SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 0-28498
Paradigm Medical Industries, Inc.
(Name of small business issuer in its charter)
DELAWARE 87-0459536
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1127 West 2320 South, Suite A 84119
Salt Lake City, Utah (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including
area code: (801) 977-8970
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each Class on which registered
- ------------------- ----------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Registrant's revenues for the fiscal year ended December
31, 1997 were $464,062.
The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 31, 1998 was
approximately $8,969,000 based on the closing price on that date
on the Nasdaq SmallCap Market.
As of March 31, 1998, Registrant had outstanding 3,798,939
shares of Common Stock, 50,122 shares of Series A Preferred
Stock, 45,381 shares of Series B Preferred Stock, and 29,980
shares of Series C Preferred Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered
to shareholders in connection with the Annual Meeting of
Shareholders to be held June 8, 1998 are incorporated by
reference into Part III hereof.
Transitional Small
Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
PART I
Item 1. Description of Business
General
Paradigm Medical Industries, Inc. (the "Company" or
"Registrant") develops, manufactures, sources, markets and sells
ophthalmic surgical and diagnostic equipment and instrumentation.
The Company's surgical equipment is designed for minimally
invasive cataract treatment. The Company markets two ultrasonic
cataract surgery systems with related disposable products,
instruments and accessories. One of the ultrasound systems, the
Precisionist Thirty Thousand(trademark), is manufactured as the
base surgery system for the Company's Ophthalmic Surgical
Workstation(trademark). The Company is currently developing a
laser cataract surgery system that would be the Company's third
minimally invasive cataract removal system. If successfully
developed and approved for medical uses, the Company plans to
market the laser system as a plug-in module for its Ophthalmic
Surgical Workstation. 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.
The system measures pulsatile blood flow and intraocular pressure
in the eye as a means of detecting and treating glaucoma.
Cataract surgery is the single largest volume and revenue
producing outpatient surgical procedure for ophthalmologists
worldwide. Most cataract procedures in the United States are
performed using a method called phacoemulsification or "phaco,"
which employs an ultrasonic probe device. The Company
manufacturers and sells two phacoemulsification systems, one a
stand-alone unit, the Precisionist 3000 Plus(trademark) system,
and the second as the base device for the Company's new
Photon(trademark) Laser Cataract Workstation, the Precisionist
Thirty Thousand(trademark). However, the Company believes 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 a
proprietary patented laser system and unique probe for laser
cataract removal which the Company believes can alleviate these
difficulties associated with phaco systems. The Company intends
to make the patented laser system part of its Workstation if and
when cleared 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 under
contract with Dixon Medical Laser Laboratory at the University of
Utah in Salt Lake City.
The Company believes its laser system will be easier to use
and safer than present phaco cataract surgery systems. The probe
will be smaller than typical probes employing ultrasonic
technology and will deliver laser energy directly to the desired
area with a blunt end and, unlike the sharp open-ended ultrasonic
probes, will cause no vibration throughout the rest of the eye
which can damage other delicate eye structures. However, during
Phase I of the FDA clinical trials of the laser system the
Company discovered that the system may not effectively remove
harder grade cataracts. The Company is thus requesting FDA
approval to conduct expanded Phase II clinical studies of the
laser system to refine the system to remove a broader range of
cataracts. There is no assurance, however, that this limitation
can be overcome, that the FDA will authorize and approve Phase II
clinical trials, or that if approved, additional disadvantages or
problems unique to the Photon(trademark) laser cataract system
will not be discovered during Phase II clinical trials or
following FDA approval of the system.
Besides cataract surgery, the Company believes that its
Photon(trademark) Laser Workstation is capable of being
configured with specialty probes for use in other ophthalmic
surgical procedures. The Company also intends to configure the
Workstation to perform glaucoma laser surgery. These potential
applications could represent substantial growth opportunities
including sales of equipment and disposables. However, there can
be no assurance that these applications will be developed or
approved. Further, there is no guarantee that the Workstation
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.
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 using the
Company's second generation SmartPump(trademark) technology to
"sense" and avoid vacuum surges in the eye that can occur during
high aspiration surgical techniques. The 3000 Plus is noted for
its smooth and effective cataract cutting capability and its low
cost reusable fluidics tubing set. 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 Ocular Surgery Workstation. 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-keys 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, 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.
Photon(trademark) Workstation. The Ocular Surgery
Workstation 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 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 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.
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 will be accepted in the market
place.
Photon(trademark) Laser Cataract System. The
Photon(trademark) laser cataract system, which is still subject
to FDA approval, is designed to be installed as an upgrade or
add-on to the Company's Ocular Surgery Workstation. 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 probe. The
Photon(trademark) laser utilizes the on-board microprocessor
computer of the Workstation to generate short pulse laser energy
developed through a patented hand-held fiber optic probe to
targeted 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 tips 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 and may therefore be used with cataract
surgery techniques which utilize a more delicate clear cornea
incision without suture. 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 clinical study. As far as the Company
can determine, no integrated single laser 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.
Blood Flow Analyzer(trademark) (Paradigm BFA(trademark)).
This is the Company's first ophthalmic diagnostic device. The
device is manufactured by OBF. Labs and will be marketed by the
Company pursuant to a license agreement. The device is designed
to detect glaucoma at an earlier stage than is presently
possible. The device utilizes a proprietary patented pneumatic
probe which is placed on the cornea of an 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 seconds) and generates
a waveform profile which can be correlated to blood flow volume
within the eye. The pressure derived blood flow volume is
calculated by a proprietary software algorithm developed by one
of the Company's directors, David M. Silver, Ph.D. The device
presents a numerical intraocular pressure (IOP) reading and blood
flow analysis (BFA) rating in a concise printout which can be
affixed to the patient history file. In addition, the data
generated by the device can be downloaded to most personal
computer systems for advanced database patient information
development and management. The blood flow analyzer utilizes a
single-use disposable cover for its corneal probe which is
shipped in sterile packages to customers. This probe tip cover
provides accurate readings and acts as a prophylactic barrier for
the patient. OBF Labs has been issued a patent in the European
economic community and has a patent pending in the United States
and Japan. The FDA has cleared the analyzer for marketing in the
United States and the Company commenced selling this device in
September 1997. This diagnostic product will permit the Company
to immediately 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.
Accessory Instruments 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 510(k) 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 sterile packs. In February
1998, the Company completed engineering on a proprietary line of
irrigation/aspiration probes and tips of which FDA 510(k)
clearance was requested in March 1998 and is anticipated in May
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. All of the Company's surgical and
diagnostic 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, laser cataract probes, glaucoma fiber optic
probes and a prophylactic transducer sleeve required for the
blood flow analyzer probe. The Company intends to expand its
disposable accessories as it further penetrates the cataract
surgery market and expands the treatment applications for its
Workstation.
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)
Workstations and six Photon(trademark) Laser Phaco(trademark)
Workstations. 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 a direct sales representative and manufacturer's
representatives. As of March 31, 1998, the Company had six
direct domestic sales representatives and one manufacturer's
representatives 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 and trade shows. 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 will
emphasize the expandable features of the Workstation. The
Company's marketing approach will be to focus on the
upgradeability of the Workstation and to develop the image of the
Workstation 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. Additional surgical applications will
expand the market for the Workstation 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 was "The Future of Phaco is the Future of
Ophthalmic Surgery." The Company will expand upon the concept of
the "Workstation" 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. All
components and the finished surgical systems are manufactured
under subcontracting arrangements. All subcontractors are
located within the United States. 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.
The Company subcontracts the manufacturing of some of its
ancillary instruments, accessories and consumables through
specified vendors in the United States. These products are
contracted in quantities and at costs consistent with the
Company's financial capabilities and pricing needs.
The Company currently subcontracts the manufacture of its
Workstation and Precisionist Thirty Thousand to one of its
stockholders, Zevex International, Inc. ("Zevex"), which is
located in Salt Lake City, Utah. See "Item 12. Certain
Relationships and Related 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 "Item 12. Certain
Relationships and Related Transactions".
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.
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 is the cataract surgery
market as well as the related retinal clinical diagnostic 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 that may, from time to time, require the Company to
deal effectively with U.S. and foreign government entities that
oversee the Company's products. 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. The Company
believes that its Workstation 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 March 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.
Item 2. Description of Property
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.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
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.
The Company's Common Stock, 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. The following are the high and low sales
prices for the Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
Period (Calendar Year) Price Range
---------------------- -----------
High Low
---- ---
<S> <C> <C>
1996
Third Quarter (since
July 22, 1996) . . . . . . . . . . . . 6 2
Fourth Quarter . . . . . . . . . . . . 5-5/8 2-7/8
1997
First Quarter . . . . . . . . . . . . 6-3/8 3
Second Quarter . . . . . . . . . . . . 5-3/4 3
Third Quarter. . . . . . . . . . . . . 6 1-9/16
Fourth Quarter . . . . . . . . . . . . 4-5/8 2-7/16
1998
First Quarter. . . . . . . . . . . . . 4-11/16 2-7/8
</TABLE>
The Company's Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock are not publicly traded.
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 Stock, Series
B Preferred Stock 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
Preferred Stock, Series B Preferred Stock 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 deem relevant. The Company
issued 6,764 shares of its Series A Preferred Stock and 6,017
shares of its Series B Preferred Stock on January 8, 1996 as a
stock dividend to Series A and Series B shareholders of record as
of December 31, 1994.
As of March 31, 1998, there were 3,798,939 record holders
of Common Stock, 50,122 record holders of Series A Preferred
Stock, 45,381 record holders of Series B Preferred Stock, and
29,980 record holders of Series C Preferred Stock.
Item 6. 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
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
ThirtyThousand(trademark), the next generation of Paradigm
products scheduled for launch in March, 1997. Cost of sales
decreased $2(trademark)25, 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 ThirtyThousand(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 "Item 12.
Certain Relationships and Related 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(trademar(. 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.
Item 7. Financial Statements
Report of Independent Accountants . . . . . . . F-1
Balance Sheet . . .. . . . . . . . . . . . . . . F-2
Statements of Operations. . . . . . . . . . . . F-3
Statements of Changes in Stockholders' Equity . F-4 to F-7
Statements of Cash Flows. . . . . . . . . . . . F-8 to F-9
Notes to Financial Statements . . . . . . . . . F-10 to F-24
<PAGE>
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 20,030 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
9,950 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 20,030 shares at a price of
$100 per share. The net proceeds to the Company from the private
placement were approximately $1.7 million.
In January 1998, the Company offered to the holders of the
Notes, through an exchange offer, the right to exchange their
Notes for shares of Series C Preferred Stock. In March 1998,
Notes totaling $995,000 were exchanged for 9,950 shares of Series
C Preferred Stock, at $100 per share, totaling $995,000. The
exchange offer has now expired.
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>
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
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 A. 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.
Compliance with Section 16(a) of the Securities and Exchange Act
of 1934
Effective May 1, 1991, the Securities and Exchange
Commission adopted revised rules regarding reporting of
beneficial ownership of securities by officers, directors and
owners of more than 10% of any class of a company's equity
securities. During fiscal 1997, George J. Barenholtz, then a
director of the Company, through an oversight, filed one late
stock purchase transaction report covering one transaction.
Item 10. 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 $100,000 for the
fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Other
Annual
Name and Compensa-
Principal Position Period Salary($) Bonus($) tion($)(6)
- ------------------ ------ --------- -------- ----------
<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 $1,000 3,600
and Chief 1995<F4> 72,000 300 0
Executive Officer
Michael W. Stelzer, 1997<F1> 50,625 0 1,500
Vice President of
Operations and
Chief Operating
Officer
Robert W. Millar, 1997<F1> 114,675 0 5,250
Vice President of 1996<F2> 31,250 0 0
Engineering and 1996<F3> 99,792 1,000 3,600
Manufacturing 1995<F4> 60,265 300 0
John W. Hemmer, 1997<F1> 112,670 0 5,250
Treasurer, Chief 1996<F2> 30,000 0 0
Financial Officer 1996<F3> 80,000 0 3,600<F7>
and Director 1995<F4> 20,000 0 0
</TABLE>
<PAGE>
Continued - Summary Compensation Table
<TABLE>
<CAPTION>
Restricted Underlying Long-term All Other
Name and Stock Options/ Incentive Compensa-
Principal Position Awards($) SARs(#) Payout($) tion($)<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 0 106,000<F6> 0 0
Executive 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
<FN>
<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 $5.00 per share. These options expire June 8, 2002.
<F7> On November 30, 1995, the Company issued Mr. Hemmer 50,513
shares of the Company's Common Stock as part of his
compensation for past and future services.
</FN>
</TABLE>
The following table sets forth information concerning the
exercise of options to acquire shares of the Company's Common
Stock by the Named Executive Officers during the fiscal year
ended December 31, 1997, as well as the aggregate number and
value of unexercised options held by the Named Executive Officers
on December 31, 1997.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal
Year-End Option/SAR Values
Shares Acquired Value
Name on Exercise(#) Realized($)
---- --------------- -----------
<S> <C> <C>
Thomas F. Motter -0- -0-
Robert W. Millar -0- -0-
John W. Hemmer -0- -0-
Michael W. Stelzer -0- -0-
</TABLE>
(Continued)
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options/SARs In-the-Money Options/SARs
at December 31, 1997(#) at December 31, 1997($)
------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexcercisable
---- ----------- ------------- ----------- --------------
<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.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information with
respect to beneficial ownership of the Company's Common Stock as
of March 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 Shares Percent of
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> 50,512 1.3%
David M. Silver<F5> 7,621 0.2%
Patrick M. Kolenik<F7> -- *
Executive officers and
directors as a group
(8 persons) 1,172,934 30.9%
_______________
<FN>
* Less than 1%.
<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>
Item 12. Certain Relationships and Related 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 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 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.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are filed herewith pursuant to Rule
601 of Regulation S-B or are incorporated by reference to
previous filings.
Table No. Document
2.1 Amended Agreement and Plan of Merger between Paradigm
Medical Industries, Inc., a California corporation
and Paradigm Medical Industries, Inc., a Delaware
corporation(1)**
3.1 Certificate of Incorporation(1)
3.2 Bylaws(1)
4.1 Warrant Agency Agreement with Continental Stock
Transfer & Trust Company(3)
4.2 Specimen Common Stock Certificate (2)
4.3 Specimen Class A Warrant Certificate(2)
4.4 Form of Class A Warrant Agreement(2)
4.5 Underwriter's Warrant with Kenneth Jerome & Co.,
Inc.(3)
4.6 Attorney's Warrant with Mackey Price & Williams(1)
4.7 Warrant to Purchase Common Stock with Win Capital
Corp.
4.8 Specimen Series C Convertible Preferred Stock
Certificate
4.9 Certificate of the Designations, Powers, Preferences
and Rights of the Series C Convertible Preferred
Stock
10.1 Exclusive Patent License Agreement with Photomed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 Confidential Disclosure Agreement with Zevex, Inc.(1)
10.4 Indemnity Agreement with Zevex International, Inc.(1)
10.5 Manufacturing Agreement with Sunrise Technologies,
Inc.(1)
10.6 Royalty Agreement dated January 30, 1992, with Dennis
L. Oberkamp Design Services(1)
10.7 Indemnity Agreement dated January 30, 1992, with
Dennis L. Oberkamp Design Services(1)
10.8 Royalty Agreement (for Ultrasonic Phaco Handpiece)
with Dennis L. Oberkamp DesignServices(1)
10.9 Lease Agreement with Eden Roc
10.10 Settlement and Release Agreement with Douglas A.
MacLeod(1)
10.11 Form of Indemnification Agreement(1)
10.12 1995 Stock Option Plan and forms of Stock Option
Grant Agreements(1)
10.13 Form of Promissory Note between the Company and third
parties(1)
10.14 Form of Warrant to Purchase Common Stock between the
Company and third parties(1)
10.15 Employee's Lock-Up Agreement(1)
10.16 Registering Shareholders Lock-Up Agreement(3)
10.17 Employment Agreement with Thomas F. Motter(1)
10.18 Employment Agreement with Robert W. Millar(1)
10.19 Employment Agreement with Jack W. Hemmer(1)
10.20 Amendment of Settlement and Release Agreement with
Douglas A. MacLeod(3)
10.21 Design, Engineering and Manufacturing Agreement with
Zevex, Inc.(5)
10.22 License and Manufacturing Agreement with O.B.F. Labs,
Ltd.
10.23 Settlement Agreement with Estate of H.L. Federman
10.24 Agreement with Win Capital Corp.
10.25 12% Convertible, Redeemable Promissory Note
10.26 Securities Exchange Agreement
23.1 Consent of Medical Laser Insight(3)
23.2 Consent of Frost & Sullivan(3)
23.3 Consent of Ophthalmologists Times(3)
(1) Incorporated by reference from Registration Statement
on Form SB-2, as filed on March 19, 1996.
(2) Incorporated by reference from Amendment No. 1 to
Registration Statement on Form SB-2, as filed on May
14, 1996.
(3) Incorporated by reference from Amendment No. 2 to
Registration Statement on Form SB-2, as filed on June
13, 1996.
(4) Incorporated by reference from Amendment No. 3 to
Registration Statement on Form SB-2, as filed on June
28, 1996.
(5) Incorporated by reference from Annual Report on Form
10-KSB, as filed on December 30, 1996
(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.
<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: April 14, 1998 Thomas F. Motter
Chairman of the Board,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1934,
this report has been signed by the following persons in
counterpart on behalf of the Company on the dates indicated.
Signature Title Date
--------- ----- ----
Thomas F. Motter Chairman of the Board, April 14, 1998
President and Chief
Executive Officer
(Principal Executive
Officer)
Michael W. Stelzer Vice President of April 14, 1998
Operations, Chief
Operatingng Officer
and Director
Robert W. Millar Vice President of April 14, 1998
Engineering and
and Manufacturing
and Director
John W. Hemmer Vice President of April 14, 1998
Finance, Treasurer,
Chief Financial Officer
and Director (Principal
Financial and Accounting
Officer)
Randall A. Mackey Secretary and Director April 14, 1998
- ----------------- Director April , 1998
William C. Fitzhugh
- ----------------- Director April , 1998
David M. Silver
- ----------------- Director April , 1998
Patrick M. Kolenik
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
OFFERED FOR SALE, SOLD, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES
ACT OF 1933 (THE "ACT"), OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE ACT.
Void after 5:00 p.m., Mountain Standard Time, February 24, 2001.
Warrant to Purchase 100,000
Shares of Common Stock
WARRANT TO PURCHASE COMMON STOCK
PARADIGM MEDICAL INDUSTRIES, INC.
This is to certify that, FOR VALUE RECEIVED,
WIN CAPITAL CORP.
or registered assigns (the "Holder"), is entitled to purchase,
subject to the provisions of this Warrant, from PARADIGM MEDICAL
INDUSTRIES, INC., a Delaware Corporation (the "Company"), at any
time on or after February 25, 1998, and not later than 5:00 p.m.,
Mountain Standard Time, on February 24, 2001, 100,000 shares of
common stock, $.001 par value of the Company (the "Common Stock")
at a purchase price of $3.00 per share. The Warrant will be
callable prior to its expiration at $.05 per share, for such
number of shares of Common Stock into which the Warrant is
exercisable, upon thirty (30) days' written notice at any time
after (i) the thirty (30) day anniversary of the effective date
on the registration statement in which the shares of Common Stock
issuable upon exercise of the Warrant are registered, (ii) the
average closing price of the Common Stock for the twenty (20) day
period immediately prior to the date on which notice of
redemption is given to the Holder is at least $5.00 per share,
and (iii) the Company has redeemed its outstanding 12%
Convertible, Redeemable Promissory Notes issued in a private
placement transaction. The number of shares of Common Stock to
be received upon the exercise of this Warrant and the price to be
paid for a share of Common Stock may be adjusted from time to
time as hereinafter set forth. The shares of the Common Stock
deliverable upon such exercise, and as adjusted from time to
time, are referred to as "Warrant Stock" and the exercise price
of a share of Common Stock in effect at any time and as adjusted
from time to time is referred to as the "Exercise Price."
1. Exercise of Warrant. Subject to the provisions of
hereof, this Warrant may be exercised in whole or in part at any
time or from time to time on or after February 25, 1998 by
presentation and tender to the Company the Purchase Form annexed
hereto, duly executed and accompanied by payment of the Exercise
Price for the number of shares specified in such form, together
with all federal and state taxes applicable upon such exercise.
If this Warrant should be exercised in part only, the Company
shall, upon surrender of this Warrant for cancellation, execute
and deliver a new Warrant evidencing the right of the holder to
purchase the balance of the shares purchasable hereunder. Upon
receipt by the Company of this Warrant at the office or agency of
the Company, in proper form for exercise, the Holder shall be
deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that the stock
transfer books of the Company shall then be closed or that
certificates representing such shares of Common Stock shall not
then be actually delivered to the Holder.
2. Reservation of Shares. The Company shall reserve for
issuance and/or delivery upon exercise of this Warrant such
number of shares of its Common Stock as shall be required for
issuance or delivery upon exercise of this Warrant.
3. Fractional Shares. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise
of this Warrant. With respect to any fraction of a share called
for upon any exercise hereof, the Company shall pay to the Holder
an amount in cash equal to such fraction multiplied by the
current market value of such fractional share.
4. Exchange, Assignment or Loss of Warrant. This Warrant
is exchangeable, without expense, at the option of the Holder,
upon presentation and surrender hereof to the Company for other
Warrants of different denominations entitling the holder thereof
to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. The term "Warrant" as used herein
includes any Warrants issued in substitution for or replacement
of this Warrant, or into which this Warrant may be divided or
exchanged. Upon receipt by the Company of evidence satisfactory
to it of the loss, theft, destruction or mutilation of this
Warrant, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification including a surety bond,
and upon surrender and cancellation of this Warrant, if
mutilated, the Company will execute and deliver a new Warrant of
like tenor and date. Any such new Warrant executed and delivered
shall constitute an additional contractual obligation on the part
of the Company, whether or not this Warrant so lost, stolen,
destroyed, or mutilated shall be at any time enforceable by
anyone.
