As filed with the Securities and Exchange Commission on April 27, 1999
Commission File No. 333-77267
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PARADIGM MEDICAL INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 3841 87-0459536
(State of jurisdiction of (Primary Standard (I.R.S. Employer incorporation
or organization) Classification Code Number Identification Number)
1127 West 2320 South, Suite A
Salt Lake City, Utah 84119
(801) 977-8970
(Address and telephone number of registrant's principal executive offices
and principal place of business)
Thomas F. Motter, President
1127 West 2320 South, Suite A
Salt Lake City, Utah 84119
(801) 977-8970
(Name, address and telephone number of agent for service)
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Copies to:
Randall A. Mackey, Esq.
Mackey Price & Williams
170 South Main Street, Suite 900
Salt Lake City, Utah 84101-1655
Telephone: (801) 575-5000
Approximate date of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
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If any of the securities being registered on this Form are being offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 (the "Securities Act"), check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each Proposed Proposed
class of Amount maximum maximum Amount of
securities to be to be offering price aggregate registration
registered registered per Share offering price fee
<S> <C> <C> <C> <C>
Resale of Common Stock issuable upon conversion of Series D Preferred
Stock............................................................. 1,140,000 $1.75 $1,596,000 $443.69
Resale of Common Stock issuable upon exercise of KSH Investment Group
Warrants.......................................................... 55,539 $2.50 $138,848 $38.60
Resale of Common Stock issuable upon exercise of KSH Investment Group
Warrants.......................................................... 10,461 $2.69 $28,140 $7.82
Resale of Common Stock issuable upon exercise of KSH Investment Group
Warrants.......................................................... 142,400 $2.38 $338,912 $94.22
Resale of Common Stock issuable upon exercise of Win Capital Warrants 35,000 $2.30 $80,500 $21.74
Resale of Common Stock issuable upon exercise of Cyn Del Warrants. 105,000 $2.30 $241,500 $67.14
Resale of Common Stock issuable upon exercise of Class A Warrants 1,000,000 $7.50 $7,500,000 (1)
Resale of Common Stock issuable upon exercise of Underwriter's Warrants 100,000 $8.125 $812,500 (1)
Resale of Common Stock issuable upon exercise of Underwriter's Warrants 100,000 $7.50 $750,000 (1)
Resale of Common Stock issuable upon exercise of Win Capital Warrants 291,000 $3.00 $873,000 (1)
Resale of Common Stock issuable upon exercise of Note Holders' Warrants 287,500 $3.33 $975,375 (1)
Resale of Common Stock issuable upon exercise of Attorney's Warrants 25,000 $3.33 $83,250 (1)
Resale of Common Stock issuable upon conversion of Series C Preferred
Stock............................................................. 1,713,143 $1.75 $2,998,000 (1)
Resale of Common Stock issuable upon conversion of Note........... 37,500 $2.00 $75,000 (1)
Resale of Common Stock Issuable to Certain Holders of Common Stock 216,316 $2.875 $621,909 (1)
Resale of Common Stock Issuable to Certain Holders of Common Stock 1,000,000 $2.875 $2,875,000 (1)
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Total Registration Fee...................................... $673.21
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</TABLE>
<PAGE>
(1) No registration fee is required as securities were previously registered
by Form SB-2 Registration Statement, No. 333-2496, effective as of July
10, 1996., Form SB-2 Registration Statement No. 333-57711, effective as of
September 14, 1998, and Form SB-2 Registration Statement No. 333-68471,
effective as of January 4, 1999. Pursuant to Rule 429, this is a combined
registration statement which relates to the securities previously
registered by the earlier registration statements and the securities being
registered by this registration statement.
The Registration hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective on
such date as the Commission acting pursuant to said Section 8(a), may determine.
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Cross Reference Sheet
Form SB-2 Item No. and Caption Prospectus Caption
<S> <C> <C>
Item 1. Front of Registration Statement and Outside Front Outside Front Cover
Cover Page of Prospectus
Item 2. Inside Front and Outside Back Cover Pages Inside Front and outside Back Cover Pages
of Prospectus
Item 3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
Item 4. Use of Proceeds Use of Proceeds
Item 5. Determination of Offering Price Not Applicable
Item 6. Dilution Not Applicable
Item 7. Selling Security Holders Not Applicable
Item 8. Plan of Distribution Outside Front Cover Page; Plan of Distribution
Item 9. Legal Proceedings Business - Legal Proceedings
Item 10. Directors, Executive Officers, Promoters Management
and Control Persons
Item 11. Security Ownership of Certain Beneficial Owners Principal Shareholders
and Management
Item 12. Description of Securities Outside Front Cover Page; Description of
Securities
Item 13. Interest of Named Experts and Counsel Legal Matters; Experts
Item 14. Disclosure of Commission Position on Description of Securities; Plan of Distribution
Indemnification for Securities Act Liabilities
Item 15. Organization Within the Last Five Years Certain Transactions
Item 16. Description of Business Business
Item 17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis or Plan of
Operation Operation
Item 18. Description of Property Business - Properties
Item 19. Certain Relationships and Certain Transactions
Related Transactions
Item 20. Market for Common Equity and Related Price Range of Common Stock and Class A
Stockholder Matters Warrants and Dividend Policy, Description of
Securities
Item 21. Executive Compensation Management - Executive Compensation
Item 22. Financial Statements Financial Statements;
Item 23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure Not Applicable
</TABLE>
<PAGE>
PROSPECTUS
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6,258,859 Shares
PARADIGM MEDICAL INDUSTRIES, INC.
Common Stock
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Paradigm Medical Industries, Inc. develops, manufactures and sells
diagnostic and surgical equipment for the eyes. We currently market two
ultrasonic surgery systems for removing cataracts and are developing a laser
surgery system for the next generation of cataract removal. We also have a Blood
Flow AnalyzerJ that detects and treats the eye condition glaucoma by diagnosing
blood flow in the eyes. In addition, we acquired exclusive technology and
manufacturing rights to four diagnostic eyecare instruments formerly
manufactured by the Humphrey Systems Division of Carl Zeiss, Inc. (AHumphrey
Systems@). Our sales come from our two ultrasonic surgery systems and related
medical supplies and the Blood Flow AnalyzerJ. We plan to market the four
diagnostic eyecare instruments acquired from Humphrey Systems. The laser system
is still being tested and needs approval from the Food and Drug Administration
before it can be sold.
Our primary purpose in registering Common Stock for resale is to
raise money to manufacture and market the four diagnostic eyecare instruments
acquired from Humphrey Systems and to bring the laser surgery system to market.
This will include significant manufacturing and marketing expenses, as well as
research and developments costs and other expenses. We are registering for
resale a total of 6,258,859 shares of Common Stock.
This Prospectus supercedes all prior registrations. Our shares are
listed for trading on The Nasdaq SmallCap Market under the symbols PMED and
PMEDW. On April 23, 1999, the closing sales price for our Common Stock was $3.25
per share and the closing sales price for our Class A Warrants was $.75 per
warrant.
Investing in the Common Stock involves a high degree of risk. You
should purchase shares only if you can afford a complete loss. See ARisk
Factors@ beginning on page 5.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities, or
determined if this Prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
This Prospectus is dated May ___, 1999.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It
may not contain all of the information that is important to you. To understand
this offering fully, you should read the entire prospectus carefully, including
the risk factors and the financial statements.
THE COMPANY
We develop, manufacture and sell surgical and diagnostic equipment
and instrumentation for the eyes known as ophthalmic equipment with related
accessories, including disposable products. Our surgical equipment is designed
for cataract treatment with minimum invasion of the eye. We market two
ultrasonic cataract surgery systems with related instruments. One of the
ultrasound systems, the Precisionist Thirty ThousandJ, is manufactured as the
base surgery system for our Precisionist Thirty ThousandJ Ophthalmic Surgical
WorkstationJ (the "WorkstationJ"). We currently developing a laser cataract
surgery system as an adjunct to its Workstation. This product is currently
undergoing investigational trials in the United States. If successfully
developed and approved for medical uses, we plan to market the laser system as a
plug-in module for its WorkstationJ. We also have the exclusive rights to sell
the Blood Flow AnalyzerJ in the United States. This product is a portable
computerized system designed for diagnosis of blood flow volume in the eye for
detection and treatment of glaucoma. We are currently developing additional test
applications for this diagnostic product. In addition, we have acquired
exclusive technology and manufacturing rights to four diagnostic eyecare
instruments, formerly manufactured by Humphrey Systems. All product
manufacturing and service related to these instruments has been moved to our
Salt Lake City facility.
EYE SURGERY
A cataract is a condition, which largely affects the elderly population, in
which the natural lens of the eye hardens and becomes cloudy, reducing vision.
Treatment consists of removal of the cloudy lens and replacement with a
synthetic lens implant which restores visual clarity. Cataract surgery is the
single largest volume and revenue producing outpatient surgical procedure for
ophthalmologists worldwide. The Health Care Finance Administration reports that
in the United States approximately 2 million cataract removal procedures are
performed annually, making this the largest outpatient procedure reimbursed by
Medicare. Most cataract procedures are performed using a method called
phacoemulsification or "phaco", which employs a high frequency (40 kHz to 60
kHz) ultrasonic probe needle to fragment the cataract while still in the eye and
remove it in pieces by suction through a small incision.
SURGERY SYSTEMS
We manufacture and sell two phaco systems with accessories. The
Precisionist 3000 PlusJ system was introduced in 1992 and is a low-cost portable
system intended primarily for the international market. The Precisionist Thirty
ThousandJ Ocular Surgery WorkstationJ is our newest generation system which is
the base for our expandable surgical "workstation" platform. We believe that
current phaco systems can be difficult for many eye surgeons to master and that
other eye surgery systems can be developed that intrude less into the eye. We
are developing its proprietary PhotonJ laser system and unique patented probe
for laser cataract removal which we believe can address the difficulties
associated with phaco systems. We intend to make the PhotonJ laser system a
plug-in module for its WorkstationJ if and when cleared for market by the Food
and Drug Administration (the "FDA"). The development of the laser cataract
system is being done in cooperation with eye surgeons in the United States and
through research and development work being conducted by our engineering group,
and under contract with the Dixon Medical Laser Laboratory at the University of
Utah in Salt Lake City.
We believe that in certain surgical conditions, our laser system will be
easier to use and safer than present phaco systems. The probe will be smaller
than typical probes employing ultrasonic needle technology and will deliver
laser energy directly to the desired tissue area by means of a smooth blunt end.
The laser probe has been shown to eliminate high-frequency vibrations in the eye
and to significantly reduce heat build-up which are complications associated
with the phaco method. In 1996, we received FDA approval to conduct clinical
trials in the United States with the PhotonJ laser system. During these Phase I
clinical trials we discovered that the PhotonJ laser system was effective in
removing softer grade cataracts. We completed our Phase I clinical trials in
1997, and received FDA approval to proceed to an expanded Phase II clinical to
provide the statistical data required to approve the PhotonJ laser system for
laser cataract removal. There is no assurance, however, that we will
successfully complete the Phase II clinical trials or that additional
disadvantages or problems unique to the PhotonJ laser system will not be
discovered during the Phase II clinical trials or following FDA approval of the
system.
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1
<PAGE>
In addition to cataract surgery, we believe that our PhotonJ laser system
is capable of being configured with specialty probes for use in other ophthalmic
surgical procedures. These potential applications could represent substantial
growth opportunities including additional sales of equipment, instruments,
accessories and disposables. However, there can be no assurance that these
applications will be developed or approved. Further there is no guarantee that
the laser will be accepted by the eye surgery market in this capacity.
BLOOD FLOW ANALYZER
In June 1997, we received FDA clearance to market the Blood Flow AnalyzerJ
for detection of glaucoma and other retina related diseases. The device measures
not only pressure in the eye but also blood flow in the eye. Reduced blood flow
in the eye may cause nerve fiber bundle death from lack of oxygen resulting in
loss of vision associated with glaucoma. Our Blood Flow AnalyzerJ is a portable
automated system that presents an affordable method for such blood flow testing
for ophthalmic and optometric doctors. We have an exclusive licence to private
label, package and market the product in the United States, with full
international marketing rights. See "Business - General."
MARKETING AGREEMENT
In June, 1998, we entered into a Co-Distribution Agreement with Pharmacia &
Upjohn Company and Natural Healthcare Manufacturing Corporation, which provides
for the marketing and sale of a range of ophthalmic products. Under the terms of
the Co-Distribution Agreement, we, Parmacia & Upjohn and National Healthcare
will offer a comprehensive package of products to cataract surgeons, including
cataract surgical equipment, intraocular lens, implants, intraocular
pharmaceuticals, surgical instruments and sterile procedural packs. See
"Business - General."
ACQUISITION OF DIAGNOSTIC INSTRUMENTS
In July 1998, we entered into an Agreement for Purchase and Sale of Assets
with the Humphrey Systems to acquire the exclusive technology and manufacturing
rights to four diagnostic eyecare instruments, formerly manufactured by Humphrey
System. These instruments are ultrasound-based products which represent one of
the Company=s core technology areas and include the Ultrasonic Biometer 820, the
A/B Scan System Model 837, the Ultrasound Pachymeter Model 855, and the
Ultrasound Biomicroscope Model 840 and all accessories, packaging and end-user
collateral products for each of the product lines. All product manufacturing and
service has been moved to our Salt Lake City facility. Product shipments of the
Ultrasound Pachymeter Model 855 resumed in December 1998. Product shipments of
the Ultrasonic Biometer 820 are expected to resume in the second quarter of 1999
and product shipments of the A/B Scan System Model 837 and the Ultrasound
Biomicroscope Model 840 are expected to resume in the third quarter of 1999. The
acquisition gives us a fast track entry into the expanding eyecare diagnostics
market. In addition, the ultrasound products compliment our cataract and
glaucoma product offerings and expand our market into optometry. See "Business -
General."
