As filed with the Securities and Exchange Commission
on June 11, 1998
Commission File No. 0-28498
- ----------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
SECURITIES ACT OF 1933
PARADIGM MEDICAL INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 3841 87-0459536
(State of jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Identification
organization) Classification Number)
Code
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, check the following box. []
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement for the same offering. []
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same
offering. []
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. []
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C>
Title of each Amount to Proposed Proposed
class of be maximum maximum Amount
securities to registered offering aggregate of
be registered price per offering registration
share price fee
- -----------------------------------------------------------------
Common Stock
issuable upon
exercise of
Class A
Warrants 1,000,000 $7.50 $8,625,000 <F1>
Common Stock
issuable upon
exercise of
Underwriter's
Warrants 100,000 $8.125 $812,500<F1> <F1>
Common Stock
issuable upon
exercise of
Underwriter's
Warrants 100,000 $7.50 $950,000 <F1>
Common Stock
issuable upon
exercise of
Underwriter's
Warrants 291,000 $3.00 $873,000 $257.54
Common Stock
issuable upon
exercise of
Note Holders'
Warrants 287,500 $3.33 $1,000,000 <F1>
Common Stock
issuable upon
exercise of
Attorney's
Warrants 25,000 $3.33 $83,333 <F1>
Resale of
Common Stock
issuable upon
conversion of
Series C
Preferred Stock 1,713,143 $1.75 $2,998,000 $ 884.41
Resale of
Common Stock
issuable upon
conversion
of Note 37,500 $2.00 $75,000 $ 22.13
--------
Total Registration
Fee $1,164.08
<FN>
<F1> No registration fee is required as securities were
previously registered by Form SB-2 Registration Statement,
No. 333-2496, effective as of July 10, 1996.
</FN>
</TABLE>
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Cross Reference Sheet
Form SB-2 Item No. and Caption Prospectus Caption
- ------------------------------ ------------------
Item 1. Front of Registration
Statement and Outside
Front Cover Page of Outside Front Cover
Prospectus Page
Item 2. Inside Front and Inside Front and
Outside Back Cover Outside Back Cover
Pages of Prospectus Pages
Item 3. Summary Information Prospectus Summary;
and Risk Factors Risk Factors
Item 4. Use of Proceeds Use of Proceeds
Item 5. Determination of
Offering Price Underwriting
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, Promoters
and Control Persons Management
Item 10. Security Ownership of
Certain Beneficial
Owners and Management Principal Shareholders
Item 11. Description of Securities Outside Front Cover
Page; Description of
Securities
Item 12. Interest of Named Experts Legal Matters; Experts
Counsel
Item 13. Disclosure of Commission Description of
Position on Indemnification Securities; Plan of
for Securities Act Distribution
Liabilities
Item 14. Organization Within the Certain Transactions
Last Years
Item 15. Description of Business Business
Item 16. Management's Discussion Management's
and Analysis or Plan of Discussion and Analysis
or Operation or Plan of Operation
Item 17. Description of Property Business - Properties
Item 18. Certain Relationships and Certain
Related Transactions Transactions
Item 19. Market for Common Equity Price Range of Common
and Related Stockholder Stock and Class A
Matters Warrants and Dividend
Policy; Description of
Securities
Item 20. Executive Compensation Management - Executive
Compensation
Item 21. Financial Statements Financial Statements;
Selected Financial
Data; Capitalization
Capitalization
Item 22. Changes in and
Disagreements on
Accounting and Not Applicable
Financial Disclosure
<PAGE>
PROSPECTUS
- ----------
PARADIGM MEDICAL INDUSTRIES, INC.
3,554,143 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 for resale 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."
Of the 3,554,143 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 May 29, 1998, the last sales prices for the
Common Stock and Class A Warrants as reported by The Nasdaq
SmallCap Market were $4.75 per share and $.875 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 Under- Proceeds
Class of Exercise Writing to the
Security Amount of Discounts Company
Being of Conversion and <F8><F9>
Registered Securities Price Commissions
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Common
Stock <F1> 1,000,000 $7.50 $.375 $7,500,000
Common
Stock <F2> 100,000 $7.50 -- $750,000
Common
Stock <F2> 100,000 $8.125 -- $812,500
Common
Stock <F3> 291,000 $3.00 -- $873,000
Common
Stock <F4> 287,500 $3.33 $.1665 $909,506
Common
Stock <F5> 25,000 $3.33 -- $83,250
Common
Stock <F6> 1,713,143 $1.75 -- --
Common
Stock <F7> 37,500 $2.00 -- --
--------- ----- --------- ---------
Total 3,566,643 -- $422,869 $10,928,256
<F10>
========= ===== ========= ===============
(footnotes on following page)
The date of this Prospectus is June __, 1998.
<FN>
<F1> Consists of 1,000,000 shares of Common Stock underlying the
Class A Warrants with an exercise price of $7.50 per share.
<F2> Consists of 200,000 shares of Common Stock underlying the
Underwriter's Warrants with exercise prices from $7.50 to
$8.125 per share.
<F3> Consists of 291,000 shares of Common Stock underlying the
Win Capital Warrants with an exercise price of $3.00 per
share.
<F4> Consists of 287,500 shares of Common Stock underlying the
Note Holders' Warrants with an exercise price of $3.33 per
share.
<F5> Consists of 25,000 shares of Common Stock underlying the
Attorney's Warrants with an exercise price of $3.33 per
share.
<F6> 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.
<F7> Consists of 37,500 shares of Common Stock for resale
underlying the Note with a conversion price of $2.00 per
share.
<F8> 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.
<F9> All expenses of this Offering are borne by the Company.
The Company estimates that it will incur approximately
$42,000 in registration, NASD, legal, accounting and
printing fees in connection with this Offering.
<F10> 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."
</FN>
</TABLE>
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.
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(trademark), is
manufactured as the base surgery system for the Company's
Precisionist Thirty Thousand(trademark) Ophthalmic Surgical
Workstation(trademark) (the "Workstation(trademark)"). 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(trademark). The Company's
diagnostic product is the Blood Flow Analyzer(trademark). 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(trademark) system was introduced in 1992
and is a low-cost portable system intended primarily for the
international market. The Precisionist Thirty
Thousand(trademark) Ocular Surgery Workstation(trademark) 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(trademark) 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(trademark)
laser system a plug-in module for its Workstation(trademark) 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(trademark)
laser system. During these Phase I clinical trials the Company
discovered that the Photon(trademark) 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(trademark) 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(trademark) 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(trademark) 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(trademark) 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(trademark) 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.
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 . . . . . 3,554,143 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 and the
resale of 1,750,643 shares of
Common Stock issuable upon the
conversion of the Series C
Preferred Stock and the Note. 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 . . . 3,830,358 shares.
Common Stock outstanding
after the offering <F1> . . . 7,384,501 shares.
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
_________________________
[FN]
<F1> Assumes exercise of all Warrants, of which there can be no
assurance.
</FN>
<TABLE>
<CAPTION>
Summary Financial Information
-----------------------------
For the three
Statement For the For the For the three
of year ended year ended months ended
Operations September 30, December 31, March 31,
Data: 1996 1997 1997 1998
------------ ------------ --------- --------
(Unaudited)(Unaudited)
<S> <C> <C> <C> <C>
Sales . . . $ 252,134 $ 464,062 $ 256,415 $ 351,382
Costs of
sales. . . 180,010 333,156 117,768 195,841
Operating
expenses. . 1,328,173 2,933,327 965,573 565,957
Operating
loss. . . . (1,256,049) (2,802,421) (826,926) (410,416)
Other
income
(expense). (192,970) 27,827 24,012 (13,602)
Net loss. . (1,449,019) (2,774,594) (802,914) (424,018)
Net loss
attribut-
able to
common
share-
holders. . (1,448,171) (2,774,594) (802,914) (424,018)
Net loss
per
common
share . . . (0.66) (0.76) (0.24) (0.11)
Shares
used in
computing
net loss
per share . 2,192,881 3,663,115 3,386,356 3,830,358
Cash
dividends
per share. . None None None None
</TABLE>
<TABLE>
<CAPTION>
As of As of
December 31, March 31,
1997 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Balance Sheet Data:
Current assets. . . . . . . $ 1,857,128 $2,999,053
Current liabilities . . . . 1,055,223 687,820
Working capital . . . . . . 801,905 2,311,233
Total assets. . . . . . . . 2,452,574 3,405,872
Long-term debt,
less current portion. . . 1,081,996 89,757
Accumulated deficit . . . (8,023,006) (8,447,507)
Stockholders' equity . . 315,355 2,628,295
</TABLE>
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 Coopers & Lybrand L.L.P., 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 $2,774,594
and $424,018 for the three month period March 31, 1997. 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 March 31, 1998,
the Company had limited working capital of $2,311,233. 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 $8,023,006 as of
December 31, 1997 and $8,447,507 as of March 31, 1998. Such
losses have resulted principally from costs incurred in
connection with research and development of the Photon(trademark)
LaserPhaco(trademark) and the Workstation(trademark) as well as
clinical trials for the Photon(trademark) LaserPhaco(trademark).
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(trademark) LaserPhaco(trademark), 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, 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(trademark) LaserPhaco(trademark), 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."
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(trademark) as well as its
Precisionist Thirty Thousand(trademark) 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(trademark) LaserPhaco(trademark)
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(trademark)
LaserPhaco(trademark) 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(trademark) 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(trademark).
However, the Company has discovered that its Precisionist Thirty
Thousand(trademark) Workstation(trademark) 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(trademark). Phase I clinical trials to obtain
domestic sales approval from the FDA for the Photon(trademark)
LaserPhaco(trademark) system have concluded. During the clinical
trial, the Company discovered that the Photon(trademark)
LaserPhaco(trademark) 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(trademark) LaserPhaco(trademark) system to generate future
revenues. With the recently discovered possible limitation of
the Photon(trademark) LaserPhaco(trademark), 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 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 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(trademark) 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 Photon(trademark) Workstation(trademark) 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(trademark)
LaserPhaco(trademark) 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."
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 Workstation(trademark)
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(trademark)
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(trademark), 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(trademark), 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 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 March 31, 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 March 31, 1997 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 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 March 31, 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."
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 $4.75 on May 29, 1998. Approximately
67% of the Warrants are exercisable for prices above $4.75.
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 May 29, 1998, the Common Stock and
Class A Warrants were $4.75 per share and $.875 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.
Common Stock Class A Warrants
Price Range Price Range
------------ ----------------
Period (Calendar
Year) High Low High Low
- ---------------- ---- --- ---- ---
1996
Third Quarter
(since July
22, 1996) . . . 6 2 1-3/16 0
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
The Company's Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock are not publicly traded. As
of March 31, 1998, there were 616 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 March 31, 1998.
<TABLE>
<CAPTION>
<S> <C>
As of
March 31,
1998
----
Long-term obligations<F1>. . . . . . . . . . . $ 89,757
---------
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
Additional paid-in-capital,
preferred stock. . . . . . . . . . . . . . . . 3,047,024
Common Stock, $.001 par value per
share; 20,000,000 shares authorized,
3,830,358 issued and outstanding
(7,397,001 issued and outstanding,
as adjusted)<F2> . . . . . . . . . . . . . . . 3,830
Additional paid-in-capital,
common stock . . . . . . . . . . . . . . . . 8,405,619
Treasury Stock, 2,600 shares of
common stock . . . . . . . . . . . . . . . . (3,777)
Accumulated deficit. . . . . . . . . . . . . (8,447,507)
Unearned compensation. . . . . . . . . . . . (376,993)
-----------
Total stockholders' equity . . . . . . . . . 2,718,052
-----------
Total Capitalization. . . . . . . . . . . . . $2,807,804
===========
___________________
<FN>
<F1> Excludes current portion of long-term debt.
<F2> 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.