5. Rights of the Holder. The Holder shall not, by
virtue hereof, be entitled to any rights of a shareholder in the
Company, either at law or equity, and the rights of the Holder
are limited to those expressed in the Warrant and are not
enforceable against the Company except to the extent set forth
herein.
6. Adjustment of Exercise Price. The Exercise Price of
Each Warrant shall be subject to adjustment from time to time as
follows:
(a) If the number of shares of Common Stock
outstanding at any time after the date hereof is increased by a
stock dividend payable in shares of Common Stock or by a
subdivision or split-up of shares of Common Stock, then, on the
date such payment is made or such change is effective, the
Exercise Price of a Warrant shall be appropriately decreased so
that the number of shares of Common Stock issuable on exercise of
such Warrant shall be increased in proportion to such increase of
outstanding shares.
(b) If the number of shares of Common Stock
outstanding at any time after the date hereof is decreased by a
combination of the outstanding shares of Common Stock, then, on
the effective date of such combination, the Exercise Price of a
Warrant shall be appropriately increased so that the number of
shares of Common Stock issuable on exercise of a Warrant shall be
decreased in proportion to such decrease in outstanding shares.
(c) In case, at any time after the date hereof, of
any capital reorganization, or any reclassification of the stock
of the Company (other than as a result of a stock dividend or
subdivision, split-up or combination of shares), or the
consolidation or merger of the Company with or into another
person (other than a consolidation or merger in which the Company
is the continuing entity and which does not result in any change
in the Common Stock), or of the sale or other disposition of all
or substantially all the properties and assets of the Company,
the Warrants shall, after such reorganization, reclassification,
consolidation, merger, sale or other disposition, be convertible
into the kind and number of shares of stock or other securities
or property of the Company or otherwise to which such holder
would have been entitled if immediately prior to such
reorganization, reclassification, consolidation, merger, sale or
other disposition he had converted his Warrants into Common
Stock. The provisions of this clause (c) shall similarly apply
to successive reorganizations, reclassifications, consolidations,
mergers, sales or other dispositions.
(d) All calculations under this paragraph 6 shall
be made to the nearest cent or to the nearest one hundredth
(1/100) of a share, as the case may be.
(e) Minimal Adjustments. No adjustment in the
Exercise Price need be made if such adjustment would result in a
change in the Exercise Price of less than $0.01. Any adjustment
of less than $0.01 which is not made shall be carried forward and
shall be made at the time of and together with any subsequent
adjustment which, on a cumulative basis, amounts to an adjustment
of $0.01 or more in the Exercise Price.
(f) Certificate as to Adjustments. Upon the
occurrence of each adjustment or readjustment of the Exercise
Price pursuant to this paragraph (f), the Company at its expense
shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to each
holder of Warrants a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Company shall, upon
written request at any time of any holder of Warrants, furnish or
cause to be furnished to such holder a like certificate setting
forth (i) such adjustments and readjustments, (ii) the Exercise
Price of such series at the time in effect, and (iii) the number
of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the exercise of
the Warrants.
(g) Reservation of Stock Issuable Upon Exercise.
The Company shall at all times reserve and keep available out of
its authorized but unissued shares of Common Stock solely for the
purpose of effecting the exercise of the Warrants such number of
its shares of Common Stock as shall from time to time be
sufficient to effect the exercise of all outstanding Warrants;
and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the exercise of
all then outstanding Warrants, the Company will take such
corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for
such purpose.
(h) Reclassification, Reorganization or Merger. In
case of any reclassification, capital reorganization or other
change of outstanding shares of Common Stock of the Company
(other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of an
issuance of Common Stock by way of dividend or other distribution
or of a subdivision or combination), or in case of any
consolidation or merger of the Company with or into another
corporation (other than a merger with a subsidiary in which
merger the Company is the continuing corporation and which does
not result in any reclassification, capital reorganization or
other change of outstanding shares of Common Stock of the class
issuable upon exercise of this Warrant) or in case of any sale or
conveyance to another corporation of the property of the Company
as an entirety or substantially as an entirety, the Company shall
cause effective provision to be made so that the holder shall
have the right thereafter, by exercising this Warrant to purchase
the kind and amount of shares of stock and other securities and
property receivable upon such reclassification, capital
reorganization or other change, consolidation, merger, sale or
conveyance. Any such provision shall include provision for
adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Warrant and
shall expressly provide that the issuer of securities to be
thereafter received on exercise of this Warrant assumes
obligations for registration of the Warrant and Warrant Stock
issuable on exercise of the Warrant substantially in accordance
with the provisions of Section 1 of this Warrant. The foregoing
provisions of this Section shall similarly apply to successive
reclassifications, capital reorganizations and changes of shares
of Common Stock and to successive consolidations, mergers, sales
or conveyances.
(i) Dissolution. In case of a dissolution,
liquidation, or winding up of the Company, all purchase rights
under this Warrant shall terminate at the close of business on
the date as of which holders of record of the Common Stock shall
be entitled to participate in a distribution of the assets of the
Company in connection with such dissolution, liquidation or
winding up. Any Warrant not exercised prior to such time shall
be void and no rights shall exist thereunder. In any such case
of termination of purchase rights, a statement thereof shall be
included in the notice required by this Warrant.
7.01 Definitions. As used in this Paragraph 7:
(a) The terms "register", "registered", and
"registration" refer to a registration effected by preparing and
filing a registration statement in compliance with the Act and
the declaration or ordering of the effectiveness of such
registration statement.
(b) The term "Registrable Securities" means (i) the
Common Stock issued or issuable pursuant to the exercise of the
Warrants and (ii) any Common Stock of the Company issued or
issuable in respect of such Common Stock or other securities
issued or issuable pursuant to the exercise of the Warrants upon
any stock split, stock dividend, recapitalization, or similar
event, or any Common Stock otherwise issued or issuable with
respect to the Warrants. Notwithstanding anything set forth
above, the above-described securities shall not be treated as
Registrable Securities if and so long as they (A) have been sold
to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, or (B) have been
sold (or are available for sale in the opinion of counsel to the
Company and market conditions would permit the sale of such
shares within a 90 day period) pursuant to Rule 144(k) in a
transaction exempt from the registration and prospectus delivery
requirements of the Act so that all transfer restrictions and
restrictive legends with respect thereto are removed upon the
consummation of such sale.
(c) The term "Holder" means any holder holding
Registrable Securities or the Shares (and any person holding
Shares or Registrable Securities to whom the registration rights
have been transferred pursuant to paragraph 9 hereof).
(d) The term "SEC" means the Securities and Exchange
Commission or any successor agency thereto.
7.02 Registration Rights. The Company shall file a
registration statement with the SEC to register the shares of
Common Stock issuable to the Holder upon conversion of this
Warrant within forty-five (45) days of the initial closing of the
Company's offering of 12% convertible, redeemable promissory
notes (the "Offering") and will keep such registration statement
current until such time as the shares of Common Stock issuable
upon conversion of the notes offered in the Offering are freely
tradeable pursuant to Rule 144(k) promulgated under the
Securities Act of 1933, as amended, all at the Company's cost and
expense (except commissions or discounts and attorney's fees and
costs of the Holder). Additionally, the Holder will have the
right to demand the registration of the shares issuable upon
exercise of this Warrant beginning six months after the closing
of a public offering of the Company's securities if such Warrant
is not exercised during the period in which the registration
statement for the shares of Common Stock issuable upon conversion
of the notes in the Offering is kept current and such shares are
not otherwise registered.
7.03 Company Registration.
(a) If at any time, or from time to time, the Company
shall determine to register any of its securities, either for its
own account or for the account of a security holder or holders,
other than a registration relating solely to employee benefit
plans, or a registration on Form S-4 relating solely to an SEC
Rule 145 transaction, or a registration on any other form (other
than Form S-1, S-3, SB-1 or SB-2) which does not include
substantially the same information as would be required to be
included in a registration statement covering the sale of
Registrable Securities, the Company will:
(i) promptly give to each Holder written notice
thereof; and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in
any underwriting involved therein (if the Holder so desires), all
the Registrable Securities specified in any written request or
requests by any Holder or Holders received by the Company within
twenty (20) days after such written notice is received on the
same terms and conditions as the Common Stock, if any, otherwise
being sold through the underwriter in such registration.
(b) If the registration that the Company gives notice is
for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written
notice given pursuant to paragraph 7.3(a). All Holders desiring
to distribute their securities through such underwriting, if any,
(together with the Company and the other holders distributing
their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by the Company.
(c) Notwithstanding any other provision of this paragraph
7.03, if the underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten,
the underwriter may limit the Registrable Securities or other
securities to be included in the registration; provided, however,
that if such registration is other than the first registered
offering of the Company's securities to the public, the
underwriter may not limit the Registrable Securities to be
included in such registration to less than 30% of the securities
included therein (based on aggregate market values). Any
reduction by the underwriter of the number of Registrable
Securities or other securities to be included in such
registration shall be made in the following manner: initially,
shares of Common Stock held by the founders or other members of
the Company's management shall be excluded from such underwritten
public offering to the extent required by the underwriter, and if
a further reduction in the number of shares is required, the
Company shall so advise all Holders and other holders
distributing their securities through such underwriting and the
number of shares of Registrable Securities and other securities
that may be included in the registration and underwriting shall
be allocated among the holders thereof in proportion, as nearly
as practicable, to the respective amounts of Registrable
Securities and other securities contractually entitled to
registration with the offering held by such Holders and other
holders at the time of filing of the Registration Statement. To
facilitate the allocation of shares in accordance with the above
provisions, the Company may round the number of shares allocated
to any Holder or holder to the nearest 100 shares. The Company
shall advise all Holders of Registrable Securities which would
otherwise be registered and underwritten pursuant hereto of any
such limitations, and the number of shares of Registrable
Securities that may be included in the registration. If any
Holder or holder disapproves of the terms of any such
underwriting, such Holder or holder may elect to withdraw
therefrom by written notice to the Company and the underwriter.
Any securities excluded or withdrawn from such underwriting shall
not be transferred in a public distribution prior to ninety (90)
days after the effective date of the registration statement
relating thereto, or such shorter period of time as the
underwriters may require.
(d) The Company shall have the right to terminate or
withdraw any registration initiated by it under this paragraph
7.03 prior to the effectiveness of such registration whether or
not any Holder has elected to register securities in such
registration.
7.04 Registration on Form S-3. If any Holder or
Holders request that the Company file a registration statement on
Form S-3 (or any successor form to Form S-3) for a public
offering of shares of the Registrable Securities the reasonably
anticipated aggregate price to the public of which, net of
underwriting discounts and commissions, would exceed $500,000,
and the Company is a registrant entitled to use Form S-3 to
register the Registrable Securities for such an offering, the
Company shall use its best efforts to cause such Registrable
Securities to be registered for the offering on such form and to
cause such Registrable Securities to be qualified in such
jurisdictions as the Holder or Holders may reasonably request;
provided, however, that the Company shall not be required to
effect more than one registration pursuant to this paragraph 7.04
in any twelve (12) month period. The substantive provisions of
paragraph 7.03 shall be applicable to each registration initiated
under this paragraph 7.04.
7.05 Expenses of Registration. All expenses incurred in
connection with any registration, qualification or compliance
pursuant to this Paragraph 7, including, without limitation, all
registration, filing and qualification fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company,
accounting fees and expenses, and expenses of any special audits
incidental to or required by such registration, shall be borne by
the Company; provided, however, that the Company shall not be
required to pay stock transfer taxes or underwriters' fees,
discounts or commissions relating to Registrable Securities, or
fees of counsel for the selling shareholders.
7.06 Information by Holder. The Holder or Holders of
Registrable Securities included in any registration shall furnish
to the Company such information regarding such Holder or Holders,
and the distribution proposed by such Holder or Holders, as the
Company may request in writing and as shall be required in
connection with any registration, qualification or compliance
referred to in this Paragraph 7.
7.07 Sale Without Registration. If at the time of any
transfer of any Registrable Securities, such Registrable
Securities shall not be registered under the Act, the Company may
require, as a condition of allowing such transfer, that the
Holder or transferee furnish to the Company (a) such information
as is necessary in order to establish that such transfer may be
made without registration under the Act, and (b) (if the transfer
is not made in compliance with Rule 144 other than a transfer not
involving a change in beneficial ownership or a pro rata
distribution by a partnership to its partners) at the expense of
the Holder or transferee, an opinion of counsel satisfactory to
the Company in form and substance to the effect that such
transfer may be made without registration under the Act; provided
that nothing contained in this paragraph 7.09 shall relieve the
Company from complying with any request for registration,
qualification, or compliance made pursuant to the other
provisions of this Paragraph 7.
7.08 Market Stand-off Agreement. The Holders, if
requested by the Company and an underwriter of Common Stock (or
other securities) of the Company, shall agree not to sell or
otherwise transfer or dispose of any Securities held by the
Holders during the ninety (90) day period following the effective
date of a registration statement covering an initial public
offering of the Company's securities filed under the Act provided
that:
(a) such agreement shall only apply to the first
such registration statement of the Company filed after the date
of this Warrant including shares of Common Stock (or other
securities) to be sold on its behalf to the public in an
underwritten offering; and
(b) all Holders holding more than one percent of the
outstanding Common Stock, all officers and directors of the
Company and all other holders of registration rights of the
Company (whether or not pursuant to this agreement) enter into
similar agreements. Such agreement shall be in writing in the
form satisfactory to the Company and such underwriter. The
Company may impose stop-transfer instructions with respect to the
Securities subject to the foregoing restriction until the end of
the foregoing period.
7.09 Amendment of Registration Rights. With the written
consent of the Holders of a majority of the then outstanding
Registrable Securities (including securities exercisable for or
convertible into Registrable Securities), the Company may amend
this Paragraph 7, or enter into an agreement with any holder or
prospective holder of any securities of the Company which would
allow such holder or prospective holder to include such
securities as Registrable Securities under this Paragraph 7.
7.10 Termination of Registration Rights. The demand
rights provided for in this Paragraph 7 shall be exercisable only
between February 25, 1998 and February 24, 2001.
8. Warrant Callable Under Certain Circumstances. If the
Company registers shares of its Common Stock with the Commission
and such shares are traded on an established securities exchange,
the Warrant will be callable by the Company at $.05 per share,
for such number of shares of Common Stock into which the Warrant
is exercisable, upon thirty (30) days' written notice at anytime
after (a) the thirty (30) day anniversary of the effective date
of the registration statement on which the shares of Common Stock
issuable upon exercise of the Warrant are registered, (b) the
average closing price of the Common Stock for the twenty (20) day
period immediately prior to the date on which notice of
redemption is given by the Company to the Holder is at least
$5.00 per share, and (c) the Company has redeemed its 12%
Convertible, Redeemable Promissory Notes issued in a private
placement transaction.
9. Transfer to Comply with the Securities Act 1933.
(a) This Warrant or the Warrant Stock or any other
security issued or issuable upon exercise of this Warrant may not
be offered or sold except in compliance with the Securities Act
of 1933, as amended, and then only against receipt of an
agreement of such person to whom such offer of sale is made to
comply with the provisions of this Section 9 with respect to any
resale or other disposition of such securities.
(b) The Company may cause the following legend to
be set forth on each certificate representing Warrant Stock or
any other security issued or issuable upon exercise of this
Warrant not theretofore distributed to the public or sold to
underwriters for distribution to the public pursuant to Section
1 hereof, unless counsel for the Company is of the opinion as to
any such certificate that such legend is unnecessary:
The securities represented by this certificate may not be
offered for sale, sold or otherwise transferred except pursuant
to an effective registration statement made under the Securities
Act of 1933 (the "Act"), or pursuant to an exemption from
registration under the Act, the availability of which is to be
established to the satisfaction of the Company.
10. Applicable Law. This Warrant shall be governed by,
and construed in
accordance with, the laws of the State of Utah.
Paradigm Medical Industries, Inc.
Thomas F. Motter, President and Chief
Executive Officer
ATTEST:
Randall A. Mackey, Secretary
Date: Effective as of February 25, 1998
[SEAL]
<PAGE>
PURCHASE FORM
Date ______________, 19__
The undersigned hereby irrevocably elects to exercise the
within Warrant to the extent of purchasing __________ shares of
Common Stock and hereby makes payment of $__________ in payment
of the actual exercise price thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name___________________________________________________________
(please typewrite or print in block letters)
Address_______________________________________________________
Signature______________________________
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED _________________________________ hereby
sells, assigns and transfers unto
Name
_____________________________________________________________
(please typewrite or print in block letters)
Address
_________________________________________________________
the right to purchase Common Stock represented by this Warrant to
the extent of ______ shares as to which such right is exercisable
and does hereby irrevocably constitute and appoint
_________________________________________ attorney, to transfer
the same on the books of the Company with full power of
substitution in the premises.
Signature _____________________________
Date: ____________________, 199__
"SPECIMEN"
PARADIGM MEDICAL INDUSTRIES, INC.
Number ______ ____________ Shares
Series C Convertible Preferred Stock
Incorporated Under
the Laws of the
State of Delaware
THIS CERTIFIES THAT ___________________________ is the
recordholder of ________________________________________________
(________) fully paid and non-assessable shares of Series C
Convertible Preferred Stock, $.001 par value per share ($100
stated value), of Paradigm Medical Industries, Inc., a Delaware
corporation (herein called the "Corporation"), transferable only
on the share register of the Corporation by the holder hereof in
person, or by duly authorized attorney, upon the surrender of
this certificate properly endorsed or assigned for transfer.
WITNESS the signatures of the duly authorized
officers of the Corporation.
DATED: _____________, 199__
__________________________ ________________________
Michael W. Stelzer, Vice President Randall A. Mackey,
of Operations and Chief Operating Secretary
Officer
<PAGE>
THE CORPORATION IS AUTHORIZED TO ISSUE COMMON STOCK, $0.001 PAR
VALUE, AND PREFERRED STOCK, $0.001 PAR VALUE, WHICH MAY BE ISSUED
IN ONE OR MORE SERIES. A STATEMENT OF THE RESPECTIVE POWERS,
DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
OR OTHER SPECIAL RIGHTS OF THE COMMON STOCK AND ANY SUCH SERIES
OF PREFERRED STOCK WILL BE FURNISHED WITHOUT CHARGE TO THE HOLDER
OF RECORD OF THIS CERTIFICATE UPON WRITTEN REQUEST TO THE
SECRETARY OF THE CORPORATION.
FOR VALUE RECEIVED HEREBY SELLS,
ASSIGNS, AND TRANSFERS UNTO
SHARES REPRESENTED BY THE WITHIN
CERTIFICATE AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT
ATTORNEY TO TRANSFER THE SAID SHARES
ON THE SHARE REGISTER OF THE WITHIN NAMED CORPORATION WITH FULL
POWER TO SUBSTITUTION IN THE PREMISES.
DATED , 19
IN PRESENCE OF
(WITNESS)
(SHAREHOLDER)
(SHAREHOLDER)
NOTICE: THE SIGNATURE ON THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAMES WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE
WHATSOEVER.
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT") OR ANY STATE SECURITIES LAWS IN RELIANCE UPON EXEMPTIONS
FROM REGISTRATION FOR NON-PUBLIC OFFERINGS. THE SHARES MAY NOT
BE SOLD OR TRANSFERRED UNLESS THE SHARES ARE REGISTERED UNDER THE
ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR UNLESS THE
COMPANY RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO IT THAT AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.
CERTIFICATE OF THE DESIGNATIONS, POWERS,
PREFERENCES AND RIGHTS
OF THE
SERIES C CONVERTIBLE PREFERRED STOCK
($.001 par value per share)
of
PARADIGM MEDICAL INDUSTRIES, INC.
a Delaware Corporation
__________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
__________
PARADIGM MEDICAL INDUSTRIES, INC., a corporation organized
and existing under the General Corporation Law of the State of
Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That, pursuant to authority conferred upon the
Board of Directors of the Corporation (the "Board") by the
Certificate of Incorporation of said Corporation, and pursuant to
the provisions of Section 151 of the Delaware General Corporation
Law, there hereby is created, out of the 5,000,000 shares of
Preferred Stock of the Corporation authorized in Article FOURTH
of the Certificate of Incorporation (the "Preferred Stock"), a
series of the Preferred Stock consisting of 30,000 shares, $.001
par value per share, to be designated "Series C Convertible
Preferred Stock," and to that end the Board adopted a resolution
providing for the designations, powers, preferences and rights,
and the qualifications, limitations and restrictions, of the
Series C Convertible Preferred Stock, which resolution is as
follows:
RESOLVED, that the Certificate of the Designations, Powers,
Preferences and Rights of the Series C Convertible Preferred
Stock, dated January 23, 1998 ("Certificate of Designation") be
and is hereby authorized and approved, which Certificate of
Designation shall be filed with the Delaware Secretary of State
in the form as follows:
1. Designations and Amount. Thirty Thousand
(30,000) shares of the Preferred Stock of the Corporation, $.001
par value per share, shall constitute a class of Preferred Stock
designated as "Series C Convertible Preferred Stock" (the "Series
C Preferred Stock").
2. Dividends.
(a) The holders of each share of Series C Preferred
Stock shall be entitled to receive, when and as declared by the
Board of Directors of the Corporation (the "Board") out of assets
of the Corporation legally available for payment, dividends at
the rate per share of Twelve Percent (12%) per annum of the
aggregate Stated Value (the "Aggregate Stated Value") of the
Series C Preferred Stock (the "Preferred Dividends"). The
"Stated Value" of each share of Series C Preferred Stock shall be
$100. Such Preferred Dividends shall accrue from the date of
issuance or the last Preferred Dividend record date and be
payable to holders of record of Series C Preferred Stock and
shall be paid, at the Company's sole discretion, in cash or in
shares of Common Stock (the number of whole shares of Common
Stock to be issued shall be the quotient of the Preferred
Dividend divided by the then-effective Conversion Price (as
defined herein)), only if, when and as declared by the Board of
Directors of the Corporation, out of funds legally available for
that purpose, unless sooner declared by the Board of Directors.
