investment of $25,000.
L. Effective as of February 19, 1996, the Company issued one Unit to George
J. Barenholtz and Barbara A. Litwinka for a cash investment of $25,000.
M. Effective as of February 28, 1996, the Company issued a total of three
Units to William C. Fitzhugh, a director of the Company; B. Michael Pisani; and
Cardinal Resources, Inc. for a total cash investment of $75,000.
III. 12% Convertible, Redeemable Promissory Notes
During the period from October 24, 1997 to December 8, 1998, the Company
sold a total of 21.4 Units of 12% Convertible, Redeemable Promissory Notes to
the 23 persons identified below in this Part III of Item 26, "Recent Sales of
Unregistered Securities" (all of whom were accredited investors), through a
private placement under Rule 505 of Regulation D promulgated under the
Securities Act at a price of $50,000 per Unit, each Unit consisting of a $50,000
Unsecured 12% Convertible, Redeemable Promissory Note. The Company received
$1,070,000 in cash as a result of the private placement transaction and paid
$128,400 in commissions and expenses to Win Capital Corp., the exclusive
placement agent of the offering.
A. On December 8, 1997, the Company issued one Unit to Continental Stock
Transfer Corp. for a cash investment of $50,000.
B. On December 8, 1997, the Company issued one Unit to Robert L. Frome for
a cash investment of $50,000.
C. On December 8, 1997, the Company issued two Units to Ronald A. Balkin,
M.D. and Karen A. Balkin, JTWROS for a cash investment of $100,000.
D. On December 8, 1997, the Company issued two Units to Michael Associates
for a cash investment of $100,000.
E. On December 8, 1997, the Company issued .50 Unit to Mark S. Richardson
for a cash investment of $25,000.
F. On December 8, 1997, the Company issued .30 Unit to Mark E. Cozens for a
cash investment of $15,000.
G. On December 8, 1997, the Company issued .50 Unit to Michael L. Salamone
for a cash investment of $25,000.
H. On December 8, 1997, the Company issued .70 Unit to Premier Alliance
Group, Inc. for a cash investment of $35,000.
I. On December 8, 1997, the Company issued .50 Unit to Gary W. Hammond for
a cash investment of $25,000.
J. On December 8, 1997, the Company issued .50 Unit to Jeffrey A. Strack
and Penny Strack, JTROS for a cash investment of $25,000.
K. On December 8, 1997, the Company issued .50 Unit to J. Michael Smith for
a cash investment of $25,000.
L. On December 8, 1997, the Company issued .50 Unit to Eileen M. O'Dea for
a cash investment of $25,000.
II-4
<PAGE>
M. On December 8, 1997, the Company issued .40 Unit to Irwin W. Messer and
Alexandra S. Urdang, JTWROS for a cash investment of $20,000.
N. On December 8, 1997, the Company issued .50 Unit to Sheila Sandman for a
cash investment of $25,000.
O. On December 8, 1997, the Company issued one Unit to Joseph Aufiero for a
cash investment of $50,000.
P. On December 8, 1997, the Company issued one Unit to Ted Levine for a
cash investment of $50,000.
Q. On December 8, 1997, the Company issued .50 Unit to B. Michael Pisani
for a cash investment of $25,000.
R. On December 8, 1997, the Company issued one Unit to Alfred J. Riccairdi
and Joseph Riccairdi, JTWROS and for a cash investment of $50,000.
S. On December 8, 1997, the Company issued two Units to R.F. Lafferty
Profit Sharing Plan FBO Henry Hackel for a cash investment of $100,000.
T. On December 8, 1997, the Company issued one Unit to Rose W. Zee for a
cash investment of $50,000.
U. On December 8, 1997, the Company issued .50 Unit to Patrick F. Vetere,
M.D. and Linda A. Vetere JTWROS for a cash investment of $25,000.
V. On December 8, 1997, the Company issued two Units to MLPF&S Tax ID
13-3180817 FBO Dr. Joseph Nemeth IRA for a cash investment of $100,000.
W. On December 8, 1997, the Company issued 1.5 Units to Bill L. Trahan for
a cash investment of $75,000.
IV. Series C Preferred Stock
During the period from February 2, 1998 to April 11, 1998, the Company sold
a total of 20,300 shares of Series C Preferred Stock to the 58 persons
identified below in this part IV. of Item 26, "Recent Sales of Unregistered
Securities" (all of whom were accredited investors) through a private placement
under Rule 505 of Regulation D promulgated under the Securities Act at a price
of $100.00 per share. The Company received $2,003,000 in cash as a result of the
private placement transaction and paid $235,360 in commissions and expenses to
Win Capital Corp., the exclusive placement agent of the offering.