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2
<PAGE>
The Offering
Securities Offered .............. The resale of 6,258,859 shares of Common
Stock, consisting of the resale of 2,151,900
shares of Common Stock issuable upon the
exercise of the Class A Warrants,
Underwriter's Warrants, Win Capital Warrants,
Note holders' Warrants, Attorney's Warrants,
KSH Investment Group Warrants, and Cyn Del
Warrants; the resale of 1,750,643 shares of
Common Stock issuable upon the conversion of
the Series C Convertible Preferred Stock (the
"Series C Preferred Stock") and the Note; the
resale of 1,140,000 shares of Common Stock
issuable upon the conversion of the Series D
Convertible Preferred Stock (the "Series D
Preferred Stock"); the resale of 216,316
shares of Common Stock consisting of the
resale of 90,000 shares for satisfaction of
debt pursuant to the Stock Exchange for
Satisfaction of Debt Agreement with Zevex
International, Inc. ("Zevex") and 126,316
shares for purchase of assets pursuant to the
Agreement for Purchase and Sale of Assets
with Humphrey Systems Division of Carl Zeiss,
Inc. ("Humphrey Systems"); and the resale of
1,000,000 shares of Common Stock for purchase
of assets from Humphrey Systems pursuant to
the Agreement for Purchase and Sale of Assets
and for raising additional working capital.
Each Class A Warrant entitles the holder to
purchase one share of common Stock at an
exercise price of $7.50 per share. Each
Underwriter's Warrant entitles the holder to
purchase one share of common Stock at an
exercise price of $7.50 to $8.125 per share.
Each Win Capital Warrant entitles the holder
to purchase one share of Common Stock at an
exercise price of $2.30 to $3.00 per share.
Each of the Note Holders' Warrants and
Attorney's Warrants entitles the holder to
purchase one share of Common Stock at an
exercise price of $3.33 per share. Each KSH
Investment Group Warrant entitles the holder
to purchase one share of Common Stock at an
exercise price of $2.38 to $2.69 per share.
Each Cyn Del Warrant entitles the holder to
purchase one share of Common Stock at an
exercise price of $2.30 per share. Each share
of Series C Preferred Stock and Series D
Preferred Stock is convertible at a
conversion price of $1.75 per share. The Note
is convertible at a conversion price of $2.00
per share. The Class A Warrants,
Underwriter's Warrants, Win Capital Warrants,
Note Holders' Warrants and Attorney's
Warrants are subject in certain circumstances
to earlier redemption by us. The Series C
Preferred Stock, Note and Series D Preferred
Stock are subject in certain circumstances to
automatic conversion. See "Securityholders
Registering Shares" and "Description of
Securities."
Common Stock outstanding
prior to the offering ........... 5,894,741 shares.
Common Stock outstanding
after the offering (1)........... 12,153,600 shares.
Use of Proceeds.................. All funds received by us upon the exercise of
the Warrants will be used for general
corporate purposes. We will not receive any
proceeds from the conversion of the Series C
Preferred Stock, the Note or the Series D
Preferred Stock. See "Use of Proceeds."
Risk Factors/Dilution............ The offering involves a high degree of risk.
See "Risk Factors."
Nasdaq Symbols
Common Stock................ PMED
Class A Warrants............ PMEDW
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3
<PAGE>
<TABLE>
<CAPTION>
Summary Financial Information
For the For the For the
year ended year ended year ended
September 30, December 31, December 31,
1996 1997 1998
---- ---- ----
Statement of Operations Data:
<S> <C> <C> <C>
Sales................................................... $ 252,000 $ 464,000 $ 1,258,000
Costs of sales.......................................... 180,000 333,000 813,000
Operating expenses...................................... 1,328,000 2,933,000 3,160,000
Operating loss.......................................... (1,256,000) (2,802,000) (2,715,000)
Other income (expense).................................. (193,000) 208,000 44,000
Net loss................................................ (1,449,000) (3,010,000) (2,759,000)
Net loss attributable to common shareholders
After non-cash preferred dividend.................... (1,448,000) (3,010,000) (2,759,000)
Net loss per common share............................... (0.66) (0.82) (.69)
Shares used in computing net loss per share............. 2,193,000 3,663,000 4,022,000
Cash dividends per share................................ None None None
As of As of
December 31, December 31,
1997 1998
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Balance Sheet Data:
Current assets........................................... $ 1,857,000 $ 1,415,000
Current liabilities..................................... 1,055,000 492,000
Working capital........................................ 802,000 923,000
Total assets........................................... 2,713,000 2,241,000
Long-term debt, less current portion.................... 1,082,000 33,000
Accumulated deficit...................................... (8,258,000) (15,887,000)
Stockholders' equity..................................... 576,000 1,716,000
</TABLE>
4
<PAGE>
RISK FACTORS
Before you invest in our Common Stock, you should be aware that there are
various risks, including those described below. You should consider carefully
these risk factors together with all of the other information included in this
Prospectus before you decide to purchase shares of our Common Stock. No
investment should be made by any person who is not in a position to lose the
entire amount of his investment.
Some of the information in this Prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as Amay,@ Awill,@ Aexpect,@ Aanticipate,@ Aestimate,@
Acontinue@ or other similar words. These statements discuss future expectations,
contain projections of results of operations or of financial condition or state
other Aforward- looking@ information. When considering such forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this Prospectus. The risk factors noted in this section and other
factors noted throughout this prospectus, including certain risks and
uncertainties, could cause our actual results to differ materially from those
contained in any forward-looking statement.
Limited Working Capital; Limited Operating History; Accumulated Deficit;
Anticipated Losses.
As of December 31, 1998, we had limited working capital of $923,000. We
also have not been in business for a long time. Most of our current sales are
related to the Precisionist 3000 Plus, our ultrasonic eye surgery machine. Our
accumulated deficit was $8,258,406 as of December 31, 1997 and $15,887,000 as of
December 31, 1998. Such losses have resulted principally from costs incurred in
connection with research and development, including clinical trials, of the
laser surgery system. Medical products were not sold by us until late 1992. Our
ability to become profitable largely depends on successfully developing clinical
applications and obtain regulatory approvals for its laser surgery products,
including the PhotonJ LaserPhacoJ, and to effectively market such products. The
problems and expenses frequently encountered in developing new products and the
competitive industry in which we operate will impact whether we are successful.
We may never achieve profitability. Furthermore, we may encounter substantial
delays and unexpected expenses related to research, development, production,
marketing, regulatory matters or other unforeseen difficulties.
Possible Future Delisting of Securities from The Nasdaq SmallCap Market and
Market Illiquidity.
We received a letter from the Nasdaq staff, dated January 7, 1998,
notifying us that our securities would be delisted from The Nasdaq SmallCap
Market at the close of business on January 15, 1998 because we failed to
demonstrate compliance with all the requirements for continued listing. We
requested a review of the staff's findings and conclusions. A hearing to review
the staff's findings and conclusions was held on February 19, 1998. We were
determined to be in compliance with the requirements for continued listing on
The Nasdaq SmallCap Market as a result of the proceeds we had received from sale
of 20,030 shares of Series C Preferred Stock and the exchange of 12%
Convertible, Redeemable Promissory Notes for 9,950 shares of Series C Preferred
Stock.
In order to remain eligible for quotation on Nasdaq, we must maintain
$2,000,000 in net tangible assets, a $500,000 market value of the public float
(excluding shares held directly or indirectly by officers, directors and
controlling stockholders), and at least 300 round lot holders of our Common
Stock. In addition, continued inclusion requires two market-makers and a minimum
bid price of $1.00 per share. If we are unable to comply with these new listing
requirements in the future, our securities would be delisted from the Nasdaq
SmallCap Market. We may be unable to satisfy all requirements to remain listed
on Nasdaq. If delisted from Nasdaq, our securities may then be traded on the OTC
Electronic Bulletin Board or in the over-the-counter market in the so-called
"pink sheets." As a result, it may be more difficult for an investor to dispose
of our securities, or to obtain accurate quotations on their market value.
Furthermore, the prices for our securities may be lower than might otherwise be
obtained.
Disclosures Relating to Low Priced Stocks; Possible Restrictions on Resales of
Low Priced Stocks and on Broker-Dealer Sales; Possible Adverse Effect of "Penny
Stock" Rules on Liquidity for the Company's Securities.
If our securities were to be delisted from Nasdaq as discussed above,
they may become subject to Rule 15g-9 promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), which imposes additional sales
practice requirements on broker-dealers that sell securities governed by Rule
15g-9 to persons other than established customers and "accredited investors"
(generally, individuals with a net worth in excess of $1,000,000 or annual
individual income exceeding $200,000 or $300,000 jointly with their spouses).
For transactions covered by Rule 15g-9, the broker-dealer must determine whether
the purchaser qualifies as a purchaser and must receive the purchaser's written
consent to the transaction prior to sale. Consequently, Rule 15g-9 may adversely
effect the ability purchasers and others to sell our securities and otherwise
affect the trading market in our securities.
The Commission has adopted regulations which generally define a "penny
stock" to be any non-Nasdaq equity security that has a market price (as therein
defined) less than $5.00 per share or with an exercise price of less than $5.00
per share, subject to certain exceptions. For any transactions by broker-dealers
involving a penny stock (unless exempt), rules promulgated under the Exchange
Act require delivery, prior to a transaction in a penny stock, of a risk
disclosure document relating to the penny stock market. Disclosure is also
required to be made about compensation payable to both the broker-dealer and the
registered representative and
5
<PAGE>
current quotations for the securities. Finally, monthly statements are required
to be sent disclosing recent price information for the penny stocks.
The foregoing penny stock restrictions will not apply to our securities
if such securities are listed on Nasdaq and have certain price and volume
information provided on a current and continuing basis or if we meet certain
minimum net tangible asset or average revenue criteria. There can be no
assurance that our securities will qualify for exemption from these
restrictions. In any event, even if our securities were exempt from such
restrictions, they would remain subject to Section 15(b)(6) of the Exchange Act,
which gives the Commission the authority to prohibit any person that is engaged
in unlawful conduct while participating in a distribution of a penny stock from
associating with a broker-dealer or participating in a distribution of a penny
stock, if the Commission finds that such a restriction would be in the public
interest. If our securities were subject to the rules on penny stocks, the
market liquidity for our securities could be materially adversely affected.
Future Capital Needs and Uncertainty of Additional Funding.
We may require substantial funds in addition to the net proceeds of this
Offering for various reasons, including continuing research and development,
expanding clinical trials, completing the FDA approval process for its products
(including the PhotonJ LaserPhacoJ), and manufacturing and marketing its
existing products. See "Risk Factors -- Government Regulation; Uncertainty of
FDA Approval@ below. In the short term, based on past financial needs and on
currently planned programs, we anticipate that the net proceeds of this Offering
and the interest earned from it, together with funds generated from future
product sales, should be adequate, even if at the minimum level, to satisfy our
capital requirements for approximately 12 months. This estimate is based on
certain assumptions and there can be no assurance that the net proceeds of this
Offering will be sufficient to satisfy our capital requirements for 12 months.
Even if this Offering is successful, we will need to seek additional capital,
possibly through public or private sales of our securities, in order to fund our
activities on a long-term basis. Adequate funds may not be available when needed
or on terms acceptable to us. Insufficient funds may require us to delay, scale
back or eliminate certain or all of its research and development programs or to
license third parties to commercialize products or technologies that we would
otherwise seek to develop itself, which may materially adversely affect our
continued operations.
Technological Uncertainty and Early Stage of Product Development.
The science and technology of medical products, including lasers, is
rapidly evolving. Our medical systems may require significant further research,
development, testing and regulatory clearances. They are also subject to the
risks of failure inherent in the development of products based on innovative
technologies. These risks include the possibility that any or all of the
proposed products will prove to be ineffective or unsafe; that they fail to
receive necessary regulatory clearances; that the proposed products are
uneconomical; that others hold proprietary rights which preclude us from
marketing such products; or that others market better products. Accordingly, we
are unable to predict whether its research and development activities will
result in any commercially profitable products. Further, due to the extended
testing and regulatory review process required, we may be unable to sell our
current and proposed laser cataract system products. There is also no guarantee
that we will be able to develop and sell a glaucoma surgery system. See
"Business."
Government Regulation; Uncertainty of FDA Approval.
We are subject to substantial regulation by the FDA and other federal and
state regulatory agencies. FDA regulations require us to obtain either a 510(k)
clearance or pre-marketing approval prior to marketing a product in the United
States. We are also subject to foreign regulation and must receive various types
of approvals from foreign government agencies prior selling its products in some
countries. The clearance and approval processes for both the FDA and foreign
regulatory authorities are costly, time consuming and uncertain. In addition, we
are required to obtain FDA approval before exporting a device which has not
received FDA marketing clearance or approval. We may never be able to obtain
these required government approvals. See "Risk Factors--Future Capital Needs and
Uncertainty of Additional Funding." Delays or failure to obtain such approvals
would materially and adversely effect us, as would changes in existing
requirements. We have received a 510(k) clearance from the FDA for our
ultrasonic surgery systems allowing us to sell both devices in the United
States. We have also received 510(k) clearance to market an ocular blood flow
analyzer manufactured by O.B.F. Labs, Ltd. ("O.B.F. Labs"). In May 1995, we were
granted an investigational device exemption for our PhotonJ LaserPhacoJ System
allowing us to conduct clinical studies in support of our application with the
FDA to obtain approval to market our laser surgery system. We have completed the
authorized clinical studies and has requested authorization for expanded
clinical studies. We have also received FDA approval to manufacture and export
the PhotonJ LaserPhacoJ System internationally. However, we have not yet
obtained approval from some foreign countries to market the laser product where
approval is necessary. We anticipate that many contemplated applications of our
currently existing and planned products will be subject to the lengthy
regulatory approval process, including preclinical studies, clinical trials and
extensive regulatory review and could take many years and require the
expenditure of substantial resources. See "Business--Regulation."