</FN>
</TABLE>
Bridge Financing
During the period beginning on December 26, 1995 and ending
on February 21, 1996, the Company issued 24 Units at a price of
$25,000 per Unit primarily to finance its public offering which
was completed in July 1996 (including 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,
1998, the Company sold a total of 21.4 Units of 12% Convertible,
Redeemable Promissory Notes to 23 persons 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 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 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 Coopers & Lybrand
L.L.P. The selected financial data as of and for the three
months ended December 31, 1995 and as of and for the three months
ended March 31, 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. Accordingly, the
Company's financial statements as of September 30, 1996 are for
nine months. 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
Statement of September 30, December 31, December 31
Operations Data: ------------ ------------ -------------------
- ----------------- 1996 1997 1995 1996
---------- ---------- ------- ------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales . . . . $ 252,134 $ 464,062 $ 65,405 $ 35,651
Net cost
of sales . . . . 180,010 333,156 45,286 21,061
Operating
expenses. . . . 1,328,173 2,933,327 312,891 1,243,984
Operating
loss. . . . . . (1,256,049) (2,802,421) (292,772) (1,229,394)
Other
income
(expenses) . . (192,970) 27,827 (178,484) (30,991)
Net loss . . . (1,449,019) (2,774,594) (471,256) (1,198,403)
Net loss
attributable
to common
shareholders . (1,448,171) (2,774,594) (471,256) (1,198,403)
Net loss
per common
share . . . . (0.66) (0.76) (0.20) (0.38)
Shares used
in computing
net loss per
share. . . . . 2,192,881 3,663,115 2,352,031 3,182,830
Cash dividends
per share. . . None None None None
</TABLE>
(table continued)
- - - - - - - - - - - - - - -
(continued)
<TABLE>
<CAPTION>
Three months ended
Statement of March 31
Operations Data: -------------------
- ----------------- 1997 1998
------- ------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales . . . . $ 256,415 $ 351,382
Net cost
of sales . . . . 117,768 195,841
Operating
expenses. . . . 965,573 565,957
Operating
loss. . . . . . (826,926) (410,416)
Other
income
(expenses) . . 24,012 (13,602)
Net loss . . . (802,914) (424,018)
Net loss
attributable
to common
shareholders . (802,914) (424,018)
Net loss
per common
share . . . . (0.24) (0.11)
Shares used
in computing
net loss per
share. . . . . 3,386,356 3,830,358
Cash dividends
per share. . . None None
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Balance Sheet Data: As of As of
- ------------------ December 31, March 31,
1997 1998
------------ ---------
(Unaudited)
Current assets . . . . . . . . $1,857,128 $2,999,053
Current liabilities . . . . . 1,055,223 687,820
Working capital . . . . . . . 801,905 2,311,233
Total assets. . . . . . . . . 2,452,574 3,405,872
Long-term debt, less
current portion. . . . . . . 1,081,996 89,757
Accumulated deficit . . . . . (8,023,006) (8,447,507)
Stockholder's equity . . . . 315,355 2,628,295
</TABLE>
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 development, manufacture and
sale of ophthalmic surgical devices designed to perform minimally
invasive cataract removal surgery. Paradigm's activities for the
fiscal year ended December 31, 1997 include international and
domestic sales of the Precisionist 3000 Plus(trademark) Phaco
system, research and developments of the Precisionist Thirty
Thousand(trademark) and the Photon(trademark) laser cataract
system, and primary research for other new products and
businesses.
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months
Ended March 31, 1997.
Sales increased by $94,967 or 37% to $351,382 for the three
months ended March 31, 1998 from $256,415 for the comparable
period in 1997. The increase in sales was a result of the
Company launching the Blood Flow Analyzer System(trademark) and
increased sales of the Precisionist Thirty Thousand(trademark)
Ocular Surgery Workstation(trademark). Cost of sales increased
$78,073 or 66% to $195,841 for the three months ended March 31,
1998 from $177,768 for the comparable period in 1997 as a result
of the increased sales. The gross margin for the three months
ended March 31, 1998 of 44% is lower than the gross margin for
the comparable period in 1997 of 54%. If the amortization of
deferred charges of $18,567, a non-cash expense, is excluded for
the three months ended March 31, 1998, the gross margin is 49.5%.
Marketing and selling expenses increased by $44,424 or 40%
to $156,576 for the three months ended March 31 1998 from
$112,152 for the comparable 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(trademark) and
in increased sales of the Precisionist Thirty Thousand(trademark)
Ocular Surgery Workstation(trademark).
General and administrative expenses decreased by $110,451
or 24% to $348,337 for the three months ended March 31, 1998,
from $458,788 for the comparable period in 1997. This reduction
was a result of a restructuring that eliminated four positions.
Research and development expenses decreased by $333,589 or
73% to $61,044 for the three months ended March 31, 1998 from
$458,788 for the comparable period in 1997. This sharp decline
can be attributed to the completion of the design and engineering
phase of the Precisionist Thirty Thousand(trademark) Ocular
Surgery Workstation(trademark).
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(trademark) and the Precisionist Thirty
Thousand(trademark), the latest generation of Paradigm products
on March 31, 1997.
Cost of sales increased $91,706, or 51%, to $271,716 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 28.2% was slightly lower than the gross
margin for the twelve months ended September 30, 1996 of 28.6%,
primarily as a result of the amortization of capitalized
engineering and design charges of $61,440 in 1997 which reduced
the gross margin from 41.4% to 28.2%.
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(trademark) 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(trademark) and the Precisionist
Thirty Thousand(trademark), 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(trademark) and the Precisionist Thirty
Thousand(trademark).
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
848%, 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 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(trademark) 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(trademark) 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(trademark) system with an unconditional arrangement
under which the customer may trade in their
Precisionist(trademark) system to upgrade to a Precisionist
Thirty Thousand(trademark) Ocular Surgery System(trademark).
Under this arrangement, the customer receives full credit for the
trade in purchase price of the Precisionist(trademark) system
against the price of the new Precisionist Thirty
Thousand(trademark) Ocular Surgery System(trademark). As of
December 31, 1997, the Company has distributed approximately 51
Precisionist(trademark) 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(trademark)
system for the Company's new Precisionist Thirty
Thousand(trademark) Ocular Surgery System(trademark) and
refurbish the ultrasonic Precisionist(trademark) systems and sell
them in the international market. Any losses on the sale of the
refurbished Precisionist(trademark) systems, which are not
expected to be significant, would reduce the gross margin on the
Precisionist Thirty Thousand(trademark) Ocular Surgery
System(trademark) 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(trademark) system to the Precisionist
Thirty Thousand(trademark) Ocular Surgery System(trademark).
Liquidity and Capital Resources
The Company used cash in operating activities of $2,644,908
for the twelve months ended December 31, 1997 compared to
$1,315,399 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 $118,889 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 $20,017 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 $4,608,254 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 $636,000 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.
As discussed above, the Company incurred a net loss of
$2,774,594 and negative cash flows from operating activities of
$2,644,908 for the year ended December 31, 1997. As of December
31, 1997, the Company had an accumulated deficit of $8,023,006.
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 $7,073,000 and research and
development tax credit carryforwards of approximately $64,000.
These carryforwards are available to offset future taxable
income, if any, and expire in the years 2005 through 2012.
Because the Company has yet to recognize significant revenue from
the sale of its Photon(trademark) 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 Postretirement Benefits",
concerning employer disclosure about pension plans and other
postretirement 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, but not
yet adopted, 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 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(trademark), is
manufactured as the base surgery system for the Company's
Precisionist Thirty Thousand(trademark) Ophthalmic Surgical
Workstation(trademark). 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(trademark). The Company's diagnostic product is the
Blood Flow Analyzer(trademark). 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(trademark) system was introduced in 1992
and is a low-cost portable system intended primarily for the
international market. The Precisionist Thirty
Thousand(trademark) Ocular Surgery Workstation(trademark) 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(trademark) 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(trademark)
laser system. During these Phase I clinical trials the Company
discovered that the Photon(trademark) 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(trademark) 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(trademark) 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(trademark) 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(trademark) 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(trademark) 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.
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 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 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(trademark) 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(trademark) phaco system for cataract surgery, which system
was upgraded to the Precisionist 3000 Plus(trademark) in 1994.
The Company also completed its preclinical in vitro and in vivo
(animal) testing of its Photon(trademark) laser cataract
solid-state laser cataract surgical system and submitted a
Section 510(k) Premarket Notification to the FDA for the
Photon(trademark) 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(trademark) System. The Precisionist
3000 Plus(trademark) system (the "3000 Plus(trademark)") 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(trademark) is in foreign countries where
phaco technology is emerging and price-points are relatively low.
The 3000 Plus(trademark) 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(trademark) 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(trademark). The Precisionist
Thirty Thousand(trademark) (the "Thirty Thousand(trademark)") is
the Company's core phaco surgical technology and the base system
for its Precisionist Thirty Thousand(trademark) Ocular Surgery
Workstation(trademark) platform. The Thirty Thousand(trademark)
was placed into production and sale in 1997. As a phaco cataract
surgery system, the Company believes the Thirty
Thousand(trademark) 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(trademark) 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(trademark) features the Company's third
generation SmartPump(trademark) technology 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(trademark) laser system.
Photon(trademark) Workstation(trademark). The Percisionist
Thirty Thousand(trademark) Ocular Surgery Workstation(trademark)
which comprises the base system for the Precisionist Thirty
Thousand(trademark) 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(trademark) 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(trademark)
with the ability to add other hardware and software features.
Expansion hardware such as the Company's Photon(trademark) 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(trademark). 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(trademark) will be accepted in the market place.
Photon(trademark) Laser System. The Photon(trademark)
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(trademark) Ocular
Surgery Workstation(trademark). 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(trademark) laser software package and
interchangeable disposable hand-held fiber optic laser
Photofragmentation Probe(trademark) (the "LCP(trademark)"). The
Photon(trademark) laser utilizes the on-board microprocessor
computer of the Workstation(trademark) to generate short pulse
laser energy developed through the patented LCP(trademark) 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(trademark) 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 accessories that will
be sold with its surgical systems and to fit other competitive
systems. In January 1998, the Company received FDA clearance for
a line of proprietary titanium ultrasonic phaco needles it
manufactures in its Salt Lake City facility. The needles will be
released for sale in May 1998 in a sterile Phaco PAK(trademark).
In February 1998, the Company completed engineering on a
proprietary line of irrigation/aspiration probes and tips of
which FDA clearance is anticipated in June 1998 with product
release targeted for July 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(trademark).
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(trademark) 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(trademark) 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(trademark). 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(trademark) (the "AMAP(trademark)") 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(trademark) 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(trademark) utilizes a single-use
disposable cover for its AMAP(trademark) corneal probe which is
shipped in sterile packages. The AMAP(trademark) 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(trademark) 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(trademark) 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(trademark). While limited in scope at present, the
Company's Blood Flow Analyzer(trademark) system utilizes or will
utilize accessory instruments and disposables, some of which are
proprietary to the Company. These include replacement
AMAP(trademark) 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 March 31,
1998, the Company had distributed over 60 Precisionist 3000 and
3000 Plus(trademark) phaco systems since the introduction of the
systems, nine of the new Precisionist Thirty Thousand(trademark)
Workstation's and six Photon(trademark) Laser Phaco(trademark)
Workstation(trademark). 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 March 31, 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(trademark) will emphasize the expandable features of
the Workstation(trademark). The Company's marketing approach
will be to focus on the upgradeability of the
Workstation(trademark) and to develop the image of the
Workstation(trademark) 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(trademark).
Additional surgical applications will expand the market for the
Workstation(trademark) 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(trademark) was "The Future of Phaco is the
Future of Ophthalmic Surgery." The Company will expand upon the
concept of the "Workstation(trademark)" 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(trademark) 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(trademark) laser cataract system are
resident in the Precisionist Thirty Thousand(trademark) 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(trademark) laser cataract system are supplied by Sunrise
Technologies, Inc. in Fremont, California ("Sunrise"). The
Company is in the process of establishing 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(trademark) 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(trademark) 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(trademark) 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 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 March 31, 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 March 31, 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(trademark) 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.
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 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(trademark) ultrasonic phaco system has the ability to
use either reusable or single-use disposable components. The
Photon(trademark) 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(trademark) System, which is comparable to
advanced ultrasonic systems, is $45,500. The list price for the
Precisionist Thirty Thousand(trademark) ocular surgery system is
$89,900. The Company's Photon(trademark) Laser Phaco(trademark)
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
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(trademark). The
Company believes that its Workstation(trademark) 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(trademark) 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(trademark) 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.
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(trademark) 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.