A. On March 4, 1998, the Company issued 125 shares of Series C Preferred
Stock to Robert M. Ball for a cash investment of $12,500.
B. On March 4, 1998, the Company issued 100 shares of Series C Preferred
Stock to Robert J. Braig for a cash investment of $10,000.
C. On March 4, 1998, the Company issued 150 shares of Series C Preferred
Stock to Thomas W. Brake for a cash investment of $15,000.
D. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Craig S. Brewer for a cash investment of $25,000.
E. On March 4, 1998, the Company issued 200 shares of Series C Preferred
Stock to Consolidated Management Services, Inc. for a cash investment of
$20,000.
II-5
<PAGE>
F. On March 4, 1998, the Company issued 200 shares of Series C Preferred
Stock to Michael Demayo for a cash investment of $20,000.
G. On March 4, 1998, the Company issued 125 shares of Series C Preferred
Stock to C. Richard Dobson for a cash investment of $12,500.
H. On March 4, 1998, the Company issued 750 shares of Series C Preferred
Stock to Robert L. Frome for a cash investment of $75,000.
I. On March 4, 1998, the Company issued 100 shares of Series C Preferred
Stock to Steven F. Gallop and Karen M. Gallop, JTWROS for a cash investment of
$10,000.
J. On March 4, 1998, the Company issued 100 shares of Series C Preferred
Stock to William A. Gantz and Carol A. Gantz, JTWROS for a cash investment of
$10,000.
K. On March 4, 1998, the Company issued 100 shares of Series C Preferred
Stock to John A. Grue for a cash investment of $10,000.
J. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Edward G. Hammond for a cash investment of $25,000.
L. On March 4, 1998, the Company issued 750 shares of Series C Preferred
Stock to Hi-Tel Group, Inc. for a cash investment of $75,000.
M. On March 4, 1998, the Company issued 100 shares of Series C Preferred
Stock to Rommie L. Honeycutt for a cash investment of $10,000.
N. On March 4, 1998, the Company issued 100 shares of Series C Preferred
Stock to Roy Lee Hounshell for a cash investment of $10,000.
O. On March 4, 1998, the Company issued 100 shares of Series C Preferred
Stock to Samuel C. Houser and Robin B. Houser, JTWROS for a cash investment of
$10,000.
P. On March 4, 1998, the Company issued 100 shares of Series C Preferred
Stock to Randy N. Humphrey for a cash investment of $10,000.
Q. On March 4, 1998, the Company issued 200 shares of Series C Preferred
Stock to Jerry R. King for a cash investment of $20,000.
R. On March 4, 1998, the Company issued 200 shares of Series C Preferred
Stock to Terry F. King for a cash investment of $20,000.
S. On March 4, 1998, the Company issued 100 shares of Series C Preferred
Stock to Shannon E. Miller and Shannon S. Miller, JTWROS for a cash investment
of $10,000.
T. On March 4, 1998, the Company issued 1,000 shares of Series C Preferred
Stock to Joseph R. Nemeth for a cash investment of $100,000.
U. On March 4, 1998, the Company issued 1,000 shares of Series C Preferred
Stock to Dr. Joseph Nemeth, IRA for a cash investment of $100,000.
II-6
<PAGE>
V. On March 4, 1998, the Company issued 100 shares of Series C Preferred
Stock to Christopher C. Northey for a cash investment of $10,000.
W. On March 4, 1998, the Company issued 500 shares of Series C Preferred
Stock to Eileen M. O'Dea for a cash investment of $75,000.
X. On March 4, 1998, the Company issued 100 shares of Series C Preferred
Stock to Laurence Leon Olive for a cash investment of $10,000.
Y. On March 4, 1998, the Company issued 200 shares of Series C Preferred
Stock to John D. Phillips, Jr. for a cash investment of $20,000.
Z. On March 4, 1998, the Company issued 100 shares of Series C Preferred
Stock to Richard D. Poling for a cash investment of $10,000.
AA. On March 4, 1998, the Company issued 150 shares of Series C Preferred
Stock to Feliciano Sergio Sabates, III for a cash investment of $15,000.
BB. On March 4, 1998, the Company issued 100 shares of Series C Preferred
Stock to Claude W. Savage and Jean G. Savage, JTWROS for a cash investment of
$10,000.
CC. On March 4, 1998, the Company issued 100 shares of Series C Preferred
Stock to Gregg Stokes for a cash investment of $10,000.