6
<PAGE>
Lack of Operating Experience.
Our executives rely on their experience and skill from their professional
occupations. None of our executives has direct experience in managing a company
which utilizes research and product development activities and technology to
such a high degree.
See "Management."
Dependence on Laser Cataract System.
We are also developing a laser cataract system for inclusion in our
WorkstationJ. Phase I clinical trials have concluded for FDA approval for the
PhotonJ LaserPhacoJ system. During the clinical trial, we discovered that the
PhotonJ LaserPhacoJ system may not effectively remove viscerous cataracts. In
May, 1998, we received FDA clearance to conduct clinical tests on soft
cataracts. We are highly dependent on FDA approval of its PhotonJ LaserPhacoJ
system to generate future revenues. With the recently discovered possible
limitation of the PhotonJ LaserPhacoJ, the system may not be approved by the
FDA. See "Business -Products."
Potential Obsolescence from Rapid Technological Change.
Our market is subject to rapid technological change. Development by
others of new or improved products, processes or technologies may make our
products obsolete or less competitive. Accordingly, we must continue investing
in research and development on our existing products and to develop new
products. Despite such investment, our current or proposed products may be
unsuccessful.
Product and Market Competition.
Our laser system will potentially receive competition from other laser
systems, such as excimer, holmium (Ho:YAG), Erbium (Er:YAG), Nd:YLF
(Neodymium:Yttium-Lithium-Fluoride) or lasers of other wave lengths. Competition
may also come from other medical devices and other surgical techniques. Further,
the cataract surgical device industry is dominated by a small number of large
competitors that are well established in the marketplace, have experienced
management, are well financed and have a well recognized trade name related to
their product lines. We may be unable to penetrate the existing market and
acquire a sufficient market share to be profitable. Significant competitive
factors which will affect future sales include regulatory approvals,
performance, pricing, timely product shipment, safety, customer support,
convenience of use and patient and general market acceptance. See
"Business-Competition."
Business Development Risks.
New ventures, particularly those involved in a highly technical industry
such as the medical industry, have substantial inherent risks. These risks are
in three general areas: technical, mechanical and human. Notwithstanding any
pre-production planning, new products can incur unexpected problems in full
scale production, which cannot always be foreseen or accurately predicted.
Designs can become unworkable, for unpredicted reasons. Quality control and
component sourcing failures can also be expected from time to time. Any
business, including ours, is substantially dependent upon the capabilities and
performance of both management and sales personnel. Mistakes in judgment or
performance can be costly and, in certain instances, disabling. Therefore,
management skill, experience, character and reliability are of significant
importance.
Dependence On Key Personnel.
Our success largely depends on a number of key employees. The loss of
services of one or more of these employees could have a material adverse effect
on us, including the development and sale of eye surgery systems. We are
especially dependent upon the efforts and abilities of certain of our senior
management, particularly Thomas F. Motter, Chairman of the Board, President and
Chief Executive Officer, and Robert W. Millar, Vice President of Engineering and
Manufacturing. Messrs. Motter and Millar are each employed by us under a
five-year employment agreement. The loss of any of our key executives could have
a material adverse effect on us and our operations and prospects, although the
loss of either Mr. Motter or Mr. Millar could have a more significant adverse
effect. We have no key man insurance on either Mr. Motter or Mr. Millar. We
believe that our future success will also depend, in part, upon our ability to
attract, retain and motivate qualified personnel. There is no assurance,
however, that we will be successful in attracting and retaining such personnel.
See "Management."
Production Risks.
The high-technology product line requires us to deal with suppliers and
subcontractors supplying highly specialized parts, operating highly
sophisticated and narrow tolerance equipment and performing highly technical
calculations. Components must be custom designed and manufactured, which is not
only complicated and expensive, but can also require a number of months to
7
<PAGE>
accomplish. Slight mistakes in either the design or manufacture can result in
unsatisfactory parts that may not be correctable. Because our business requires
the talents of various professions, mistakes from very slight oversights or
miscommunications can occur, resulting not only in costly delays and lost
orders, but also in disagreements regarding liability and, in any event,
extended delays in production. Moreover, we rely on suppliers that are related
to each other for parts and equipment. When dealing with related suppliers the
terms on which parts and equipment are purchased may not be as favorable as
could be obtained from unrelated third-party suppliers. See "Business."
Lack of Independent Market Testing.
We believe that there is substantial commercial demand for its laser
surgery system and blood flow analyzer for the eyes at a profitable price.
However, this belief is solely based on our management=s experience and
judgment. At this time, there have been no independent marketing studies by
independent professional marketing firms to reliably confirm the extent of this
demand, the price ranges within which it exists and the amount of promotion
necessary to exploit whatever demand does exist. See "Business."
No Assurance of Market Acceptance.
Our products may not be accepted in the marketplace. Such acceptance will
depend on a number of factors including receiving regulatory approvals,
demonstrating the safety, and advantages of our products over existing systems
and techniques. Our laser surgery system may never gain market acceptance since
the system may not effectively remove viscerous cataracts. Further, we be unable
to successfully market our products even if they perform successfully in
clinical applications. Our Precisionist ThirtyThousandJ WorkstationJ may not
gain acceptance unless we can reduce or eliminate the vacuum surge and develop
additional, complementary surgical devices for installation in that host system.
Dependence on Patents and the Protection of Proprietary Technology.
We depend on our ability to license and obtain patents and on the
adherence to confidentiality agreements executed by employees, consultants and
third-parties to maintain the proprietary nature of our technology and to
operate without infringing on the proprietary rights of others. Our laser probe
is protected by a United States patent issued in 1987 to Daniel M. Eichenbaum,
M.D. We own the exclusive worldwide rights to this patent. Patents are reported
by O.B.F. Labs to be pending in the United States and Japan and with the
European Economic Community for the blood flow analyzer for the eyes we plan to
market. The pending patents may not be perfected. Also, our present or future
products may be found to infringe upon the patents of others. If our products
are found to infringe on the patents, or otherwise impermissibly utilize the
intellectual property of others, our development, manufacture and sale of such
products could be severely restricted or prohibited. We may be required to
obtain licenses to utilize such patents or proprietary rights of others and
acceptable terms may be unavailable. If we do not obtain such licenses, the
development, manufacture or sale of products requiring such licenses would be
materially adversely affected. In addition, we could incur substantial costs in
defending itself against challenges to our patents or infringement claims made
by third parties or in enforcing any patents we may obtain. See
"Business--Intellectual Property."
Limited Nature of Patent Protection.
Others may sell products similar to our PhotonJ LaserPhacoJ system or the
Blood Flow AnalyzerJ for the eyes before we can market either device. We rely on
the protections that we hope to realize under the United States and foreign
patent laws. See "Business--Intellectual Property Protection." However, patents
provide limited protections. We have a United States patent on the hand-held
probe design and applications for various foreign patents are either pending or
planned, and the patents for the blood flow analyzer for the eyes are reported
by O.B.F. Labs to be pending. Similar devices, however, could be designed that
do not infringe on our patent rights, but that are similar enough to compete
against our patented products. Moreover, it is possible that an unpatented but
prior existing device or design may exist that has never been made public and
therefore is not known to us or the industry in general. Such a device could be
introduced into the market without infringing on our current patent. If any such
competing non-infringing devices are produced and distributed, our profit
potential would be seriously limited, which would seriously impair our
viability. See "Business--Competition."
Limitations on Medical Reimbursement.
We anticipate that our medical devices will generally be purchased by
ophthalmologists and hospitals that will then bill various third-party payors,
such as government programs and private insurance plans, for the health care
services provided to their patients. Government agencies generally reimburse at
a fixed rate based on the procedure performed. Some of the potential procedures
for which our medical devices may be used, however, may be denied reimbursement
as elective. In addition, third-party payors may deny reimbursement if they
determine that the use of our products was unnecessary, inappropriate, not
cost-effective, experimental or used for a non-approved indication. Even if we
receive FDA clearances for our products, third-party payors may nevertheless
deny reimbursement. Furthermore, third-party payors increasingly challenge the
prices charged for medical products and services. Reimbursement from third-party
payors may be unavailable or if available, that reimbursement may be limited
when compared with
8
<PAGE>
reimbursement for competitive procedures, thereby materially adversely affecting
our ability to profitably sell products. The market for our products could also
be adversely affected by recent federal legislation that reduces reimbursements
under the capital cost pass-through system utilized in connection with the
Medicare program. Failure by hospitals and other users of our products to obtain
reimbursement from third-party payors or changes in government and private
third-party payors' policies toward reimbursement for procedures employing our
products would have a material adverse effect on us. See "Risk Factors--Proposed
Health Care Reform" and "Business--Marketing and Sales--Third-Party
Reimbursement."
Proposed Health Care Reform.
President Clinton's Administration is making proposals to change aspects
of the delivery and financing of health care services. Other legislation to
accomplish the same purpose has or will also be introduced by members of
Congress. Legislation derived from one or more of these proposals may be enacted
in the near future. Such legislation to control or reduce public (Medicare and
Medicaid) and private spending on health care, to reform the methods of payment
for health care goods and services by both the public and private sectors, and
to provide universal access to health care may be passed. We cannot predict what
form this legislation may take or the effect of such legislation on its
business. It is possible that the legislation ultimately enacted by Congress
will contain provisions resulting in price limits and utilization controls which
may reduce the rate of increase in the growth of the ophthalmic laser market or
otherwise adversely affect our business. It is also possible that future
legislation could result in modifications to the nation's public and private
health care insurance systems which will affect reimbursement policies in a
manner adverse to us. We also cannot predict what other legislation relating to
our business or the health care industry may be enacted, including legislation
relating to third-party reimbursement, or what effect legislation may have on
the results of its operations.
New Product Quality.
Our Precisionist ThirtyThousandJ WorkstationJ is a new computer-based
product unproven by day-to-day use in the marketplace. As is common with other
new computer-based products, we have discovered certain circuitry problems and
component failures with the first WorkstationJ that we manufactured. We believe
that we have corrected most if not all of these problems. However, there is no
assurance that all of these problems have been detected or corrected. If
customers were to experience significant problems with the WorkstationJ, if we
could not fix or correct the problems, or if our customers were dissatisfied
with the functionality or performance of the WorkstationJ, or product support
provided by us, we would be materially adversely effected.
Dependence on Outside Suppliers and Manufacturers.
We currently purchase all of its components, supplies and contract
manufacturing from third-party suppliers. Substantially all of our current
products are manufactured or assembled by three companies under long-term
manufacturing agreements. See "Business--Marketing and Sales--Manufacturing and
Raw Materials." However, if we were required to locate other manufacturers or
suppliers, we could experience increased costs and significant delays in both
locating and switching to new vendors. Further, it would be difficult for us to
develop the capacity to manufacture or assemble its products in-house since we
have no experience in large-scale manufacturing. In addition, we may be
unsuccessful in developing the necessary facilities or recruiting trained
personnel to achieve profitable manufacturing or assembling capacities.
Minimal Marketing Experience.
We have commenced a direct sales program to market its current and
proposed products. See "Business--Marketing and Sales." However, we have minimal
direct sales experience and may need to recruit additional qualified personnel
for this purpose. Our sales program may be unsuccessful or we may be unable to
attract and retain qualified distributors on favorable terms.
Product Liability and Possible Insufficiency of Insurance.
The nature of our business exposes it to risk from product liability
claims and there can be no assurance that the Company can avoid significant
product liability exposure. We maintain product liability insurance providing
coverage up to $1,000,000 per claim with an aggregate policy limit of
$1,000,000. There is substantial doubt that this amount of insurance would be
adequate to cover liabilities should we face significant claims. A successful
products liability claim brought against us could have a material adverse effect
on our business, operating results and financial condition. Further, product
liability insurance is becoming increasingly expensive, and there can be no
assurance that we will successfully maintain adequate product liability
insurance at acceptable rates, or at all. Should we be unable to maintain
adequate product liability insurance, our ability to market our products would
be significantly impaired. Any losses that we may suffer from future liability
claims or a voluntary or involuntary recall of our products and the damage that
any product liability litigation or voluntary or involuntary recall may do to
the reputation and marketability of our products would have a material adverse
effect on our business, operating results and financial condition.
9
<PAGE>
World Economic, Political and Currency Fluctuations.
We anticipate that a significant portion of its future product sales will
be in foreign countries. Because we quote prices for our products and accepts
payment on sales principally in U.S. dollars, any significant increase in the
value of the U.S. dollar against local currencies may make our products less
competitive with foreign products. The economic and political instability of
some foreign countries also may affect the ability of ophthalmologists and
others to purchase our products, or the ability of potential customers to pay
for the procedures for which our products are used. See "Business--Competition."
Potential Adverse Effects of Future Sales of Stock; Dilution.