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 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(trademark) 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(trademark) and the Precisionist
Thirty Thousand(trademark) Systems. Pursuant to Section 510(k)
of the FDC Act, the FDA granted market clearance for the
commercialization of the Precisionist 3000 Plus(trademark) system
in 1990 and the Precisionist Thirty Thousand(trademark) 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. In Japan and
Korea, the Company has provided the Precisionist(trademark)
system to established dealers that have applied for approval in
those respective countries.
The Photon(trademark) 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(trademark) 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(trademark) 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(trademark) laser cataract
system sometime in 1998.
The Company submitted its Premarket Notification under
Section 510(k) of the FDC Act for the Photon(trademark) 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(trademark) 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(trademark) laser cataract system may not effectively
remove harder grade cataracts. The Company thus plans to request
FDA approval to conduct experimental or Phase II clinical studies
in hopes of refining the laser system 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(trademark) (Paradigm BFA(trademark)).
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 May 31, 1998, the Company had 19 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.
MANAGEMENT
Directors and Executive Officers
The executive officers and directors of the Company, their
ages and their positions are set forth below:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Thomas F. Motter 49 Chairman of the Board, President
and Chief Executive Officer
Michael W. Stelzer 50 Vice President of Operations,
Chief Operating Officer and
Director
Robert W. Millar 41 Vice President of Engineering and
Manufacturing, and Director
John W. Hemmer 70 Vice President of Finance,
Treasurer, Chief Financial
Officer and Director
Roy E. Moser 51 Vice President of Corporate
Development
Randall A. Mackey 52 Secretary and Director
William C. Fitzhugh 48 Director
David M. Silver 56 Director
Patrick M. Kolenik 46 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,
Humphrey Instruments Division, a company engaged in the
development of advanced ophthalmic diagnostic instruments, his
last position was national sales manager. Mr. Motter received a
Bachelors of Arts degree in English from Stephen's College in
1970 and a Master of Business Administration from Pepperdine
University in 1975.
Michael W. Stelzer has served as Vice President of
Operations and Chief Operating Officer since December 12, 1997.
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, Mr. Stelzer served as a General Counsel and
director for Paradigm Medical, Inc. which merged with the Company
in May 1994. From February 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 from 1993 to 1995, Mr. Stelzer was President and
General Counsel for MarDec, Inc., a golf accessory marketing
company. 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 Bachelor of
Science degree in Business Management 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 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 by Esselte Pendaflex Corporation, a company
engaged in the business of manufacturing and distributing office
supply products. He served as group product manager for the
customer products division. From July 1986 to February 1988, Mr.
Millar was employed by TechnaVision Inc. a company engaged in the
manufacture of diagnostic and other equipment. From February
1980 to July 1986, he was employed by Pogue McJunkin &
Associates, a professional industrial design firm. Mr. Millar
received a Bachelors of Science 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 since December 12,
1997 and as a director of the Company since November 1995. Since
November 1995 to December 12, 1997, he served as Treasurer and
Chief Financial Officer of the Company. 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. He has
also served as a director of International Heritage, Inc., a
multi-level marketing company, since March, 1997. 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 employed as
the Secretary and Treasurer of Belize Agro Industrial
Development, Ltd. which established a Free Trade Zone in Belize
engaged in 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. Mr. Hemmer received a Bachelors of
Arts degree in Economics from Queens College in 1951 and a Master
of Science 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.
Randall A. Mackey has been Secretary and a director of the
Company since November 1995. Since 1989, Mr. Mackey has been a
shareholder of the Salt Lake City law firm of Mackey Price &
Williams and its predecessor firms. From 1979 to 1989, he
practiced law with the Salt Lake City law firm of Fabian &
Clendenin, where he was a shareholder and a director of the firm
from 1982 to 1989. From 1977 to 1979, Mr. Mackey was associated
with the Washington D.C. law firm of Hogan and Hartson. Mr.
Mackey received a Bachelor of Science degree in Economics from
the University of Utah in 1968, a Master of Business
Administration degree from Harvard University in 1970, a Juris
Doctor degree from Columbia University in 1975 and a Bachelor of
Civil Law degree from Oxford University in 1977. Since January
1998, Mr. Mackey has served as a director of Cimetrix
Incorporated, a software development company.
William C. Fitzhugh, M.D. has been a director of the
Company since November 1995. Dr. Fitzhugh has operated a private
ophthalmology practice in Twin Falls, Idaho since 1980 and is the
past president of the Idaho Society of Ophthalmology. Dr.
Fitzhugh received a Bachelor of Science degree in pre-medicine
from the University of Idaho in 1971 and a Medical Degree from
the University of Oregon Medical School in 1976.
David M. Silver, Ph.D. has been a director of the Company
since November 1995. Dr. Silver currently is a member of the
principal staff of The Johns Hopkins University Applied Physics
Laboratory and Dunning Professor in the Department of
Ophthalmology School of Medicine at The Johns Hopkins University,
1998-99. He received a B.S. degree in Chemistry from the
Illinois Institute of Technology in 1962, an M.A. degree from The
Johns Hopkins University in 1964 and a Ph.D. degree from Iowa
State University in 1968. After a postdoctoral fellowship at
Harvard University and a visiting scientist position at the
University of Paris, Dr. Silver returned to The Johns Hopkins
University in 1970. Currently, he is Senior Scientist in the
Milton S. Eisenhower Research Center at The Johns Hopkins
University Applied Physics Laboratory.
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. 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.
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:
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.
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,
William C. Fitzhugh 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 Randall A. Mackey, David
M. Silver and William C. Fitzhugh. 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 $100,000 for the
fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
---------------------------------------------
Other
Annual
Name and Compensa-
Principal Position Period Salary($) Bonus($) tion($)<F6>
- ------------------ ------ --------- -------- -------------
<S> <C> <C> <C> <C>
Thomas F. Motter, 1997<F1> $129,584 0 $5,250
Chairman of the 1996<F2> 33,750 0 0
Board, President 1996<F3> 111,042 $1,000 3,600
and Chief Executive 1995<F4> 72,000 300 0
Officer
Michael W. Stelzer, 1997<F1> 50,625 0 1,500
Vice President of
Operations and
Chief Operating
Officer
Robert W. Millar, 1997<F1> 114,675 0 5,250
Vice President of 1996<F2> 31,250 0 0
Engineering and 1996<F3> 99,792 1,000 3,600
Manufacturing 1995<F4> 60,265 300 0
John W. Hemmer, 1997<F1> 112,670 0 5,250
Treasurer, Chief 1996<F2> 30,000 0 0
Financial Officer 1996<F3> 80,000 0 3,600<F7>
and Director 1995<F4> 20,000 0 0
(table continued)
</TABLE>
(continued)
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------------------------------
Awards Payouts
--------------------- -----------------------
Securities Long-
Restricted Under- term
Stock lying Incentive All Other
Name and Awards Options/ Payout Compensa-
Principal Position ($) SARs(#) ($) tion($)<F5>
- ------------------ ------ --------- -------- -------------
<S> <C> <C> <C> <C>
Thomas F. Motter, 0 0 0 0
Chairman of the 0 0 0 0
Board, President 0 0 0 $6,000
and Chief Executive 0 106,000<F6> 0 0
Officer
Michael W. Stelzer, 0 20,000<F6> 0 0
Vice President of
Operations and
Chief Operating
Officer
Robert W. Millar, 0 0 0 0
Vice President of 0 0 0 0
Engineering and 0 0 0 6,000
Manufacturing 0 84,000<F6> 0 0
John W. Hemmer, 0 0 0 0
Treasurer, Chief 0 0 0 0
Financial Officer 0 20,000<F6> 0 4,000
and Director 0 0 0 0
________________
<F1> For the fiscal year ended December 31, 1997.
<F2> For the three month period ended December 31, 1996.
<F3> For the fiscal year ended September 30, 1996.
<F4> For the fiscal year ended September 30, 1995.
<F5> The amounts indicated under "Other Annual Compensation" for
1996 and 1997 consist of payments related to the operation
of automobiles by the named executive.
<F6> 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 $5.00 per share. These options expire June 8, 2002.
<F7> On November 30, 1995, the Company issued Mr. Hemmer 50,513
shares of the Company's Common Stock as part of his compensation
for past and future services.
The following table sets forth information concerning the
exercise of options to acquire shares of the Company's Common
Stock by the Named Executive Officers during the fiscal year
ended December 31, 1997, as well as the aggregate number and
value of unexercised options held by the Named Executive Officers
on December 31, 1997.
</TABLE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/SAR Values
Shares Acquired Value
Name on Exercise (#) Realized($)
---- --------------- -----------
<S> <C> <C>
Thomas F. Motter -0- -0-
Robert W. Millar -0- -0-
John W. Hemmer -0- -0-
Michael W. Stelzer -0- -0-
</TABLE>
(table continued)
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Options/SARs at SARs at December 31,
December 31, 1997(#) 1997($)
---------------------- ---------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas F.
Motter 106,000 -0- -0- -0-
Robert W.
Millar 84,000 -0- -0- -0-
John W.
Hemmer 20,000 -0- -0- -0-
Michael W.
Stelzer 20,000 -0- -0- -0-
</TABLE>
Director Compensation
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 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.
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(trademark) and Precisionist Thirty
Thousand(trademark) Workstation(trademark) 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(trademark) and
Precisionist Thirty Thousand(trademark). 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(trademark)
Laser Phaco(trademark) 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 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(trademark) LaserPhaco(trademark) 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(trademark) LaserPhaco(trademark) 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, Secretary and a director of the Company since
September 1995, 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.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with
respect to beneficial ownership of the Company's Common Stock as
of May 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<F1> Number of Percent of
Shares Ownership<F2>
- -------------------- --------- -------------
<S> <C> <C>
Thomas F. Motter<F3><F6> 557,056 14.7%
Douglas MacLeod 418,451 11.0%
Robert W. Millar<F4><F6> 374,605 9.9%
William C. Fitzhugh<F5> 69,692 1.8%
Michael W. Stelzer<F5><F6> 62,935 1.7%
John W. Hemmer<F5><F6> 50,513 1.3%
Randall A. Mackey<F5> 40,512 1.1%
David M. Silver<F5> 7,621 0.2%
Patrick M. Kolenik<F7> -- *
Executive officers and
directors as a group
(8 persons) 1,162,934 30.5%
_______________
* Less than 1%.
<FN>
<F1> 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. Fitzhugh is 589
Sharp Avenue West, Twin Falls, Idaho 83301. The address
for Mr. Hemmer is 88 Meadow Road, Briarcliff Manor, New
York 10510. The address for Mr. Mackey is 170 South Main
Street, Suite 900, Salt Lake City, Utah 84101. The address
for Mr. Silver is 17 Avalon Court, Bethesda, Maryland
20816. The address for Mr. Kolenik is 35 Elizabeth Drive,
Laurel Hollow, New York 11791.
<F2> 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.
<F3> Does not include 106,000 options granted to Mr. Motter
under the Company's 1995 Option Plan.
<F4> 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.
<F5> Does not include 20,000 options granted to each of the five
directors under the Company's 1995 Option Plan.
<F6> Does not include 250 shares of Series C Convertible
Preferred Stock held by each of the four management
directors.
<F7> Does not include 2,000 shares of Series C Convertible
Preferred Stock held by Patrick M. Kolenik.
</FN>
</TABLE>
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 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 March 31, 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 March 31, 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 March 31, 1997, 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 March 31, 1998, 459,764 shares of Series B
Preferred Stock have been converted into 551,717 shares of Common
Stock.
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 March 31, 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 March 31, 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 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 May 31, 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 May 31,
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 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
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 May
31, 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 May 31, 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.
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 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 Rule 10b-6
promulgated under the Exchange Act.
In connection with the solicitation of the Class A Warrant
or the Note Holders' Warrant exercises, unless granted an
exemption by the Securities and Exchange Commission from its Rule
10b-6, 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.
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 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 Coopers & Lybrand L.L.P.,
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.
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.
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.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants . . . . . . . . . . . . F-1
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . .F-2
Statements of Operations . . . . . . . . . . . . . . . . . .F-3
Statements of Changes in Stockholders' Equity. . . . F-5 to F-7
Statements of Cash Flows . . . . . . . . . . . . . . F-8 to F-9
Notes to Financial Statements. . . . . . . . . . . F-10 to F-24
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Paradigm Medical Industries, Inc.:
We have audited the accompanying balance sheets of Paradigm
Medical Industries, Inc. (the Company) as of December 31, 1997
and 1996, and the related statements of operations, changes in
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.