Preferred Dividends on shares of Series C Preferred Stock shall
not be cumulative, so that Preferred Dividends in such amounts
shall have been declared on the shares of the Series C Preferred
Stock and a sum sufficient for the payment thereof shall have
been set apart for such payment, before any dividend shall be
declared or paid or any other distribution ordered or made upon
any class of stock ranking as to dividends or upon liquidation
junior to the Series C Preferred Stock (other than a dividend
payable in such junior stock) and before any sum or sums shall be
set aside for or applied to the purchase or redemption of any
shares of any class of stock ranking as to dividends or upon
liquidation junior to the Series C Preferred Stock (with respect
to rights to dividends and on liquidation, the Series C Preferred
Stock shall rank prior to the Common Stock (as hereinafter
defined)), the Preferred Dividends must be paid. All Preferred
Dividends declared upon the Series C Preferred Stock shall be
declared pro rata per share. Holders of shares of Series C
Preferred Stock shall not be entitled to any Preferred Dividends,
whether payable in cash, property or stock, in excess of the
Preferred Dividends at the rate set forth above. All payments
due under this Section 2 to any holder of shares of Series C
Preferred Stock shall be made to the nearest cent.
(b) In addition to, and not in lieu of, Preferred
Dividends payable under Section 2(a), in the event that the
Corporation shall pay, on any date, dividends or any other
distribution of any kind on common stock, $.01 par value per
share (the "Common Stock"), then a dividend or distribution on
each share of Series C Preferred Stock shall be paid in an amount
in cash equal to the cash dividend or, in the event of a
distribution, the holder of Series C Preferred Stock shall
receive such distribution that a holder of Series C Preferred
Stock would have received if such holder had converted its shares
of Series C Preferred Stock to shares of Common Stock immediately
prior to the record date for such dividend or other distribution
at the applicable conversion rate as set forth in Section 5. The
Corporation shall declare a dividend or distribution on the
Series C Preferred Stock as provided in this Section 2(b)
contemporaneously with the declaration of a dividend or
distribution on the Common Stock.
(c) The Corporation may not declare or pay any
dividend or make any distribution of assets on, or redeem,
purchase or otherwise acquire, shares of Common Stock or of any
other capital stock of the Corporation ranking junior to the
Series C Preferred Stock as to the payment of dividends or the
distribution of assets upon liquidation, dissolution or winding
up, unless all declared and unpaid Preferred Dividends on the
Series C Preferred Stock have been or contemporaneously are paid.
3. Rights on Liquidation, Dissolution or Winding
Up, Etc.
(a) In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation (each, a "Liquidation"), the assets of the
Corporation available for distribution to its stockholders,
whether from capital, surplus or earnings, shall be distributed
in the following order of priority:
(i) The holders of Series C Preferred Stock
shall be entitled to receive, prior and in preference to any
distribution to the holders of Common Stock, any other series or
class of Preferred Stock or any other class of the Corporation's
capital stock, whether now existing or hereafter created (except
for the Series A Preferred Stock and the Series B Preferred
Stock, with which Series C Preferred Stock shall, for the
purposes of a Liquidation, rank junior), an amount per share
equal to the greater of (A) the amount they would have received
had they converted all of the shares of Series C Preferred Stock
into shares of Common Stock immediately prior to such Liquidation
plus all declared but unpaid dividends on such shares of Series
C Preferred Stock as of the date of such Liquidation or (B) the
Stated Value, subject to adjustment as described in Section 5
hereof. If, upon the occurrence of a Liquidation, the assets and
funds thus distributed among the holders of the Series C
Preferred Stock shall be insufficient to permit the payment to
such holders of the full aforesaid preferential amounts, then the
entire assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of
the Series C Preferred Stock, in proportion to the preferential
amount each such holder is otherwise entitled to receive.
(ii) After distribution of the amounts set
forth in Section 3(a)(i) hereof, the remaining assets of the
Corporation available for distribution, if any, to the
stockholders of the Corporation shall be distributed to (A) the
holders of issued and outstanding shares of Common Stock. If,
upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Common Stock shall be
insufficient to permit the payment to such holders of the full
aforesaid aggregate amount, then the entire remaining assets and
funds of the Corporation legally available for distribution shall
be distributed ratably among the holders of the Common Stock in
proportion to the number of shares of Common Stock held by each
such holder.
4. Voting Rights. The holders of Series C
Preferred Stock shall not be entitled to vote on any matter
except as required by law.
5. Conversion of Series C Preferred Stock.
(a) The holders of Series C Preferred Stock shall
have the right, at such holders' option, at any time or from time
to time beginning on the day immediately following the date the
Series C Preferred Stock is first issued and until January 1,
2002, to convert each share of Series C Preferred Stock into such
whole number of shares of Common Stock as is equal to the number
of fully paid and non-assessable shares of Common Stock which
results by dividing the number of shares of Series C Preferred
Stock to be converted by the Conversion Price per share for the
Series C Preferred Stock in effect at the time of conversion.
The initial "Conversion Price" per share of the Series A
Preferred Stock shall be $1.75. The holder of any shares of
Series C Preferred Stock, exercising the aforesaid right to
convert such shares into shares of Common Stock shall be entitled
to receive, in cash, an amount equal to all declared dividends
with respect to such shares of Series C Preferred Stock up to and
including the respective conversion date of such shares of Series
C Preferred Stock.
(b) Each share of Series C Preferred Stock shall,
subject to adjustment as provided in this Section 5,
automatically be converted into Common Stock by converting each
share of Series C Preferred Stock as is equal to the number of
fully paid and non-assessable shares of Common Stock which
results by dividing each share of Series C Preferred Stock by the
Conversion Price in accordance with Section 5(a) hereof (i) on
January 1, 2002 or (ii) at any time after (x) the 30-day
anniversary of the effective date of the registration statement
on which the shares of Common Stock issuable upon conversion of
the Series C Preferred Stock were registered and (y) the average
closing price of the Common Stock for the 20-day period
immediately prior to the date on which notice of redemption is
given by the Corporation to the holders of the Series C Preferred
Stock is at least $3.50 per share.
(c) Before any holder of Series C Preferred Stock
shall be entitled to convert the same into shares of Common
Stock, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for the Series C Preferred
Stock, and shall give written notice to the Corporation at its
principal corporate office, of the election to convert the same
and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be
issued. The Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of
Series C Preferred Stock, or to the nominee or nominees of such
holder, a certificate or certificates for the number of shares of
Common Stock to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of
the shares of Series C Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock as
of such date.
(d) The Conversion Price shall be subject to
adjustment from time to time as follows:
(i) In the event the Corporation should at any time
or from time to time after the Series C Issuance Date fix a
record date for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or
Common Stock equivalents without payment of any consideration by
such holder for the additional shares of Common Stock or the
Common Stock equivalents (including the additional shares of
Common Stock issuable upon conversion or exercise thereof), then,
as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed),
the Conversion Price shall be appropriately decreased so that the
number of shares of Common Stock issuable upon conversion of each
share of such Series C Preferred Stock shall be increased in
proportion to such increase in the aggregate of shares of Common
Stock outstanding and those issuable with respect to such Common
Stock equivalents.
(ii) If the number of shares of Common Stock
outstanding at any time after the Series C Issuance Date is
decreased by a combination of the outstanding shares of Common
Stock, then, following the record date of such combination, the
Conversion Price shall be appropriately increased so that the
number of shares of Common Stock issuable upon conversion of each
share of Series C Preferred Stock shall be decreased in
proportion to such decrease in outstanding shares.
(iii) No adjustment in the Conversion Price for the
Series C Preferred Stock shall be required unless such adjustment
would require an increase or decrease of at least one cent
($0.01) in such Conversion Price; provided, however, that any
adjustments which by reason of this Section 5(d)(iii) are not
required to be made shall be carried forward and taken into
account in any subsequent adjustment required to be made
hereunder. All calculations under this Section 5(d) shall be
made to the nearest one cent ($0.01). In the case of the
issuance of Common Stock for cash, the consideration shall be
deemed to be the amount of cash paid therefor before deducting
any reasonable discounts, commissions or other expenses allowed,
paid or incurred by the Corporation for any underwriting or
otherwise in connection with the issuance and sale thereof.
(e) In the event the Corporation shall declare a
distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets
(excluding cash dividends) or options or rights not referred to
in Section 5(c) hereof to the holders of Common Stock, then, in
each such case for the purpose of this Section 5(e), the holders
of the Series C Preferred Stock shall be entitled to a
proportionate share of any such distribution as though they were
the holders of the number of shares of Common Stock of the
Corporation into which their shares of Series C Preferred Stock
are convertible as of the record date fixed for the determination
of the holders of Common Stock of the Corporation entitled to
receive such distribution.
(f) If at any time or from time to time there shall
be a recapitalization of the Common Stock (other than a
subdivision, combination or merger or sale of assets transaction
provided for elsewhere in this Section 5), provision shall be
made so that the holders of the Series C Preferred Stock shall
thereafter be entitled to receive upon conversion of the Series
C Preferred Stock the number of shares of stock or other
securities or property of the Corporation or otherwise, to which
a holder of Common Stock deliverable upon conversion would have
been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the
provisions of this Section 5 with respect to the rights of the
holders of the Series C Preferred Stock after the
recapitalization to the end that the provisions of this Section
5 (including adjustment of the number of shares issuable upon
conversion of the Series C Preferred Stock) shall be applicable
after that event as nearly equivalent as may be practicable.
(g) The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 5 and in the
taking of all such action as may be necessary or appropriate in
order to protect the conversion rights of the holders of the
Series C Preferred Stock against impairment.
(h) If any capital reorganization or
reclassification of the capital stock of the Corporation, or
consolidation or merger of the Corporation with and into another
corporation, or the sale of all or substantially all of its
assets to another corporation, shall be effected while any shares
of Series C Preferred Stock are outstanding in such a manner that
holders of shares of Common Stock shall be entitled to receive
stock, securities or assets with respect to or in exchange for
Common Stock, then, as a condition of such reorganization or
reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby each holder of Series C
Preferred Stock shall thereafter have the right to receive upon
the basis and upon the terms and conditions specified herein and
in lieu of the shares of Common Stock immediately theretofore
receivable upon conversion of Series C Preferred Stock, such
shares of stock, securities or assets as may be issued or payable
with respect to or in exchange for a number of outstanding shares
of such Common Stock equal to the number of shares of such Common
Stock immediately theretofore so receivable had such
reorganization or reclassification, consolidation, merger or sale
not taken place, and in such case appropriate provision shall be
made with respect to the rights and interests of the holders of
Series C Preferred Stock to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the
number of shares of Common Stock issuable upon conversion
thereof) shall thereafter be applicable, as nearly as may be
possible, in relation to any shares of stock, securities or
assets thereafter deliverable upon the conversion of such shares
of Series C Preferred Stock.
(i) (A) No fractional shares shall be issued upon
the conversion of any share or shares of the Series C Preferred
Stock, and the number of shares of Common Stock to be issued
shall be rounded to the nearest whole share. In lieu of any
fractional shares to which the holder would otherwise be
entitled, the Corporation shall make a cash payment equal to the
Fair Market Value (as hereinafter defined) of the Common Stock as
of two business days prior to payment multiplied by such
fraction. "Fair Market Value" shall mean the closing price of
the Common Stock on the national securities exchange on which the
Common Stock is listed (if the Common Stock is so listed) or on
the NASDAQ National Market or Small Cap Market (if the Common
Stock is regularly quoted on the NASDAQ National Market or Small
Cap Market), or, if not so listed or regularly quoted or if there
is no such closing price, the mean between the closing bid and
asked prices of the Common Stock in the over-the-counter market
or on such exchange or on NASDAQ, or, if such bid and asked
prices shall not be available, as reported by any nationally
recognized quotation service, or if the price is not so reported,
as determined in good faith by the Board.
(B) Upon the occurrence of each adjustment or
readjustment of the Conversion Price, the Corporation, at its
expense, shall promptly compute such adjustment or readjustment
in accordance with the terms hereof and prepare and furnish to
each holder of Series C Preferred Stock a statement, signed by
its independent certified public accountants, setting forth such
adjustment or readjustment and showing in detail the facts upon
which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of
Series C Preferred Stock, furnish or cause to be furnished to
such holder a like certificate setting forth (A) such adjustment
and readjustment and (B) the number of shares of Common Stock and
the amount, if any, of other property which at the time would be
received upon the conversion of a share of such Series C
Preferred Stock.
(j) In the event of any taking by the Corporation
of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to
receive any dividend (other than a cash dividend) or other
distribution, any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities
or property, or to receive any other right, the Corporation shall
mail to each holder of Series C Preferred Stock, at least 20 days
prior to the date specified therein, a notice specifying the date
on which any such record is to be taken for the purpose of such
dividend, distribution or right, and the amount and character of
such dividend, distribution or right.
(k) The Corporation shall at all times reserve and
keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion
of the shares of the Series C Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of the Series
C Preferred Stock; and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the
Series C Preferred Stock, in addition to such other remedies as
shall be available to the holder of such Series C Preferred
Stock, the Corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes, including,
without limitation, engaging in best efforts to obtain the
requisite stockholder approval of any necessary amendment to
these provisions.
(l) The Corporation shall pay all documentary, stamp
or other transactional taxes attributable to the issuance or
delivery of shares of capital stock of the Corporation upon
conversion of any shares of Series C Preferred Stock; provided,
however, that the Corporation shall not be required to pay any
taxes which may be payable in respect of any transfer involved in
the issuance or delivery of any certificate for such shares in a
name other than that of the holder of the shares of Series C
Preferred Stock in respect of which such shares are being issued.
(m) All shares of Common Stock which may be issued
in connection with the conversion provisions set forth herein
will, upon issuance by the Corporation, be validly issued, fully
paid and nonassessable and free from all taxes, liens or charges
with respect thereto.
(n) Any notice required by the provisions of this
Section 5 to be given to the holders of shares of Series C
Preferred Stock shall be deemed given if deposited in the United
States mail, postage prepaid, and addressed to each holder of
record at his address appearing on the stock books of the
Corporation.
(o) In the event any shares of Series C Preferred
Stock shall be converted pursuant to Section 5 hereof or
otherwise reacquired by the Corporation, the shares so converted
or reacquired shall be cancelled. The Certificate of
Incorporation of the Corporation may be appropriately amended
from time to time to effect the corresponding reduction in the
Corporation's authorized capital stock.
6. No Pre-emptive Rights. No holder of shares of
the Series C Preferred Stock will possess any preemptive rights
to subscribe for or acquire any unissued shares of capital stock
of the Corporation (whether now or hereafter authorized) or
securities of the Corporation convertible into or carrying a
right to subscribe to or acquire shares of capital stock of the
Corporation.
7. Redemption. The holders of shares of Series C
Preferred Stock shall have no redemption rights.
IN WITNESS WHEREOF, Paradigm Medical Industries, Inc.
has caused this Certificate of Designation to be executed this
2nd day of February, 1998.
PARADIGM MEDICAL INDUSTRIES, INC.
Michael W. Stelzer
Vice President of Operations and
Chief Operating Officer
Randall A. Mackay
Secretary
(SEAL)
LEASE AGREEMENT
THIS LEASE AGREEMENT made and entered into this 19th day of
December, 1997, by and between Eden Roc, a California
corporation, hereinafter referred to as the "Landlord", and
Paradigm Medical Industries, a Delaware corporation, hereinafter
referred to as the "Tenant":
WITNESSETH
ARTICLE 1. PREMISES AND TERM. Landlord hereby leases and
by these presents does lease and demise to the Tenant, and the
Tenant does lease and take from the Landlord, the premises
described on Exhibit "B" attached hereto, consisting of
approximately 4,397 square feet of office/warehouse space, the
"Demised Premises", situated in the building erected on the
property described on Exhibit "A" attached hereto, together with
all the easements, rights, privileges and appurtenances thereunto
belonging or in any way appertaining to the Demised Premises.
TO HAVE AND TO HOLD the said Demised Premises, together
with all and singular the improvements, appurtenances, rights,
privileges and easements thereunto belonging to or in anywise
appertaining, unto Tenant for a three (3) year term commencing as
of January 1, 1998, and continuing thereafter to and including
the date December 31, 2000, subject, however, to extension and
renewal as hereafter provided.
ARTICLE 2. CONSTRUCTION OF IMPROVEMENTS. Landlord agrees,
at Landlord's sole cost and expense, to construct a building and
other improvements, containing the Demised Premises, in
accordance with the preliminary plans and specifications prepared
by Tenant, copies of which have been attached hereto and
incorporated herein as Exhibit "B", and initialed by the parties,
which plans and specifications the parties have carefully
reviewed and specifically approved.
ARTICLE 3. OBLIGATIONS OF TENANT AND LANDLORD.
3.1 Real Property Taxes. Tenant shall pay, within ten (1O)
days front the date Landlord submits to Tenant a statement
setting forth the amount due Landlord under the provisions of
this paragraph, Tenant's proportionate share of the real property
taxes and assessments on the Demised Premises as additional rent
hereunder. Tenant's proportionate share of such taxes and
assessments shall be determined by multiplying the total amount
of such taxes and assessments by a fraction, the numerator of
which is the floor area of the Demised Premises and the
denominator of which is the total floor area of the building or
buildings being assessed. Tenant shall pay one-twelfth (1/12) of
Tenant's proportionate share of the estimated annual taxes in
advance each month in addition to the minimum rental payment due
hereunder Landlord shall pay all taxes, and assessments lawfully
levied or assessed against the building or buildings or any part
thereof, provided, however, that Landlord may, dispute and
contest the same Tenant may, at its sole cost and expense, after
it has paid in full its proportionate share of any taxes or
assessments due hereunder, upon fifteen (15) days prior written
notice to Landlord, contest with the appropriate governmental
authority such tax or assessment. Tenant shall be entitled to
any refund of any tax or penalty paid by Tenant, or paid by
Landlord and reimbursed by Tenant to Landlord. (See Lease Rider
"A" Building Expenses attached hereto and incorporated herein.)
3.2 Personal Property Taxes. Tenant shall additionally
pay, when due, all personal property taxes and license fees
levied and assessed against the Demised Premises during the term
of this Lease. Nothing contained in this Lease shall require or
be construed to obligate the Tenant to pay any franchise, excise,
corporate, estate, inheritance, succession, capital levy or
transfer tax of the Landlord, or any income, profits or revenue
tax upon the income of the Landlord; provided, however, that in
any case where a tax may be levied, assessed or imposed upon
Landlord for the privilege of renting or leasing the Demised
Premises or which is based upon the rental revenue derived
therefrom, Tenant shall pay to Landlord as additional rent
hereunder the amount of said tax, but in no event shall the
Tenant be obligated to pay an amount greater than that which
would be payable if the Demised Premises were the only asset of
the Landlord.
3.3 Tenant's Insurance. The Tenant shall, during the entire
term of this Lease, at the Tenant's sole cost and expense, but
for the mutual benefit of the Landlord and Tenant, maintain
general public liability insurance against claims for personal
injury, death or property damage occurring upon, in or about the
entire property described on Exhibit "B" attached hereto and on,
in or about the adjoining streets and passageways, such insurance
to afford protection to the limit of not less than $1,000,000 in
respect to injury or death to a single person, and to the limit
of not less than $2,000,000 in respect to any one accident, and
to the limit of not less than $250,000 in respect to property
damage or a combined single limit policy not less than $1,000,000
per occurrence. All policies shall name Landlord and the
mortgages of the property as an additional named insured, as
their interest may appear.
Tenant shall also provide insurance coverage to the extent
of the full replacement value covering all of Tenant's property,
fixtures, equipment, tools, improvements, stock, goods, wares or
merchandise, that it may have in or on or about the Demised
Premises.
Other forms of insurance may be reasonably required to
cover future risks against which a prudent Tenant would protect
itself.
All policies of insurance provided for herein shall be
issued by insurance companies with a general policy holder's
rating of not less than A and a financial rating of AAA, as rated
in the most current available "Best's Guide" Insurance Reports,
and qualified to do business in the state of Utah.
The policies for the foregoing insurance shall provide that
the proceeds thereof shall be payable to the Tenant and to the
Landlord, as their respective interests may appear. Said
required Tenant insurance coverage shall be verified to the
Landlord by an insurance carrier in the form of either a
certified copy of the policy or other written verification of
insurance coverage acceptable to Landlord and the lending
institution for the Demised Premises Such insurance policies
shall provide that Landlord be given thirty (30)days written
notice prior to any cancellation or alteration of any policy.
To the extent that Tenant fails to provide the foregoing
insurance, either hazard or liability, Tenant shall be
responsible to Landlord, as his interest appears, for such damage
that would have been insured by said policies but for Tenant's
failure to obtain such insurance.