As of March 31, 1999, approximately 58% or about 3,390,000 of the total
5,894,741 shares of Common Stock outstanding were "restricted securities" within
the meaning of Rule 144 under the 1933 Act. Ordinarily, under Rule 144, a person
holding restricted securities for a period of one year may, every three months,
sell in ordinary transactions, or in transactions directly with a market maker
an amount equal to the greater of one percent of our then outstanding Common
Stock or the average weekly trading volume during the four calendar weeks prior
to such sale. An additional 47,226 shares could immediately be sold in reliance
on Rule 144 upon the conversion of our Series A and Series B Preferred Stock
issued and outstanding as of March 31, 1999 for shares of Common Stock. An
additional 33,125 shares could also be immediately sold in reliance upon Rule
144 upon the exercise of the La Jolla Warrants and FAS Warrants and an
additional 660,280 shares could eventually be sold in reliance upon Rule 144
upon the exercise of Stock Options granted to our employees and directors.
Moreover, an additional 80,000 shares of Common Stock could be sold upon the
conversion of the Series C Preferred Stock and 1,140,000 shares of Common Stock
could be sold upon the conversion of the Series D Preferred Stock. Further,
1,000,000 shares could be sold upon the exercise of Class A Warrants issued in
connection with the July 1996 public offering and 512,500 shares could be sold
upon the exercise of warrants held by Bridge Note investors, and our attorneys
and underwriters of the July 1996 public offering. Finally, 639,400 shares could
be sold upon the exercise of warrants that we have issued to Win Capital , Cyn
Del and KSH Investment Group. We have agreed to register the shares of Common
Stock issuable upon exercise of Class A Warrants, Underwriter's Warrants, Win
Capital Warrants, Note Holders' Warrants, Attorney's Warrants, KSH Investment
Group Warrants and Cyn Del Warrants on the same registration statement as the
shares of Common Stock issuable upon conversion of the Series C and Series D
Preferred Stock and Note and keep such registration statement current until such
time as all shares of Common Stock issuable upon exercise of the warrants and
conversion of the Series C and Series D Preferred Stock are freely tradeable
pursuant to Rule 144(k) promulgated under the Securities Act, all at our cost
and expense. Sales of such shares would increase the number of shares in the
public float and have an adverse effect on the market price of the Common Stock.
Possible Volatility of Stock Price.
Our Common Stock and Class A Warrants are currently traded on The Nasdaq
SmallCap Market. Factors such as announcements by us of the regulatory status of
products, quarterly variations in its financial results, the gain or loss of
material contracts, changes in management, regulatory changes, trends in the
industry or stock market and announcements by competitors, among other things,
could cause the market price of such securities to fluctuate significantly.
Adverse Effects of Board of Director Control of Preferred Stock.
Our Certificate of Incorporation authorizes the issuance of shares of
"blank check" preferred stock, which will have such designations, rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval
(but subject to applicable government regulatory restrictions), to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
our Common Stock. Those terms and conditions may include preferences on an equal
or prior rank to existing series of Preferred Stock. Those shares may be issued
on such terms and for such consideration as the Board then deems reasonable and
such stock shall then rank equally in all aspects of the series and on the
preferences and conditions so provided, regardless of when issued. In the event
of such issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. As of March 31, 1999, 8,119 shares of Series A Preferred
Stock, 31,236 shares of Series B Preferred Stock, 1,400 shares of Series C
Preferred Stock and 1,140,000 shares of Series D Preferred Stock were issued and
outstanding, which are immediately convertible, in the aggregate, into 1,267,226
shares of our Common Stock. See "Description of Securities--Preferred Stock."
No Dividends on Common Stock.
We issued a stock dividend on its Series A Preferred Stock and Series B
Preferred Stock on January 8, 1996, to stockholders of record as of December 31,
1994. We have not paid any cash dividends on our Common Stock and do not expect
to declare or pay any cash or other dividends in the foreseeable future so that
we may reinvest earnings, if any, into the development of the business. The
holders of our Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock are entitled to non-cumulative cash
dividends paid out of surplus earnings. See "Dividend Policy" and "Description
of Securities--Preferred Stock."
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Board Discretion as to Use of Proceeds.
All of the net proceeds of the Offering, if any, have been allocated to
working capital (and not otherwise allocated for a specific purpose) and will be
used for such purposes as management may determine in its sole discretion
without the need for stockholder approval with respect to any such allocations.
See "Use of Proceeds."
Rescission Offer to Series B Shareholders.
We issued 493,000 shares of Series B Preferred Stock in 1994 and 1995.
The Series B Shares may not have been sold in compliance with certain aspects of
California corporate law and federal and state securities laws. Concurrently
with our July 1996 public offering, we provided the Series B Shareholders with a
rescission offer (the "Rescission Offer") to repurchase all Series B Preferred
shares (the "Rescission Shares") owned by the Series B Shareholders. The Series
B Shareholders were offered the right to rescind their purchases and receive a
refund of the price paid by them of $4.00 per share plus an amount equal to the
interest thereon at rates ranging from 6% to 12% per annum from the date the
Rescission Shares were purchased to July 25, 1996, the date our public offering
closed and each rescinding shareholder was paid by us. The original purchasers
of approximately 93% of the Series B Shares (460,250 shares) rejected the
Rescission Offer by responding as requested in the Rescission Offer or by
failing to return a response within thirty days of receiving the Rescission
Offer. Two shareholders owning a combined total of 32,750 shares accepted the
Rescission Offer. The Rescission Offer was designed to reduce any type of
contingent liability we may be subject to in connection with its private
placement of Series B Preferred Stock. However, the Rescission Offer may not
have fully relieved us from exposure to contingent liability under federal or
state securities laws. Not every state statutorily provides for voluntary
rescission offers. In addition, other states, although authorizing rescission
offers, do not completely limit the liability of the offeror. Thus, we may have
continuing liability in certain states following the Rescission Offer.
Limited Liability for Officers and Directors and Indemnification Matters.
Our Certificate of Incorporation eliminates in certain circumstances the
liability of directors for monetary damages for breach of their fiduciary duty
as directors. We have entered into indemnification agreements (the
"Indemnification Agreements") with certain directors and officers. Each such
Indemnification Agreement provides that we will indemnify the indemnitee against
expenses, including reasonable attorneys' fees, judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with any civil or criminal action or administrative proceeding arising out of
his performance of his duties as a director or officer, other than an action
instituted by the director or officer. The Indemnification Agreements will also
require that we indemnify the director or other party thereto in all cases to
the fullest extent permitted by applicable law. Each Indemnification Agreement
will permit the director or officer that is party thereto to bring suit to seek
recovery of amounts due under the Indemnification Agreement and to recover the
expenses of such a suit if he or she is successful. See "Management--Limitation
of Liability and Indemnification Matters."
Dilutionary Possibilities.
The Board of Directors has the inherent right under applicable Delaware
law, for whatever value the Board deems adequate, to issue additional shares of
Common Stock up to the limit of shares authorized by the Certificate of
Incorporation, and, upon such issuance, all holders of shares of Common Stock,
regardless of when it is issued, thereafter generally rank equally in all
aspects of that class of stock, regardless of when issued. The Board of
Directors likewise has the inherent right, limited only by applicable Delaware
law and provisions of the Certificate of Incorporation to increase the number of
shares of Preferred Stock in a series, to create a new series of Preferred Stock
and to establish preferences and all other terms and conditions in regard to
such newly-created series. Any of those actions will dilute the holders of
Common Stock and also affect the relative position of the holders of any series
of any class. Current stockholders have no rights to prohibit such issuances nor
inherent "preemptive" rights to purchase any such stock when offered. See "The
Offering."
USE OF PROCEEDS
Holders of Class A Warrants, Underwriter's Warrants, Win Capital
Warrants, Note Holders' Warrants, Attorney's Warrants, Cyn Del Warrants and KSH
Investment Group Warrants are not obligated to exercise any of their Warrants.
However, assuming exercise of all of the Warrants and assuming the issuance of
the 1,000,000 additional shares of Common Stock being registered for resale for
the purchase of assets from Humphrey Systems and for raising additional working
capital, the net proceeds from this Offering to be received by the Company from
the issuance of 2,151,900 shares of Common Stock covered by this Prospectus and
issuable upon the exercise of the Warrants and from the insurance of 1,000,000
additional shares of Common Stock are estimated to be $14,820,025. The closing
bid price of the Common Stock on The Nasdaq SmallCap Market was $3.25 on April
23, 1999. Approximately 80% of the Warrants are exercisable at prices above
$3.25. Accordingly, there is no assurance that any of the Warrants will be
exercised and the Company may not receive any proceeds from this Offering. The
Company will not receive any proceeds from the issuance of shares of Common
Stock upon conversion of the Series C Preferred Stock, the Note or Series D
Preferred Stock.
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The Company currently anticipates that it will use the net proceeds of
this Offering, if any, to fund working capital requirements. In the event
sufficient proceeds are not received, the Company's short term plan is to meet
cash needs through external financing sources such as bank financing and private
offerings of debt and/or equity. The Company also expects the cash flow from
operations will provide additional funds to the Company as operating revenues
increase.
The cost, timing and the amount of funds required for such uses by the
Company cannot be precisely determined at this time and will be based upon,
among other things, competitive developments, the rate of the Company's progress
in product development, and the availability of alternative methods of
financing. In addition, the Company's Board of Directors has broad discretion in
determining how the proceeds of this Offering received by the Company will be
applied.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1998.
<TABLE>
<CAPTION>
As of
December 31,
1998
- ----------------------------------------------------------------------------------------- ------------------------
<S> <C>
Long-term obligations(1) $ 33,000
-----------
Stockholders' equity:
Series A Preferred Stock, $.001 par value per share;
500,000 shares authorized, 34,619 issued and outstanding --
Series B Preferred Stock, $.001 par value per share;
500,000 shares authorized, 31,236 issued and outstanding --
Series C Preferred Stock, $.001 par value per share;
30,000 shares authorized; 6,900 issued and outstanding --
Series D Preferred Stock, $.001 par value per share;
1,140,000 shares authorized; -0- issued and outstanding --
Common Stock, $.001 par value per share; 20,000,000 shares
authorized, 5,500,306 issued and outstanding (2) 5,000
Additional paid-in-capital 17,704,000
Treasury Stock, 2,600 shares of common stock (4,000)
Unearned compensation (94,000)
Stock subscription receivable (8,000)
Accumulated deficit (15,887,000)
Total stockholders' equity 1,716,000
Total capitalization $1,749,000
- ----------------------------------------------------------------------------------------- ------------------------
</TABLE>
(1) Excludes current portion of long-term debt.
(2) Does not include (i) 2,151,900 shares of Common Stock issuable upon
the exercise of the Class A Warrants, Underwriter's Warrants, Win
Capital Warrants, Note Holders' Warrants, Attorney's Warrants, KSH
Investment Group Warrants and Cyn Del Warrants; (ii) 21,525 shares
of Common Stock issuable upon exercise of the FAS Warrants; (iii)
13,920 shares of Common Stock issuable upon conversion of the 11,600
Series A Preferred Stock underlying the La Jolla Warrants; (iv)
47,226 shares of Common Stock issuable upon the conversion of the
8,119 shares of outstanding Series A Preferred Stock and 31,236
shares of outstanding Series B Preferred Stock; (v) 2,890,643 shares
of Common Stock issuable upon the conversion of the Series C
Preferred Stock, the Note and the Series D Preferred Stock; and (vi)
750,000 shares of Common Stock issuable upon the exercise of options
granted under the Company's 1995 Option Plan.
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Bridge Financing
During the period beginning on December 26, 1995 and ending on February
21, 1996, the Company sold a total of 23 Units to 14 investors (13 of which were
accredited investors) at a price of $25,000 per Unit primarily to finance its
public offering which was completed in July 1996 (excluding one Unit which was
issued for services). Each Unit consisted of a $25,000 Promissory Note with a
stated interest rate of 12% and Warrants to purchase 12,500 shares of Company's
Common Stock. Each Note bears interest at an imputed interest rate of 18% per
annum and is payable on the earlier of the closing of the Company raising at
least $4,000,000 through a public offering or December 31, 1996, at the $25,000
face amount of the Notes plus accrued interest at the rate of 12% per annum.
Each Warrant is exercisable, beginning on the date the Warrant is issued and
expiring on December 1, 2000, by the holder thereof to purchase one share of the
Company's Common Stock at an exercise price of $3.33 per share. The Company may
redeem the Warrants one year after completion of the offering at a price of $.05
per Warrant at such time as the Company's Common Stock has been trading in The
Nasdaq SmallCap Market or an established exchange at a price equal to or above
$10.00 for a period of 30 consecutive trading days ending within 15 days of the
date of redemption. See "Description of Securities."
Private Placement of 12% Convertible, Redeemable Promissory Notes
During the period from October 24, 1997 to December 8, 1997, the Company
sold a total of 21.4 Units of 12% Convertible, Redeemable Promissory Notes to 23
persons (all of whom were accredited investors) through a private placement at a
price of $50,000 per Unit, each Unit consisting of a $50,000 Unsecured 12%
Convertible, Redeemable Promissory Note. The Company received $1,070,000 in cash
as a result of the private placement transaction and paid $128,400 in
commissions and expenses. The Notes bear interest at 12% per annum, payable
semi-annually on each six month anniversary of the initial closing of the
private placement. The principal amount of the Notes, together with all accrued,
unpaid interest are due and payable on the three year anniversary of the closing
of the private placement. The Notes are redeemable prior to maturity at 112% of
the face value of each Note, plus accrued unpaid interest, upon 30 days written
notice to the holders of the Notes at any time after (i) the 30-day anniversary
of the effective date of the registration statement the Company will undertake
to file with the Securities and Exchange Commission to register the shares of
its Common Stock issuable to the noteholders upon conversion of the Notes, and
(ii) the average closing price of the Company's Common Stock for the 20-day
period immediately prior to the date on which notice of redemption is given to
the Company to the noteholders is at least $3.50 per share. Each Note is
convertible into 25,000 shares of the Company's Common Stock (one share for each
$2.00 principal amount of the Note) at the option of the noteholders until such
time as the Notes have been repaid in full. During the period from February 2,
1998 to March 26, 1998, 22 of the noteholders representing $995,000 of the Notes
elected to exchange their Notes for Series C Convertible Preferred Stock
pursuant to the terms of a Security Exchange Agreement. See "Capitalization --
Private Placement of Series C Convertible Preferred Stock" and "Description of
Securities."