COOPERS & LYBRAND L.L.P.
Salt Lake City, Utah
April 10, 1998
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS
as of December 31, 1997 and 1996
ASSETS 1997 1996
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 886,558 $ 2,468,988
Marketable debt
securities, available-
for-sale - 509,411
Trade accounts
receivable 120,853 18,228
Inventories 833,930 241,746
Prepaid expenses 15,787 24,093
--------- ---------
Total current assets 1,857,128 3,262,466
Debt offering costs 164,776 -
Capitalized engineering
and design charges 309,396 -
Property and equipment, net 121,274 129,494
--------- ---------
Total assets $ 2,452,574 $ 3,391,960
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 243,206 $ 35,767
Accounts payable -
related party 458,467 200,000
Accrued liabilities 349,930 277,473
Notes payable - current 3,620 3,278
------------ -----------
Total current liabilities 1,055,223 516,518
Notes payable, less
current portion 1,081,996 15,605
----------- ----------
Total liabilities 2,137,219 532,123
---------- ----------
Commitments (Notes 5, 11 and 12)
Stockholders' equity:
Preferred stock, Authorized:
5,000,000 $.001 par value
shares
Series A, Authorized:
500,000 shares; issued
and outstanding: 50,122
$.001 par value shares at
December 31, 1997 (aggregate
liquidation preference of
$50,122 at December 31,
1997) and 121,704 $.001
par value shares at
December 31, 1996. 50 122
Series B, Authorized:
500,000 shares; issued
and outstanding: 45,383
$.001 par value shares
at December 31, 1997
(aggregate liquidation
preference of $181,532
at December 31, 1997) and
448,398 $.001 par value
shares at December 31, 1996. 45 448
Additional paid-in capital,
preferred stock 318,355 1,900,637
Common stock, Authorized:
20,000,000 $.001 par value
shares; issued and
outstanding: 3,798,931
shares at December 31, 1997
and 3,194,061 shares at
December 31, 1996. 3,799 3,194
Additional paid-in capital,
common stock 8,280,142 6,261,097
Treasury stock, 2,600
shares, at cost (3,777) (3,777)
Unearned compensation (260,253) (63,141)
Accumulated deficit (8,023,006) (5,248,412)
Unrealized gain on
marketable debt securities,
available-for-sale - 9,669
--------- ---------
Total stockholders' equity 315,355 2,859,837
--------- ---------
Total liabilities and
stockholders' equity $ 2,452,574 $ 3,391,960
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the financial statements
2
<PAGE>
STATEMENTS OF OPERATIONS
for the year ended December 31, 1997,
the three month periods ended December 31, 1996 and 1995
and the year ended September 30, 1996
<TABLE>
<CAPTION>
Three month Three month
Year ended period ended Year ended period ended
December 31, December 31, September December 31,
1997 1996 30, 1996 1995
----------- ----------- --------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Sales $ 464,062 $ 35,651 $ 252,134 $ 65,405
Cost of sales 271,716 21,061 180,010 45,286
Amortization of
capitalized
engineering
and design
charges 61,440 - - -
-------- -------- -------- --------
Net cost of sales 333,156 21,061 180,010 45,286
-------- -------- -------- --------
Gross profit 130,906 14,590 72,124 20,119
-------- -------- -------- --------
Operating
expenses:
Marketing and
selling 590,941 168,880 216,128 92,748
General and
administrative 1,802,238 594,520 823,191 169,479
Research and
development 540,148 480,584 288,854 50,664
--------- -------- --------- ----------
Total
operating
expenses 2,933,327 1,243,984 1,328,173 312,891
---------- --------- --------- --------
Operating loss (2,802,421) (1,229,394) (1,256,049) (292,772)
---------- --------- --------- --------
Other income
(expense):
Cost associated
with relin-
quishment of
anti-dilution
rights - - (179,000) (179,000)
Interest income 57,303 31,474 42,859 2,720
Interest expense (29,476) (483) (56,829) (2,204)
-------- ------ -------- -------
27,827 30,991 (192,970) (178,484)
------- ------ -------- --------
Net loss (2,774,594) (1,198,403) (1,449,019) (471,256)
Return of
stock dividend
on 12% Series B
Preferred Stock - - 848 -
---------- --------- --------- ----------
Net loss
attributable to
common share-
holders $(2,774,594) $(1,198,403) $(1,448,171) $ (471,256)
=========== =========== =========== ==========
Basic and
diluted loss
per common
share (Note
1) $(.76) $(.38) $(.66) $(.20)
========== =========== ========== =========
Weighted
average
shares
outstanding 3,663,115 3,182,830 2,192,881 2,352,031
========== =========== ========== =========
</TABLE>
The accompanying notes are an integral part of the
financial statements
3
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the year ended December 31, 1997,
the three month period ended December 31, 1996
and the year ended September 30, 1996
<TABLE>
<CAPTION>
Preferred Stock
------------------------------------------------------------
Series A
Committed
Series A Series B to be issued
---------- --------- ------------
No. of No. of
Shares Amount Shares Amount Shares
----- ------ ------- ------ --------
<S> <C> <C> <C> <C> <C>
Balance
at
September
30, 1995 116,000 $403,680 493,000 $1,653,120 6,764
Issuance
of 6%
Series A
Preferred
Stock
dividend 6,764 27,056 (6,764)
Issuance
of 12%
Series B
Preferred
Stock
dividend 6,017 24,068
Conversion
of no par
value
preferred
shares to
$.001 par
value
preferred
shares
upon
reincorp-
oration
in
Delaware (430,613) (1,676,689)
Redemption
of
recision
offer of
Series B
Preferred
Stock (32,962) (33)
------- ------- ------- ------- -------
Balance
at
September
30, 1996 122,764 123 466,055 466
Con-
version
of
preferred
stock to
common
stock (1,060) (1) (17,657) (18)
------- ------- ------- ------- -------
Balance
at
December
31, 1996 121,704 122 448,398 448
Conversion
of
preferred
stock to
common
stock (71,582) (72) (403,015) 403
------- ------- ------- ------- -------
Balance
at
December
31, 1997 50,122 $ 50 45,383 $ 45 $ -
======= ======= ======= ======= =======
</TABLE>
-Continued-
The accompanying notes are an integral
part of the financial statements
4
<PAGE>
<TABLE>
<CAPTION>
Preferred Stock
------------------------------------------------------------
Series A Series B
Committed Committed Additional
to be issued to be issued Paid in
------------- ------------- Capital,
No of Preferred
Amount Shares Amount Stock
------ ------- ------ --------
<S> <C> <C> <C> <C>
Balance
at
September
30, 1995 $27,056 6,017 $24,068
Issuance
of 6%
Series A
Preferred
Stock
dividend (27,056)
Issuance
of 12%
Series B
Preferred
Stock
dividend (6,017) (24,068)
Conversion
of no par
value
preferred
shares to
$.001 par
value
preferred
shares
upon
reincorp-
oration
in
Delaware $2,107,302
Redemption
of
recision
offer of
Series B
Preferred
Stock (131,815)
------- ------- ------- -------
Balance
at
September
30, 1996 1,975,487
Con-
version
of
preferred
stock to
common
stock (74,850)
------- ------- ------- -------
Balance
at
December
31, 1996 1,900,637
Conversion
of
preferred
stock to
common
stock (1,582,282)
------- ------- ------- ----------
Balance
at
December
31, 1997 $ - $ - $ - $318,355
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part
of the financial statements
4
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, Continued
for the year ended December 31, 1997,
the three month period ended December 31, 1996
and the year ended September 30, 1996
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------ Additional ------------
No. of Paid in Capital No. of
Shares Amount Common Stock Shares
---------- ---------- ------------- -------
<S> <C> <C> <C> <C>
Balance at
September
30, 1995 1,985,573 $980,378 2,600
Issuance
of common
stock
previously
accrued
as a
liability
for
services
rendered
in
connection
with Series
B Preferred
Stock
offering 25,000 10,251
Issuance
of common
stock for
relinquish-
ment of
anti
- -dilution
rights 20,000 30,000
Transfer of
common
stock
from
Company
officers
for relin-
quishment
of anti-
dilution
rights $ 149,000
Issuance
of common
stock for
future
services 101,025 151,538
Amortization
of unearned
compensation
</TABLE>
-Continued-
The accompanying notes are an integral
part of the financial statements
5
<PAGE>
<TABLE>
<CAPTION>
Unearned
Gain(Loss) on
Treasury Stock Marketable Debt
------------ Securities
Unearned Accumulated Available
Amount Compensation Deficit for sale
---------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Balance at
September
30, 1995 $ (3,777) $(2,600,990)
Issuance
of common
stock
previously
accrued
as a
liability
for
services
rendered
in
connection
with Series
B Preferred
Stock
offering
Issuance
of common
stock for
relinquish-
ment of
anti
- -dilution
rights
Transfer of
common
stock
from
Company
officers
for relin-
quishment
of anti-
dilution
rights
Issuance
of common
stock for
future
services $(151,538)
Amortization
of unearned
compensation 69,455
</TABLE>
The accompanying notes are an integral
part of the financial statements
5
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, Continued
for the year ended December 31, 1997,
the three month period ended December 31, 1996
and the year ended September 30, 1996
--------
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
------------ ----------------
No. of Paid-in-capital, No. of
Shares Amount Common Stock Shares
-------- ------ ------------ ------
<S> <C> <C> <C> <C>
Issuance
of warrants
in
connection
with
private
placement
of notes
(net of
offering
costs of
$2,175) $ 27,825
Conversion
of no par
value common
shares to
$.001 par
value common
shares upon
reincorp-
oration in
Delaware $(1,170,035) 1,170,035
Issuance of
common
stock for
initial
public
offering
(net of
offering
costs of
$1,509,569) 1,000,000 1,000 4,739,431
Issuance
of
common
stock 40,000 40 99,960
Un-
realized
loss on
market-
able debt
securities,
available-
for-sale
Net loss
for the
year ended
September
30, 1996
------- ------- ------- -------
Balance
at September
30, 1996 3,171,598 3,172 6,186,251 2,600
--------- ------- --------- --------
</TABLE>
-Continued-
The accompanying notes are an integral part
of the financial statements
<PAGE>
<TABLE>
<CAPTION>
Unrealized
Gain(Loss)
Treasury Stock on Marketable
-------------- Debt Securities
Unearned Accumulated Available
Amount Compensation Deficit -for-sale
-------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Issuance
of warrants
in
connection
with
private
placement
of notes
(net of
offering
costs of
$2,175)
Conversion
of no par
value common
shares to
$.001 par
value common
shares upon
reincorp-
oration in
Delaware
Issuance of
common
stock for
initial
public
offering
(net of
offering
costs of
$1,509,569)
Issuance
of
common
stock
Un-
realized
loss on
market-
able debt
securities,
available-
for-sale $(13,703)
Net loss
for the
year ended
September
30, 1996 $(1,499,019)
------- ------- ----------- ---------
Balance
at September
30, 1996 (3,777) (82,083) (4,050,009) (13,703)
======== ========= ============ =========
</TABLE>
The accompanying notes are an integral part
of the financial statements
6
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, Continued
for the year ended December 31, 1997,
the three month period ended December 31, 1996
and the year ended September 30, 1996
<TABLE>
<CAPTION>
Treasury
Common Stock Stock
------------ Additional -------
No. of Paid-in-capital, No. of
Shares Amount Common Stock Shares
------- ------- ------------ -------
<C> <C> <C> <C> <C>
Conversion
of
preferred
stock to
common stock 22,463 $ 22 $ 74,846
Amortization
of unearned
comp-
ensation
Net change
in un-
realized
gain (loss)
on market-
able debt
securities,
available
- -for-sale
Net loss
for the
three month
period
ended
December
31, 1996 ------- ------- ------- -------
Balance at
December
31, 1996 3,194,061 3,194 6,261,097 2,600
Conversion
of
preferred
stock to
common
stock 569,518 570 1,582,187
Issuance
of common
stock for
comp-
ensation 22,852 22 78,179
Warrants
exercised
for common
stock
(exercised
for 3.33
per share) 12,500 13 41,619
Issuance of
warrants
for future
consulting
services 317,060
Amortization
of unearned
compensation
Net change
in unreal-
ized gain
(loss) on
marketable
debt
securities,
available
- -for-sale
Net loss
for the
year ended
December
31, 1997
------- ------- ------- -------
Balance
at December
31, 1997 3,798,931 $3,799 $8,280,142 2,600
========= ======== ========== ========
</TABLE>
-Continued-
The accompanying notes are an integral part
of the financial statements
7
<PAGE>
<TABLE>
<CAPTION>
Unrealized
Gain(Loss) on
Marketable
Treasury Debt
Stock Securities
------- Unearned Accumulated Available
Amount Compensation Deficit for-sale
------- ------------ ------------ -------
<S> <C> <C> <C> <C>
Conversion
of
preferred
stock to
common stock
Amortization
of unearned
comp-
ensation $ 18,942
Net change
in un-
realized
gain (loss)
on market-
able debt
securities,
available
- -for-sale $23,372
Net loss
for the
three month
period
ended
December
31, 1996 $1,198,403)
------- ------- ----------- ----------
Balance at
December
31, 1996 $(3,777) (63,141) (5,248,412) 9,669
Conversion
of
preferred
stock to
common
stock
Issuance
of common
stock for
comp-
ensation
Warrants
exercised