DD. On March 4, 1998, the Company issued 1,000 shares of Series C Preferred
Stock to TSP Associates, Inc. for a cash investment of $100,000.
EE. On March 4, 1998, the Company issued 130 shares of Series C Preferred
Stock to William E. Webb, III for a cash investment of $13,000.
FF. On March 4, 1998, the Company issued 500 shares of Series C Preferred
Stock to Artas Corporation for a cash investment of $50,000.
GG. On March 4, 1998, the Company issued 500 shares of Series C Preferred
Stock to United Growth Fund, Inc. Profit Sharing Plan for a cash investment of
$50,000.
HH. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Sterling Capital LLC for a cash investment of $25,000.
II. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to John W. Hemmer and Barbara Bean Hemmer, JTWROS for a cash investment of
$25,000.
JJ. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Gregory J. Lavin for a cash investment of $25,000.
KK. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Robert W. Millar for a cash investment of $25,000.
LL. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Thomas F. Motter for a cash investment of $25,000.
II-7
<PAGE>
MM. On March 4, 1998, the Company issued 500 shares of Series C Preferred
Stock to Marc N. Rubin for a cash investment of $50,000.
NN. On March 4, 1998, the Company issued 300 shares of Series C Preferred
Stock to Thomas R. Wolf and Erica P. Wolf, JTWROS for a cash investment of
$30,000.
OO. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Dr. Thomas R. Wolf, SEP IRA for a cash investment of $25,000.
PP. On March 4, 1998, the Company issued 2,500 shares of Series C Preferred
Stock to Canadian Advantage Limited Partnership for a cash investment of
$250,000.
QQ. On March 4, 1998, the Company issued 300 shares of Series C Preferred
Stock to Paul N. Davis for a cash investment of $30,000.
RR. On March 4, 1998, the Company issued 1,000 shares of Series C Preferred
Stock to RF Lafferty & Co. Profit Sharing Plan FBO Henry Hackel for a cash
investment of $100,000.
SS. On March 4, 1998, the Company issued 500 shares of Series C Preferred
Stock to Roger Newman for a cash investment of $50,000.
TT. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Samuel Richman for a cash investment of $25,000.
UU. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Jeffrey Zarry Schwartz for a cash investment of $25,000.
VV. On March 4, 1998, the Company issued 500 shares of Series C Preferred
Stock to Richard C. Siskey for a cash investment of $50,000.
WW. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Jeffrey G. Straus for a cash investment of $25,000.
XX. On March 4, 1998, the Company issued 500 shares of Series C Preferred
Stock to Wight Investment for a cash investment of $50,000.
YY. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Michael W. Stelzer and Paula J. Stelzer, JTWROS for a cash investment
of $25,000.
ZZ. On March 4, 1998, the Company issued 500 shares of Series C Preferred
Stock to Patrick Kolenik - IRA for a cash investment of $50,000.
AAA. On March 4, 1998, the Company issued 500 shares of Series C Preferred
Stock to Patrick Kolenik and Dolores Kolenik, JTWROS for a cash investment of
$50,000.
BBB. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Roger C. Husted for a cash investment of $25,000.
CCC. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to Lincoln Trust Company FBO Michael B. Limberg, M.D. for a cash
investment of $100,000.
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<PAGE>
DDD. On April 6, 1998, the Company issued 300 shares of Series C Preferred
Stock to Charles F. Trapp for a cash investment of $35,000.
EEE. On March 4, 1998, the Company issued 500 shares of Series C Preferred
Stock to BCN Associates for a cash investment of $50,000.
FFF. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Charles R Thompson, Jr., M.D. for a cash investment of $25,000.
GGG. On March 4, 1998, the Company issued 500 shares of Series C Preferred
Stock to Continental Stock Transfer & Trust for a cash investment of $50,000.
HHH. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to Ronald A. and Karen A. Ballsin, JTWROS for a cash investment
of $100,000.
III. On March 4, 1998, the Company issued 1,000 shares of Series C Preferred
Stock to Michael Associates for a cash investment of $100,000.
JJJ. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Mark S. Richardson for a cash investment of $25,000.
KKK. On March 4, 1998, the Company issued 150 shares of Series C Preferred
Stock to Mark and Lori Cozins for a cash investment of $15,000.
LLL. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Michael L. Salamone for a cash investment of $25,000.
MMM. On March 4, 1998, the Company issued 350 shares of Series C Preferred
Stock to Premier Alliance Group, Inc. for a cash investment of $35,000.
NNN. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Gary Hammond for a cash investment of $25,000.