3.4 Landlord's Insurance, Subject to Tenant's
reimbursement, Landlord shall provide fire, lightning, and
extended coverage ("all risk") insurance and such additional
insurance coverage as may be required by Landlord's mortgagee
(including "loss of rents" insurance) on the building, of which
the Demised Premises is a part, for the full replacement value
thereof or such value as is required by Landlord's mortgagee,
whichever is greater, against such loss. Tenant shall reimburse
Landlord, as additional rental hereunder, for Tenant's
proportionate share (determined in the same manner as Tenant's
proportionate share of taxes and assessments herein above) of the
costs of the insurance premium therefor within ten (10) days from
the date Landlord submits to Tenant a statement setting forth the
amount due Landlord under the provisions of this paragraph,
Tenant agrees that it will not at any time, during the term of
this Lease, carry any stock of goods or do anything in or about
the demised Premises which will in any way tend to increase the
insurance rates upon the building of which the Demised Premises
are a pari. In addition to Tenant's proportionate share of the
costs of insurance premiums as described herein, Tenant agrees to
pay to Landlord forthwith upon demand the amount of any increase
in premiums for insurance against loss by the that may be charged
during the term of this Lease on the amount of insurance to be
carried by Landlord on the building of which the Demised Premises
are a part resulting from the foregoing or from Tenant doing any
act in or about said Demised Premises which does so increase the
insurance rates, whether or not the Landlord shall have consented
to such act on the part of Tenant. If Tenant installs upon the
Demised Premises any electrical equipment which constitutes an
overload on the electrical lines of the Demised Premises, Tenant
shall at its own expense make whatever changes are necessary to
comply with the requirements of the insurance underwriters,
nothing herein contained shall be deemed to constitute Landlord's
consent to such overloading. Tenant shall pay 1/1 2 of Tenant's
proportionate share of the estimated annual building insurance
premium in advance each month along with the minimum rental
payment. (See Lease Rider "A" Building Expenses attached hereto
and incorporated herein.)
3.5 Subrogation. Landlord and any other tenants of the
building shall not be liable to Tenant or anyone claiming by,
through or under Tenant, including an insurance carrier or
carriers, for any insurable loss or damage, and no such carriers
shall have the right to subrogate against Landlord, or any other
Tenant. All of the insurance policies required hereunder
pertaining to the Demised Premises shall contain an endorsement
by the respective insurance carriers waiving any and all rights
of subrogation against Landlord, and any other tenant of the
building, a copy of which endorsement or endorsements, or
evidence thereof by way of certificate shall be furnished to the
Landlord.
3.6 Assumption of Risk, Anything herein to the contrary
notwithstanding, after the commencement of the term as provided
in Article 1, the Tenant assumes full risk of damage to its
property, fixtures, equipment, tools, improvements, stock, goods,
wares or merchandise, that it may have in or on or about the
Demised Premises, resulting from fire, lightning, extended
coverage perils, flood and any catastrophe, regardless of cause
or origin. The Landlord shall not be liable to Tenant or anyone
claiming by, through or under Tenant, including Tenant's
insurance carrier or carriers, for any loss or damage resulting
from fire, lightning or extended coverage perils or from an act
of God, Landlord shall not be liable to the insurance carrier for
damages insured against, either directly or by way of
subrogation.
ARTICLE 4. TENANT'S USE. The Tenant may use the Demised
Premises for conducting its medical products/general office
business. Tenant shall use the Demised Premises only for lawful
and proper purposes, which are permissible under applicable law
(including under applicable zoning laws). Tenant shall not make
any use of the Demised Premises which will cause cancellation of
any insurance policy covering the same and shall not keep or use
on the Demised Premises any article, item, or thing which is
prohibited by the terms of the hazard insurance policy covering
the improvements. Tenant shall not commit any waste upon the
Demised Premises and shall not conduct or allow any business,
activity or thing on the Demised Premises which is or becomes
unlawful, prohibited, or a nuisance or which may cause damage to
Landlord, to occupants or other tenants in the vicinity, or to
other third parties. Tenant shall comply with and abide by all
laws, ordinances, and regulations of all municipal, county, state
and federal authorities which are now in force or which may
hereafter become effective with respect to use and occupancy of
the Demised Premises. Tenant shall make no alteration or
addition to the Premises without the prior written consent of
Landlord.
Tenant represents to Landlord that neither Tenant or any
affiliates of Tenant will generate, store or dispose of any
Hazardous Substances (as defined below) at or in the area of the
Demised Premises and Property.
Tenant covenants with Landlord: a) to prohibit any
generation, storage or disposal of Hazardous Substances at the
Premises, b) to deliver promptly to Landlord true and complete
copies of all notices received by Tenant from any governmental
authority with respect to the generation, storage or disposal by
Tenant of Hazardous Substances (whether or not at the Premises);
and c) to permit entry onto the Premises by Landlord or
Landlord's representative(s) at any reasonable time to verify
Tenant's compliance with the foregoing.
Tenant agrees to indemnify and defend Landlord (with legal
counsel reasonably acceptable to Landlord) from and against any
costs, fees or expenses (including, without limitation, cleanup
expenses, third party claims and environmental impairment
expenses and reasonable attorneys' fees and expenses) incurred by
Landlord in connection with Tenant's generation, storage, or
disposal of Hazardous Substances at or near the Demised Premises
in accordance with the foregoing and with Tenant's compliance
with the foregoing representations and covenants. This
indemnification by Tenant shall survive termination or expiration
of this Lease.
"Hazardous Substances" shall mean (i) hazardous substances
as defined in the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, (ii) "PCBs", as
defined in 40 C.F.R. 761 et seq. and "TCDD" as defined in 40
C.F.R. 755 et seq. (or in either case analogous regulations
promulgated under the Toxic Substances Control Act, as amended),
(iii) "asbestos" as defined in 29 C.F.R. 1910. 1001 et seq, (or
analogous regulations promulgated under the Occupational Safety
and Health Act of 1970, as amended), and (iv) waste oils and
other petroleum hydrocarbon compounds.
In the event Tenant's business, or use of the demised
premises, should require the legal storing of barrels, drums and
other storage containers, Tenant covenants with Landlord to
provide Landlord no less often than every three (3) months with
a complete and accurate list of all storage containers, chemical
inventories and quantities. Such inventory list shall be updated
by Tenant to Landlord every quarter and certified as a true and
correct inventory.
Additionally, Tenant shall supply Landlord with a container
and contents disposal plan acceptable to Landlord or in the
alternative, a bond payable to Landlord to fund the disposal and
discardment of all chemicals and/or storage containers located on
or about the demised premises, Said bond shall be used by
Landlord in the event Tenant fails to properly dispose of such
containers and chemicals
Tenant covenants with Landlord to Store all chemical
containers in a safe and secure manner either inside the Demised
Premises or within a secured fenced area, so as not to cause a
nuisance to Landlord and other tenants in the proximity of the
Demised Premises, and to prevent tile unlawful infiltration of
chemicals and container discardment by others.
ARTICLE 5. POSSESSION. Possession of the Demised Premises
shall be delivered to the Tenant as herein provided, free and
clear of all Tenants and occupants and the rights of either .
The Demised Premises shall also be free of liens, encumbrances
and violations of laws, ordinances and regulations adversely
affecting the use and occupancy of the Demised Premises, except
those presently of record including mortgages and trust deeds and
those that may be specified herein. Tenant agrees to deliver to
the Landlord physical possession of the Demised Premises
including all keys to the Demised Premises, upon the termination
or expiration of this Lease, or any extension thereof, in as good
order, condition and state of repair as when received by Tenant,
reasonable wear and tear thereof and damage by fire, acts of God
or the elements excepted.
ARTICLE 6. RENT.
6.1 Minimum Rent. The Tenant agrees to pay the Landlord,
at such address as shall from time to time be designated by
Landlord, as minimum rental during the initial term of this Lease
without right of offset or deduction, the sum of:
01/01/98 - 01/31/98 -0-/month
02/01/98 - 12/31/98 $3,3 15.66/month - $36,472.26/11
months
01/01/99 - 12/3 1/99 $3,415.13/month - $40,981.56/year
01/01/00 - 12/31/00 $3,517.58/month - $42,210,96/year
Minimum rental shall be payable monthly, in advance,
without demand on the first day of each calendar month throughout
the Lease term. Should Tenant's occupancy of the Demised
Premises commence on any day other than on the first (1st) day of
the calendar month, the first rental shall be prorated
accordingly.
6.2 Late Penalty. Tenant shall be charged a five percent
(5%) late fee on all rental payments which are received by
Landlord more than ten (10) days after their due date. Such late
fee shall compensate Landlord for I) the costs attributable to
giving notice of delinquency, ii) the expense of servicing the
mortgage loan on landlord's Building from alternative funds; and
iii) Landlord's loss of interest. Any rental payments which are
not paid within twenty (20) days of their due date shall bear
interest thereafter at the rate of one and one-half percent
(1-1/2%) per month, or the highest rate permitted by law,
whichever is lower, until paid.
ARTICLE 7.SIGNS. With the prior written approval of
Landlord, which approval shall not be unreasonably withheld,
Tenant shall have the right and privilege to place on the
building or Demised Premises signage necessary for the operation
of Tenant's business. Such sign installation shall not adversely
affect or damage the physical structure of the building, nor
detract from the overall harmony of the building and the Metro
Business Park development. All such signs must conform with the
codes and regulations of West Valley City and adhere to the
signage criteria for the development. Tenant shall have the use
of the existing monument sign currently used by WHN and Maxim
Technologies,
Upon the expiration or termination of the lease, the Tenant
shall remove all signage installed by Tenant and repair any
damaged areas on the building or Demised Premises caused thereby,
to a condition acceptable to the Landlord,
ARTICLE 8. ALTERATIONS AND IMPROVEMENTS. Tenant shall have
the right, subject to Landlord's prior written approval, to make
non-structural alterations, additions, or improvements
(hereinafter collectively referred to as "improvements") to the
interior of the Demised Premises. Said improvements and
additions shall be accomplished at Tenant's sole cost and expense
and shall be made in compliance with all building codes and
ordinances, laws, and regulations applicable to the Demised
Premises. Tenant shall cause all improvements to be accomplished
in a good workmanlike manner using the same quality and finish to
match existing, Landlord shall have the right, but not the
obligation, to require Tenant's removal of said improvements at
the expiration or termination of the Lease, including restoration
of the Demised Premises, to its original state of improvement,
configuration, etc.
Tenant shall keep the Premises free from any liens arising
out of any work performed, material furnished or obligation
incurred by or for Tenant or any person or entity claiming
through or under Tenant. In the event that Tenant shall not,
within sixty (60) days following the imposition of any such lien,
cause the same to be released by payment or posting of a bond,
Landlord shall have the right, but not the obligation, to cause
such lien to be released by such means as Landlord deems proper,
including payment of the claim giving rise to such lien, All such
sums paid and all expenses incurred by Landlord in connection
therewith shall be due and payable to Landlord by Tenant as
additional rent within fifteen (15) days of Tenant's receipt of
Landlord's invoice.
ARTICLE 9. FIXTURES AND PERSONAL PROPERTY. All fixtures
(not including trade fixtures) installed or attached to the
Demised Premises by and/or at the expense of Tenant shall become
the property of Landlord. Any trade fixtures installed in the
Demised Premises by and at the expense of the Tenant shall remain
the property of the Tenant or Tenant's trade fixture Lessors, and
the Landlord agrees that so long as Tenant is not in default
hereunder, Tenant or its Lessors shall have the right at any time
to remove any and all of its trade fixtures which it may have
stored or installed in the Demised Premises. Landlord expressly
agrees to waive or subordinate any claim which Landlord may or
might have against the trade fixtures and personal property of
Tenant in favor of a Lessor who intends to Lease any of the same
to Tenant. Tenant shall be required, at the expiration or
termination of this Lease Agreement or any extension or renewal
thereof, to remove any and all of its trade fixtures which it may
have stored or installed in the Demised Premises. Tenant will
repair all damage to the Demised Premises occasioned by such
trade fixture removal. If Tenant shall holdover beyond lease
expiration or lease termination, with Landlord's approval of such
holdover, for removal of fixtures and equipment (not to exceed
ten (10) days), Tenant shall pay to the Landlord as rental
therefore, a sum equal to the prorata portion of the previous
monthly rental thereof. In the event Tenant has not completed the
removal of its fixtures and equipment and restoration of the
Premises caused thereby, within the ten (10) day period following
the expiration or termination of the lease, Landlord shall, in
Tenant's behalf and at Tenant's sole and exclusive expense, cause
such fixtures and equipment to be removed and the Premises to be
restored. Upon completion, the cost of said removal and
restoration, plus twenty percent (20%) for overhead and profit,
including prorated rental for the period of time required to
accomplish such, shall be passed on to Tenant for Tenant's
payment to Landlord,
ARTICLE 10. UTILITIES. The Tenant shall pay for all
water, heat, gas, electricity, and other costs of utilities
connected with, consumed, or used by it in connection with its
occupancy of the Demised Premises. In the event that one or more
of such utilities or related services shall be supplied to the
Demised Premises and to one or more other Tenants within the
development without being individually metered or measured to the
Demised Premises, Tenant's appropriate proportionate share
thereof shall be paid as additional rent based upon Landlord's
estimate of Tenant's anticipated usage. In the event any utility
service to the Demised Premises is interrupted or temporarily
discontinued for any reason whatsoever, Landlord shall not be
liable therefor to Tenant and the rent required to be paid
hereunder shall not be abated as a result thereof, and Tenant
waives any claims it might otherwise have against Landlord as a
result of any such interruption or discontinuation.
ARTICLE 11. MAINTENANCE AND REPAIRS. It is understood and
agreed that the Landlord shall, at its sole cost and expense,
keep and maintain, during the term of the Lease Agreement or any
extension or renewal thereof, the foundations, and structural
support portion of the improvements, including the structural
portions of the roof, in proper condition and in a good state of
repair. Landlord shall not be responsible for any maintenance or
repair caused by the fault or neglect of the Tenant, or due to
hazards and risks covered or required to be covered by insurance
hereunder except as insurance proceeds are available therefor.
All other maintenance and repair of said structure, including,
but not limited to, painting of walls, and maintenance, repair
and replacement of equipment, shall be the responsibility of the
Tenant. Any repairs or maintenance required to the roof
membrane, or any repainting of the exterior walls, shall be
accomplished by the Landlord and reimbursed by the Tenant as a
common area maintenance expense as further defined herein.
It is understood and agreed that should either party to
this Agreement fail or refuse to start and to proceed thereafter
with due diligence to make any repairs or maintenance as may be
reasonably necessary for the purpose of fulfilling the terms and
conditions of the agreements herein set forth within a reasonable
length of time (not to exceed seven (7) days) after being
notified in writing of the need thereof, that the other party
hereto may make such repairs at the cost and expense of the party
so failing or refusing. In the event of an emergency situation,
Tenant may, in its discretion, make emergency repairs without
giving written notification to Landlord, and Landlord shall
reimburse Tenant in the event that such repairs were the
responsibility of the Landlord hereunder and were not due to the
fault of Tenant or Tenant's agents. The rights of Tenant
hereunder specifically do not include the right to offset or
deduct any amounts claimed hereunder from rentals due.
Landlord reserves the right to enter upon the Demised
Premises (in a manner that will not unnecessarily interfere with
the business of Tenant) during business hours at any time to
inspect the same and to make necessary repairs to fulfill
Landlord's obligation hereunder.
ARTICLE 12. RESTORATION OF DAMAGE. If the Demised
Premises are partially damaged by fire, the elements or other
casualty covered by the "all risk" insurance policy referred to
herein above, Landlord shall promptly repair all damage and
restore the Demised Premises to their condition immediately prior
to the occurrence of such damage. During the period of
reconstruction referred to above, rent payable by Tenant shall
ratably abate, based upon the percentage of the Demised Premises
usable during reconstruction. The term of the Lease shall extend
one additional day for each day the entire Demised Premises are
not usable due to the reconstruction process.
If the Demised Premises shall be totally destroyed and/or
shall it be determined that more than one hundred eighty (180)
days will be required to repair or rebuild the Demised Premises,
both Landlord and Tenant shall have the right to terminate this
Lease Agreement upon written notice to the other within thirty
(30) days of the occurrence at which time this Lease Agreement
shall become null and void.
ARTICLE 13. EMINENT DOMAIN. If, during the term hereof,
or any renewal term, the entire Demised Premises shall be taken
for any public or quasi-public use under any governmental law,
ordinance or regulation, or by right of eminent domain, this
Lease and all right, title and interest of Tenant hereunder shall
cease and come to an end on the date of vesting of title pursuant
to such proceeding, or upon the date Tenant is dispossessed under
an order of immediate occupancy, whichever first occurs. If less
than all of the Demised Premises shall be taken for any public or
quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain, this Lease shall not
terminate, but the rent payable hereunder during the unexpired
portion of this Lease shall be reduced to such extent as may be
fair and reasonable under all of the circumstances. In any
taking of the Demised Premises or any part thereof, whether or
not this Lease is terminated as provided in this Paragraph, the
parties hereto may claim and shall be entitled to receive an
award or compensation therefor in accordance with their
respective legal rights and interests.
ARTICLE 14. DEFAULT IN PAYMENT OR RENT OF ABANDONMENT. In
the event of default by Tenant in the performance of its
obligation to pay rent hereunder, or in the event Tenant shall
vacate or abandon the Demised Premises, or in the event Tenant,
or any guarantor hereunder, shall be adjudicated as bankrupt for
the benefit of creditors, or enter into an arrangement or
participate voluntarily or involuntarily in any bankruptcy or
related proceeding under Federal or State Law, Landlord shall
have the right to terminate this Lease and to re-enter the
Demised Premises or any part thereof with or without process of
law@ or Landlord, at his option, without terminating this Lease,
shall have the right to re-enter the Demised Premises and sublet
the whole or any part thereof, for the account of the Tenant,
upon as favorable terms and conditions as the market will allow.
In the latter event, the Landlord shall have the right to collect
any rent which may thereafter become payable under such sublease
and to apply the same first to the payment of any expenses
incurred by the Landlord in the dispossessing the Tenant and in
subletting the Demised Premises, and Landlord may charge interest
at the rate equal to one percentage point higher than the prime
bank rate of Key Bank of Utah in Salt Lake City, which rate shall
vary front time to time as the prime bank rate varies, per annum
on such expenses; and, second, to the payment of the rental
herein reserved and the fulfillment of Tenant's covenants
hereunder, and the Tenant shall be liable for amounts equal to
the installments of rent as they become due, less any amounts
actually received by the Landlord and applied on account of
rental as aforesaid. The Landlord shall not be deemed to have
terminated this Lease by reason of taking possession of the
Demised Premises unless written notice of such termination has
been served on the Tenant.
ARTICLE 15. OTHER DEFAULTS BY TENANT. It is mutually
agreed that if the Tenant shall default in performing any of the
terms or provisions of this Lease Agreement other than as
provided in the preceding Article, and if the Landlord shall give
to the Tenant notice in writing of such default, and if the
Tenant shall fail to cure such default within fifteen (15) days
after the date of receipt of such notice, or if the default is of
such a character as to require more than fifteen (15) days to
cure, and if Tenant shall fail to use reasonable diligence in
curing such default, then in such applicable event the Landlord
may cure such default for the account of and at the cost and
expense of Tenant, plus interest at the rate equal to one
percentage point higher than the prime bank rate of Key Bank of
Utah, in Salt Lake City, which rate shall vary from time to time
as the prime bank rate varies, per annum, and the sum so expended
by the Landlord and interest shall be deemed to be additional
rent and on demand shall be paid by the Tenant on the day when
rent shall next become due and payable. Failure to pay any
additional rent as provided in this Article shall be deemed a
failure to pay rent within the meaning of Article 14.
ARTICLE 16. QUIET ENJOYMENT. Landlord represents and
warrants that it has full right and authority to enter into this
Lease, Tenant, upon paying all rentals and performing all the
Tenant's covenants, terms and conditions in this Lease Agreement,
shall and may peaceably and quietly hold and enjoy the Demised
Premises for the term of this Lease Agreement. Tenant
understands that other persons and entities conduct businesses or
reside near the Demised Premises. Tenant covenants and agrees to
conduct its business in such a manner as to not unreasonably
interfere with the occupants of surrounding properties.
ARTICLE 17. WAIVER. No delay or omission by either party
hereto to exercise any right or power accruing upon any
non-compliance or default by the other party with respect to any
of the terms hereof shall impair any such right or power to be
construed to be a waiver thereof Subject to the provisions of
this Article, every such right and power may be exercised at
anytime during the continuance of such default. It is further
agreed that a waiver by either of the parties hereto of any of
the covenants and agreements hereof to be performed by the other
shall not be construed to be a waiver of any succeeding breach
thereof or of any other covenants or agreements herein contained.
ARTICLE 18. ATTORNEY'S FEES. In the event of any action
at law or in equity between Landlord and Tenant to enforce any of
the provisions and/or rights hereunder or to recover damages for
breach hereof, the unsuccessful party to such litigation
covenants and agrees to pay to the successful party all costs and
expenses, including reasonable attorney's fees, incurred therein
by such successful party, and if such successful party shall
recover judgment in any such action or proceeding, such costs and
expenses and attorney's fees shall be included in and as a part
of such judgment.
ARTICLE 19. NOTICES. Any notices or demand required or
permitted to be given under this Lease Agreement shall be deemed
to have been properly given when, and only when, the same is in
writing and has been deposited in the United States Mail, with
postage prepaid, to be forwarded by certified mail and addressed
as follows:
TO THE LANDLORD AT: Eden Roe
c/o Chris Lynn Investments LLC
Property Management Company
P.O. Box 980427
Park City, Utah 84060-0427
801-647-9916
TO THE TENANT AT: Michael Stelzer
1127 West 2320 South, Suite A
West Valley City, Utah 84119
801-977-8970
Such addresses may be changed from time to time by either party
by serving notices as above provided.
ARTICLE 20. SUBORDINATION. This Lease shall be subject and
subordinate to all mortgages or trust deeds which may now or
hereafter affect the real property comprising the Demised
Premises, and also to all renewals, modifications, consolidations
and replacements of said mortgages and Trust Deeds. Although no
instrument or act on the part of Tenant shall be necessary to
effectuate such subordination; Tenant will, nevertheless, execute
and deliver in a prompt and diligent manner such further
instruments confirming such subordination of this Lease as may be
desired by the holders of said mortgages or Trust Deeds.