for common
stock
(exercised
for 3.33
per share)
Issuance of
warrants
for future
consulting
services (317,060)
Amortization
of unearned
compensation 119,948
Net change
in unreal-
ized gain
(loss) on
marketable
debt
securities,
available
- -for-sale (9,669)
Net loss
for the
year ended
December
31, 1997 (2,774,594)
------- ------- ------------ -----
Balance
at December
31, 1997 (3,777) $(260,253) $(8,023,006 $ -
========= ======== ========== ========
</TABLE>
The accompanying notes are an integral part
of the financial statements
7
<PAGE>
STATEMENTS OF CASH FLOWS
for the year ended December 31, 1997,
the three month periods ended December 31, 1996 and 1995
and the year ended September 30, 1996
<TABLE>
<CAPTION>
Three month Three month
Year ended period ended Year ended period ended
December 31, December 31, September December 31,
1997 1996 30, 1996 1995
----------- ----------- --------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows
from
operating
activities:
Net loss $(2,774,594) $(1,198,403) $(1,449,019) $(471,256)
Adjustments
to reconcile
net loss to
net cash
used in
operating
activities:
Depreciation 28,237 6,205 17,771 3,642
Amortization
of capi-
talized
engineering
and design
charges 61,440 - - -
Issuance of
common stock
for compensa-
tion, ser-
vices and
relinquish-
ment of anti-
dilution
rights 78,201 - 179,000 179,000
Amortization
of unearned
compensation 119,948 18,942 69,455 9,471
Amortization
of debt
offering
costs - - 41,325 -
Issuance of
bridge note
and warrants
for services - - 25,000 -
Increase
(decrease)
from changes
in:
Trade accounts
receivable (102,625) 37,226 49,445 52,656
Inventories (592,184) 127,299 31,855 12,372
Prepaid
expenses (1,694) 9(trademark)68 (96,718)
11,396
Accounts
payable 207,439 (2,889) (255,791) (4,788)
Accounts
payable -
related
party 258,467 200,000 - -
Accrued
liabilities 72,457 159,114 72,278 108
-------- -------- -------- --------
Net cash
used in
operating
activities (2,644,908) (558,238) (1,315,399) (207,399)
---------- ------- --------- --------
Cash flows
from investing
activities:
Purchase of
property and
equipment (20,017) (12,155) (91,179) (10,600)
Capitalized
engineering
and design
charges (360,836) - - -
Proceeds from
the sale of
marketable
debt
securities,
available-for
-sale 499,742 - - -
Purchase of
marketable
debt
securities,
available-for-
sale - - (499,742) -
--------- ---------- -------- -------
Net cash
provided by
(used in)
investing
activities 118,889 (12,155) (590,921) (10,600)
--------- --------- -------- -------
</TABLE>
The accompanying notes are an integral part of the
financial statements
8
<PAGE>
STATEMENTS OF CASH FLOWS, Continued
for the year ended December 31, 1997,
the three month periods ended December 31, 1996 and 1995
and the year ended September 30, 1996
<TABLE>
<CAPTION>
Three month Three month
Year ended period ended Year ended period ended
December 31, December 31, September December 31,
1997 1996 30, 1996 1995
----------- ----------- --------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows
from
financing
activities:
Proceeds from
lines of
credit $ 980,000 $ - $ - $ -
Repayment of
lines of
credit (980,000) - - -
Proceeds from
issuance of
promissory
notes and
warrants - - 575,000 75,000
Proceeds
from
exercise of
warrants 41,632 - - -
Debt offering
costs (164,776) - (41,325) -
Proceeds from
issuance of
notes payable 1,070,000 - - -
Principal
payments on
notes payable (3,267) (771) (631,829) (2,765)
Proceeds from
issuance of
common stock - - 6,350,000 -
Issuance costs
- common stock - - (1,509,569) -
Payments for
recision offer
of Series B
preferred stock - - (131,848) -
Issuance costs
- warrants - - (2,175) -
--------- --------- ---------- -------
Net cash
provided by
(used in)
financing
activities 943,589 (771) 4,608,254 72,235
--------- -------- --------- -------
Net increase
(decrease)
in cash and
cash
equivalents (1,582,430) (571,164) 2,701,934 (145,764)
Cash and
cash
equivalents
at beginning
of period 2,468,988 3,040,152 338,218 338,218
----------- --------- --------- --------
Cash and cash
equivalents
at end of
period $ 886,558 $ 2,468,988 $ 3,040,152 $ 192,454
============ =========== =========== =========
Supplemental
disclosure
of cash flow
information:
Cash paid for
interest $ 21,537 $ 483 $ 56,829 $ 2,107
Supplemental
disclosure
of noncash
investing
and
financing
activities:
Issuance of
warrants for
future
consulting
services $ 317,060
Issuance of
common stock
for services
rendered in
connection
with
preferred
stock
offering $ 10,251 $ 10,251
Common stock
issued for
future
services $ 151,538 $ 151,538
Equipment
purchased
with
accounts
payable $ 44,000
Issuance
costs for
bridge notes
and warrants
included in
accounts payable $ 43,500
</TABLE>
The accompanying notes are an integral
part of the financial statements
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies:
Organization and Nature of Operations
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.
The Company incurred a net loss of $2,774,594 and negative
cash flows from operating activities of $2,644,908 for the year
ended December 31, 1997. As of December 31, 1997, the Company
had an accumulated deficit of $8,023,006. In March 1998, the
Company completed the private placement of 29,980 shares of Class
C Preferred Stock at $100 per share (see Note 8), 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.
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.
Reclassifications
Certain accounts of the prior year have been reclassified
to conform with the current year's presentation. These
reclassifications had no effect on the net loss or total assets.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market
funds and highly liquid investments with original maturities of
three months or less. Essentially all of the cash and cash
equivalents balance, which is held by a single bank in Utah, is
not covered by FDIC insurance.
Inventories
Inventories are stated at the lower of cost or market, with
cost determined using the weighted average method. Inventories
consist primarily of finished goods.
Property and Equipment
Property and equipment are recorded at cost. Replacements
and major improvements are capitalized and maintenance and
repairs are charged to expense as incurred. The cost and related
accumulated
depreciation of assets sold or otherwise disposed of are
removed from the accounts and any resulting gain or loss is
charged to operations.
Depreciation of property and equipment is computed using
the straight-line method over the estimated useful lives of the
related assets, which range from five to seven years.
Debt Offering Costs
Debt offering costs 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 (see Note 11) are being amortized
using the straight line method over a five year period.
Income Taxes
The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting For Income Taxes. Deferred income taxes
are provided for differences between the financial statement and
tax bases of assets and liabilities using enacted future tax
rates.
Net 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.
As of December 31, 1997, December 31, 1996 and September
30, 1996, options to purchase 450,200, 378,940 and 337,660,
respectively, shares of common stock at $5.00 per share were
outstanding. As of December 31, 1997, December 31, 1996 and
September 30, 1996, warrants to purchase 1,635,565, 1,457,065 and
1,458,125, respectively, shares of common stock at $3.00 - $7.50
per share were outstanding. As of December 31, 1997, December
31, 1996 and September 30, 1996, preferred stock at a conversion
rate of one share of preferred stock for 1.2 shares of common
shares were outstanding. None of these common stock equivalents
were included in the computation of diluted loss per share
because the effect would have been antidilutive.
Use of Estimates
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 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.
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 arrangement, 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.
Concentrations of Risk
The market for ophthalmic lasers is subject to rapid
technological change, including advances in laser and other
technologies and the potential development of alternative
surgical techniques or new pharmaceutical products. Development
by others of new or improved products, processes or technologies
may make products developed by the Company obsolete or less
competitive.
The Company's high technology product line requires the
Company to deal with suppliers and subcontractors supplying
highly specialized parts, operating highly sophisticated and
narrow tolerance equipment and performing highly technical
calculations and tasks. Substantially all of the Company's
current products are manufactured and assembled by two companies
who are related parties (see Note 11). 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 may suffer from any product liability litigation
could have a material adverse effect on the Company.
A significant portion of the Company's product sales are in
foreign countries. The economic and political instability of
some foreign countries may affect the ability of medical
personnel to purchase the Company's products and the ability of
the customers to pay for the procedures for which the Company's
products are used. Such circumstances could cause a possible
loss of sales, which would affect operating results adversely.
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.
2. Investment in Marketable Debt Securities:
The Company's investment in marketable debt securities at
December 31, 1996 was classified as available-for-sale and was
carried at market value, with the unrealized loss reflected as a
separate component of stockholders' equity. The Company sold all
of the available-for-sale securities during 1997.
The cost and estimated market values of marketable debt
securities available-for-sale at December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Market
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Corporate bonds $499,742 $9,669 $ - $509,411
</TABLE>
The marketable debt securities available for sale were due
in one year or less.
3. Property and Equipment:
<TABLE>
<CAPTION>
Property and equipment consist of the following at December 31,:
1997 1996
---------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
4. Notes Payable:
<TABLE>
<CAPTION>
Notes payable consist of the following at December 31,:
1997 1996
---------- ----------
<S> <C> <C>
Note payable to 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
=========== =========
</TABLE>
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 December
2000. Interest is due and payable semi-annually. 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 totalling $995,000 were exchanged for
995 shares of Series C preferred stock (see Note 8).
The Company's remaining notes payable after the conversion
have scheduled maturities for years ending December 31, as
follows:
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.
5. 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. Interest is due monthly
with principal due 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. Interest is due monthly with principal
due 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.
6. Income Taxes:
At December 31, 1997, the Company had net operating loss
carryforwards for income tax purposes of approximately $7,073,000
and research and development tax credit carryforwards of
approximately $63,700. These carryforwards are available to
offset future taxable income, if any, and expire in the years
2005 through 2012.
The components of the net deferred tax asset as of December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating
loss carryforwards $ 2,638,000 $ 1,574,000
Research and development
tax credit carryforwards 64,000 53,000
Other 73,000 112,000
Valuation allowance (2,775,000) (1,739,000)
----------- ----------
Net deferred tax asset $ - $ -
============= =============
</TABLE>
The Company recognized no income tax benefit from the
losses generated in the year ended December 31, 1997, the three
month period ended December 31, 1996 or the year ended September
30, 1996.
The valuation allowance increased by approximately
$1,036,000 during the year ended December 31, 1997, $444,100
during the three month period ended December 31, 1996 and
$577,100 during the year ended September 30, 1996, primarily as
a result of the increases in deferred tax assets related to net
operating losses and research and development tax credits. SFAS
No. 109 requires that a valuation allowance be provided if it is
more likely than not that some portion or all of a deferred tax
asset will not be realized. The Company's ability to realize
the benefit of its deferred tax asset will depend on the
generation of future taxable income. Because the Company has yet
to recognize significant revenue from the sale of its laser-based
Photon or other products, the Company believes that a full
valuation allowance should be provided.