Private Placement of Series C Convertible Preferred Stock
During the period from February 2, 1998 to April 11, 1998, the Company
sold a total of 20,300 shares of Series C Preferred Stock to 58 persons (all of
whom were accredited investors) through a private placement at a price of
$100.00 per share. The Company received $2,003,000 in cash as a result of the
private placement transaction and paid $235,360 in commissions and expenses. The
holders of the shares are entitled to 12% non-cumulative dividends. However, the
shares are entitled to dividends declared on the Company's Common Stock on an as
converted basis, i.e., as if the shares had been converted into Common Stock.
The holders of the shares of Series C Preferred Stock have the option at any
time to convert such shares into the Company's Common Stock at a conversion
price equal to $1.75 per share of the Common Stock, subject to adjustments for
stock splits, stock dividends and certain combinations or recapitalizations with
respect to the Common Stock. In addition, the shares will be automatically
converted into Common Stock upon 30 days' written notice by the Company to the
holders of the shares after (i) the 30-day anniversary of the effective date of
the filing of a registration statement on which shares of Common Stock issuable
upon conversion of the shares are registered and (ii) the average closing price
of the Common Stock for the 20-day period immediately prior to the date on which
notice of conversion is given by the Company to holders of the shares is at
least $3.50 per share. Any shares still outstanding after January 1, 2002 will
be automatically converted at such date at the conversion price then in effect.
See "Description of Securities."
Private Placement of Series D Convertible Preferred Stock
During the period from January 14, 1999 to March 1, 1999, the Company
sold a total of 1,140,000 shares of Series D Preferred Stock to 71 persons (all
of whom are accredited investors) through a private placement at a price of
$1.75 per share. The Company received $1,995,000 in cash as a result of the
private placement transaction and paid $199,500 in commissions. The holders of
the shares are entitled to 10% non-cumulative dividends. However, the shares are
entitled to dividends declared on the Company's
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<PAGE>
Common Stock on an as converted basis, i.e., as if the shares had been converted
into Common Stock. The holders of the shares of Series D Preferred Stock have
the option at any time to convert such shares into the Company's Common Stock at
a conversion price equal to $1.75 per share of the Common Stock, subject to
adjustments for stock splits, stock dividends and certain combinations or
recapitalizations with respect to the Common Stock. In addition, the shares will
be automatically converted into Common Stock upon 30 days' written notice by the
Company to the holders of the shares after (i) the 30-day anniversary of the
effective date of the filing of a registration statement on which shares of
Common Stock issuable upon conversion of the shares registered and (ii) average
closing price of the Common Stock over a 20-day period immediately prior to the
date on which notice of conversion is given by the Company to holders of the
shares is at least $3.50 per share. Any shares still left standing after January
1, 2002 will be automatically converted at such date at the conversion price
then in effect. See "Description of Securities."
SELECTED FINANCIAL DATA
The following table sets forth the Company's selected historical
financial data for the years ended September 30, 1996, December 31, 1997, and
December 31, 1998. The selected financial data as of and for the years ended
September 30, 1996, December 31, 1997 and December 31, 1998 are derived from the
financial statements of the Company which have been audited by Tanner & Co. The
Company changed its fiscal year end to December 31, effective December 31, 1996.
The following financial information should be read in conjunction with the
Financial Statements and related notes thereto.
<TABLE>
<CAPTION>
For the For the For the
year ended year ended year ended
September 30, December 31, December 31,
Statement of Operations Data 1996 1997 1998
- ---------------------------- ---- ---- ----
<S> <C> <C> <C>
Net sales...................................................$ 252,000 $ 464,000 $ 1,258,000
Net cost of sales........................................... 180,000 333,000 813,000
Operating Expenses.......................................... 1,328,000 2,933,000 3,160,000
Operating Loss.............................................. (1,256,000) (2,802,000 (2,715,000)
Other income (expenses)..................................... (193,000) (208,000) (44,000)
Net loss.................................................... (1,449,000) (3,010,000) (2,759,000)
Net loss attributable to common shareholders................ (1,448,000) (3,010,000) (2,759,000)
Net loss per common share................................... (0.66) (0.82) (.69)
Shares used in computing net loss per share ................ 2,193,000 3,663,000 4,022,000
Cash dividends per share.................................... None None None
</TABLE>
<TABLE>
<CAPTION>
As of As of
December 31, December 31,
Balance Sheet Data: 1997 1998
- ------------------- ---- ----
<S> <C> <C>
Current Assets............................................................. $1,857,000 $1,415,000
Current liabilities........................................................ 1,055,000 492,000
Working capital............................................................ 802,000 923,000
Total assets............................................................... 2,713,000 2,241,000
Long-term debt, less current portion....................................... 1,082,000 33,000
Accumulated deficit........................................................ (8,258,000) (15,887,000)
Stockholder's equity....................................................... 576,000 1,716,000
</TABLE>
14
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PRICE RANGE OF COMMON STOCK AND CLASS A WARRANTS
AND DIVIDEND POLICY
Our Common Stock and Class A Warrants trade on The Nasdaq SmallCap
Market under the symbols of "PMED" and "PMEDW." Prior to July 22, 1996, there
was no public market for the common stock. As of April 23, 1999, the closing bid
prices for our Common Stock and Class A Warrants were $3.25 per share and $.75
per warrant. The following are the high and low sales prices for the Common
Stock and Class A Warrants by quarter as reported by Nasdaq since July 22, 1996.
<TABLE>
<CAPTION>
Common Stock Class A Warrants
Price Range Price Range
-------------------------------------- --------------------------------------
Period (Calendar Year) High Low High Low
----------------------
1996
<S> <C> <C> <C> <C>
Third Quarter (Since July 22, 1996) 6 2 1-3/16 1/8
Fourth Quarter 5-5/8 2-7/8 1-7/16 7/16
1997
First Quarter 6-3/8 3 1-9/16 3/4
Second Quarter 5-3/4 3 1 2
Third Quarter 6 1-9/16 1-3/8 1/8
Fourth Quarter 4-5/8 2-7/16 7/8 1/4
1998
First Quarter 4-11/16 2-7/8 15/16 1/4
Second Quarter 6-1/2 3-13/16 1-5/16 1/4
Third Quarter 4-9/16 2-1/2 11/16 7/16
Fourth Quarter 3 1-9/16 1-3/16 7/16
1999
First Quarter 4 2-3/32 1-1/16 15/32
</TABLE>
Our Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, and Series D Convertible Preferred Stock are not publicly
traded. As of March 31, 1999, there were 646 record holders of Common Stock, 8
record holders of Series A Preferred Stock, 6 holders of Series B Preferred
Stock, 3 record holders of Series C Preferred Stock, and 72 record holders of
Series D Convertible Preferred Stock.
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We must pay cash dividends to holders of our Series A Preferred, Series
B Preferred, Series C Preferred, and Series D Convertible Preferred Stock before
we can pay any cash dividends to holders of our common stock. Dividends paid in
cash pursuant to outstanding shares of our Series A, Series B, Series C, and
Series D Preferred Stock are only payable from surplus earnings and are
non-cumulative and therefore, no deficiencies in dividend payments from one year
will be carried forward to the next. We currently intend to retain future
earnings, if any, to fund the development and growth of our proposed business
and operations. Any payment of cash dividends in the future on the Common Stock
will be dependent upon our financial condition, results of operations, current
and anticipated cash requirements, plans for expansion, restrictions, if any,
under any debt obligations, as well as other factors that the Board of Directors
deems relevant. We did issue 6,764 shares of Series A Preferred and 6,017 shares
of our Series B Preferred on January 8, 1996 as a stock dividend to Series A and
Series B shareholders of record as of December 31, 1994.
(See "Description of Securities - Preferred Stock.")
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
General
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations, contains forward looking statements which involve
risks and uncertainty. Our actual results could differ materially from those
anticipated in these forward looking statements as a result of certain factors
discussed in this section. We changed our fiscal year to the period from January
1 to and including December 31.
15
<PAGE>
We are engaged in the design, development, manufacture and sale of high
technology eye care products. Our surgical equipment is designed to perform
minimally invasive cataract surgery and is comprised of surgical devices and
related instruments and accessories, including disposable products. Our
ultrasound diagnostic products include a pachymeter, an A-Scan, an A/B Scan and
a biomicroscope, the technology for which we acquired from Humphrey Systems in
1998. In addition, we market our Blood Flow AnalyzerTM. Our activities for the
twelve months ended December 31, 1998 included domestic and international sales
of the Precisionist Thirty Thousand(TM) Ocular Surgery Workstation(TM) cataract
surgery systems, the Blood Flow Analyzer(TM), the Humphrey Systems ultrasound
diagnostic equipment, and research and development on the Photon(TM) laser
cataract removal system which received FDA approval for expansion to Phase II
Clinical Trials on May 19, 1998.
In July 1998, we announced the acquisition of the exclusive manufacturing
rights to four FDA-approved ophthalmic diagnostic instruments from Humphrey
Systems, a division of Carl Zeiss, Inc. which complement our cataract surgical
equipment and Blood Flow AnalyzerTM. We commenced delivery of the Pachymetric
Analyzer, which measures corneal thickness, in December 1998 and the Ultrasound
A-Scan, which measures the axial length of the eye, in March 1999. We expect to
begin shipments of the Ultrasound A/B Scan, which is used by retinal specialists
to identify foreign bodies in the posterior chamber of the eye and in evaluating
the structural integrity of the retina, in the second quarter of 1999. We should
commence shipments of the Ultrasonic Biomicroscope ("UBM"), which creates a
high-resolution computer image of the unseen parts of the eye providing a map
for the glaucoma surgeon, in the third quarter of 1999. In summary, we expect
all four instruments to be in production in the third quarter of 1999.
Results of Operations
Fiscal year Ended December 31, 1998 Compared to Fiscal year Ended
December 31, 1997.
Our sales increased by $794,000, or 171%, to $1,258,000 for the twelve
months ended December 31, 1998 from $464,000 for the comparable period in 1997.
The higher level of sales in fiscal 1998 was primarily due to the sale of 21
Precisionist Thirty ThousandTM and 17 Blood Flow Analyzers compared with 8
Precisionist Thirty ThousandTM and 3 Blood Flow Analyzers in fiscal 1997. Sales
of products in the surgery equipment market are contingent upon customer
evaluation and acceptance. In 1998, two Precisionist Thirty Thousands were
returned compared with five in 1997 when we identified and corrected certain
necessary software and hardware revisions. With the introduction of the new
fluidic system in March 1999 for the Precisionist Thirty Thousand WorkstationTM,
coupled with the shipment of the four new ophthalmic diagnostic instruments, we
anticipate a significant improvement in sales. The cost of sales increased
$480,000 or 144%, to $813,000 for the twelve months ended December 31, 1998,
from $333,000 for the comparable period in 1997. The gross margin for the twelve
months ended December 31, 1998 of 35.4%, was 7.2% higher than the gross margin
for the comparable period in 1997, of 28.2%, primarily as a result of the
amortization of capitalized engineering and design charges. If the amortization
of capitalized engineering and design charges, a non-cash expense, is excluded,
the gross margin for 1998 was 41.3% or slightly less than the gross margin of
41.4% for 1997.
Marketing and selling expenses increased by $430,000, or 72.8%, to
$1,021,000 for the twelve months ended December 31, 1998, from $591,000 for the
comparable period in 1997. The increase was a result of our adding a sales
manager and two additional sales representatives, an increase in advertising
promotional activities associated with trade shows and laser seminars for
ophthalmic surgeons in conjunction with launching the Photon Ocular Surgery
SystemTM, and service problems due to software and hardware revisions to the
Precisionist ThirtyThousand(TM) Ocular Surgery Workstation(TM).
General and administrative expenses increased $39,000 from $1,802,000 in
1997 or 2.2% to $1,841,000 for the twelve months ended December 31, 1998,
primarily due to higher costs associated with the implementation of a new
computer network and accounting, manufacturing and inventory control system.
Research and development expenses decreased by $242,000, or 44.8% for the
year ended December 31, 1998, to $298,000 from $540,000 for the comparable
period in 1997. The decrease was primarily the result of the completion of a
substantial part of the engineering and design changes on the Precisionist
ThirtyThousand(TM) Ocular Surgery Workstation(TM).
Other expenses decreased by $164,000 to $44,000 for the year ended
December 31,1998, compared to $208,000 for the same period in 1997. This is
primarily due to the conversion of promissory notes into convertible preferred
stock.
We had a net loss of $2,759,000 or $.69 per share for the year ended
December 31, 1998 as compared to a net loss of $3,010,000 or $.82 per share for
the year ended December 31, 1997, a decrease of $251,000. The decrease was a
result of increased sales and decreased research and development expenses offset
by increased costs of sales, marketing, and selling expenses.