ARTICLE 21. ASSIGNMENT AND SUBLEASING. With the specific
prior written consent of Landlord first obtained, Tenant can, at
any time, assign this Lease or sublet all or any portion of tile
Demised Premises. Landlord's consent shall not be unreasonably
withheld, Any purported assignment or sublease without Landlord's
prior written approval shall be null and void and of no force and
effect whatsoever.
ARTICLE 22. SCOPE OF THE AGREEMENT. This Lease Agreement
shall be considered to be the only agreement between the parties
hereto. All negotiations and oral agreements acceptable to both
parties are included therein.
ARTICLE 23. OBLIGATIONS OF SUCCESSORS. Landlord and
Tenant agree that all of the provisions hereof are to be
construed as covenants and agreements as though the words
importing such covenants and agreements were used in each
separate paragraph hereof, and that all of the provisions hereof
shall bind and inure to the benefit of the parties hereto, and
their respective heirs, legal representatives, successors and
assigns.
ARTICLE 24. HOLD OVER. If, at the expiration or termination
of this Lease or any extension thereof, Tenant shall hold over
for any reason, if Landlord consents to the holding over, the
tenancy of Tenant thereafter shall be from month to month only
and shall, in the absence of a written agreement to the contrary,
be subject to all the other terms and conditions of this Lease
with the monthly rental adjusted to One Hundred Fifty Percent
(150%) of the monthly rental for the last month of the primary
Lease term or subsequent Lease renewal term.
ARTICLE 25. PARKING. The plans and specifications for the
construction of the Demised Premises, as approved by the parties,
depict adjacent parking for the non-exclusive use of Tenant.
Such parking and maintenance thereof shall remain under the
control of Landlord (subject to reimbursement of common area
maintenance as hereinafter set forth) and Landlord shall have the
right from time to time to publish reasonable nondiscriminatory
regulations for Tenant's use of the parking, with which
regulations Tenant covenants to comply.
ARTICLE 26. METRO BUSINESS PARK DEVELOPMENT. The parties
acknowledge that Exhibit "A" hereto contains a proposed site plan
for Landlord's entire construction project to be known as
(hereinafter referred to as the "Development"). Tenant
acknowledges that the site plan for the Metro Business Park
Development is subject to change and that Landlord may construct
the Development in a totally different configuration or may not
develop certain portions. During or after construction of the
Development, Landlord reserves the right to sell the Development
or portions thereof as developed with buildings or as undeveloped
property. The parties understand that in the event of Landlord's
sale of portions of the property developed as an integral part of
the Development, prior to such sale, Landlord shall place cross
easement, access and parking easements, suitable to Landlord upon
released and unreleased portions of the Development to facilitate
its continued integral use. Common Area Maintenance provisions
contained in the next immediate paragraphs of this Lease shall be
unaffected by any such partial sale and the Landlord shall
exercise his best efforts to ensure the parking and common areas
of the entire Development, as built, will be under common
management.
ARTICLE 27. COMMON AREAS. Areas within the outer property
lines of the Development as delineated on the plat attached
hereto marked Exhibit "A", exclusive of areas therein specified
or as built for leasing to Tenants shall be known as Common
Areas, as shall all other areas from time to little designated by
Landlord for use as part of the Development. Landlord covenants
and agrees at its sole cost and expense to improve said Common
Areas by installing and constructing tilereon parking lots,
access roads, pedestrian walkways, sidewalks, exterior canopies,
delivery and landscaped areas and lighting facilities to the
extent to which Landlord shall determine to be necessary. Said
Common Areas shall be available for the common use of all
Landlord's Tenants in the Development, their employees, customers
and invitees. Notwithstanding anything elsewhere herein
contained, Landlord reserves the right from time to time to make
reasonable changes in, additions to and deletions from the Common
Areas and the purposes to which the same may be devoted, and the
use of Common Areas shall at all times be subject to such
reasonable rules and regulations as may be promulgated by
Landlord.
ARTICLE 28. Landlord will maintain or cause to be
maintained the Common Areas and Tenant will reimburse Landlord
for Tenant's prorata share of the cost of such maintenance as
hereinafter provided,(a)Common area maintenance costs and
expenses shall be determined in accordance with generally
accepted accounting principles consistently applied and allocated
to any particular calendar year on the accrual method of
accounting. Such costs and expenses shall include, but shall not
be limited to upkeep, exterior painting, repairs, replacements
and improvements in the Common Areas, snow removal, sweeping and
cleanup, depreciation allowance on any machinery and equipment
owned by Landlord and used in connection therewith, payroll and
payroll costs, utility services including fire line water service
charges, police protection, night watchmen, premiums for public
liability, property damage and fire insurance including the
Common Areas, any real estate tax and/or tax consultant expense
incurred for the purpose of maintaining equitable tax assessments
on the Development, all property taxes or assessments levied or
assessed against all Common Areas, which, if not separately
assessed, shall be determined, far land, by the ratio of land
area designated for Common Area use to the total land area in the
Development and, for improvements, on a fair and equitable
allocation among the various improvements ill the Development,
giving weight to the factors which determine the amount of the
real property tax or assessment in question. In addition, such
costs shall include administrative costs equal to ten percent
(10%) of the total cost paid or incurred by Landlord under this
paragraph.
(b)Tenant shall pay as additional rent to Landlord, Tenant's
prorata share of such Common Area expenses in the following
manner:
(1)From and after the date the Minimum rental provided for
herein has commenced, but subject to adjustment as hereinafter in
this subparagraph (1) provided, Tenant shall pay Landlord in
advance on the first day of each calendar month during the term
of this Lease an estimated and adjustable amount covering
Tenant's proportionate share of common area services and
expenses, which amount may be adjusted by Landlord by notice to
Tenant at the end of any calendar month on the basis of
Landlord's experience and reasonably anticipated costs. (See
Lease Rider "A" attached hereto and incorporated herein.)
(2)Within thirty (30) days following the end of each
calendar year, Landlord shall furnish Tenant a statement covering
the calendar year just expired, showing the total operating
costs, the amount of Tenant's prorata share of such Common Area
expenses for such calendar year and the payments made by Tenant
with respect to such calendar year as set forth in subparagraph
(b) 1. If Tenant's prorata share of such Common Area expenses
exceeds Tenant's payments so made, Tenant shall pay Landlord the
deficiency within ten (10) days after receipt of such statement.
If said payments exceed Tenant's prorata share of such Common
Area expenses, Tenant shall be entitled to offset the excess
against payments next thereafter to become due Landlord as set
forth in said subparagraph (b) 1. Tenant's pro-rata share of the
total Common Area expenses for the previous calendar year shall
be that portion of all such expenses which is equal to the
proportion which the number of square feet of gross leasable area
in the Demised Premises bears to the total number of square feet
of gross leasable area of buildings in the entire Development
which are from time to time completed and occupied as of the
commencement of each calendar year.
There shall be appropriate adjustment of Tenant's share of
the Common Area expenses as of the commencement and expiration of
the term of this Lease. The term "Gross Leasable Area", as used
herein, shall be deemed to mean and include all fully enclosed
areas for the exclusive use and occupancy by occupant, measured
front the exterior surface of exterior walls (and from the
extensions thereof, in the case of openings), including
warehousing or storage areas, clerical or office areas,
mezzanines or the second levels of any spaces and employee areas.
"Gross Leasable Area" shall not include docks, areas for truck
loading and unloading nor any utility and/or mechanical equipment
vaults or rooms (to the extent such facilities lie outside
exterior building lines).
Anything to the contrary notwithstanding, in the event
Landlord or his designated agent do not maintain the entire
common area in the Development, then and in that event, for the
length of time such condition may exist, Landlord's
responsibility shall only be towards the maintenance and repair
of those portions of the Common Area not maintained by others,
and the "expense in connection with said common areas" shall only
refer to such areas maintained by Landlord, In this event,
Tenant's proportionate share of the expenses shall be determined
on the basis of the proportion of such expenses which the number
of square feet of gross leasable area in the Demised Premises
bears to the total number of square feet of gross leasable area
of buildings in the entire Development which are from time to
time completed and occupied as of the commencement of each
calendar year, exclusive of the area occupied and maintained by
others.
ARTICLE 29. SECURITY DEPOSIT. Tenant shall pay an amount
equal to last months rent at the time of signing of this Lease.
The amount equal to last months rent shall be held by Landlord as
security for the faithful performance of Tenant throughout the
Lease term, The security deposit shall be refundable to Tenant at
the end of the Lease term upon Tenant's satisfactory performance
throughout the Lease term.
ARTICLE 30. FORCE MAJEURE. In the event that either party
hereto shall be delayed or hindered in or prevented from the
performance of any act required hereunder by reason of strikes,
lockouts, labor troubles, inability to procure materials, failure
of power, restrictive governmental laws or regulations, riots,
insurrection, war or other reason of a like nature not the fault
of the party delayed in performing work or doing acts required
under the terms of this Lease, then performance of such act shall
be excused for the period of the delay and the period for the
performance of any such act shall be extended for a period
equivalent to the period of such delay. The provisions of this
Section shall not operate to excuse Tenant from prompt payment of
rent or any other payments required by the terms of this Lease.
ARTICLE 31. ESTOPPEL CERTIFICATE. Within ten (10) days
after request therefor by Landlord, or in the event that upon any
sale, assignment or hypothecation of the demised premises and/or
the land thereunder by Landlord, an estoppel statement shall be
required from Tenant. Tenant agrees to deliver to any proposed
mortgagee or purchaser, or to Landlord, in recordable form a
certificate certifying (if such be the case) that this Lease is
in full force and effect and that there are not defenses or
offsets thereto, or stating those claimed by Tenant
LEASE ARTICLE 32. LEASE RENEWAL OPTION. Landlord hereby
grants Tenant the right and option to renew this Lease Agreement
for one (1) successive three (3) year Lease renewal term under
the same Lease covenants and conditions as stated herein,
including the rental adjustment, as stated below. Should Tenant
desire to renew this Lease, Tenant must notify Landlord in
writing stating Tenant's intent to renew this Lease at least one
hundred twenty (120) days prior to the expiration of the base
Lease term. Tenant must also be current under all Lease
covenants and conditions for any Lease renewal right to be
effective and valid.
Year 1 $3,623.11 /month - $43,477.32/year
Year 2 $3,731.80/month - $44,781,60/year
Year 3 $3,843.75/month - $46,125.00/year
ARTICLE 33. The submission of this Lease for examination
does not constitute a reservation of or option for the Lease
Premises and this Lease becomes effective as a Lease only upon
execution and delivery thereof by Landlord to Tenant.
IN WITNESS WHEREOF, the Landlord and Tenant have duly
executed and affixed their respective seals to this Lease
Agreement on the day and year first above written.
LANDLORD: Eden Roc,
a California partnership
Mike Stangle
V.P. of S-PM, Inc.
Landlord's agent
TENANT: Paradigm Medial Industries, Inc.
a Delaware corporation
Michael Stelzer
President & CEO
Attached hereto and incorporated herein:
Lease Rider "A" - Building Expenses
Lease Rider "B" - Lease Guarantee
Exhibit "A" - Site Plan
Exhibit "B1" - Floor Plan
Exhibit "B2" - New Construction Plan
Exhibit "B3" - Floor Covering Plan
<PAGE>
LEASE RIDER "A"
"BUILDING EXPENSES"
With reference to Tenant's appropriate proportionate share
of property tax, insurance expenses and common area service
expenses as defined in the Lease Agreement, Tenant hereby agrees
to pay, as additional monthly rental, Five Hundred Twenty Five
Dollars and No Cents ($525.00) to be paid monthly, in advance,
along with the monthly rental previously stated in Lease ARTICLE
6. Minimum Rent. The above stated fee is an estimated and
adjustable fee for such expenses and services. At the end of
each calendar year, Landlord shall furnish a statement to Tenant
defining what the actual tax, insurance and common area expenses
are for the calendar year just expired, stating what Tenant's
appropriate proportionate share of such expenses are and compare
such to that amount which has been prepaid by Tenant. If
Tenant's proportionate share of such expenses exceeds Tenant's
payments so made, Tenant shall pay Landlord the deficiency within
ten (10) days after receipt of said statement. If Tenant's
prepaid payments exceed Tenant's proportionate share of such
expenses, the excess shall be applied against future payments for
such expenses.
Landlord's Initials Tenant's Initials
LICENSE AND MANUFACTURING AGREEMENT
THIS LICENSE AND MANUFACTURING AGREEMENT (the "Agreement")
is made and entered into as of this 16 day of January, 1997 (the
"Effective Date"), by and between PARADIGM MEDICAL INDUSTRIES,
INC., a Delaware corporation ("Paradigm") and O.B.F. LABS, LTD.,
a United Kingdom corporation ("Manufacturer"). Paradigm and
Manufacturer are also referred to herein, individually, as
"party," and collectively, as "parties."
RECITALS
WHEREAS, Paradigm is a company engaged in the production,
distribution, and sale of ophthalmic products throughout the
world and is capable of supplying technical products, services
and support to the medical and health care industry;
WHEREAS, Manufacturer is an engineer and manufacturer of
medical and health care products, including an ophthalmic
tonometer (the "Tonometer"); and
WHEREAS, Paradigm desires to obtain from Manufacturer, and
Manufacturer desires to grant to Paradigm, the right to repackage
the Tonometer as well as an exclusive license to sell the
repackaged tonometer in the United States under Paradigm's
tradenames and trademarks and a nonexclusive license to sell the
repackaged tonometer worldwide also under Paradigm's tradenames
and trademarks;
NOW, THEREFORE, in consideration of the respective
representations, warranties, covenants and agreements contained
herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. Definitions. The capitalized terms in this Agreement
shall have the following meanings unless otherwise defined
herein:
1.1 "System" shall mean the Tonometer packaged as
a subassembly without the module cover which encloses the
electronic components, but including the tonometer probe, power
cord and modifications thereto.
1.2 "Disposable Tip" shall mean the plastic
membrane tip attached to the Tonometer probe and packaged as a
single unit in a sealed, single-use pack.
1.3 "Repackaged System" shall mean the System
repackaged in a cover designed by or for Paradigm and marketed
under tradenames and trademarks selected by Paradigm.
2. Right to Repackage. Manufacturer hereby grants to
Paradigm, the right to repackage the System and sell the
Repackaged System under tradenames and trademarks selected by
Paradigm.
3. Ownership of Design and Mark. Manufacturer hereby
acknowledges and agrees that the cover designed by or for
Paradigm in which the System will be repackaged as well as the
tradenames and/or trademarks selected by Paradigm to market the
Repackaged System shall be the exclusive property of Paradigm and
Manufacturer shall have no rights to, nor ownership interest in
such property.
4. Exclusive License. Manufacturer hereby grants
Paradigm the exclusive license to sell the Repackaged System in
the United States during the Term or any Renewed Term of this
Agreement (as defined in paragraph 13 below). Manufacturer shall
not grant any other person or entity the right to repackage the
System and sell such repackaged System in the United States.
Notwithstanding the foregoing, Manufacturer shall be entitled to
sell the Tonometer directly or indirectly in the United States
during the Term or any Renewed Term of this Agreement under its
own tradenames and trademarks. Further, Manufacturer shall be
entitled to license other persons or entities to repackage the
System for marketing in any country other than the United States
and its territories provided that such persons or entities are
expressly restricted from selling such repackaged Systems
directly or indirectly in the United States.
5. Non-exclusive Right. Manufacturer hereby grants to
Paradigm, the non-exclusive right to sell the Repackaged System
throughout the world in any country during the Term or any
Renewed Term of this Agreement (as defined in paragraph 13
below).
6. Development and Manufacturing. Manufacturer shall
manufacture and produce the System so that Paradigm can repackage
the System in a cover. Manufacturer shall bear the reasonable
expenses, if any, of packaging the System as subassembly.
Manufacturer shall notify Paradigm of all changes from time to
time made to the System and shall supply Paradigm with written
notice and information concerning such changes. Each party shall
keep its own master engineering and medical device files.
7. Quality Control. Manufacturer will perform product
testing, burn-in, calibration and quality assurance inspections
for the System to comply with regulatory standards and product
performance specifications prescribed by Paradigm. Manufacturer
will keep accurate records that comply with regulatory standards
of the Food, Drug and Cosmetics Act for each System or other
product manufactured and make copies of the same available to
Paradigm for its product history and reporting records. Paradigm
shall be entitled to integrate Manufacturer's Quality Manual or
portions thereof into its own Quality Manual.
8. Regulatory Approval. Paradigm shall perform or be
responsible for all clinical evaluations, testing and
documentation related to regulatory approvals as may be required
to market the Repackaged System in the United States.
Notwithstanding the foregoing, Manufacturer will make available
to authorized representatives of the United States Food and Drug
Administration ("FDA"), all documents reasonably necessary to
demonstrate FDA Good Manufacturing Practice ("GMP") requirements
and will make all reasonable efforts to comply with FDA GMP
requirements. Paradigm shall also be permitted to seek
regulatory approval from authorized representatives of any other
governmental or regulatory body which may oversee or control the
sell of the Repackaged System. Manufacturer shall make available
all documents reasonably necessary to satisfy the requirements of
such body and obtain marketing approval for the Repackaged
System. Manufacturer will also make any and all other testing
records and documents pertaining to the System or any
subarrangement thereof, available for their inspection and
copying.
9. Service and Training. Paradigm shall be responsible
for performing field service and maintenance of the Repackaged
System. Manufacturer shall train Paradigm's designated service
technicians and sales personnel in training classes at Paradigm's
offices in Salt Lake City, Utah and pursuant to terms mutually
agreed to by both parties.
10. Price & Purchase Requirements.
10.1 Systems. For a period of one year from the
date Paradigm shall purchase at least 12 Systems by January 31,
1998; an additional 24 Systems by January 31, 1999; and an
additional 24 Systems by January 31, 2000. Notwithstanding the
foregoing, there is no limit to the number of Systems Paradigm
may purchase. Paradigm shall purchase each completed System for
$4,700 (the "Fixed Purchase Price"). Paradigm shall pay the
Fixed Purchase Price of each System within thirty (30) days after
receipt of an invoice.
10.2 Beta Tonometers. Paradigm shall purchase two
(2) Tonometers within thirty (30) days from the Effective Date of
this Agreement for evaluation and engineering and design
purposes. Manufacturer shall sell the two Tonometers, including
the tonometer probes, all accessories, manuals and four (4) cases
of Disposable Tips, to Paradigm for $13,200.
11. Disposable Tip Resales. Manufacturer hereby grants
Paradigm a license to sell the Disposable Tip in any country
throughout the world and agrees to sell the Disposable Tip to
Paradigm at Manufacturer's usual and customary, wholesale prices
during the Term and any Renewed Terms of this Agreement (as
defined in paragraph 13 below) and for at least two (2) years
following the termination or expiration of this Agreement.
Manufacturer further agrees not sell the Disposable Tip to
purchasers or owners of the Repackaged System and to restrict any
and all licensees from selling the Disposable Tip to purchasers
or owners of the Repackaged System.
12. Warranty and Service.
12.1 Warranty. For a period of one year from the
date of purchase of the Repackaged System by a Paradigm customer,
Manufacturer shall provide replacement parts or replace defective
parts or components of the System only at no cost to Paradigm or
the purchaser of the Repackaged System within ten (10) days after
notification by Paradigm. Manufacturer's warranties shall
include the implied warranty of merchantability and fitness for
a particular purpose.
12.2 Field Service. Paradigm will coordinate all
customer service communications, product delivery to and from
customers, field service and service billing (post-warranty where
available).
12.3 Parts. Manufacturer will make System parts
available to Paradigm at Manufacturer's usual and customary,
wholesale prices for distribution to field service organizations
and Paradigm's dealers or representatives during the Term and any
Renewed Terms of this Agreement (as defined in paragraph 13
below) and for at least two (2) years following the termination
or expiration of this Agreement.
13. Term. The term of this Agreement shall commence on
the date first above written and shall expire at midnight, United
States Mountain Daylight Time, December 31, 2000 (the "Term").
This Agreement shall be automatically renewed thereafter for
successive one (1) year additional terms (each, a "Renewed Term")
unless either party gives written notice to the other party at
least ninety (90) days prior to the expiration of the Term or
Renewed Term that the Agreement shall not be renewed.
14. Confidentiality; Proprietary Rights.
14.1 Definition of Confidential Information. For
purposes of this Agreement, "Confidential Information" means any
customer lists, information, materials, technical data, know-how,
or trade secrets of either party, which is disclosed to or
learned by or otherwise acquired by the other party prior to or
during the Term or any Renewed Term of this Agreement or in the
course of the business discussions contemplated hereby.
14.2 Non-Disclosure of Confidential Information.
The parties agree not to use the Confidential Information for
their own use or for any purpose except as provided for in this
Agreement. The parties agree not to disclose Confidential
Information to any third party. The parties agree that they will
protect the confidentiality of, and take all reasonable steps to
prevent unauthorized disclosure or use of, the Confidential
Information to prevent it from falling into the public domain or
the public literature or to prevent it from falling into the
possession of unauthorized persons or entities. Without limiting
the generality of the foregoing, the parties agree to take the
same steps and use the same methods to prevent the unauthorized
use or disclosure of the Confidential Information as the other
party takes to protect its secret, confidential, or proprietary
information and data, including causing their employees, agents,
consultants and representatives to agree to abide by the
conditions and promises made in this Agreement. Each party will
promptly notify the other party in writing of any
misappropriation or misuse by any person or entity of the
Confidential Information that comes to either party's attention.
14.3 Return of Materials. Any Confidential
information or other information, materials, or documents of
either party that are furnished to the other party hereunder or
were derived from the Confidential Information or such
information or materials will be promptly returned to the other
party, accompanied by all copies of such Confidential Information
or such other information, materials, or documents made by the
party or in the party's possession or under the party's control,
at the earlier of the other party's request for return of the
same or the termination of this Agreement excluding any documents
required to be maintained by any regulatory agency.