OOO. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Jeffrey A. and Penny Strack for a cash investment of $25,000.
PPP. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to J. Michael Smith for a cash investment of $25,000.
QQQ. On March 4, 1998, the Company issued 200 shares of Series C Preferred
Stock to Irwin Messer and Alexandra S. Urdang for a cash investment of $20,000.
RRR. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Sheila Sandman for a cash investment of $25,000.
SSS. On March 4, 1998, the Company issued 500 shares of Series C Preferred
Stock to Joseph Aufrino for a cash investment of $50,000.
TTT. On March 4, 1998, the Company issued 500 shares of Series C Preferred
Stock to Ted Levine for a cash investment of $50,000.
UUU. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to B. Michael Pisani for a cash investment of $25,000.
II-9
<PAGE>
VVV. On March 4, 1998, the Company issued 500 shares of Series C Preferred
Stock to Alfred J. Ricciardi and Joseph Ricciardi for a cash investment of
$50,000.
WWW. On March 4, 1998, the Company issued 500 shares of Series C Preferred
Stock to Rose W. Zee for a cash investment of $50,000.
XXX. On March 4, 1998, the Company issued 250 shares of Series C Preferred
Stock to Patrick and Linda Vetere, JTWROS, for a cash investment of $50,000.
Item 27. Exhibits
Exhibit
Number Document Description
(a) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-B or are incorporated by reference to previous filings.
Table No. Document
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 Bylaws(1)
4.1 Warrant Agency Agreement with Continental Stock Transfer & Trust
Company(3)
4.2 Specimen Common Stock Certificate (2)
4.3 Specimen Class A Warrant Certificate(2)
4.4 Class A Warrant Agreement(2)
4.5 Underwriter's Warrant with Kenneth Jerome & Co., Inc.(3)
4.6 Warrant to Purchase Common Stock with Note Holders re bridge
financing(1)
4.7 Warrant to Purchase Common Stock with Mackey Price & Williams(1)
4.8 Warrant to Purchase Common Stock with Win Capital Corp.(6)
4.9 Specimen Series C Convertible Preferred Stock Certificate(6)
4.10 Certificate of the Designations, Powers, Preferences and Rights of the
Series C Convertible Preferred Stock(6)
5. Opinion of Mackey Price & Williams(8)
10.1 Exclusive Patent License Agreement with Photomed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 Confidential Disclosure Agreement with Zevex, Inc.(1)
10.4 Indemnity Agreement with Zevex International, Inc.(1)
10.5 Manufacturing Agreement with Sunrise Technologies, Inc.(1)
10.6 Royalty Agreement dated January 30, 1992, with Dennis L. Oberkamp
Design Services(1)
10.7 Indemnity Agreement dated January 30, 1992, with Dennis L. Oberkamp
Design Services(1)
10.8 Royalty Agreement (for Ultrasonic Phaco Handpiece) with Dennis L.
Oberkamp Design Services(1)
10.9 Lease Agreement with Eden Roc (6)
10.10 Settlement and Release Agreement with Douglas A. MacLeod(1)
10.11 Form of Indemnification Agreement(1)
10.12 1995 Stock Option Plan and forms of Stock Option Grant Agreements(1)
10.13 Promissory Note with Note Holders re bridge financing(1)
10.14 Employee's Lock-Up Agreement(1)
10.15 Registering Shareholders Lock-Up Agreement(3)
10.16 Employment Agreement with Thomas F. Motter(1)
10.17 Employment Agreement with Robert W. Millar(1)
II-10
<PAGE>
10.18 Employment Agreement with Jack W. Hemmer(1)
10.19 Amendment of Settlement and Release Agreement with Douglas A.
MacLeod(3)
10.20 Design, Engineering and Manufacturing Agreement with Zevex, Inc.(5)
10.21 License and Manufacturing Agreement with O.B.F. Labs, Ltd.(6)
10.22 Settlement Agreement with Estate of H.L. Federman(6)
10.23 Agreement with Win Capital Corp.(6)
10.24 12% Convertible, Redeemable Promissory Note(6)
10.25 Securities Exchange Agreement(6)
10.26 Stock Exchange for Satisfaction of Debt Agreement with Zevex
International, Inc. (7)
10.27 Co-Distribution Agreement with Pharmacia & Upjohn Company and National
Healthcare Manufacturing Corporation (7)
10.28 Agreement for Purchase and Sale of Assets with Humphrey Systems
Division of Carl Zeiss, Inc. (7)
23.1 Consent of Medical Laser Insight(3) 23.2 Consent of Frost &
Sullivan(3)
23.3 Consent of Ophthalmologists Times(3)
23.4 Consent of Mackey Price & Williams(8)
23.5 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 Amendment No. 3 to Registration Statement on
Form SB-2, as filed on June 28, 1996.