7. 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 with a par
value of $.001, which 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 shares will be forfeited in the
event either individual resigns or is removed for cause as an
officer and director of the Company within two years from the
date of grant. The value assigned by the Company's investment
banker of $1.50 per share 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.
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 offering
(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 9). 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).
8. Preferred Stock:
On September 1, 1993 the Company established a series of
non-voting preferred shares designated as the 6% Series A
Preferred Stock, consisting of 500,000 shares with $.001 par
value, of which 121,704 shares were issued and outstanding as of
December 31, 1996 and 50,122 issued and outstanding as of
December 31, 1997. This series is part of the Company's
5,000,000 authorized shares of non-voting preferred stock. The
Series A Preferred Stock has the following rights and privileges:
1. The holders of the shares are entitled to dividends
at the rate of twenty-four cents ($.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 shares of the Series A Preferred Stock at a
price of $4.50 per share, plus accrued and unpaid dividends
related to the fiscal year in which such redemption occurs.
On April 21, 1995, the Company declared a 6% preferred
stock dividend in the amount of $27,056 to all shareholders of
record as of December 31, 1994, which was paid through the
issuance of 6,764 shares of Series A Preferred Stock on January
8, 1996.
On May 9, 1994, the Company established a series of
non-voting preferred shares designated as 12% Series B Preferred
Stock, consisting of 500,000 shares with $.001 par value, of
which 448,398 shares were issued and outstanding as of December
31, 1996 and 45,383 shares were issued and outstanding as of
December 31, 1997. This series is also part of the Company's
5,000,000 authorized shares of non-voting preferred stock. The
Series B Preferred Stock have the following rights and
privileges:
1. The holders of the shares are entitled to dividends
at the rate of forty-eight cents ($.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 shares of the Series B Preferred Stock at a
price of $4.50 per share, plus accrued and unpaid dividends
related to the fiscal year in which such redemption occurs.
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.
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 the Series B Preferred Stock. The rescission
offer, however, may not fully relieve the Company from exposure
to contingent liability under federal or state securities laws.
Two shareholders owning a combined total of 32,750 shares
accepted the Recision Offer. These shareholders were paid $4.00
per share plus interest from the date the Rescission shares were
purchased to July 25, 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 Preferred Stock
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
combinations or recapitalizations 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 28,985 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, 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 995 shares of Series
C Preferred Stock, at $100 per share, totaling $995,000. The
exchange offer has now expired.
9. 1995 Stock Option Plan:
In November, 1995, the Company's Board of Directors and
shareholders approved the Company's 1995 Stock Option Plan (the
Option Plan) which reserved 300,000 shares of the Company's
authorized but unissued common stock for the granting of stock
options. In February 1996, 300,000 options to purchase shares of
the Company's common stock at $5.00 per share were granted. In
June 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.
The Option Plan provides for the grant of incentive stock
options within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended, and non-qualified stock options to
employees and non-employee directors of the Company. Incentive
stock options may be granted only to employees. The Option Plan
is administered by the Board of Directors or a Compensation
Committee, which determines the terms of options granted
including the exercise price, the number of shares subject to the
option, and the exercisability of the option.
The Company has adopted the provisions of SFAS No. 123.
Under these provisions, the Company is allowed to continue to
apply Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its Option plan. Accordingly,
no compensation expense has been recognized as options are
granted at the stock's then market price. Had compensation
expense for the Company's stock-based compensation plans been
determined based on the value at the grant dates for awards under
the option plans as recommended by SFAS No. 123, the Company's
net loss and loss per share would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Three month
Year ended period ended Year ended
December 31, December 31, September
1997 1996 1996
----------- ----------- ----------
<S> <C> <C> <C> <C>
Net loss As reported $(2,774,594) $(1,198,403) $(1,448,171)
Pro forma $(2,927,732) $(1,266,458) $(2,098,771)
Basic and
diluted
loss per
share As reported $(0.76) $(0.38) $(0.66)
Pro forma $(0.80) $(0.40) $(0.96)
</TABLE>
The pro forma compensation expense may not be
representative of such expense in future years.
The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions for all periods:
expected volatility of 101.8 percent, risk-free interest rate of
5.52 percent, expected life of 5 years, and a dividend yield of
zero.
Changes in all outstanding options are as follows:
<TABLE>
<CAPTION>
Three month
Year ended period ended
December 31, December 31, September 30,
1997 1996 1996
----------------- ---------------- -------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- ------------- ------- ------ -------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
period 378,940 $5.00 337,660 $5.00 - -
Granted 135,000 5.00 41,280 5.00 340,160 $5.00
Exercised - - - - - -
Forfeited (63,740) 5.00 - - (2,500) 5.00
------- ------- -------
Outstanding
at end of
period 450,200 378,940 337,660
======= ======= =======
Options
exercisable
at year-end 323,908 259,174 259,174
Weighted-
average fair
value of
options
granted
during the
year $3.41 $2.35 $2.42
</TABLE>
At December 31, 1997, the weighted-average remaining
contractual life of the 450,200 options outstanding is 3.6 years.
10. Warrants:
The Company, in conjunction with the $600,000 private
placement (see Note 7), 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.
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.
In conjunction with the Offering, 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.
The Company issued to the Underwriter's of the Offering
warrants to purchase 100,000 shares of the Company's common stock
at a price of $7.50 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.
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.
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.
In connection with an investment banking agreement (see
Note 11), 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 $317,000 has
been recorded as unearned compensation in the stockholders'
equity section and is being recognized as expense over the two
year period of the related agreement. 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.
11. 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.
$690,604 of this amount was charged to expense as research and
development; the balance was recorded as capitalized engineering
and design charges.
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 delivery 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 the 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 or 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 purchased $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.
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.
12. Leases:
In December 1997, the Company entered into a new 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.
In addition, the Company leases a condominium for approximately
$2,150 per month through 1998. 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 $53,204,
$11,066 and $28,954, respectively.
Future minimum lease payments are:
1998 $ 57,972
1999 40,982
2000 42,211
---------
$141,165
13. Export Sales:
Total sales include the following export sales by major
geographic area:
<TABLE>
<CAPTION>
Three month
Year ended period ended Year ended
December 31, December 31, September
1997 1996 1996
------------ ------------- ---------------
Geographic Area
- ---------------
<S> <C> <C> <C>
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
======== ======== =========
</TABLE>
14. 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.
15. 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.
16. 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 of up to 3% of a participant's
compensation. During the year ended December 31, 1997, the
Company contributed $36,136 to the Plan.
<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 as having
been authorized by the Company or the Underwriter. This
Prospectus does not constitute an offer to sell or a 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.
_____________________
TABLE OF CONTENTS
Page
Prospectus Summary. . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . .
Use of Proceeds . . . . . . . . . . . . . . . . . . . . .
Price of Common Stock and Class A
Warrants and Dividend Policy. . . . . . . . . . . . . .
Capitalization. . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . .
Management's Discussion and Analysis . . . . . . . . . .
Business . . . . . . . . . . . . . . . . . . . . . . . .
Management. . . . . . . . . . . . . . . . . . . . . . . .
Certain Transactions. . . . . . . . . . . . . . . . . . .
Principal Shareholders. . . . . . . . . . . . . . . . . .
Description of Securities . . . . . . . . . . . . . . . .
Shares Eligible for Future Sale . . . . . . . . . . . . .
Plan of Distribution. . . . . . . . . . . . . . . . . . .
Legal Matters . . . . . . . . . . . . . . . . . . . . . .
Experts . . . . . . . . . . . . . . . . . . . . . . . . .
Definitions . . . . . . . . . . . . . . . . . . . . . . .
Until ____________, 1998 (90 days after the date of this
Prospectus), all dealers effecting transactions in the securities
offered hereby, whether or not participating in the distribution,
may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
3,554,143 Shares of Common Stock Issuable
Upon Exercise of Warrants and
Conversion of Series C Preferred Stock
and Note
PARADIGM MEDICAL INDUSTRIES, INC.
_________________
PROSPECTUS
_________________
June __, 1998
<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:
(1) a written affirmation of his or her good faith belief that
his or her conduct was in good faith, that he or she reasonably
believed that his or her conduct was in, or not opposed to, the
Company's best interests and, in the case of any criminal
proceeding, he or she had no reasonable cause to believe his or
her conduct was unlawful and (2) the individual furnishes to the
Company a written undertaking, executed personally or on his or
her behalf, to repay the advance if it is ultimately determined
that he or she did not meet the standard of conduct referenced in
part (1) of this sentence. In addition to the individual
furnishing the aforementioned written affirmation and
undertaking, in order for the Company to advance expenses, a
determination must also be made that the facts then- known to
those making the determination would not preclude
indemnification.
All determinations relative to indemnification must be made
as follows: (1) by the Board of Directors of the Company by a
majority vote of those present at a meeting at which a quorum is
present, and only those directors not parties to the proceeding
shall be counted in satisfying the quorum requirement; or (2) if
a quorum cannot be obtained as contemplated in part (1) of this
sentence, by a majority vote of a committee of the Board of
Directors designated by the Board of Directors of the Company,
which committee shall consist of two or more directors not
parties to the proceeding, except that directors who are parties
to the proceeding may participate in the designation of directors
for the committee; or (3) by special legal counsel selected by
the Board of Directors or its committee in the manner prescribed
in part (1) or part (2) of this sentence (however, if a quorum of
the Board of Directors cannot be obtained under part (1) of this
sentence and a committee cannot be designated under part (2) of
this sentence, then a special legal counsel shall be selected by
a majority vote of the full board of directors, in which
selection directors who are parties to the proceeding may
participate); or (4) by the shareholders, by a majority of the
votes entitled to be cast by holders of qualified shares present
in person or by proxy at a meeting.
The Company has also entered into Indemnification
Agreements with its executive officers and directors. These
Indemnification Agreements are substantially similar in effect to
the Bylaws and the provisions of 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 . . . . . . . . . $ 1,164
NASD fee . . . . . . . . . . . . 2,000
Printing and engraving expenses. . 7,500
Legal fees and disbursements . . . . 12,500
Accounting fees and disbursements. . 7,500
Blue Sky fees and expenses
(including legal fees). . . . . . . 10,000
Miscellaneous. . . . . . . . . . . 1,336
--------
Total expenses . . . . . . . . . . $ 42,000
========
Item 26. Recent Sales of Unregistered Securities
The following information is furnished with regard to all
issuances of unregistered shares of the Company's Common Stock
during the past three years. Each of the following transactions
was exempt from under the 1933 Act by virtue of the provisions of
Section 4(2) of the 1933 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.
I. Common Stock
A. On May 5, 1993, the Company issued a total of 1,670,376
shares of Common Stock to 15 shareholders of Paradigm Medical,
Inc. pursuant to the Company's merger with Paradigm Medical,
Inc., wherein the Company acquired all of the issued and
outstanding shares of Common Stock of Paradigm Medical, Inc. in
a stock for stock transaction.
B. On or about May 15, 1993, the Company issued a total of
1,500 shares of Common Stock to David Gwilliam for a $3,000
capital investment.
C. On July 7, 1993, the Company issued 4,000 shares of
Common Stock to William C. Fitzhugh in consideration for a
$20,000 capital investment.
D. On September 24, 1993, the Company issued a total of
51,530 shares of Common Stock to seven employees and consultants,
Frank Lambert, Linda Alder, Hugh Haws, Anthony Sansone, Richard
Vincent, Roy Moser and Michael Limberg, for services they
provided the Company, including, but not limited to, market
research, drafting a business plan, developing an international
distribution system, and developing complementary products and
markets for the existing product line.
E. On September 24, 1993, the Company issued a total of
48,386 shares of Common Stock to Douglas A. MacLeod, an existing
shareholder in consideration of a $100,000 capital investment and
for providing collateral for a loan obtained by the Company's
line of credit.
F. On January 24, 1994, the Company issued a total of
6,364 shares of Common Stock to Anthony Sansone and Michael
McDonald for employment services as part of their employee
compensation packages.
G. On January 24, 1994, the Company issued 450 shares of
Common Stock to Dennis Johnson for a cash investment in the
amount of $6,625.
H. On February 11, 1994, the Company issued 20,000 shares
of Common Stock to Pamela Erickson, an existing shareholder in
consideration for a $100,000 cash investment.