14.4 Legal Remedies. It is understood and agreed
that no failure or delay by any party in exercising any right,
power, or privilege hereunder will operate as a waiver thereof,
nor will any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other
right, power, or privilege hereunder. It is further understood
and agreed that money damages will not be a sufficient remedy for
any breach of this Section 13 by either party or any employees,
agents, consultants or representatives of that party and that the
other party will be entitled to equitable relief, including
injunctive relief and specific performance, as a remedy for any
such breach of this Agreement.
15. Miscellaneous.
15.1 Entire Agreement. This Agreement constitutes
the entire agreement and understanding of the parties with
respect to the subject matter hereof, and supersedes all prior
agreements, arrangements and understandings related to the
subject matter hereof. No representation, promise, inducement or
statement of intention has been made by either of the parties
that is not embodied in this Agreement or in the documents
referred to herein, and neither of the parties shall be bound by
or be liable for any alleged representation, promise, inducement
or statement of intention not set forth or referred to herein.
15.2 Governing Law. This Agreement shall be
governed by and construed and enforced in accordance with the
laws of the United States and the state of Utah.
15.3 Amendments; Waiver. This Agreement may not be
amended, modified, superseded or canceled, nor may any of the
terms, covenants, representations, warranties, conditions or
agreements herein be waived, except by a written instrument
executed by the party against whom such amendment, modification,
supersedure, cancellation or waiver is charged. The failure of
either of the parties at any time or times to require performance
of any provision hereof shall in no manner affect the right at a
later time to enforce the same. No waiver by either of the
parties of any condition, or of any breach of any term, covenant,
representation, warranty, condition or agreement contained
herein, shall be deemed to be or shall be construed to be a
waiver or continuing waiver of any such condition or breach or a
waiver of any other condition or of the breach of any other term,
covenant, representation, warranty, condition or agreement
hereof.
15.4 Headings; Construction. The captions and
headings contained herein are for convenience of reference only,
and shall not in any way affect the meaning or interpretation of
this Agreement. Notwithstanding any rule or maxim of construction
to the contrary, any ambiguity or uncertainty in this Agreement
shall not be construed against either of the parties based upon
authorship of any of the provisions hereof.
15.5 Counterparts. This Agreement may be executed
by facsimile and may be executed in one or more counterparts,
each of which shall be deemed an original, and all of which, when
taken together, shall constitute one and the same instrument.
15.6 Attorneys' Fees. In the event either of the
parties shall bring an action in connection with the performance,
breach or interpretation of this Agreement, or in any action
related to the subject matter hereof, the prevailing party in
such action shall be entitled to recover from the non-prevailing
party in such action all reasonable costs and expenses of such
action, including, without limitation, attorneys' fees, costs of
investigation, accounting and other costs reasonably incurred or
related to such action, in such amount as may be determined in
the discretion of the arbitrator(s).
15.7 Severability. In the event any provision
hereof is determined to be illegal or unenforceable for any
reason whatsoever, such determination shall not affect the
validity or enforceability of the remaining provisions hereof,
all of which shall remain in full force and effect.
15.8 Further Assurances. The parties each hereby
covenant and agree that, from time to time, after the date
hereof, at the reasonable request of either party, and without
further consideration, they will execute and deliver such other
documents and instruments and take such other action as may be
reasonably required to carry out in all respects the subject
matter hereof and the intent of this Agreement.
15.9 Notices. All notices, demands and other
communications required or permitted to be given hereunder shall
be in writing and shall be deemed to have been duly given and
received (a) immediately if delivered personally, (b) upon
completed transmission, if faxed, (c) the following business day,
if sent by overnight courier, or (d) upon receipt if mailed. All
such notices shall be addressed to the parties at the addresses
and/or fax numbers listed below. Either party may change the
address and/or the fax number to which communications are to be
directed by giving written notice to the other party in the
manner provided herein.
TO PARADIGM: PARADIGM MEDICAL INDUSTRIES, INC.
1772 West 2300 South
Salt Lake City, Utah 84119
Attn: Thomas F. Motter,President
Fax No. (801) 977-8973
With a copy to: Randall A. Mackey, Esq.
Mackey Price & Williams
900 First Interstate Plaza
170 South Main Street
Salt Lake City, Utah 84101-1655
Fax No. (801) 575-5006
TO MANUFACTURER: David Massey, Director
O.B.F. Labs (UF) Ltd.
Unit 6, Malmesbury Business Park,
Beutlel Way
Malmesbury, Wiltshire SN165JU
ENGLAND
Fax No. 44 (0) 1666 823763
15.10 No Third-Party Beneficiaries. Nothing in this
Agreement, whether express or implied, is intended to confer any
rights or remedies under or by reason of this Agreement on any
person other than the parties and their respective successors or
permitted assigns, nor is anything in this Agreement intended to
relieve or discharge the obligation or liability of any third
person to either of the parties, nor shall any provision hereof
give any third person any right of subrogation or action over or
against either of the parties.
15.11 Force Majeure. Neither party shall be
responsible or liable to the other hereunder for failure or delay
in performance of the Agreement due to any war, fire, accident or
other casualty, or any labor disturbance or act of God or the
public enemy, or any other contingency beyond such party's
reasonable control. In addition, in the event of the
applicability of this Section 14.11, the party failing or
delaying performance shall use its best efforts to expeditiously
eliminate, cure and overcome any of such causes and resume
performance of its obligations.
15.12 Relationship of the Parties. Notwithstanding
any provision hereof, for all purposes of this Agreement, each
party shall be and act as an independent contractor and not as a
partner, joint venturer or agent of the other party and shall not
bind nor attempt to bind the other party to any contract or
agreement.
15.13 Successors and Assigns. This agreement shall
be binding on all successors and assigns of the parties.
IN WITNESS WHEREOF, the parties have caused this Agreement
to be duly executed as of the day and year first above written.
PARADIGM MEDICAL INDUSTRIES, INC.,
a Delaware corporation
Robert W. Millar
Title: Vice President
O.B.F. LABS, LTD., a United Kingdom
corporation
A.D. Massey
Title: Director
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT (hereiinafter the "Agreement") is
entered into as of this 09 day of May, 1997, by and between
Paradigm Medical Industries, Inc., a Delaware corporation (the
"Company) and the Estate of H.L. Federman (the "Estate")
RECITALS
WHEREAS, on November 25, 1996, the Company was served with a
Summons and Complaint in an action styled Federman Associates and
H.L. Federman v. Paradigm Medical Industries, Inc., No. 96 Civ
8545, which was commenced in the United States District court for
the Southern District of New York against the Company by Federman
Associates and H.L. Federman ("Federman");
WHEREAS, the claims asserted in the Complaint are based upon
a March 31, 1995 agreement between Federman Associates and the
Company (the "March 31, 1995 Agreement") in which Federman
Associates agreed to obtain $5,000,000 to $8,000,000 in
capitalization for the Company prior to December 31, 1995 in
exchange for the right to purchase a 5% equity position in the
Company for $25,000 and the payment of $3,000 per month for a
period of 36 months, as well as additional services Federman
Associates alleges it performed for the Company;
WHEREAS, the Company contends that Federman Associates did not
obtain the required capitalization for the Company prior to
December 31, 1995 nor was there any agreement for payment by the
Company to Federman Associates or Federman for services Federman
Associates and Federman contend they performed for the Company;
WHEREAS, Federman passed away on November 28, 1996, and the
Estate uis to be substituted for Federman as a plaintiff party to
the Action;
WHEREAS, on January 29, 1997, the company filed a Motion to
Transfer, or in the Alternative, to Diusmiss for Improper Venue or
Lack of Personal Jurisdiction, together with a supporting
memorandum;
WHEREAS, on April 4, 1997, Judge Barbara Jones of the United
States District Court for the Southern District of New York granted
the Company's motion to transfer the Action to the United States
District court for the District of Utah; and
WHEREAS, the Company and the Estate desire to dismi8ss the
Complaint with prejudice and settle all potential claims, disputes
or actions, known or unknown, which the Estate or heirs of the
Estate may have against the Company;
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
AGREEMENT
1. Payment. The Company agrees to pay the Estate One
Thousand Five Hundred Dollars ($1,500) each month for 36 months and
to pay Five Thousand Dollars ($5,000) as reimbursement for legal
expenses. The one time payment of Five Thousand Dollars ($5,000)
to the Estate for legal expenses shall be paid on May 16, 1997, or
on the date of execution of this Agreement, whichever is later.
The monthly payments to the Estate shall commence on May 16, 1997,
or on the date of execution of this Agreement, whichever is later,
and shall be payable at the first of each month thereafter for a
total of 36 consecutive months. If the Company does not make a
monthly payment within ten (10) days of the date the payment is due
and payable hereunder, the Company shall be in default, and
interest shall accrue on the unpaid amounts at the rate of ten
percent (10%) per annum.
2. Dismissal of Action. Contemporaneous with the execution
of this Agreement, the Estate shall submit to the court a
Stipulation and Order for Dismissal with Prejudice.
3. Entire Agreement. This Agreement constitutes the entire
agreement of the parties. No modification or amendment of this
Agreement shall be of any force or effect unless in writing and
executed by all of the parties to this Agreement. The provisions
of this Agreement shall survive the closing of the settlement and
this Agreement.
4. No Assignment of Rights. Federman Associates and the
Estate represent, warrant and covenant that they have not assigned
or transferred any of their rights to any claims, disputes, losses,
demands, actions, causes of action, damages, compensation, costs,
fees, expenses, contracts, covenants, obligations, debts and
lliabilities related to the Action and/or transactions between the
Company and Federman or Federman Associates or both, and that they
are lawfully entitled to make this settlement and receive the
satisfaction described herein.
5. Successors and Assigns. This Agreement shall be binding
on, and sdhall inure to the benefit of, the parties to this
Agreement and their respective legal representatives, successors
and assigns as well as heirs of the Estate.
6. Costs and Fees. Except as otherwise specified in this
Agreement, each party agrees to bear its own costs, expenses and
attorneys, fees incurred in connection with or relating to this
Agreement. However, in the event any dispute or contest shall arise
hereunder or any party shall breach or fail to perform or discharge
any of its obligations hesreunder, the party to this Agreement who
shall prevail in litigation concerning any such dispute, contest or
failure to perform or discharge, shall be entitled to an award
against the losing party of reasonable attorney's fees and other
costs incurred by said prevailing party.
7. Release of All Claims. The Estate hereby fully releases
the Coimpany and its officers, directors, employees, attorneys and
agents of each, every and all claims of every kind and nature which
the Estate and heirs of the Estate ever had or now have, or may
have, and which arose, accrued, or which may hereafter arise or
accrue, including but not limited to those claims asserted in the
Complaint. The Estate hereby represents, warrants and agrees that
no claim, right, cause of action or demand is reserved and that
this Agreement waives and releases the Company and its officers,
directors, employees, attorneys and agents of and from any and all
claims, damages, demands, costs, expenses and causes of action,
compensation of every kind and nature, to which the Estate and
heirs of the Estate may be entitled or which the Estate and heirs
of the Estate may have in the future as a result of any events
which have occurred, including but not limited to those claims and
causes of action asserted in the Compalint.
8. Indemnification of Claims. The Estate hereby agrees to
indemnify and hold the Company and its officers and directors
harmless from and against any and all claims, demands, rights,
causes of action, and other liabilities and obligations of every
kind and nature which Federman Associates and Federman ever had or
now have, or may have, and which arose, accrued, or which may
hereafter arise or accrue, including but not limited to those
claims and causes of action asserted in the Complaint.
9. Binding Effect. This Agreement is binding on each of the
undersigned parties, including its respective successors,
representatives, affiliates, agents and assigns, as well as the
heirs of the Estate.
10. Severability. any term or provision of this Agreement
that is invalid or unenforceable in any situation in any
jurisdication shall not affect the validity or enforceability of the
remaining terms and provisions hereof, nor the validity or
enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
11. Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall constitute one and the same
agreement, and when taken together this Agreement shall become
effective when one or more counterparts have been signed by each of
the paraties hereto and delivered by facsimile to the other parties
hereto.
12. Governing Law. This Agreement, to the extent permitted
by applicable law, shall be governed by and construed in accordance
with the laws of the State of Utah applicable to contracts entered
into and to be performed within said State.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date and year first above written.
PARADIGM MEDICAL INDUSTRIES, INC.
Thomas F. Motter
President Chief Executive Officer
ESTATE OF H.L. FEDERMAN
Ruth F. Silverstone
Executor
5/09/97
August 20, 1997
Albert L. Barbara, Vice Chairman
Win Capital Corp.
80 Broad Street
New York, NY 10004
Dear Mr. Barbara:
Tom Motter just returned from Las Vegas where he met with Steven
Bayern and Pat Koelnick to discuss the details regarding an
investment banking relationship. Based upon their discussions an
agreement was reached whereby both parties agreed as follows:
1) Paradigm Medical Industries, Inc. ("PMED") hereby
retains Win Capital Corp. ("WIN") to act as its investment
bankers for two (2) year period which would be extended an
additional year unless either party notified the other party in
writing thirty days before the expiration of the two year
contract of their desire to terminate the contractual
relationship.
2) PMED will pay a monthly retainer to WIN of $2,000 for
the first six months, #4,000 for the second six months and $6,000
per month for the remainder of the contract.
3) PMED will issue a warrant to WIN to purchase up to
200,000 shares of common stock at $4.00 per share but not in
excess of 4.9% of the current number of common shares outstanding
plus common shares to be issued upon the conversion of both the
Class A and Class B Preferred Stock issues. In all other
respects, the terms of the warrant will be identical to the Class
A warrant issued in connection with PMED's public offering in
July, 1996.
The aforementioned terms were submitted to the Paradigm
Board of Directors and was unanimously approved and resolved to
authorize the officers of the company to finalize the agreement.
Please indicate your concurrence by signing below and
returning a signed copy of this agreement by facsimile. Upon
receipt of your acceptance we will immediately forward our
initial month's payment.
Thank you for your assistance. We look forward to a long and
fruitful relationship with WIN.
Very truly yours,
Michael W. Stelzer
CEO & President
Thomas F. Motter
Chairman of the Board
Agreed to and accepted by:
Albert L. Barbara Date:
Vice Chairman
Win Capital Corp.
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THEY MAY NOT
BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED
EXCEPT (i) PURSUANT TO A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH
RESPECT TO THESE SECURITIES OR (ii) PURSUANT TO A SPECIFIC
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT BUT ONLY
UPON A HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF
COUNSEL TO THE BORROWER, AS DEFINED BELOW, OR OTHER COUNSEL
REASONABLY ACCEPTABLE TO THE BORROWER, THAT THE PROPOSED
DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE
SECURITIES ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR OTHER
STATE SECURITIES LAW.
PARADIGM MEDICAL INDUSTRIES, INC.
12% Convertible, Redeemable Promissory Note
$25,000 December 8, 1997
The transferability of this 12% Convertible, Redeemable
Promissory Note (the "Note") is restricted as provided in Section
3 below.
FOR VALUE RECEIVED, Paradigm Medical Industries, Inc., a
Delaware corporation (the "Borrower"), hereby promises to pay to
the order of Mark S. Richardson, and to any subsequent holders
hereof (collectively, the "Payee"), the principal sum of
Twenty-five Thousand Dollars ($25,000) together with interest on
the unpaid principal balance from and including the date hereto
and including the date upon which the principal shall have been
paid in full, at the rate of twelve percent (12%) per annum. The
principal on this Note shall be payable upon the Maturity Date
(as defined below). All accrued and unpaid interest shall be due
and payable semi-annually on each six-month anniversary of the
initial closing (the "Initial Closing Date") of the offering (the
"Offering") of the Note or upon conversion or redemption.
Interest shall be calculated on the basis of actual elapsed days
in a year of 360 days. The Note may be redeemed prior to
maturity at 112% of the face value of the Note, together with
accrued interest thereon, upon 30 days' written notice to the
Payee at any time after (i) the 30-day anniversary of the
effective date of the registration statement to register the
shares of the Borrower's Common Stock, $.001 par value per share
(the "Common Stock"), issuable to the Payee upon conversion of
the Note, and (ii) the average closing price of the Common Stock
for the 20-day period immediately prior to the date on which
notice of redemption is given by the Borrower to the Payee is at
least $3.50 per share.
The principal amount of the Note together with all accrued,
unpaid interest shall be due and payable on December 8, 2000 (the
"Maturity Date"), unless sooner redeemed in the manner set forth
above, or converted to one share of the Common Stock for each
$2.00 principal amount of the Note (the "Conversion Price") at
any time upon the option of the Payee by written notice to the
Borrower prior to repayment of the Note.
The Borrower shall also undertake to file a registration
statement with the Securities and Exchange Commission to register
the shares of Common Stock issuable to the Payee upon conversion
of the Note within 45 days of the initial closing of the Offering
and shall use its best efforts to have such registration
statement declared effective as soon as possible and to keep such
registration statement current until such time as the shares of
the Common Stock issuable upon conversion of the Note are freely
tradeable pursuant to Rule 144(k) promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), all at
the Borrower's cost and expense (except commissions or discounts
and attorney's fees and costs of the Payee).
In addition, the Borrower shall pay to the Payee, upon
demand, interest on any overdue principal and, to the extent
permitted by law, overdue installments of interest, at a rate of
interest equal to 15% per annum. Any amounts of principal and/or
interest not paid when due hereunder shall continue to be due and
payable by the Borrower, on each day immediately following the
date of such failure of payment, until such amounts shall have
been paid in full.
This Note is issued pursuant to that certain Subscription
Agreement and Investment Representation submitted November 11,
1997 (the "Subscription Agreement"), by and between the Borrower
and Payee. Capitalized terms used herein and not otherwise
defined herein shall have the meanings ascribed to them in the
Subscription Agreement. Neither this reference to the
Subscription Agreement nor any provision thereof shall affect or
impair the absolute and unconditional obligation of the Borrower
to pay the principal of and interest on this Note as provided
herein.
All payments of principal and interest hereunder shall be
made by the Borrower in lawful money of the United States of
America in immediately available funds not later than 5:00 p.m.,
Mountain Time on the date each such payment is due in accordance
with this Note. Whenever any payment on this Note shall be
stated to be due on a Saturday, Sunday or a day on which banking
institutions in Salt Lake City, Utah are authorized or obligated
by law, regulation or executive order to remain closed (a "Legal
Holiday"), such payment shall be made on the next succeeding day
which is not a Legal Holiday and such extension of time shall not
be included in the computation of the payment of interest on this
Note.
In case an Event of Default, as defined below, shall occur
and be continuing, the principal of and accrued interest on this
Note may be declared due and payable.
The holder of this Note is not entitled, as such, to
receive dividends or other distributions, receive notice of any
meeting of the stockholders, consent to any action of the
stockholders, or to any other rights as a stockholder of the
Borrower.
1. The Notes: This Note is one of several promissory
notes (the "Notes") made and issued by the Borrower in an
aggregate principal amount of up to $2,000,000, pursuant to the
terms and subject to the conditions of Subscription Agreements by
and among the Borrower and certain investors, providing for all
of the terms and conditions set forth herein. Reference is made
to the Subscription Agreements for agreements of the parties
applicable to this Note.
2. Covenants: The Borrower covenants and agrees that so
long as any of the Notes shall be outstanding and unpaid:
2.1 Payment of Notes. The Borrower will punctually
pay or cause to be paid the Principal Amount and interest on this
Note. Any sums required to be withheld from any payment of
Principal Amount, or interest on this Note by operation of law or
pursuant to any order, judgment, execution, treaty, rule or
regulation may be withheld by the Borrower and paid over in
accordance therewith.
Nothing in this Note or in any other agreement
between the Payee and the Borrower shall require the Borrower to
pay, or the Payee to accept, interest in an amount which would
subject the Payee to any penalty or forfeiture under applicable
law. In the event that the payment of any charges, fees or other
sums due under this Note, or provided for in any other agreement
between the Borrower and the Payee are or could be held to be in
the nature of interest and would subject the Payee to any penalty
or forfeiture under applicable law, then ipso facto the
obligations of the Borrower to make such payment to the Payee
shall be reduced to the highest rate authorized under applicable
law and, in the event that the Payee shall have ever received,
collected, accepted or applied as interest any amount in excess
of the maximum rate of interest permitted to be charged by
applicable law, such amount which would be excess interest under
applicable law shall be applied first to the reduction of
principal then outstanding, and, second, if such principal amount
is paid in full, any remaining excess shall forthwith be returned
to the Borrower.
2.2 Maintenance of Corporate Existence; Merger and
Consolidation. The Borrower will at all times cause to be done
all things necessary to preserve and keep in full force and
effect its corporate existence and all of its rights and
franchises and shall not be consolidated with or merged into any
other corporation or transfer all or substantially all of its
assets to any person unless (i) the survivor of such merger or
consolidation is the Borrower or (ii) the corporation formed by
such corporation or into which the Borrower is merged or to which
the assets of the Borrower are transferred is a corporation which
expressly assumes all of the obligations of the Borrower under
the Notes, and (iii) after giving effect to such transaction, no
Event of Default (as hereinafter defined) and no event which,
after notice or lapse of time, or both, would become an Event of
Default, shall have occurred and be continuing.
2.3 Maintenance of Properties. The Borrower will
reasonably maintain in good repair, working order and condition
its properties and other assets, and from time to time make all
reasonably necessary or desirable repairs, renewals and
replacements thereto.
2.4 Payment of Taxes. The Borrower will pay or
cause to be paid, set aside for payment or discharge, before the
same shall become delinquent, all taxes, assessments and
governmental charges levied or imposed upon the Borrower or upon
its income, profits or property; provided, however, that the
Borrower shall not be required to pay or discharge or cause to be
paid or discharged any such tax, assessment, charge or claim
whose amount, applicability or validity is being contested in
good faith by appropriate proceedings.