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended
September 30, 1996.
Sales increased by $212,000, or 84%, to $464,000 for the twelve months
ended December 31, 1997 from $252,000 for the twelve months ended September 30,
1996. Sales of product in the surgical equipment market are contingent upon
customer
16
<PAGE>
evaluation. Based on the evaluation of the products shipped in our 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 our launching the Photon Ocular Surgery System(TM) and the
Precisionist Thirty Thousand(TM), the latest generation of our products on March
31, 1997.
Cost of sales increased $153,000 or 85%, to $333,000 for the twelve
months ended December 31, 1997 from $180,000 for the twelve months ended
September 30, 1996, as a result of the increased sales. The gross margin for the
twelve months ended December 31, 1997 of 28% was slightly lower than the gross
margin for the twelve months ended September 30, 1996 of 29%, primarily as a
result of the amortization of capitalized engineering and design charges of
$61,000 in 1997 which reduced the gross margin from 41% to 28%.
Marketing and selling expenses increased by $375,000, or 174%, to
$591,000 for the twelve months ended December 31, 1997 from $216,000 for the
fiscal year ended September 30, 1996. The increase was a result of our adding
two additional sales representatives and increasing promotional activity in
anticipation of our launching the Photon Ocular Surgery System(TM) and the
Precisionist Thirty Thousand during the first quarter of 1997, and the resulting
service expenses associated with installing identified software and hardware
revisions.
Generaland administrative expenses increased by $979,000, or 119%, to
$1,802,000 for the twelve months ended December 31, 1997 from $823,000 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.
Upgrades
To garner sales, we offer the ultrasonic Precisionist(TM) system with an
unconditional arrangement under which the customer may trade in its
Precisionist(TM) system to upgrade to a Precisionist Thirty Thousand(TM) Ocular
Surgery System(TM). Under this arrangement, the customer receives full credit
for the trade in purchase price of the Precisionist(TM) system against the price
of the new Precisionist Thirty Thousand(TM) Ocular Surgery System(TM). As of
December 31, 1998, we had distributed approximately 51 Precisionist(TM) systems
under this provision. The gross margin on these original sales was approximately
$295,000 or 32%. If all of these customers were to exercise their upgrade
privilege, we would exchange the Precisionist(TM) system for our new
Precisionist Thirty Thousand(TM) Ocular Surgery System(TM) and refurbish the
ultrasonic Precisionist(TM) systems and sell them in the international market.
Any losses on the sale of the refurbished Precisionist(TM) systems, which are
not expected to be significant, would reduce the gross margin on the
Precisionist Thirty Thousand(TM) Ocular Surgery System(TM) sales. The total
gross margin on the upgrade sales is estimated to be $1,677,000 or 41%. During
the fiscal year ended December 31, 1998, there were two trade-in sales of units
totaling $76,000 compared to two trade in sales totaling $94,000 for the like
period in 1997. Liquidity and Capital Resources
We used cash in operating activities of $2,414,000 for the twelve months
ended December 31, 1998 compared to $2,624,000 for the twelve months ended
December 31, 1997. The decrease of cash used by operating activities in 1998 is
primarily attributable to a lower net loss. We used cash from investing
activities of $92,000 for the twelve months ended December 31, 1998 compared to
cash received from investing activities of $98,000 in fiscal 1997. The net cash
provided by financing activities for the twelve months ended December 31, 1998
was $1,733,000 compared with $944,000 for the similar period in 1997. In March
1998, we completed the private placement of 20,030 shares of Series C Preferred
Stock at $100 per share resulting in net proceeds of $1,739,000. In addition, we
exchanged $995,000 of promissory notes for 9,950 shares of Series C Preferred
Stock at $100 per share and the conversion of a $75,000 note into common stock.
In March 1999, we completed a private placement of 1,140,000 shares of
Series D Convertible Preferred Stock at $1.75 per share with the net proceeds
approximating $1.6 million. On a pro-forma basis to reflect the March 1999
equity financing as of December 31,1998, total stockholders equity would be
about $3.3 million with cash and cash equivalents of $1.7 million. Based on our
1999 budget and the net proceeds from the 1999 Preferred Stock offering, we
believe that funds are sufficient to continue operations through December 31,
1999. However, no assurances can be given that our plan will be successful in
achieving positive cash flow or profitability. The 1,140,000 common shares into
which the Series D Convertible Preferred Stock is convertible are some of the
shares being registered in this Offering.
We will seek funding to meet our working capital requirements through
collaborative arrangements and strategic alliances, additional public offerings
and/or private placements of our securities or bank borrowings. There can be no
assurance, however, that additional funds, if required, will be available from
any of these or other sources on favorable terms, if at all.
Our ratio of inventory to sales for the twelve month period ended
December 31, 1998 was .57 compared with 1.80 for a similar period in 1997. With
the launching of two new products within the past eighteen months, we have had
to build inventory in anticipation of sales. As a result, the ratio of inventory
to sales, particularly computed on the basis of inventory to quarterly sales,
tends to fluctuate widely depending on our purchase orders with the
manufacturers, the time lags between customer purchase orders, delivery and
sales, the number of demonstration units in the field, the accuracy of the sales
forecast and seasonal factors.
At December 31, 1998, we had net operating loss carryforwards (NOLs) of
approximately $9,600,000 and research and development tax credit carryforwards
of approximately $34,000. These carryforwards are available to offset future
taxable income, if any, and begin to expire in the year 2006. Our ability to use
NOLs to offset future income is dependant upon the tax laws in effect
17
<PAGE>
at the time the NOLs can be utilized. The Tax Reform Act of 1996 significantly
limits the annual amount that can be utilized for certain of these carryforwards
as a result of change of ownership.
Effect of Inflation and Foreign Currency Exchange
We have not realized a reduction in the selling price of the Precisionist
phaco system as a result of domestic inflation. Nor have we experienced
unfavorable profit reductions due to currency exchange fluctuations or inflation
with its foreign customers.
Impact of New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. We believe that the adoption of SFAS
133 will not have any material effect on our financial statements.
We have reviewed all other recently issued accounting standards in order
to determine their effects, if any, on the results of operations or financial
position. Based on that review, we believe 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. We do not
anticipate that any significant modification or replacement of our software will
be necessary for our computer systems to properly utilize dates beyond December
31, 1999 or that we will incur significant operating expenses to make any such
computer system improvements. We are not able to determine, however, whether any
of our 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 our operations or financial
condition.
BUSINESS
General
We develop, manufacture, source, market and sell ophthalmic surgical
and diagnostic equipment, instrumentation and related accessories, including
disposable products. Our surgical equipment is designed for minimally invasive
cataract treatment. We market two ultrasonic cataract surgery systems with
related instruments, accessories and disposable products. One of the ultrasound
systems, the Precisionist Thirty Thousand(TM), is manufactured as the base
surgery system for our Precisionist Thirty Thousand(TM) Ophthalmic Surgical
Workstation(TM). We are currently developing a laser cataract surgery system as
an adjunct to our ultrasound cataract surgery equipment. This product is
currently undergoing investigational trials in the United States. If
successfully developed and approved for medical uses, we plan to market the
laser system as a plug-in module for our Workstation(TM). Our diagnostic product
is the Blood Flow Analyzer(TM). This product is a portable computerized system
for which we have secured a license granting us the right to market the product
in the United States. This product is designed for diagnosis of ocular blood
flow volume for detection and treatment of glaucoma. We are currently developing
additional test applications for this diagnostic product.
A cataract is a condition, which largely affects the elderly
population, in which the natural lens of the eye hardens and becomes cloudy,
thereby reducing visual acuity. Treatment consists of removal of the cloudy lens
and replacement with a synthetic lens implant which restores visual acuity.
Cataract surgery is the single largest volume, and revenue producing outpatient
surgical procedure, for ophthalmologists worldwide. The Health Care Finance
Administration reports that in the United States approximately 2 million
cataract removal procedures are performed annually, making this the largest
outpatient procedure reimbursed by Medicare. Most cataract procedures are
performed using a method called phacoemulsification or "phaco", which employs a
high frequency (40 kHz to 60 kHz) ultrasonic probe needle device to fragment the
cataract while still in the eye and remove it in pieces by suction through a
small incision.
We manufacturer and sell two phaco systems with instruments,
accessories and disposable products. The Precisionist 3000 Plus(TM) system was
introduced in 1992 and is a low-cost portable system intended primarily for the
international market. The Precisionist Thirty Thousand(TM) Ocular Surgery
Workstation(TM) is our newest generation system which is the base for our
expandable surgical "workstation" platform. We believe current phaco systems can
be difficult for many ophthalmic surgeons to master and are limited in their
ability to be the most minimally invasive method possible. We are developing a
proprietary patented laser system and unique patented probe for laser cataract
removal which we believe can address the difficulties associated with phaco
systems. We intend to make the patented laser system a plug-in module for its
Workstation(TM) if and when cleared for market by the FDA. The development of
the laser cataract system is being done in cooperation with ophthalmic surgeons
in the United States and through research and development work being conducted
by our engineering group, and under contract with the Dixon Medical Laser
Laboratory at the University of Utah in Salt Lake City.
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<PAGE>
We believe that in certain surgical conditions, our laser system will
be easier to use and safer than present phaco systems. The probe will be smaller
than typical probes employing ultrasonic needle technology and will deliver
laser energy directly to the desired tissue area by means of a smooth blunt end.
The laser probe has been shown to eliminate high-frequency vibrations in the eye
and to significantly reduce heat build-up which are complications associated
with the phaco method. In 1996, we received FDA approval to conduct clinical
trials in the United States with the Photon(TM) laser system. During these Phase
I clinical trials, we discovered that the Photon(TM) laser system was effective
in removing softer grade cataracts. We completed our Phase I clinical trials in
1997, and have received FDA approval to proceed to an expanded Phase II clinical
to provide the statistical data required to approve the Photon(TM) laser system
for laser cataract removal. There is no assurance however that we will
successfully complete the Phase II clinical trials or that additional
disadvantages or problems unique to the Photon(TM) laser system will not be
discovered during the Phase II clinical trials or following FDA approval of the
system.
In addition to cataract surgery, we believe that our Photon(TM) laser
system is capable of being configured with specialty probes for use in other
ophthalmic surgical procedures. These potential applications could represent
substantial growth opportunities including additional sales of equipment,
instruments, accessories and disposables. However, there can be no assurance
that these applications will be developed or approved. Further, there is no
guarantee that the laser will be accepted by the ophthalmic surgery market in
this capacity.
In June 1997, we received FDA clearance to market the Blood Flow
Analyzer(TM) for detection of glaucoma and other retina related diseases. The
device measures not only intraocular pressure but also pulsatile ocular blood
flow, the reduction of which may cause nerve fiber bundle death through oxygen
deprivation thus resulting in visual field loss associated with glaucoma. Our
Blood Flow Analyzer(TM) is a portable automated in-office system that presents
an affordable method for ocular blood flow testing for the ophthalmic and
optometric practitioner. We have secured a license granting us the exclusive
right to private label, package and market the product in the United States,
with full international marketing rights. The procedure done by the Blood Flow
Analyzer<0- 74> is not currently covered by an insurance procedure code for
which third-party payors will reimburse providers. As such, sales of this
product may be significantly less than would otherwise be expected.
On June 26, 1998, we entered into a Co-Distribution Agreement with
Pharmacia & Upjohn Company and National Healthcare Manufacturing Corporation
which provides for the marketing and sale of a range of ophthalmic products.
Under the terms of the Co-Distribution Agreement, we, Pharmacia & Upjohn and
National Healthcare will offer a comprehensive package of products to cataract
surgeons, including cataract surgical equipment, intraocular lens implants,
intraocular pharmaceuticals, surgical instruments and sterile procedural packs.
We will provide the Precisionist ThirtyThousand(TM) for distribution and sale
under the Co-Distribution Agreement. The Pharmacia & Upjohn products to be
distributed as part of the Co-Distribution Agreement include the Healon(R) and
Healong(R) viscoelastic solution and the CeeOn line of foldable, small
intraocular lens implants, designed to replace the natural lens removed during
cataract surgery.
On July 23, 1998, we entered into an Agreement for Purchase and Sale of
Assets with the Humphrey Systems Division of Carl Zeiss, Inc. to acquire the
ownership and manufacturing rights to certain assets of Humphrey Systems that
are used in the manufacturing and marketing of an ultrasonic microprocessor
based-line of ophthalmic diagnostic instruments, including the Ultrasonic
Biometer Model 820, the A/B Scan System Model 837, the Ultrasound Pachymeter
Model 855, and the Ultrasound Biomicroscope Model 840, and all accessories,
packaging and end-user collateral materials for each of the product lines for
the sum of $500,000, payable in the form of 78,947 shares of our common stock
which were issued to Humphrey Systems and 26,316 shares of common stock which
were issued to Douglas Adams. However, if the net proceeds received by Humphrey
Systems from the sale of the shares issued pursuant to the Agreement for
Purchase and Sale of Assets is less than $375,000 (after payment of commissions,
transfer taxes and other expenses relating to the sale of such shares), then we
are required to issue additional shares of common stock or pay additional funds
to Humphrey Systems as is necessary to increase Humphrey Systems' net proceeds
from the sale of the assets to $375,000. Since Humphrey Systems realized only
$162,818 from the sale of the 78,947 shares of common stock, we will probably
have to issue approximately 80,000 additional shares at current market prices to
enable Humphrey Systems to receive its guaranteed amount.