I. On February 17, 1994, the Company issued 280 shares of
Common Stock to Arthur Triager for a cash investment in the
amount of $1,400.
J. On September 23, 1994, the Company issued 12,830 shares
of Common Stock to Brite + Schott A.G. Ltd. for international
consulting services to set up manufacturing outside of the United
States for the Company.
K. On September 8, 1995, the Company issued 3,425 shares
of Common Stock to Zevex International in consideration of the
shareholder's relinquishment of anti-dilution rights.
L. On November 30, 1995, the Company issued 126,025 shares
of Common Stock to John W. Hemmer and Randall A. Mackey, who are
officers and directors of the Company, as part of their
compensation, and Ervin R. Witherspoon, for financial services he
provided the Company.
M. On December 19, 1995, the Company issued 20,000 shares
of its Common Stock to Douglas A. MacLeod, a shareholder in
consideration of the shareholder's relinquishment of certain
anti-dilution rights.
The issuances of shares of Common Stock reflected above
were made in reliance upon Section 4(2) of the 1933 Act as being
transactions by an issuer not involving a public offering. No
underwriter has been involved in, nor have any commissions been
paid in connection with, any of the above transactions.
II. Series A Preferred Stock
During the period from October 4, 1993 to April 20, 1994,
the Company sold a total of 116,000 shares of its Series A
Preferred Stock to the 22 investors identified below in this Part
II of Item 26, "Recent Sales of Unregistered Securities", through
a private placement under Regulation D promulgated under the
Securities Act at a price of $4.00 per share. The Company
received $464,000 in cash as a result of the private placement
transaction and paid $60,320 in commissions and expenses.
A. On or about October 4, 1993, the Company issued 6,000
shares of Series A Preferred Stock to Warren E. Hill in
consideration for a $24,000 cash investment.
B. On or about October 15, 1993, the Company issued a
total of 6,000 shares of Series A Preferred Stock to Robert H.
Bedrossian, Dennis T. Grendahl and Randolph M. Lindblad for a
total capital investment of $24,000.
C. On or about October 18, 1993, the Company issued a
total of 5,000 shares of Series A Preferred Stock to Kimberly W.
Mosier for a $20,000 capital investment.
D. On or about October 22, 1993, the Company issued a
total of 1,000 shares of Series A Preferred Stock to Conrad
Hamako M.D. Inc. Profit Sharing Plan for a $4,000 capital
investment.
E. On or about October 26, 1993, the Company issued a
total of 5,000 shares of Series A Preferred Stock to Thomas D.
and Beverly J. Motter for a $20,000 capital investment.
F. On or about November 18, 1993, the Company issued a
total of 25,000 shares of Series A Preferred Stock to Bruce L.
Erickson for a $100,000 capital investment.
G. On or about December 5, 1993, the Company issued 3,000
shares of Series A Preferred Stock to I.H. Jacobs for a capital
investment of $12,000.
H. On or about December 9, 1993, the Company issued 5,000
shares of Series A Preferred Stock to Charles L. Thompson, Jr.
for a $20,000 capital investment.
I. On or about December 12, 1993, the Company issued a
total of 25,000 shares of Series A Preferred Stock to Bank of
Newport as custodian for the benefit of Michael B. Limberg for a
$100,000 capital investment.
J. On or about December 13, 1993, the Company issued a
total of 2,000 shares of Series A Preferred Stock to John D. and
Josie K. Hicks for a $8,000 capital investment.
K. On or about December 16, 1993, the Company issued a
total of 2,000 shares of Series A Preferred Stock to the
Revocable Living Trust of Arthur S. Rathkey for a $8,000 capital
investment.
L. On or about December 18, 1993, the Company issued a
total of 2,000 shares of Series A Preferred Stock to Arthur N.
Donaldson for a $8,000 capital investment.
M. On or about January 4, 1994, the Company issued a total
of 1,000 shares of Series A Preferred Stock to Raymond A. Argyros
for a $4,000 capital investment.
N. On or about January 11, 1994, the Company issued a
total of 10,000 shares of Series A Preferred Stock to the
Southwest Trust Bank of Alabama, N.A. as trustee of the Norwood
Clinic 401(k) Profit Sharing Retirement Trust for a $40,000
capital investment.
O. On or about January 25, 1994, the Company issued a
total of 10,000 shares of Series A Preferred Stock to Bryan
Blades and Jeffrey G. Straus for a total capital investment of
$40,000.
P. On or about March 1, 1994, the Company issued a total
of 1,000 shares of Series A Preferred Stock to Edward D. Jones &
Co. as Custodian for the benefit of David O. Ranz for a $4,000
capital investment.
Q. On or about April 20, 1994, the Company issued a total
of 7,000 shares of Series A Preferred Stock to R. Husted, Earl D.
Mires and G.W. Owens for a total capital investment of $28,000.
R. On January 8, 1996, the Company issued 6,764 shares of
its Series A Preferred as a stock dividend to Series A
shareholders of record as of December 31, 1994.
S. The Company also committed to issue La Jolla Securities
Corporation warrants to purchase 11,600 shares (or 10% of the
number of shares sold in the private placement) as of May 8, 1995
as partial compensation for its services in connection with the
private placement of Series A Preferred Stock.
III. 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 the 43 persons identified below in this Part
III of Item 26, "Recent Sales of Unregistered Securities",
through a private placement under 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.
A. On or about May 21, 1994, the Company issued a total of
3,750 shares of Series B Preferred Stock to John D. and Elleen
Van Dyke and Keith A. and Evelyn Van Dyke in consideration for a
total cash investment of $15,000.
B. On or about May 27, 1994, the Company issued 6,250
shares of Series B Preferred Stock to James W. Carroll in
consideration for a $25,000 cash investment.
C. On or about June 17, 1994, the Company issued 2,000
shares of Series B Preferred Stock to Robert A. Steele in
consideration for a $8,000 cash investment.
D. On or about June 24, 1994, the Company issued a total
of 9,750 shares of Series B Preferred Stock to John R. Afinowicz
and Henry Dyksterhouse in consideration for a total cash
investment of $39,000.
E. On or about July 8, 1994, the Company issued 2,000
shares of Series B Preferred Stock to Barry E. Remely in
consideration for a $8,000 cash investment.
F. On or about July 19, 1994 and February 6, 1995,
respectively, the Company issued a total of 9,000 shares of
Series B Preferred Stock to Subba R. Gollamudi in consideration
for a total cash investment of $36,000.
G. On or about July 22, 1994, the Company issued 2,500
shares of Series B Preferred Stock to Robert J. Purnell, Jr. in
consideration for a $10,000 cash investment.
H. On or about July 28, 1994, the Company issued 6,000
shares of Series B Preferred Stock to Paul L. Kathrein in
consideration for a $24,000 cash investment.
I. On or about August 16, 1994, the Company issued 5,000
shares of Series B Preferred Stock to Fred A. Van Horn in
consideration for a $20,000 cash investment.
J. On or about September 24, 1994 and April 11, 1995,
respectively, the Company issued a total of 9,000 shares of
Series B Preferred Stock to Frank and Joy Truncale in
consideration for a total cash investment of $36,000.
K. On or about September 24, 1994, the Company issued
2,000 shares of Series B Preferred Stock to Frank J. Weinstock in
consideration for a $8,000 cash investment.
L. On or about September 24, 1994 and July 14, 1995,
respectively, the Company issued a total of 18,500 shares of
Series B Preferred Stock to Deborah R. Distefano in consideration
for a total cash investment of $74,000.
M. On or about October 16, 1994, the Company issued 2,500
shares of Series B Preferred Stock to Paul O. Keverline in
consideration for a $10,000 cash investment.
N. On or about August 17, 1994, the Company issued 2,000
shares of Series B Preferred Stock to Richard A. Lewis in
consideration for a $8,000 cash investment.
O. On or about October 20, 1994, November 14, 1994,
January 30, 1995 and March 8, 1995, respectively, the Company
issued a total of 125,000 shares of Series B Preferred Stock to
Paul L. Archambeau for a total cash investment of $500,000.
P. On or about October 26, 1994, the Company issued 3,750
shares of Series B Preferred Stock to Jane K. Powell in
consideration for a $15,000 cash investment.
Q. On or about October 26, 1994 and November 7, 1994,
respectively, the Company issued a total of 18,750 shares of
Series B Preferred Stock to Sol D. and Rosa K. Becker in
consideration for a $75,000 cash investment.
R. On or about November 10, 1994, the Company issued 5,000
shares of Series B Preferred Stock to Robert C. Clement in
consideration for a $20,000 cash investment.
S. On or about November 17, 1994 and November 21, 1994,
respectively, the Company issued a total of 6,250 shares of
Series B Preferred Stock to Marta Hackney for a total cash
investment of $25,000.
T. On or about November 23, 1994, the Company issued
12,500 shares of Series B Preferred Stock to Richard G. Bowe in
consideration for a $50,000 cash investment.
U. On or about November 28, 1994, the Company issued
15,000 shares of Series B Preferred Stock to Desmond L. Fischer
in consideration for a $60,000 cash investment.
V. On or about December 19, 1994, the Company issued 5,000
shares of Series B Preferred Stock to Randolph M. Lindblad in
consideration for a $20,000 cash investment.
W. On or about January 2, 1995, the Company issued 3,000
shares of Series B Preferred Stock to Drew A. Tucker in
consideration for a $12,000 cash investment.
X. On or about February 6, 1995, the Company issued 2,000
shares of Series B Preferred Stock to Robert L. Villalobos, Jr.
in consideration for a $8,000 cash investment.
Y. On or about February 6 and June 22, 1995, respectively,
the Company issued a total of 7,500 shares of Series B Preferred
Stock to Howard L. Bruckner in consideration for a $30,000 cash
investment.
Z. On or about March 3, 1995, the Company issued a total
of 12,000 shares of Series B Preferred Stock to John P. Belardo,
William A. Kinney and Daniel K. and Gloria Diercks in
consideration for a $48,000 cash investment.
AA. On or about April 4, 1995, the Company issued 25,000
shares of Series B Preferred Stock to Nisaruddin Khan in
consideration for a $100,000 cash investment.
BB. On or about April 11, 1995, the Company issued 10,000
shares of Series B Preferred Stock to Peter A. Bartlo in
consideration for a $40,000 cash investment.
CC. On or about April 12, 1995, the Company issued 2,000
shares of Series B Preferred Stock to Harlen A. Lee in
consideration for a $8,000 cash investment.
DD. On or about May 8, 1995, the Company issued 6,000
shares of Series B Preferred Stock to James B. Arthur in
consideration for a $24,000 cash investment.
EE. On or about May 10, 1995, June 26, 1995 and July 30,
1995, respectively, the Company issued a total of 10,000 shares
of Series B Preferred Stock to Larry G. and Loretta R. Obie in
consideration for a total cash investment of $40,000.
FF. On or about May 11, 1995, the Company issued 5,000
shares of Series B Preferred Stock to M. Javel Akhtar in
consideration for a $20,000 cash investment.
GG. On or about May 15, 1995, the Company issued 10,000
shares of Series B Preferred Stock to Harry W. Miles in
consideration for a $40,000 cash investment.
HH. On or about June 5 and 15, 1995, respectively, the
Company issued a total of 20,000 shares of Series B Preferred
Stock to H. Fredrick Keiber in consideration for a total cash
investment of $80,000.
II. On or about June 8, 1995 and July 14, 1995, the
Company issued a total of 14,000 shares of Series B Preferred
Stock to Wilson M. McCarthy in consideration for a total cash
investment of $56,000.
JJ. On or about June 22, 1995 and July 14, 1995,
respectively, the Company issued a total of 25,000 shares of
Series B Preferred Stock to Thomas R. Wolf in consideration for
a total cash investment of $100,000.
KK. On or about August 3, 1995, the Company issued 30,000
shares of Series B Preferred Stock to Subodh Chandra Debnath in
consideration for a $120,000 cash investment.
LL. On or about September 18, 1995, the Company issued
40,000 shares of Series B Preferred Stock to Jaswant Singh and
Debra B. Pannu in consideration for a $160,000 cash investment.
MM. 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.
NN. 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.