(5) Incorporated by reference from Annual Report on Form 10-KSB, as filed on
December 30, 1996
(6) Incorporated by reference from Annual Report on Form 10-KSB, as filed on
April 16, 1998
(7) Incorporated by reference from report on Form 10-QSB, as filed on August
19, 1998.
(8) Incorporated by reference from Registration Statement on Form SB-2, as
filed on June 15, 1998.
(b) Reports on Form 8-K
On January 7, 1998, the Company filed a report on Form 8-K regarding pro
forma financial statements as of November 30, 1997.
On February 18, 1998, the Company filed a report on Form 8-K regarding pro
forma financial statements as of December 31, 1997.
On February 27, 1998, the Company filed a report on Form 8-K regarding pro
forma financial statements as of January 31, 1998.
On May 29, 1998, the Company filed a report on Form 8-K regarding a change
in the Company's independent accountants.
On June 9, 1998, the Company filed an amended report on Form 8-K regarding
a change in the Company's independent accountants.
Item 28. Undertakings
The undersigned Registrant hereby undertakes (a) subject to the terms and
conditions of Section 15(d) of the Securities Exchange Act of 1934, to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section; (b) to provide the Underwriter at the
closing
II-11
<PAGE>
specified in the Underwriting Agreement certificates in such denominations and
registered in the names as required by the Underwriters to permit prompt
delivery to each purchaser; (c) if any public offering by the Underwriters is to
be made on terms differing from those set forth on the cover page of the
Prospectus, to file a post-effective amendment setting forth the terms of such
offering; and (d) to deregister, by means of a post-effective amendment, any
securities covered by this Registration Statement that remain unsold at the
termination of this offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or preceding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant also undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a 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,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering of those securities.
The undersigned Registrant further undertakes that it will file, during any
period in which it offers or sells securities, a post-effective amendment to
this Registration Statement to (i) include any prospectus required by Section
10(a)(3) of the Securities Act, (ii) reflect in the prospectus any facts or
events which, individually or together, represent a fundamental change in the
information in the Registration Statement, and (iii) include any additional or
changed material information on the plan of distribution.
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PARADIGM MEDICAL INDUSTRIES, INC.
Dated: September 11, 1998 By:____________________________________
Thomas F. Motter, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
___________________ Chairman of the Board, September 11,1998
Thomas F. Motter President and Chief Executive Officer
(Principal Executive Officer)
___________________ Vice President of Operations, Secretary, September 11, 1998
Michael W. Stelzer Chief Operating Officer and Director
___________________ Vice President of Engineering and September 11, 1998
Robert W. Millar Manufacturing and Director
___________________ Treasurer, Chief Financial Officer and September 11, 1998
John W. Hemmer Director (Principal Financial and
Accounting Officer)
___________________ Director September 11, 1998
Patrick M. Kolenik
___________________ Director September 11, 1998
Robert L. Frome
SB2-817M.PMI
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PARADIGM MEDICAL INDUSTRIES, INC.
Dated: September 11, 1998 By: /s/Thomas F. Motter
---------------------
Thomas F. Motter, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Thomas F. Motter Chairman of the Board, September 11, 1998
- ----------------------------------
Thomas F. Motter President and Chief Executive
Officer (Principal Executive
Officer)
/s/Michael W. Stelzer Vice President of Operations, Chief September 11, 1998
- ----------------------------------
Michael W. Stelzer Operating Officer, Secretary and
Director
/s/Robert W. Millar Vice President of Engineering and September 11, 1998
- ----------------------------------
Robert W. Millar Manufacturing and Director
/s/John W. Hemmer Treasurer, Chief Financial Officer September 11, 1998
- ----------------------------------
John W. Hemmer and Director (Principal Financial
and Accounting Officer)
/s/Patrick M. Kolenik Director September 11, 1998
- ----------------------------------
Patrick M. Kolenik
/s/Robert L. Frome Director September 11, 1998
- ----------------------------------
Robert L. Frome
</TABLE>
SB2-825M.PMI
EXHIBIT 23.2
CONSENT OF TANNER + CO
CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated July 14, 1998, relating to the financial statements of Paradigm
Medical Industries, Inc., and to the reference to our Firm under the caption
"Experts" in the Prospectus.
TANNER + CO.