The rights to the ophthalmic diagnostic instruments that have been
purchased from Humphrey Systems under the Agreement compliment both our cataract
surgical equipment and our ocular Blood Flow Analyzer(TM). The Ultrasonic
Biometer calculates the prescription for the intraocular lens to be implanted
during cataract surgery. The Ultrasound Pachymeter measures corneal thickness
for the new refractive surgical applications that eliminate the need for
eyeglasses and for optometric applications including contact lense fitting. The
A/B Scan System combines the Ultrasonic Biometer and ultrasound imaging for
advanced diagnostic testing throughout the eye and is a viable tool for retinal
specialists. The Ultrasound Biomicroscope utilizes microscopic digital
ultrasound resolution for detection of tumors and improved glaucoma management.
19
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Background
History. Our business originated with Paradigm Medical, Inc., a
California corporation formed in October 1989. Paradigm Medical, Inc. developed
our present ophthalmic business and was operated by its founders, Thomas F.
Motter and Robert W. Millar. In May 1993, Paradigm Medical, Inc. merged with and
into Paradigm Medical Industries, Inc. At the time of the merger, Paradigm
Medical Industries, Inc. was a dormant public shell existing under the name
French Bar Industries, Inc. French Bar had operated a mining and tourist
business in Montana. Prior to its merger with Paradigm Medical, Inc. in 1993,
French Bar had disposed of its mineral and mining assets in a settlement of
outstanding debt and had returned to the status of a dormant entity. Pursuant to
the merger, we caused a 1-for 7.96 reverse stock split of our shares of common
stock. We then acquired all of the issued and outstanding shares of common stock
of Paradigm Medical, Inc. using shares of our own common stock as consideration.
As part of the merger, we changed our name from French Bar Industries, Inc. to
Paradigm Medical Industries, Inc. and the management of Paradigm Medical, Inc.
assumed control. In April 1994, we caused a 1-for-5 reverse stock split of our
shares of common stock. In February 1996, we 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 1960s 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.
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
1960s 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-1970s, 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 1960s. 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
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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, our Photon(TM) laser cataract
system is designed to be used for multiple ophthalmic applications, including
certain new applications that may be made possible with our proprietary
technology. Such new applications, however, must be tested in clinical trials
and be approved by the FDA.
Products
Our principal surgical product is an ultrasonic system used by
ophthalmologists to remove cataracts. In 1990, we received clearance from the
FDA pursuant to Section 510(k) of the Food, Drug and Cosmetics Act on our
Precisionist 3000(TM) phaco system for cataract surgery, which system was
upgraded to the Precisionist 3000 Plus(TM) in 1994. We also completed our
preclinical in vitro and in vivo (animal) testing of the Photon(TM) laser
cataract surgical system and submitted a Section 510(k) Premarket Notification
to the FDA for the Photon(TM) laser cataract system in September 1993, with a
follow-up Investigational Device Exemption application submitted in October 1994
to provide additional clinical data through human cases to support its earlier
filing. The Investigational Device Exemption 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 we submitted our final report to the FDA thereafter. During
the Phase I clinical trials, we discovered that the Nd:YAG laser system is most
effective on soft cataracts. Hard cataracts can be removed using the already
existing ultrasound capability of the Workstation(TM). The FDA approved Phase II
trials on soft cataracts in May 1998. Seven laser systems are now installed in
the United States and surgeries are being performed with trial completion
expected in the first half of 1999.
Precisionist 3000 Plus(TM) System. The Precisionist 3000 Plus(TM)
system is our first cataract surgery system, having been developed in 1992 and
enhanced in 1994. The system is compact, portable and simple to operate with a
very low operating cost. The primary market for the 3000 Plus(TM) is in
foreign countries where phaco technology is emerging and price-points are
relatively low. The 3000 Plus(TM) is also a good replacement or back-up
system. The system features a simple analog presentation of the ultrasound phaco
equipment, irrigation and aspiration fluidics. The 3000 Plus(TM) provides the
basic standard features for phaco surgery including: automated priming and
tuning, error detection of ultrasound handpiece and tip functions, audible
vacuum feedback tones, ultrasound energy metering, pneumatic high-speed anterior
vitrectomy and bipolar electrosurgery coagulation.
Precisionist Thirty Thousand(TM). The Precisionist Thirty Thousand(TM)
is our core phaco surgical technology and the base system for the Precisionist
Thirty Thousand(TM) Ocular Surgery Workstation(TM) platform. The Thirty
Thousand(TM) was placed into production and sale in 1997. As a phaco cataract
surgery system, we believe the Thirty Thousand(TM) is equal or superior to the
present competitive systems in the United States. The system features a graphic
color display and unique proprietary on-board computer and graphic user
interface linked to a soft-key membrane panel for flexible programmable
operation. The system provides real-time "on-the-fly" adjustment capabilities
for each surgical parameter during the surgical procedure for high-volume
applications. In addition, the Thirty Thousand(TM) provides one hundred
pre-programmable surgery set-ups, with a second level of sub-programmed custom
modes within each major surgical screen (i.e., ultrasound phaco and
irrigation/aspiration modes). The Thirty Thousand(TM) features our newly
developed proprietary fluidics panel which is completely non-invasive for
improved sterility and provides a surgical environment in the eye that virtually
eliminates fluidic surge and chamber maintenance problems normally associated
with phaco cataract surgery. This new fluidics system provides greater control
for the surgeon and allows safe operation at much higher vacuum setting by
sampling changes in aspiration 100 times per second. Greater vacuum in phaco
surgery means less use of ultrasound or laser energy to fragment the cataract
and less chance for surrounding tissue damage. In addition to the full
complement of surgical modalities (e.g., irrigation, aspiration, bipolar
coagulation and anterior vitrectomy), system automation includes "dimensional"
audio feedback of vacuum levels and voice confirmation for major system
functions, providing an intuitive environment in which the advanced phaco
surgeon can concentrate on the surgical technique rather than the equipment.
Photon(TM) Workstation(TM). The Precisionist Thirty Thousand(TM) Ocular
Surgery Workstation(TM) which comprises the base system for the Precisionist
Thirty Thousand(TM) is the first system known by us which uses the expansive
capabilities of today's advanced computer technology to offer seamless open
architecture expandability of the system hardware and software modules. The
Workstation(TM) utilizes an embedded computer developed for us. The computer is
controlled by a proprietary software system we developed that interfaces with
all components of the system: ultrasound, fluidics (irrigation), aspiration,
venting, coagulation and
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anterior vitrectomy (pneumatic). Each component is controlled as a peripheral
module within this fully integrated system. This approach allows for seamless
expansion and refinement of the Workstation(TM) with the ability to add other
hardware and software features. Expansion hardware such as our Photon(TM) laser
system, when approved by the FDA, and hardware for additional surgical
applications are easily implemented by means of a pre-existing expansion rack
which resides in the base of the Workstation(TM). These expanded capabilities
could include, but would not be limited to: laser systems, video surgical fiber
optic imaging, cutting and electrosurgery equipment. However, there is no
guarantee that the Workstation(TM) will be accepted in the market place.
Photon(TM) Laser System. The Photon(TM) laser cataract system, which is
still subject to FDA approval, is designed to be installed as a seamless plug-in
upgrade or add-on to our Precisionist Thirty Thousand(TM) Ocular Surgery
Workstation(TM). The plug-in platform concept is unique in the ophthalmic
surgical market for systems of this magnitude and presents a unique market
opportunity for us. The main elements of the laser system are the Nd:YAG laser
module, Photon(TM) laser software package and interchangeable disposable
hand-held fiber optic laser Photofragmentation Probe(TM) or LCP(TM). The
Photon(TM) laser utilizes the on-board microprocessor computer of the
Workstation(TM) to generate short pulse laser energy developed through the
patented LCP(TM) to targeted cataract tissue inside the eye, while
simultaneously irrigating the eye and aspirating the diseased cataract tissue
from the eye. The probe is smaller in diameter than conventional ultrasound
phaco needles and presents no damaging vibration or heat build-up in the eye.
Our Phase I clinical trials demonstrated that this probe can easily reduce the
size of the cataract incision from 3.0 mm to under 2.0 mm thereby reducing
surgical trauma and complementing current foldable intraocular implant
technology. The laser probe may also eliminate any possibility for burns around
the incision or at the cornea and may therefore be used with cataract surgery
techniques which utilize a more delicate clear cornea incision which can
eliminate sutures and be conducted with topical anesthesia. However, this system
may not effectively remove harder grade cataracts. Harder grade cataracts can be
removed using the already existing ultrasound capability of the Workstation(TM).
We intend to refine the laser delivery system and laser cataract surgical
technique through expanded research and clinical studies. As far as we can
determine, no integrated single laser photofragmenting probe is presently
available on the market that uses laser energy directly, contained in an
enclosed probe, to plasmatize cataract tissue at a precise location inside the
eye while simultaneously irrigating and aspirating the site.
Our laser system is based upon the concept that pulsed laser energy
produced with the micro-processor controlled Nd:YAG laser system provides
ophthalmic surgeons with a more precise and less traumatic alternative in
cataract surgery. Although conventional ultrasonic surgical systems have proven
effective and reliable in clinical use for many years, their use of high
frequency shock waves and vibration to fragment the cataract can make the
procedure difficult and present risk of complication both during and after
surgery. In contrast, our laser system, which utilizes short centralized energy
bursts, should permit the delivery of the laser beam with less trauma to
adjacent tissue. Therefore, unlike ultrasonic systems, whose vibrations and
shock waves affect (and can damage) non-cataractous tissues within the eye, our
Photon(TM) laser cataract system should only affect tissues it comes into direct
contact with.
Surgical Instruments, Accessories and Disposables. In addition to the
cataract surgery equipment, we are aggressively pursuing development and product
introductions for a range of cataract surgery instruments and accessories that
will be sold with our surgical systems and to fit other competitive systems. In
January 1998, we received FDA 510(k) clearance for a line of proprietary
titanium ultrasonic phaco needles we manufacture in our Salt Lake City facility.
The needles were released for sale in May 1998 in a sterile Phaco PAK(TM). In
May 1998, we received FDA 510(k) clearance for a line of irrigation/aspiration
probes and tips. Product release occurred in October 1998. These products and
additional instruments were previously sourced from third-party vendors. We
believe that by developing our own instruments and accessories we can improve
product performance, introduce innovative differentiation and improve sales
margins. Our surgical systems utilize or will utilize accessory instruments and
disposables, some of which are proprietary to us. These include replacement
ultrasound tips, sleeves, tubing sets and fluidics packs, instrument drapes and
laser cataract probes. We intend to expand our disposable accessories as we
further penetrate the cataract surgery market and expand the treatment
applications for our Workstation(TM).
Diagnostic Eyecare Products. Glaucoma is a leading cause of blindness
in the world. Glaucoma is a partial or total loss of visual field resulting from
certain progressive disease or degeneration of the retina, macula or nerve fiber
bundle. The cause and mechanism of the glaucoma pathology is not completely
understood. Present detection methods focus on the measurement of intraocular
pressure in the eye to determine the possibility of pressure being exerted upon
the retina, and optic nerve fiber bundle, which can diminish visual field.
Recently, retinal blood circulation has been indicated as a key component in the
presence of glaucoma. Several companies produce color Doppler equipment in the
$150,000 price range intended to provide measurement of ocular blood flow
activity in order to diagnose and treat glaucoma at an earlier stage.
Blood Flow Analyzer(TM) This is our first diagnostic eyecare device.
The device is manufactured for us and we market it pursuant to a license
agreement. The device is a portable desktop system that utilizes a proprietary
patented pneumatic Air Membrane Applanation Probe(TM) (the "AMAP(TM)") which is
attached to any model of standard examination slit lamp which is then placed on
the cornea of the patient's eye to measure the intraocular pressure within the
eye. The device is unique in that it reads a series of intraocular pressure
pulses over a short period of time (approximately five to ten seconds) and
generates a wave form profile which can be correlated to blood flow volume
within the eye. The blood flow volume is calculated by a proprietary software
algorithm developed by David M. Silver, Ph.D, one of our directors. The device
presents a numerical intraocular pressure reading and blood flow analysis rating
in a concise printout which is affixed to the patient history file. In addition,
the data generated by the device can
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be downloaded to a personal computer system for advanced database development
and management. The device measures not only intraocular pressure but also
pulsatile ocular blood flow, the reduction of which may cause nerve fiber bundle
death through oxygen deprivation thus resulting in visual field loss associated
with glaucoma. Our Blood Flow Analyzer(TM) is a portable automated in-office
system that presents an affordable method for ocular blood flow testing for the
ophthalmic and optometric practitioner. We have secured a license granting us
the exclusive right to private label, package and market the product in the
United States, with full international marketing rights. We market the Blood
Flow Analyzer(TM) as a stand-alone Model 100 SE unit, and packaged with a custom
built computer system as the Model 100 LE. The Blood Flow Analyzer(TM) utilizes
a single-use disposable cover for its AMAP(TM) corneal probe which is shipped in
sterile packages. The AMAP(TM) probe tip cover provides accurate readings and
acts as a prophylactic barrier for the patient. The device has been issued a
patent in the European Economic Community and is patent pending in the United
States and Japan. The FDA cleared the Blood Flow Analyzer(TM) for marketing in
June 1997 and we commenced selling the system in September 1997. In addition to
the Humphrey products, this diagnostic product will permit us to expand our
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 our surgical systems. International
sales of the Blood Flow Analyzer(TM) will be further expanded in 1999.
Pachymetric Analyzer. We produce the Ultrasonic Pachymeter used for
measurement of corneal thickness. We anticipate steady monthly sales with the
positioning of this product for use in conjunction with the popular LASIK
(refractive laser surgery) procedure. Delivery of our backlog of the first eight
units began December 1998.