IV. 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 IV of Item 26, "Recent Sales of
Unregistered Securities", (13 of whom were accredited investors)
and issued one Unit to one investor for services through a
private placement transaction under Rule 506 of Regulation D
promulgated under the 1933 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 the
Noteholder's relinquishment of contractual rights concerning the
performance of certain 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.
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.
V. 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 V of Item 26, "Recent Sales of Unregistered
Securities," through a private placement under 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.
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.
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.
VI. 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 V of Item
26, "Recent Sales of Unregistered Securities," through a private
placement under 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.
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 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 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.
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 250 shares of
Series C Preferred Stock to Robert L. Frome for a cash investment
of $25,000.
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 100 shares of
Series C Preferred Stock to Christopher C. Northey for a cash
investment of $10,000.
V. On March 4, 1998, the Company issued 500 shares of
Series C Preferred Stock to Eileen M. O'Dea for a cash investment
of $50,000.
W. 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.
X. 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.
Y. 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.
Z. 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.
AA. 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.
BB. On March 4, 1998, the Company issued 100 shares of
Series C Preferred Stock to Gregg Stokes for a cash investment of
$10,000.
CC. 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.
DD. 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.
EE. On March 4, 1998, the Company issued 500 shares of
Series C Preferred Stock to Atlas Corporation for a cash
investment of $50,000.
FF. 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.
GG. 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.
HH. 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.
II. 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.
JJ. 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.
KK. 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.
LL. 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.
MM. 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.
NN. On March 4, 1998, the Company issued 250 shares of
Series C Preferred Stock to Thomas R. Wolf, M.D. SEP IRA for a
cash investment of $25,000.
OO. 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.
PP. 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.
QQ. 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.
RR. On March 4, 1998, the Company issued 500 shares of
Series C Preferred Stock to Roger Newman for a cash investment of
$50,000.
SS. On March 4, 1998, the Company issued 250 shares of
Series C Preferred Stock to Samuel Richman for a cash investment
of $25,000.
TT. 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.
UU. 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.
VV. 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.
WW. On March 4, 1998, the Company issued 500 shares of
Series C Preferred Stock to Wight Investment Partners for a cash
investment of $50,000.
XX. 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.
YY. 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.
ZZ. 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.
AAA. On March 4, 1998, the Company issued 500 shares of
Series C Preferred Stock to BCN Associates Corp. for a cash
investment of $50,000.
BBB. 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.
CCC. 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.
DDD. 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.
EEE. 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.
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<F1>
3.1 Certificate of Incorporation<F1>
3.2 Bylaws<F1>
4.1 Warrant Agency Agreement with Continental Stock
Transfer & Trust Company<F3>
4.2 Specimen Common Stock Certificate <F2>
4.3 Specimen Class A Warrant Certificate<F2>
4.4 Class A Warrant Agreement<F2>
4.5 Underwriter's Warrant with Kenneth Jerome & Co.,
Inc.<F3>
4.6 Warrant to Purchase Common Stock with Note Holders re
bridge financing<F1>
4.7 Warrant to Purchase Common Stock with Mackey Price &
Williams<F1>
4.8 Warrant to Purchase Common Stock with Win Capital
Corp.<F6>
4.9 Specimen Series C Convertible Preferred Stock
Certificate<F6>
4.10 Certificate of the Designations, Powers, Preferences
and Rights of the Series C Convertible Preferred
Stock<F6>
5. Opinion of Mackey Price & Williams
10.1 Exclusive Patent License Agreement with Photomed<F1>
10.2 Consulting Agreement with Dr. Daniel M.
Eichenbaum<F1>
10.3 Confidential Disclosure Agreement with Zevex,
Inc.<F1>
10.4 Indemnity Agreement with Zevex International,
Inc.<F1>
10.5 Manufacturing Agreement with Sunrise Technologies,
Inc.<F1>
10.6 Royalty Agreement dated January 30, 1992, with Dennis
L. Oberkamp Design Services<F1>
10.7 Indemnity Agreement dated January 30, 1992, with
Dennis L. Oberkamp Design Services<F1>
10.8 Royalty Agreement (for Ultrasonic Phaco Handpiece)
with Dennis L. Oberkamp DesignServices<F1>
10.9 Lease Agreement with Eden Roc <F6>
10.10 Settlement and Release Agreement with Douglas A.
MacLeod<F1>
10.11 Form of Indemnification Agreement<F1>
10.12 1995 Stock Option Plan and forms of Stock Option
Grant Agreements<F1>
10.13 Promissory Note with Note Holders re bridge
financing<F1>
10.14 Employee's Lock-Up Agreement<F1>
10.15 Registering Shareholders Lock-Up Agreement<F3>
10.16 Employment Agreement with Thomas F. Motter<F1>
10.17 Employment Agreement with Robert W. Millar<F1>
10.18 Employment Agreement with Jack W. Hemmer<F1>
10.19 Amendment of Settlement and Release Agreement with
Douglas A. MacLeod<F3>
10.20 Design, Engineering and Manufacturing Agreement with
Zevex, Inc.<F5>
10.21 License and Manufacturing Agreement with O.B.F. Labs,
Ltd.<F6>
10.22 Settlement Agreement with Estate of H.L. Federman<F6>
10.23 Agreement with Win Capital Corp.<F6>
10.24 12% Convertible, Redeemable Promissory Note<F6>
10.25 Securities Exchange Agreement<F6>
23.1 Consent of Medical Laser Insight<F3>
23.2 Consent of Frost & Sullivan<F3>
23.3 Consent of Ophthalmologists Times<F3>
23.4 Consent of Mackey Price & Williams
23.5 Consent of Coopers & Lybrand L.L.P.
- ------------------------
<F1> Incorporated by reference from Registration Statement on
Form SB-2, as filed on March 19, 1996.
<F2> Incorporated by reference from Amendment No. 1 to
Registration Statement on Form SB-2, as filed on May 14,
1996.
<F3> Incorporated by reference from Amendment No. 2 to
Registration Statement on Form SB-2, as filed on June 13,
1996.
<F4> Incorporated by reference from Amendment No. 3 to
Registration Statement on Form SB-2, as filed on June 28,
1996.
<F5> Incorporated by reference from Annual Report on Form
10-KSB, as filed on December 30, 1996
<F6> Incorporated by reference from Annual Report on Form
10-KSB, as filed on April 16, 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 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 1933 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 1933
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 1933 Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
1933 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 1933 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 1933 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.
<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: June 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.
Signature Title Date
--------- ----- ----
/s/Thomas F. Motter Chairman of the Board, June 11, 1998
President and Chief
Executive Officer
(Principal Executive
Officer)
/s/Michael W. Stelzer Vice President of June 11, 1998
Operations, Chief
Operating Officer and
Director
/s/Robert W. Millar Vice President of June 11, 1998
Engineering and
Manufacturing and
Director
/s/John W. Hemmer Treasurer, Chief June 11, 1998
Financial Officer
and Director (Principal
Financial and Accounting
Officer
/s/Randall A. Mackey Secretary and Director June 11, 1998
- -------------------- Director June __, 1998
William C. Fitzhugh
- -------------------- Director June __, 1998
David M. Silver
/s/Patrick M. Kolenik Director June 11, 1998
June 11, 1998
Paradigm Medical Industries, Inc.
1127 West 2300 South, Suite A
Salt Lake City, Utah 84119
Re: Form SB-2 Registration Statement
Ladies and Gentlemen:
We have acted as your counsel in connection with the
registration on a Form SB-2 Registration Statement (the
"Registration Statement") of (i) an aggregate of 1,000,000 shares
of common stock, $.001 par value (the "Common Stock") issuable
upon the exercise of 1,000,000 Class A Warrants (the "Class A
Warrants") which 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. (the
"Underwriter's Warrants"); (iii) an aggregate of 291,000 shares
of Common Stock issuable upon the exercise of 291,000 warrants
issued to Win Capital Corporation (the "Win Warrants"); (iv) an
aggregate of 207,500 shares of Common Stock issuable upon the
exercise of 207,500 warrants issued to certain investors
participating in the Company's Bridge Financing (the "Note
Holders' Warrants"); and (v) an aggregate of 25,000 shares of
common stock issuable upon the exercise of 25,000 warrants issued
to Mackey Price & Williams (the "Attorney's Warrants"). The
shares of Common Stock underlying the Class A Warrants, the
Underwriter's Warrants, the Note Holders' Warrants and the
Attorney's Warrants were previously registered by a Form SB-2
Registration Statement, No. 333-2496, effective as of July 10,
1996. The Company is further registering for resale 1,713,142
shares of Common Stock issuable upon conversion of its Series C
Convertible Preferred Stock (the "Series C Preferred Stock") and
75,000 shares of Common Stock issuable upon conversion of a 12%
Convertible, Redeemable Promissory Note (the "Note").
In such connection, we have examined certain corporate
records and proceedings of the Company, including the proceedings
taken in connection with the authorization and issuance of the
securities described above, including the shares of Common Stock
issuable upon the conversion of the Class A Warrants, the
Underwriter's Warrants, the Note Holders' Warrants, the
Attorney's Warrants and the Win Capital Warrants and the resale
of the shares of Common Stock issuable upon the conversion of the
Series C Preferred Stock and the Note (hereinafter collectively
referred to as the "Securities") and such other investigation as
we deemed necessary. Based upon the foregoing, we are of the
opinion that when sold or registered as contemplated by the
Registration Statement, the Securities will be validly issued,
fully paid and nonassessable.
We hereby consent to being named in the Registration
Statement and in the Prospectus constituting a part thereof, as
amended from time to time, as issuer's counsel and the attorneys
who will pass upon legal matters in connection with the issuance
or registration of the Securities, and to the filing of this
opinion as an Exhibit to the Registration Statement.
Very truly yours,
Mackey Price & Williams
June 11, 1998
Paradigm Medical Industries, Inc.
1127 West 2300 South, Suite A
Salt Lake City, Utah 84119
Re: Form SB-2 Registration Statement
Ladies and Gentlemen:
We have acted as your counsel in connection with the
registration on a Form SB-2 Registration Statement (the
"Registration Statement") of (i) an aggregate of 1,000,000 shares
of common stock, $.001 par value (the "Common Stock") issuable
upon the exercise of 1,000,000 Class A Warrants (the "Class A
Warrants") which 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. (the
"Underwriter's Warrants"); (iii) an aggregate of 291,000 shares
of Common Stock issuable upon the exercise of 291,000 warrants
issued to Win Capital Corporation (the "Win Warrants"); (iv) an
aggregate of 207,500 shares of Common Stock issuable upon the
exercise of 207,500 warrants issued to certain investors
participating in the Company's Bridge Financing (the "Note
Holders' Warrants"); and (v) an aggregate of 25,000 shares of
common stock issuable upon the exercise of 25,000 warrants issued
to Mackey Price & Williams (the "Attorney's Warrants"). The
shares of Common Stock underlying the Class A Warrants, the
Underwriter's Warrants, the Note Holders' Warrants and the
Attorney's Warrants were previously registered by a Form SB-2
Registration Statement, No. 333-2496, effective as of July 10,
1996. The Company is further registering for resale 1,713,142
shares of Common Stock issuable upon conversion of its Series C
Convertible Preferred Stock (the "Series C Preferred Stock") and
75,000 shares of Common Stock issuable upon conversion of a 12%
Convertible, Redeemable Promissory Note (the "Note").
In such connection, we have examined certain corporate
records and proceedings of the Company, including the proceedings
taken in connection with the authorization and issuance of the
securities described above, including the shares of Common Stock
issuable upon the conversion of the Class A Warrants, the
Underwriter's Warrants, the Note Holders' Warrants, the
Attorney's Warrants and the Win Capital Warrants and the resale
of the shares of Common Stock issuable upon the conversion of the
Series C Preferred Stock and the Note (hereinafter collectively
referred to as the "Securities") and such other investigation as
we deemed necessary. Based upon the foregoing, we are of the
opinion that when sold or registered as contemplated by the
Registration Statement, the Securities will be validly issued,
fully paid and nonassessable.
We hereby consent to being named in the Registration
Statement and in the Prospectus constituting a part thereof, as
amended from time to time, as issuer's counsel and the attorneys
who will pass upon legal matters in connection with the issuance
or registration of the Securities, and to the filing of this
opinion as an Exhibit to the Registration Statement.
Very truly yours,
Mackey Price & Williams