2.5 Compliance with Statutes. The Borrower will
comply in all material respects with all applicable statutes and
regulations of the United States of America and of any state or
municipality, and of any agency thereof, in respect of the
conduct of business and the ownership of property by the
Borrower; provided, however, that nothing contained in this
Section 2.5 shall require the Borrower to comply with any such
statute or regulation so long as its legality or applicability
shall be contested in good faith or where noncompliance will not
have a material adverse effect on the Borrower; and provided
further that an unintentional violation of this covenant done in
good faith or inadvertently shall not be deemed an Event of
Default under Section 4 hereof.
2.6 Limitation on Dividend Payments. The Borrower
will not, and will not permit any subsidiaries, if any, to
declare or make any dividend payment at any time so long as Notes
are outstanding.
2.7 Prohibition on Changes to Executive
Compensation. The Borrower will not increase any executive
officer's compensation from the existing compensation level at
the time of the Initial Closing of the Notes so long as the Notes
are outstanding.
3. Restrictions Upon Transferability. This Note has not
been registered under the Securities Act, and may not be offered,
sold, pledged, hypothecated, assigned or transferred except (i)
pursuant to a registration statement under the Securities Act
which has become effective and is current with respect to this
Note, or (ii) pursuant to a specific exemption from registration
under the Securities Act but only upon a Payee hereof first
having obtained the written opinion of counsel to the Borrower,
or other counsel reasonably acceptable to the Borrower, that the
proposed disposition is consistent with all applicable provisions
of the Securities Act as well as any applicable "blue sky" or
other state securities law.
4. Events of Default and Remedies. An "Event of
Default" shall occur if:
4.1 Payment of Notes. The Borrower defaults in the
payment of Principal Amount or interest of this Note, when and as
the same shall become due and payable whether at maturity
thereof, or by acceleration or otherwise, which default shall
continue uncured for a period of thirty (30) days from the date
thereof, or
4.2 Bankruptcy, Insolvency, etc. The Borrower
shall file or consent by answer or otherwise to the entry of an
order for relief or approving a petition for relief,
reorganization or arrangement or any other petition in bankruptcy
for liquidation or to take advantage of any bankruptcy or
insolvency law of any jurisdiction, or shall make an assignment
for the benefit of its creditors, or shall consent to the
appointment of a custodian, receiver, trustee or other officer
with similar powers of itself or of any substantial part of its
property, or shall be adjudicated a bankrupt or insolvent, or the
Board of Directors or shareholders of the Borrower shall
authorize any of the foregoing, or if a court or Governmental
authority of competent jurisdiction shall enter an order
appointing a custodian, receiver, trustee or other officer with
similar powers with respect to the Borrower or any substantial
part of its property, or an order for relief or approving a
petition for relief or reorganization or any other petition in
bankruptcy or for liquidation or to take advantage of any
bankruptcy or insolvency law, or an order for the dissolution,
winding up or liquidation of the Borrower, or if any such
petition shall be filed against the Borrower and such petition
shall not be dismissed within sixty (60) days.
4.3 Remedies. In case an Event of Default shall
occur and be continuing (after giving affect to applicable "cure"
provisions provided for herein), the Payee of the Note may
declare by notice in writing to the Borrower all unpaid Principal
Amount and accrued interest on the Note to be due and payable
immediately.
5. Conversion Rights.
(a) If this Note is converted pursuant to the terms
and conditions as set forth above, the holder of this Note shall
surrender the instrument representing the Note being converted to
the Borrower at its principal office. As promptly as practicable
after the conversion date, the Borrower shall issue and shall
deliver to the holder of the Note being converted, a certificate
or certificates as it may request for the number of full shares
of Common Stock issuable upon the conversion of this Note in
accordance with the provisions of this paragraph (a) and in cash
as provided in paragraph (b), in respect of any fraction of a
share of Common Stock issuable upon such conversion. Such
conversion shall be deemed to have been effected immediately
prior to the close of business on the date of the conversion (the
"Conversion Date"), and at such time the rights of the holder of
the Note shall cease and the person or entity in whose name or
names any certificate or certificates for shares of Common Stock
shall be issuable upon such conversion shall be deemed to have
become the holder of record of shares of Common Stock represented
thereby.
(b) No fractional shares of Common Stock or scrip
representing fractional shares shall be issued upon conversion of
this Note. Instead of any fractional shares of Common Stock
which would otherwise be issuable upon conversion of this Note,
the Borrower shall pay to the holder of this Note which is
converted a cash adjustment in respect of such fraction in an
amount equal to the same fraction of the market price per share
of the Common Stock (as determined in a manner determined by the
Board of Directors) at the close of business on the Conversion
Date.
6. Anti-Dilution Adjustments.
(a) The Conversion Price of the Note shall be
subject to adjustment from time to time as follows:
(i) If the Borrower shall issue, after the
Initial Closing Date, any Additional Stock (as hereinafter
defined) without consideration or for a consideration per share
less than the Conversion Price for the Note in effect immediately
prior to the issuance of such Additional Stock, the Conversion
Price in effect immediately prior to each such issuance shall
forthwith be reduced to an amount equal to such lower purchase
price for such Additional Stock (or in the case of options and
similar securities, the consideration received for the option and
to be received upon exercise of such option), or, if for no
consideration, $.01.
(ii) "Additional Stock" as used herein shall
mean any shares of Common Stock issued (or deemed to have been
issued) or rights, warrants, options or other exchangeable
securities convertible into Common Stock (including shares of
Common Stock held in the Borrower's Treasury) by the Borrower
after the date hereof other than:
(A) Common Stock issued or issuable
upon conversion of the Note;
(B) Common Stock issuable or issued to
employees, advisors, consultants or outside directors of the
Borrower directly or pursuant to the Borrower's stock option
plans and restricted stock plans approved by the Borrower's Board
of Directors and existing as of the date hereof, but only to the
extent of the number of shares of Common Stock authorized to be
issued under such plans as of the date hereof; and
(C) Common Stock issued to employees,
advisors, consultants or outside directors of the Borrower not
exceeding 25,000 shares in the aggregate for a consideration per
share greater than or equal to $2.00.
(iii)Except to the limited extent provided for
in Section 6(a) (viii) hereof, no adjustment of such Conversion
Price pursuant to this Section 6 shall have the effect of
increasing the Conversion Price for the Note above the Conversion
Price for the Note in effect immediately prior to such
adjustment.
(iv) No adjustment in the Conversion Price for
the Note shall be required unless such adjustment would require
an increase or decrease of at least one cent ($0.01) in such
conversion Price; provided, however, that any adjustments which
by reason of this Section 6(a) (iv) are not required to be made
shall be carried forward and taken into account in any subsequent
adjustment required to be made hereunder. All calculations under
this Section 6 shall be made to the nearest one cent ($0.01). In
the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid
therefor before deducting any reasonable discounts, commissions
or other expenses allowed, paid or incurred by the Borrower for
any underwriting or otherwise in connection with the issuance and
sale thereof.
(v) In the case of the issuance of Common
Stock for a consideration in whole or in part other than cash,
the consideration other than cash shall be deemed to be the fair
value thereof as determined in good faith by the Borrower's Board
of Directors.
(vi) In the case of the issuance (whether
before, on or after the Initial Closing Date) of options to
purchase or rights to subscribe for Common Stock, securities by
their terms convertible into or exchangeable for Common Stock or
options to purchase or rights to subscribe for such convertible
or exchangeable securities, the following provisions shall apply
for all purposes of this Section 6:
(A) The aggregate maximum number of
shares of Common Stock deliverable upon exercise (assuming the
satisfaction of any conditions to exercisability including,
without limitation, the passage of time, but without taking into
account potential antidilution adjustments) of such options to
purchase or rights to subscribe for Common Stock shall be deemed
to have been issued at the time such options or rights were
issued and for a consideration equal to the consideration
(determined in the manner provided in Section 6(a) (v) and this
Section 6 (a) (vi) hereof), if any, received by the Borrower upon
the issuance of such options or rights plus the minimum exercise
price provided in such options or rights (without taking into
account potential antidilution adjustments) for the Common Stock
covered thereby.
(B) The aggregate maximum number of
shares of Common Stock deliverable upon conversion of or in
exchange (assuming the satisfaction of any conditions to
convertibility or exchangeability including, without limitation,
the passage of time, but without taking into account potential
antidilution adjustments) for any such convertible or
exchangeable securities or upon the exercise of options to
purchase or rights to subscribe for such convertible or
exchangeable securities and subsequent conversion or exchange
thereof, shall be deemed to have been issued at the time such
securities were issued or such options or rights were issued and
for a consideration equal to the consideration, if any, received
by the Borrower for any such securities and related options or
rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional
consideration, if any, to be received by the Borrower (without
taking into account potential antidilution adjustments) upon the
conversion or exchange of such securities or the exercise of any
related options or rights (the consideration in each case to be
determined in the manner provided in Section 6 (a) (v) and this
Section 6 (a) (vi) hereof)
(C) In the event of any change in the
number of shares of Common Stock deliverable or in the
consideration payable to the Borrower upon exercise of such
options or rights or upon conversion of or in exchange for such
convertible or exchangeable securities (excluding a change
resulting solely from the antidilution provisions thereof if such
change results from an event which gives rise to an antidilution
adjustment under this Section 6, the Conversion Price of the
Note, to the extent in any way affected by or computed using such
options, rights or securities, shall be recomputed to reflect
such change, but no further adjustment shall be made for the
actual issuance of Common Stock or any payment of such
consideration upon the exercise of any such options or rights or
the conversion or exchange of such securities.
(D) Upon the expiration of any such
options or rights, the termination of any such rights to convert
or exchange or the expiration of any options or rights related to
such convertible or exchangeable securities, the Conversion Price
of the Note, to the extent in any way affected by or computed
using such options, rights or securities or options or rights
related to such securities, shall be recomputed to reflect the
issuance of only the number of shares of Common Stock (and
convertible or exchangeable securities which remain in effect)
actually issued upon the exercise of such options or rights, upon
the conversion or exchange of such securities or upon the
exercise of the options or rights related to such securities.
(E) The number of shares of Common
Stock deemed issued and the consideration deemed paid therefor
pursuant to Section 6 (a) (vi) (A) and Section 6 (a) (vi) (B)
hereof shall be appropriately adjusted to reflect any change,
termination or expiration of the type described in either Section
6 (a) (vi) (C) or Section 6 (a) (vi) (D) hereof.
(vii)In the event the Borrower should at any
time or from time to time after the Initial Closing Date fix a
record date for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or
Common Stock equivalents without payment of any consideration by
such holder for the additional shares of Common Stock or the
Common Stock equivalents (including the additional shares of
Common Stock issuable upon conversion or exercise thereof), then,
as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed),
the Conversion Price of the Note shall be appropriately decreased
so that the number of shares of Common Stock issuable upon
conversion of the Note shall be increased in proportion to such
increase in the aggregate of shares of Common Stock outstanding
and those issuable with respect to such Common Stock Equivalents.
(viii) If the number of shares of Common
Stock outstanding at any time after the Initial Closing Date is
decreased by a combination of the outstanding shares of Common
Stock, then, following the record date of such combination, the
Conversion Price for the Note shall be appropriately increased so
that the number of shares of Common Stock issuable on conversion
of each Note shall be decreased in proportion to such decrease in
outstanding shares.
(b) If at any time or from time to time there shall
be a recapitalization of the Common Stock (other than a
subdivision, combination or merger or sale of assets transaction
provided for elsewhere in this Section 6) , provision shall be
made so that the Payee shall thereafter be entitled to receive
upon conversion of the Note the number of shares of stock or
other securities or property of the Borrower or otherwise, to
which a holder of Common Stock deliverable upon conversion would
have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the
provisions of this Section 6 with respect to the rights of the
Payee after the recapitalization to the end that the provisions
of this Section 6 (including adjustment of the Conversion Price
for the Note then in effect and the number of shares issuable
upon conversion of the Note) shall be applicable after that event
as nearly equivalent as may be practicable.
(c) The Borrower will not, by amendment of its
Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the
Borrower, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 6 and in the
taking of all such action as may be necessary or appropriate in
order to protect the conversion rights of the Payee against
impairment.
(d) If any capital reorganization or
reclassification of the capital stock of the Borrower, or
consolidation or merger of the Borrower with and into another
corporation, or the sale of all or substantially all of its
assets to another corporation, shall be effected while the Note
is outstanding in such a manner that the holders of Common Stock
shall be entitled to receive stock, securities or assets with
respect to or in exchange for Common Stock, then, as a condition
of such reorganization or reclassification, consolidation, merger
or sale, lawful and adequate provision shall be made whereby the
Payee shall thereafter have the right to receive upon the basis
and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock immediately theretofore receivable
upon conversion of the Note, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Common Stock equal to
the number of shares of such Common Stock immediately theretofore
so receivable had such reorganization or reclassification,
consolidation, merger or sale not taken place, and in such case
appropriate provision shall be made with respect to the rights
and interests of the Payee to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the
Conversion Price of the Note and of the number of shares of
Common Stock issuable upon conversion thereof) shall thereafter
be applicable, as nearly as may be possible, in relation to any
shares of stock, securities or assets thereafter deliverable upon
the conversion of the Note. The Borrower shall not effect any
such consolidation, merger, or sale unless prior to or
simultaneously with the consummation thereof the survivor or
successor corporation (if other than the Borrower) resulting from
such consolidation or merger with the corporation purchasing such
assets shall assume by written instrument executed and mailed or
delivered to the Payee, the obligation to deliver to the Payee
such shares of stock, securities or assets as, in accordance with
the foregoing provisions, the Payee may be entitled to receive,
and containing the expressed assumption of such successor
corporation of the due and punctual performance and observance of
every provision of the Note and of all liabilities and
obligations of the Borrower hereunder with respect to the Note.
(e) (1) No fractional shares shall be issued upon
the conversion of the Note and the number of shares of Common
Stock to be issued shall be rounded to the nearest whole share.
In lieu of any fractional shares to which the holder would
otherwise be entitled, the Borrower shall make a cash payment
equal to the fair market value of the Common Stock as of two
business days prior to payment (the "Payment Date") multiplied by
such fraction. Fair market value shall be defined as the closing
bid price of the Common Stock on the Nasdaq SmallCap Market as of
the Payment Date or, if the Common Stock is not trading on the
Nasdaq SmallCap Market, then on the OTC Electronic Bulletin Board
or in the over-the-counter market.
(2) Upon the occurrence of each adjustment or
readjustment of the Conversion Price of the Note pursuant to this
Section 6, the Borrower, at its expense, shall promptly compute
such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to the Payee a statement, signed
by its independent certified public accountants, setting forth
such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The
Borrower shall, upon the written request at any time of the
Payee, furnish or cause to be furnished to such holder a like
certificate setting forth (A) such adjustment and readjustment,
(B) the Conversion Price for the Note at the time in effect, and
(C) the number of shares of Common Stock and the amount, if any,
of other property which at the time would be received upon the
conversion of the Note.
(f) In the event of any taking by the Borrower of
a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to
receive any dividend (other than a cash dividend) or other
distribution, any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities
or property, or to receive any other right, the Borrower shall
mail to the Payee, at least 20 days prior to the date specified
therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend,
distribution or right.
(g) The Borrower shall at all times reserve and
keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion
of the shares of the Note, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the
conversion of the Note; and if at any time the number of
authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of the Note, in addition to
such other remedies as shall be available to the Payee, the
Borrower will take such corporate action as may, in the opinion
of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall
be sufficient for such purposes, including, without limitation,
engaging in best efforts to obtain the requisite stockholder
approval of any necessary amendment to these provisions. The
Borrower shall pay all documentary, stamp or other transactional
taxes attributable to the issuance or delivery of shares of
capital stock of the Borrower upon conversion of the Note;
provided, however, that the Borrower shall not be required to pay
any taxes which may be payable in respect of any transfer
involved in the issuance or delivery of any certificate for such
shares in a name other than that of the Payee in respect of which
such shares are being issued. All shares of Common Stock which
may be issued in connection with the conversion provisions set
forth herein will, upon issuance by the Borrower, be validly
issued, fully paid and nonassessable and free from all taxes,
liens or charges with respect thereto.
(h) Any notice required by the provisions of this
Section 6 to be given to the Payee shall be deemed given if
deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on
the stock books of the Borrower.
7. Notice. Any notice or other communication required
or permitted hereunder shall be in writing and shall be delivered
personally, telegraphed or sent by certified, registered, or
express mail, postage prepaid, and shall be deemed given when so
delivered personally, telegraphed or, if mailed, five (5) days
after the date of deposit in the United States mails, as follows:
(i) if to the Borrower, to:
Paradigm Medical Industries, Inc.
1772 West 2300 South
Salt Lake City, Utah 84119
Attn: John W. Hemmer
with a copy to:
Mackey Price & Williams
170 South Main Street, Suite 900
Salt Lake City, Utah 84101-1655
Attn: Randall A. Mackey, Esq.
(ii) If to the Payee, to the address of such Payee as
shown on the books of the Borrower.
8. Waiver. The Borrower hereby waives presentment,
demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, default, or enforcement
of this Note, assent to any and all extensions or postponements
of the time of payment or any other indulgence, to any
substitution, exchange, or release of collateral, and/or to the
addition or release of any other part or person primarily or
secondarily liable, and generally waive all suretyship defenses
and defenses in the nature thereof.
9. Costs. The Borrower will pay all costs and expenses
of collection, including reasonable attorneys' fees, incurred or
paid by the holder in enforcing this Note or the obligations
evidenced thereby, to the extent permitted by law.
10. Governing Law. This Note shall take effect as a
sealed instrument and shall be governed by and construed in
accordance with the laws of the State of New York.
11. Successors and Assigns. All the covenants,
stipulations, promises and agreement in this
Note contained by or on behalf of the Borrower shall bind its
successors and assigns, whether or not so expressed.
Executed as of the date first above written.
PARADIGM MEDICAL INDUSTRIES, INC.
Michael W. Stelzer, President
and Chief Executive Officer
ATTEST:
Randall A. Mackey, Corporate Secretary
(CORPORATE SEAL)
<PAGE>
CONVERSION FORM
(To be Executed by the Registered Payee
in order to convert the Note)
The undersigned hereby irrevocably elects to exercise the
right to purchase ______ shares upon conversion of this Note in
accordance with the conditions hereof and herewith makes payment
of the purchase price of such shares in full.
______________________________
Signature
___________________________________
Address
___________________________________
Social Security Number or
Taxpayer's Identification Number
DATED: ______________________
SECURITIES EXCHANGE AGREEMENT
by and between
PARADIGM MEDICAL INDUSTRIES, INC.
and
THE SECURITYHOLDERS
SIGNATORY HERETO
Dated as of February 2, 1998
<PAGE>
THIS SECURITIES EXCHANGE AGREEMENT is dated as of February
___, 1998, by and between PARADIGM MEDICAL INDUSTRIES, INC., a
Delaware corporation (the "Company") and the person named on the
signature page hereof and signatory hereto (a "Holder").
In consideration of the mutual covenants and agreements set
forth herein and for good and valuable consideration, the receipt
of which is hereby acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1Definitions. As used in this Agreement, and
unless the context requires a different meaning, the following
terms have the meanings indicated:
"Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under
direct or indirect common control with such specified Person.
For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management
and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Agreement" means this Securities Exchange Agreement, as
the same may be amended, supplemented or modified in accordance
with the terms hereof and in effect.
"Code" means the Internal Revenue Code of 1986, as amended,
and any successor code thereto, and any reference to the Code
shall include a reference to any successor provisions.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, $.001 par value per
share, of the Company.
"Company" means Paradigm Medical Industries, Inc., a
Delaware corporation and any successor to the Company, whether by
contract, assumption, merger, consolidation, operation of law or
otherwise.
"ERISA" means the Employee Retirement Income Security Act
of 1974, as amended from time to time. Section references to
ERISA are to ERISA as in effect at the Time of Exchange and any
subsequent provisions of ERISA amendatory thereof, supplemental
thereto or substituted therefor.
"ERISA Plan" means an employee benefit plan as such term is
defined in Section 3(3) of ERISA, with respect to which the
Company or an Affiliate is a disqualified person or a party in
interest, as those terms are defined in Section 4975 of the Code
and Section 3(14) of ERISA, respectively.
"Exchange Preferred Stock" means the 10 shares of Series C
Preferred Stock, to be issued in exchange for each $1,000
principal amount of Old Notes with such terms as set forth in the
Certificate of Designations, Powers, Preferences and Rights
attached hereto as Exhibit A.
"Expiration Date" means February 28, 1998, the last day on
which Holders may deliver the Old Notes to the Company.
"Holder" means (i) the Person who prior to the Time of
Exchange accepts and agrees to the terms hereof as indicated by
its signature on the signature page of this Agreement and (ii)
each Person, if any, on whose behalf the Holder executes this
Agreement and whose Old Notes are the subject of any exchange
hereunder.
"Old Notes" means the 12% Convertible, Redeemable
Promissory Notes of the Company.
"Person" means any individual (including an individual when
acting in a fiduciary capacity), corporation, partnership, joint
venture, association, limited liability company, joint-stock
company, trust, estate, unincorporated organization or government
or other agency or political subdivision thereof.
"Prohibited Transaction" means a transaction described in
Section 4975(e) of the Code or in Section 406 of ERISA, for which
there is no available exemption.
"Prospectus" shall mean the prospectus included in any
Registration Statement, as amended or supplemented by any
prospectus supplement with respect to the terms of the offering
of any portion of the Registrable Securities covered by such
Registration Statement, and all other amendments and supplements
to the Prospectus, including post-effective amendments to the
Registration Statement of which such Prospectus is a part, and
all material incorporated by reference in such Prospectus.
"Registrable Securities" means the shares of Common Stock
of the Company issuable upon conversion of the Exchange Preferred
Stock.
"Registration Statement" means any registration statement
of the Company which covers any of the Registrable Securities
pursuant to the provisions of this Agreement, including a
prospectus, amendments and supplements to such Registration
Statement, including post-effective amendments, all exhibits, and
all material incorporated by reference in such Registration
Statement.
"Series C Preferred Stock" means the Series C Convertible
Preferred Stock, $.001 par value per share, of the Company.
"Shares" means the number of shares of Exchange Preferred
Stock set forth on the signature page hereto, to be issued by the
Company to the Holder in exchange for the Holder's Old Notes by
the Holder hereunder.
"State" means each of the states of the United States, the
District of Columbia and the Commonwealth of Puerto Rico.
"Subsidiary" means, with respect to any Person, (i) a
corporation a majority of whose capital stock with voting power,
under ordinary circumstances, to elect directors is at the time,
directly or indirectly, owned by such Person, by one or more
Subsidiaries of such Person or by such Person and one or more
Subsidiaries thereof, (ii) any other Person (other than a
corporation), including without limitation a joint venture, in
which such Person, one or more Subsidiaries thereof or such
Person and one or more Subsidiaries thereof, directly or
indirectly, at the date of determination thereof, has at least
majority ownership interest entitled to vote in the election of
directors, managers or trustees thereof (or other Persons
performing similar functions) or (iii) any other Person required
to be consolidated with such Person in accordance with generally
accepted accounting principles. For purposes of this definition
(and for the determination of whether or not a Subsidiary is a
wholly-owned Subsidiary of a Person), any directors' qualifying
shares or investment by foreign nationals mandated by applicable
law shall be disregarded in determining the ownership of a
Subsidiary.
"Time of Exchange" has the meaning provided therefor in
Section 2.1 of this Agreement.
ARTICLE II
EXCHANGE OF SECURITIES
Section 2.1Exchange of Securities. Subject to the terms
and conditions herein set forth, the Company agrees that it will
issue the Shares to the Holder in exchange for the Holder's Old
Notes, and the Holder agrees that it will tender the Holder's Old
Notes to the Company in exchange for the Shares, at or prior to
5:00 p.m. New York time on February 28, 1998 (the "Expiration
Date"). The Company reserves the right to extend the Expiration
Date for receipt of Old Notes.
The Holder agrees to sign the signature page to this
Agreement (the "Signature Page") and deliver the Signature Page
with the certificates representing the Holder's Old Notes by the
Expiration Date.
The acceptance for exchange and the exchange of all
outstanding Old Notes which are validly tendered will be made
promptly after the Expiration Date. The Company will be deemed
to have accepted for exchange tendered Old Notes as, if and when
the Company gives oral or written notice to a Holder of its
acceptance of the tenders of such Old Notes (the "Time of
Exchange"). Delivery of the Shares in exchange for the Old Notes
will be made by the Company as soon as practicable after receipt
of such notice.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE HOLDER
Section 3.1(a) Representations and Warranties of the
Holder. The Holder represents and warrants to, and covenants and
agrees with, the Company that the Shares to be acquired by the
Holder pursuant to this Agreement are being acquired for such
Holder's own account and not for the account of any ERISA Plan,
and with no intention of distributing or reselling the Shares or
any part thereof in any transaction, which would be or result in
a Prohibited Transaction or would be in violation of the
securities laws of the United States of America or any State,
without prejudice, however, to the Holder's rights at all times
to sell or otherwise dispose of all or any part of the Shares
under a registration under the Act or under an exemption from
such registration available under such Act, provided that the
disposition of the Holder's property at the time of the sale or
disposition of the Shares is within such Holder's control. If
the Holder should in the future decide to dispose of any of the
Shares, the Holder understands and agrees with the Company that
he will do so only (i) if such disposition will not be or result
in a Prohibited Transaction; (ii) if a subsequent or transferee
Holder shall agree in writing to be bound by the representations
and warranties of this Article III; and that the Holder may do so
only in compliance with the Act, as then in effect, and that
stop-transfer instructions to that effect will be in effect with
respect to the Shares. If the Holder should decide to dispose of
any of the Shares, the Company must first be in receipt of an
opinion of counsel to the effect that the proposed disposition of
the Shares would not be in violation of the Act. The Holder
agrees to the imprinting of legends required by law on
certificates representing all of the Shares including but not
limited to the following: "This security has not been registered
under the Securities Act of 1933, as amended, or any state
securities laws and may be reoffered and sold, pledged or
otherwise transferred only if so registered or if an exemption
from registration is available." The Holder also represents and
warrants to, and covenants and agrees with, the Company that,
with respect to itself (i) it is an "accredited investor" as
defined in Rule 501(a) under the Act and (ii) by reason of its
business and financial experience, and the business and financial
experience of those Persons retained by it to advise it with
respect to its investment in the Shares, it, together with such
advisors, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment, and it,
together with its Affiliates, is able to bear the economic risk
of such investment and, at the present time, is able to afford a
complete loss of such investment.
The Holder also represents and warrants to the Company that
(i) it has received and reviewed those certain Confidential
Private Placement Memoranda of the Company dated October 24, 1997
and February 2, 1998, respectively, (ii) it has been given the
opportunity to discuss the transactions contemplated hereby and
the offering materials with, and ask questions of,
representatives of the Company; (iii) it has all requisite
corporate power and authority (A) to execute, deliver and perform
its obligations under this Agreement, (B) to exchange the Old
Notes for the Shares in the manner and for the purpose
contemplated in this Agreement and (C) to execute, deliver and
perform its obligations under all other agreements and
instruments executed and delivered by, or to be executed and
delivered by, the Holder pursuant to or in connection with this
Agreement or any of the transactions contemplated hereby; (iv)
this Agreement has been duly and validly authorized by the Holder
and this Agreement has been duly and validly executed and
delivered by the Holder and constitutes a valid and binding
agreement of the Holder, enforceable in accordance with its
terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization and other similar laws now or
hereafter in effect relating to or affecting creditors' rights
generally; and (v) the exchange of the Holder's Old Notes for the
Shares does not violate the Holders' charter or by-laws or any
other governing documents, any material law or regulation or any
court order applicable to it.
The Holder has relied solely on the representations made
herein in determining to exchange the Holder's Old Notes for the
Shares pursuant hereto.
ARTICLE IV
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY
Section 4.1Conditions Precedent. The obligations of the
Company to issue the Shares in exchange for the Holder's Old
Notes pursuant to this Agreement are subject, at the Time of
Exchange, to the satisfaction of the following conditions:
(a) The representations and warranties made by the Holder
herein shall be true and correct in all material respects on and
as of the Time of Exchange with the same effect as though such
representations and warranties had been made on and as of the
Time of Exchange and the Holder shall have complied in all
material respects with all agreements and conditions set forth or
contemplated herein that are required to be performed or complied
with by the Holder at or prior to the Time of Exchange. It is
understood and agreed that the Company shall be entitled to
request and receive such certificates or opinions from the Holder
at the Time of Exchange as shall be satisfactory to the Company
to demonstrate compliance with the provisions of this Section
4.1(a).
(b) The issuance of the Shares by the Company in exchange
for the Holder's Old Notes shall not be enjoined (temporarily or
permanently) at the Time of Exchange under the laws of any
jurisdiction to which the Company is subject.
ARTICLE V
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE HOLDERS
Section 5.1Conditions Precedent. The Obligations of the
Holders to tender their Old Notes in exchange for the Shares
pursuant to this Agreement are subject, at the Time of Exchange,
to the satisfaction of the following conditions:
(a) the determination by the Nasdaq Stock Market not to
delist the Company's Common Stock from the Nasdaq SmallCap
Market;
(b) the stockholders of the Company shall have approved
the issuance of shares of the Series C Preferred Stock, with such
terms as set forth in the Certificate of Designations, Powers,
Preferences and Rights attached hereto as Exhibit A.
ARTICLE VI
EXPENSES
Section 6.1Expenses. The Company agrees to pay the
following expenses relating to this Agreement:
(a) the cost of reproducing, executing and delivering
this Agreement and any other documents contemplated hereby;
(b) the cost of delivering to the Holder the Shares
issued to the Holder at the Time of Exchange; and
(c) all other expenses incurred by the Company.
ARTICLE VII
REGISTRATION RIGHTS
Section 7.1Registration Rights. The Company will
undertake to file a Registration Statement with the Commission to
register the Registrable Securities that the holders of the
Shares will receive upon the exercise of their conversion rights
within 45 days of the Expiration Date and will use its best
efforts to have such Registration Statement declared effective.
Section 7.2Information. The Company may require the
Holders to furnish to the Company such information regarding
themselves and the distribution of Registrable Securities as the
Company may from time to time reasonably request in writing in
order to comply with the Act. The Holders agree to notify the
Company as promptly as practicable of any inaccuracy or change in
information they have previously furnished to the Company.
Section 7.3Registration Procedures. If and whenever the
Company is required by the provisions of this Article VI to
effect a registration under the Act, the Company will, at its
expense:
(a) In accordance with the Act and the rules and
regulations of the Commission, prepare and file with the
Commission a Registration Statement and use its best efforts to
cause such Registration Statement to become and remain
continuously effective until the earlier of (i) all of the
Registrable Securities covered by such Registration Statement
having been sold in accordance with the intended methods of
disposition of the seller or sellers set forth in such
Registration Statement and (ii) two years after such Registration
Statement has been declared effective, provided, that if for any
portion of such two-year period the Registration Statement is not
effective, then such two-year requirement for maintaining the
effectiveness of the Registration Statement shall be extended by
the length of such interruption(s), and the Company shall prepare
and file with the Commission such amendments to such Registration
Statement and supplements to the Prospectus contained therein as
may be necessary to keep such Registration Statement effective
and such Registration Statement and Prospectus accurate and
complete in all material respects during such period;
(b) Furnish to the Holders participating in such
registration such reasonable number of copies of the Registration
Statement and Prospectus and such other documents as such Holders
may reasonably request;
(c) Use its best efforts to register or qualify the
Registrable Securities covered by such Registration Statement
under such state securities or blue sky laws of such
jurisdictions as such Holders may reasonably request, provided,
however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified
or to subject itself to taxation in connection with any such
registration or qualification of such Registrable Securities;
(d) Notify the Holders participating in such
registration, promptly after it shall receive notice thereof, of
the date and time when such Registration Statement and each
post-effective amendment thereto has become effective or a
supplement to any Prospectus forming a part of such Registration
Statement has been filed;
(e) Notify the Holders participating in such registration
promptly of any request by the Commission for the amending or
supplementing of such Registration Statement or Prospectus or for
additional information;
(f) Prepare and promptly file with the Commission and
promptly notify the Holders participating in such registration of
the filing of such amendments or supplements to such Registration
Statement or Prospectus as may be necessary to correct any
statements or omissions if, at the time when a Prospectus
relating to such securities is required to be delivered under the
Act, any event has occurred as the result of which any such
Prospectus or any other Prospectus then in effect may include an
untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements made, in the light
of the circumstances under which they were made, not misleading;
(g) Advise the Holders participating in such
registration, promptly after it shall receive notice or obtain
knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such Registration
Statement or the initiation or threatening of any proceeding for
that purpose and promptly use its best efforts to prevent the
issuance of any stop order or to obtain its withdrawal if such
stop order should be issued;
(h) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make
generally available to the Company's security holders earnings
statements satisfying the provisions of Section 11(a) of the Act,
no later than forty-five (45) days after the end of any twelve
(12) month period (or ninety (90) days, if such a period is a
fiscal year) beginning with the first month of the Company's
first fiscal quarter commencing after the effective date of a
Registration Statement.
Section 7.4Expenses of Registration. All expenses of the
Company incident to the Company's performance of or compliance
with the provisions of Sections 7.1 through 7.3 of this Agreement
shall be borne by the Company including without limitation:
(a) All registration and filing fees;
(b) Fees and expenses of compliance with all securities
or blue sky laws (including fees and disbursements of counsel for
the Company in connection with blue sky qualifications of the
Registrable Securities; provided, however, that the Company shall
not be required to consent to general service of process in any
such state);
(c) Printing, messenger, telephone and delivery expenses;
and
(d) Fees and disbursements of counsel for the Company and
its independent auditors.
Nothing in this Section 7.4 shall be deemed to
require the Company to pay or bear any expenses of any Holder's
attorneys or accountants or any other personal expenses or any
underwriting discounts, selling commissions or similar fees if
such registration results in an underwritten public offering of
all or any portion of the Registrable Securities. Moreover, the
Company shall not be responsible for any personal or corporate
taxes that the Holder may be liable for as a result of any
registration or sale of any of the Registrable Securities.
Section 7.5Indemnification and Contribution.
(a) Indemnification by the Company. Whenever, pursuant to
this Article VI, a Registration Statement relating to the
Registrable Securities is filed under the Act, the Company will
(except as to matters covered by Section 7.5(b) hereof) indemnify
and hold harmless each Holder participating in the registration,
each of their officers, directors and employees, and each person,
if any, who controls any such Person (collectively, the "Holder
Indemnitees" and, individually, a "Holder Indemnitee") within the
meaning of Section 15 of the Act and Section 20 of the Securities
Exchange Act of 1934 (the "Exchange Act"), against any losses,
claims, damages or liabilities, joint or several, to which such
Holder Indemnitees may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact
contained in such Registration Statement, or Prospectus contained
therein, or any amendment or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state
therein a material fact necessary in order to make the statements
therein made, in the light of the circumstances under which they
were made, not misleading.
(b) Indemnification by Holders. Each Holder
participating in such registration will indemnify and hold
harmless the Company, each of its directors, each of its officers
who has signed the Registration Statement and each other person,
if any, who controls the Company, within the meaning of Section
15 of the Act and Section 20 of the Exchange Act (collectively,
the "Company Indemnitees" and, individually, a "Company
Indemnitee") and each other Holder Indemnitee against all losses,
claims, damages or liabilities, joint or several, to which any of
the Company Indemnitees or the other Holder Indemnitees may
become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in such
Registration Statement, or Prospectus contained therein, or any
amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material
fact necessary in order to make the statements therein made, in
the light of the circumstances under which they were made, not
misleading, but only if, and to the extent that, such statement
or omission was in reliance upon and in conformity with written
information furnished to the Company by such Holder specifically
for inclusion in the Registration Statement or Prospectus
contained therein.
(c) Indemnification Procedures. Promptly after receipt by
a Holder Indemnitee or a Company Indemnitee (collectively,
"Indemnitees" and, individually, an "Indemnitee") under Section
7.5(a) or 7.5(b) hereof of notice of the commencement of any
action, such Indemnitee will, if a claim in respect thereof is to
be made against the indemnifying party under such clause, notify
the indemnifying party in writing of the commencement thereof;
but the omission so to notify the indemnifying party will not
relieve the indemnifying party from any liability which it may
have to any Indemnitee otherwise than under such clauses. In case
any such action shall be brought against any Indemnitee, and it
shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate in, and,
to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such Indemnitee, and after
notice from the indemnifying party to such Indemnitee of its
election to assume the defense thereof, the indemnifying party
shall not be liable to such Indemnitee under such clause for any
legal or other expenses subsequently incurred by such Indemnitee
in connection with the defense thereof other than reasonable
costs of investigation; provided, however, that the Indemnitee
shall have the right to employ one counsel to represent such
Indemnitee if, in the reasonable judgment of such Indemnitee, it
is advisable for such party to be represented by separate counsel
because separate defenses are available, or because a conflict of
interest exists between such indemnified and indemnifying party
in respect of such claim, and in that event the fees and expenses
of such separate counsel shall be paid by the indemnifying party.
Notwithstanding the foregoing, if the Company is an Indemnitee,
the Company shall designate the one counsel, and in all other
circumstances, the one counsel shall be designated by a majority
in interest based upon the Registrable Securities of the
Indemnities.
(d) Contribution. If for any reason the foregoing
indemnity is unavailable, or is insufficient to hold harmless an
Indemnitee, then the indemnifying party shall contribute to the
amount paid or payable by the Indemnitee as a result of such
losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits
received by the indemnifying party on the one hand and the
Indemnitee on the other from the registration or (ii) if the
allocation provided by clause (i) above is not permitted by
applicable law, or provides a lesser sum to the Indemnitee than
the amount hereinafter calculated, in such proportion as is
appropriate to reflect not only the relative benefits received by
the indemnifying party on the one hand and the Indemnitee on the
other but also the relative fault of the indemnifying party and
the Indemnitee as well as any other relevant equitable
considerations. The relative fault of the Company and the
Holders shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact
relates to information supplied by the Company or by the Holders
and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement
or omission. Notwithstanding the provisions of this Section
7.5(d), in no event shall the Company be required to contribute
any amount in excess of the amount by which the total price at
which the Registrable Securities were sold exceeds the amount of
any damages that the Holders have otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
ARTICLE VIII
MISCELLANEOUS
Section 8.1No Waiver; Modifications in Writing. No
failure or delay on the part of the Company or the Holder in
exercising any right, power or remedy hereunder shall operate as
a waiver thereof, nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or
remedy. The remedies provided for herein are cumulative and are
not exclusive of any remedies that may be available to the
Company or the Holder at law or in equity or otherwise. No
waiver of or consent to any departure by the Company or the
Holder from any provision of this Agreement shall be effective
unless signed in writing by the parties hereto. Any amendment,
supplement or modification of or to any provision of this
Agreement, any waiver of any provision of this Agreement, and any
consent to any departure by the Company or the Holder from the
terms of any provision of this Agreement, shall be effective only
in the specific instance and for the specific purpose for which
made or given. Except where notice is specifically required by
this Agreement, no notice to or demand on the Company in any case
shall entitle the Company to any other or further notice or
demand in similar or other circumstances.
Section 8.2Communications. All notices and other
communications provided for or permitted hereunder shall be in
writing and shall be deemed to have been duly given if delivered
personally or sent by overnight delivery service, registered or
certified mail (return receipt requested), postage prepaid to the
parties at the following addresses (or at such other address for
any party as shall be specified by like notice, provided that
notices of a change of address shall be effective only upon
receipt thereof). Notices sent by mail shall be effective two
days after mailing, notices delivered personally shall be
effective upon receipt, and notices sent by overnight delivery
service guaranteeing next day delivery shall be effective on the
next business day after timely delivery to the courier:
i) if to the Holder at the most current address given by
the Holder to the Company in writing (the address set forth on
the Holder's signature page hereof to be such address initially);
with a copy to:
Win Capital Corp.
80 Broad Street, 26th Floor
New York, New York 10004
Attention: Albert Barbara, Vice-Chairman
and
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Attention: Steven Wolosky, Esq.
ii) if to the Company at the following address:
Paradigm Medical Industries, Inc.
1127 West 2320 South, Suite A
Salt Lake City, Utah 84119
Attention: John Hemmer
with copies to:
Mackey, Price & Williams
170 South Main Street, Suite 900
Salt Lake City, Utah 84101-1655
Attention: Randall E. Mackey, Esq.
Section 8.3Determinations. All determinations to be made
by the Company and the Holder hereunder in its opinion or
judgment or with its approval or otherwise shall be made by it in
its sole discretion, except as otherwise indicated herein.
Section 8.4Execution in Counterparts. This Agreement may
be executed in counterparts and by the parties hereto on separate
counterparts, each of which counterparts, when so executed and
delivered, shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the
same Agreement.
Section 8.5Binding Effect; Assignment. This Agreement
shall be binding upon the Company and the Holder, and their
respective successors and permitted assigns. The respective
rights and obligations of the Holder and the Company under this
Agreement may not be assigned to any other Person except with the
prior consent of the other party. Except as expressly provided
in this Agreement, this Agreement shall not be construed so as to
confer any right or benefit upon any Person other than the
parties to this Agreement, and their respective successors and
permitted assigns.
Section 8.6Governing Law. This Agreement shall be deemed
to be contract made under the laws of the State of New York, and
for all purposes shall be construed in accordance with the laws
of said State, without regard to principles of conflict of laws.
Section 8.7Severability of Provisions. Any provisions of
this Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to
the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the
validity or enforceability of such provision in any other
jurisdiction.
Section 8.8Headings. The Article and Section headings
used or contained in this Agreement are for convenience of
reference only and shall not affect the construction of this
Agreement.<PAGE>
SECURITIES EXCHANGE AGREEMENT SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers hereunto
duly authorized, as of the date first above written.
PARADIGM MEDICAL INDUSTRIES, INC.
Thomas F. Motter
Accepted and Agreed as of the
date first above written
Name of Holder (Please type or print)
By:
(Please sign)
Name:
Title:
Address:
Social Security Number or Tax I.D. Number
Aggregate principal amount of
Old Notes to be delivered by you:
$
Number of Shares of Series C Convertible
Preferred Stock to be issued to you:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED BALANCE SHEET OF PARADIGM MEDICAL INDUSTRIES, INC. AS OF
DECEMBER 31, 1997, AND THE RELATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 886,558
<SECURITIES> 0
<RECEIVABLES> 120,853
<ALLOWANCES> 0
<INVENTORY> 833,930
<CURRENT-ASSETS> 1,857,128
<PP&E> 182,691
<DEPRECIATION> (61,417)
<TOTAL-ASSETS> 2,452,574
<CURRENT-LIABILITIES> 1,055,223
<BONDS> 0
0
95
<COMMON> 3,799
<OTHER-SE> 311,461
<TOTAL-LIABILITY-AND-EQUITY> 2,452,574
<SALES> 464,062
<TOTAL-REVENUES> 521,365
<CGS> 333,156
<TOTAL-COSTS> 2,933,327
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (29,476)
<INCOME-PRETAX> (2,774,594)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,774,594)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,774,594)
<EPS-PRIMARY> (.76)
<EPS-DILUTED> (.76)
</TABLE>