Ultrasonic A Scan. The Ultrasonic A Scan was and remains the industry
standard for axial length eye measurement, which is a prerequisite procedure
reimbursed by Medicare and is performed before every cataract surgery. Product
shipments began in January 1999. Over 5,000 Humphrey model A-Scan systems have
been installed in the worldwide market, representing a substantial market
opportunity for software upgrades and extended warranty contract sales.
Ultrasonic A/B Scan. The A/B Scan is used by retinal sub-specialists to
identify foreign bodies in the posterior chamber of the eye and to evaluate the
structural integrity of the retina. The A/B Scan is attractive to the general
ophthalmic community at large because of its lower price point.
Ultrasonic Biomicroscope ("UBM"). The UBM was developed by Humphrey
Systems in conjunction with the New York Eye and Ear Infirmary in Manhattan and
the University of Toronto. The UBM creates a high-resolution computer image of
the unseen parts of the eye that is a "map" for the glaucoma surgeon. The UBM is
an "enabling technology" for the ophthalmologist that we have repositioned for
broader market sales penetration. Formerly sold only to glaucoma sub-specialty
practitioners, we reintroduced the UBM at a price-point (Retail List $39,500)
targeted for the average practitioner seeking to add glaucoma filtering surgical
procedures and income to his/her cataract surgical practice. The UBM related
surgical filtering procedures are fully reimbursable by Medicare and insurance
providers. This untapped new market positions us as a leader in the rapidly
expanding glaucoma imaging and treatment segment. The UBM was introduced at the
American Academy of Ophthalmology meeting in November 1998 where we secured
eight system sales with cash deposits from domestic and foreign customers. At
the time these orders represented our total projected unit sales for fiscal
1999. As a result, and based on recently submitted foreign dealer sales
forecasts, we have revised our UBM unit sales projections upward and plan to
begin 1999 shipments earlier than projected to meet a potential steady-state
demand of five systems per month.
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 ophthalmologists, 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.
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Current Market Acceptance and Potential. As of December 31, 1998, we
had distributed over 60 Precisionist 3000 and 3000 Plus(TM) phaco systems since
the introduction of the systems, 14 of the new Precisionist Thirty Thousand(TM)
Workstation(TM)s and 11 Photon(TM) Laser Phaco(TM) Workstation(TM). The
principal purchasers have been ophthalmologists and clinics in many countries
throughout the world. We believe that the market for our products is being
driven by:
- the aging of the population, which is evidenced by the
domestic and international cataract surgery volume
growth trend over the past ten years,
- 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,
- increased awareness worldwide of the benefits of the
minimally invasive phaco cataract procedure, and
- the introduction of technology improvements such as our
laser system.
Marketing Organization. Paradigm markets its products internationally
through a network of dealers and domestically through direct sales
representatives and manufacturer's representatives. As of December 31, 1998, we
had six direct domestic sales representatives and one manufacturer's
representative in the United States and 21 foreign dealers. This is in addition
to 53 Paradigm Pharmacia & Upjohn Alliance representatives domestically. All of
these sales representatives are assigned exclusive territories and have entered
into contracts with Paradigm that contain performance quotas. Paradigm also
plans to continue to market its products by identifying customers through
internal market research, trade shows and direct marketing programs. We also
utilize a Clinical Advisory Board comprised of leading ophthalmic surgeons in
the United States and Europe who speak at conventions, train ophthalmologists
and visit foreign doctors and dealers to promote Paradigm's products.
We will emphasize the expandable features of the Workstation(TM) when
marketing it. Our marketing approach will be to focus on the upgradeability of
the Workstation(TM) and to develop the image of the Workstation(TM) as the most
versatile, upgradeable and cost effective surgical equipment available. Paradigm
will continue to focus its sales efforts towards ophthalmic hospital and
surgical center facilities specializing in cataract surgery. However, as systems
are installed, Paradigm will expand its focus to provide additional ophthalmic
and non-ophthalmic surgical applications as part of its Workstation(TM).
Additional surgical applications will expand the market for the Workstation(TM)
as well as associated sales of disposable surgical products.
We disseminated information about the innovative capabilities of our
products through advertisement and printed materials at our annual exhibition at
the annual meeting of the American Academy of Ophthalmology in New Orleans,
Louisiana in November 1998. The theme of our advertisement for the Ocular
Surgery Workstation(TM) was "The Future of Phaco is the Future of Ophthalmic
Surgery." We will expand upon the concept of the "Workstation(TM)" with
additional advanced laser and surgical capabilities. We have 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 Paradigm'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 our technology and products, as evidenced by
several recent front page articles in these publications.
Manufacturing and Raw Materials. Currently, Paradigm has a small
manufacturing and warehousing facility located in Salt Lake City. All components
and the finished surgical systems are manufactured under subcontracting
arrangements. None of these subcontractors manufactures products that compete
with our products. All component and systems manufacturing is performed under a
system of quality control and testing. As a condition to such contracting, each
subcontractor's manufacturing facilities and personnel must comply with the Good
Manufacturing Practices (GMP) guidelines established by the FDA, as well as
similar guidelines established by foreign governments, including CE Mark and
1S0-9001.
We currently subcontract the manufacture of our Precisionist Thirty
Thousand(TM) system to one of our stockholders, Zevex International, Inc., which
is located in Salt Lake City, Utah. The remaining operating elements of the
Photon(TM) laser cataract system are resident in the Precisionist Thirty
Thousand(TM) system supplied by Zevex. Although substantial reliance is
currently placed with Zevex, we believe we would be able to find alternative
manufacturers for our products currently manufactured by Zevex, including
in-house manufacturing. Paradigm also believes that there are multiple sources
of raw materials that are used or could be used in its products.
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The laser cavity, optical train and power source for the Photon(TM)
laser cataract system are supplied by Sunrise Technologies, Inc. in Fremont,
California. We have established an internal laser cataract probe manufacturing
facility and plan to have all probe production take place in Salt Lake City. The
remaining operating elements of the Photon(TM) laser cataract system, the
computer controller, fluidics and ancillary surgical modalities, are developed
through Zevex. Although substantial reliance is currently placed with Zevex and
Sunrise, we believe we would be able to find alternative manufacturers for the
components of the Photon(TM) lower cataract system. We also believe that there
are multiple sources of raw materials that are used or could be used in our
products.
Paradigm subcontracts the manufacturing of some of its ancillary
instruments, accessories and disposables through specified vendors in the United
States. These products are contracted in quantities and at costs consistent with
our financial purchasing capabilities and pricing needs. Paradigm manufactures
the LCP(TM) laser cataract probe and some of its surgical instruments,
accessories and fluidics surgical tubing sets at its facility in Salt Lake City.
The Blood Flow Analyzer(TM) is manufactured by OBF Labs. We may
repackage the analyzer using a module cover we designed and it may also be
marketed under our trade name and mark regardless of whether it is repackaged.
Our 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 at least 90 days
prior to the expiration of the term.
Product Service and Support. Service for Paradigm's products is
overseen from its Salt Lake City, Utah headquarters and is augmented by its
international dealer network who provide technical service and repair.
Installation, on-site training and a limited product warrant are included as the
standard terms of sale. We provide distributors with replacement parts at no
charge during the warranty period. To date, we have incurred minimal expenses
under this warranty program. International distributors are responsible for
installation, repair and other customer service to installed systems in their
territory. All systems parts are modular sub-components that are easily removed
and replaced. Paradigm maintains an adequate parts inventory and provides
overnight replacement parts shipment to its dealers. After the warranty period
expires, we offer one year and three year service contracts to domestic
customers and will continue to sell parts to international dealers who in turn
create their own service plans with their customers. As of December 31, 1998, we
have not sold any service contracts.
Third-Party Reimbursement. It is expected that our laser systems and
diagnostic system will generally be purchased by ophthalmologists and hospitals
as well as optometrists who will then bill various third-party payors for the
health care services provided to their patients. These payors include Medicare,
Medicaid and private insurers. Government agencies generally reimburse at a
fixed rate based on the procedure performed. Some of the potential procedures
for which the Photon(TM) laser cataract systems may be used, may be determined
to be elective in nature, and third-party reimbursement may not be available for
such procedures, even if approved by the FDA. In addition, third-party payors
may deny reimbursement if they determine that the procedure was unnecessary,
inappropriate, not cost-effective, experimental or used for a non-approved
indication. There can be no assurance that reimbursement from third-party payors
will be available, or if available, that reimbursement will not be limited,
thereby having a material adverse effect on our ability to develop new products
on a profitable basis, its operating results and financial condition.
Co-Distribution Agreement with Pharmacia & Upjohn Company and National
Healthcare Manufacturing Corporation. We entered into a Co-Distribution
Agreement as of June 26, 1998 with Pharmacia & Upjohn Company and National
Healthcare Manufacturing Corporation, which provides for the marketing and sale
of a range of ophthalmic products. Under the terms of the Co-Distribution
Agreement, Paradigm, Pharmacia & Upjohn and National Healthcare will offer a
comprehensive package of products to cataract surgeons, including cataract
surgical equipment, intraocular lens implants, intraocular pharmaceuticals,
surgical instruments and sterile procedural packs. We will provide the
Precisionist ThirtyThousand(TM) for distribution and sale under the
Co-Distribution Agreement. The Pharmacia & Upjohn products to be distributed as
part of the Co-Distribution Agreement include Healon(R) and Healongv(R)
viscoelastic solution and the CeeOn line of foldable, small intraocular lens
implants, designed to replace the natural lens removed during cataract surgery.
Research and Development
Paradigm's primary market for its surgical products is the cataract
surgery market. However, we believe that our laser systems may potentially have
broader ophthalmic applications. Consequently, we believe that a strong research
and development capability is important for our future. We have enlisted several
recognized and respected consultants and other technical personnel to act in
technical and medical advisory capacities. Several of these consultants serve on
Paradigm's Clinical Advisory Board to provide expert and technical support for
current and proposed products, programs and services. In addition, we are
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.
Paradigm believes its research and development capabilities provide it
with the ability to respond to regulatory developments, including new products,
new product features devised from its users and new applications for its
products on a timely and proprietary basis. Paradigm intends to continue
investing in research and development and to strengthen its ability to enhance
existing products
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and develop new products. We spent $540,000 in fiscal year ended December 31,
1997, and $298,000 in the year ended December 31, 1998.
Competition
General. Paradigm faces competition in the cataract and the glaucoma
surgery markets, and the glaucoma diagnostic market from two principal sources:
- manufacturers of competing ultrasound systems used when
performing cataract treatments and
- developers of technologies for ophthalmic diagnostic and
surgical used for 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. We believe 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 offered by
the major manufacturers utilize 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, Paradigm
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. Our Precisionist Thirty Thousand(TM)
ultrasonic phaco system has the ability to use either reusable or single-use
disposable components. The Photon(TM) laser cataract system will utilize probes
and cassette packs designed for single-use and semi-disposable instruments
priced at a level consistent with the demands of health care cost containment.
This will allow health care provider a substantial measure of cost containment,
while providing Paradigm 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 Precisionist Thirty Thousand(TM) ocular surgery system is $89,900. The
Photon(TM) Laser Phaco(TM) will be sold at a price of approximately $129,000.
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 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, Paradigm is
establishing itself and, as yet, does not hold a significant share of the
market. We currently recognize Bausch & Lombe, Alcon Laboratories, and Allergan
Medical Optics as our primary competitors in the ultrasound phaco cataract
equipment market.
Laser Equipment Manufacturers. To our knowledge, there are several
other companies attempting to develop laser equipment for cataract surgery.
Based on currently available information, these competitive laser companies
appear to offer a less viable means of treating cataracts using laser
technology. We believe that there is presently no directly competing Nd:YAG
laser-assisted cataract surgical system available in the market. Paradigm 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, we are seeking to
exploit these opportunities. Depending upon further developments, we may
ultimately exploit those opportunities through a merger with a stronger entity
already established or one that desires to enter the medical industry.
Paradigm 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.
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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.
We are subject to intense competition in the ophthalmic diagnostic
market from well-financed, established companies with recognizable trade names
and product lines and new and developing technologies. The industry is dominated
by several large entities which we believe account for the majority of
diagnostic equipment sales. Paradigm 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 blood flow analyzer has 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
Paradigm's analyzer yet retail at comparable prices. We believe that we can
compete in the diagnostic marketplace 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, Paradigm hopes to be able to enter the market relatively quickly
through FDA Section 510(k) clearance of its new systems and products. Paradigm
believes that it can compete in this established marketplace since it will be
offering its glaucoma surgery system as an add-on to its Workstation(TM). We
believe that our Workstation(TM) will give us a competitive advantage to gain a
position in the marketplace.
Intellectual Property Protection
Our cataract surgical products are proprietary in design, engineering
and performance. These ultrasonic products have not been patented to date
because the primary technology for ultrasonic tissue fragmentation, as available
to all competitors in the market, is mainly in the public domain.
The Photon(TM) laser cataract system is protected under a United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. and subsequently assigned by
Photomed International, Inc. and a Japanese patent issued in 1997 to Paradigm
for the utility and methods of laser ablation, aspiration and irrigation of
tissue through a hand-held probe of a unique design. We 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 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 Paradigm would receive
royalty payments equal to 1% of the proceeds from the net sales of products
utilizing the patent.
OBF Labs, the manufacturer of the Blood Flow Analyzer(TM) that Paradigm
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 our trademarks are important to our business, it is not our
policy to pursue trademark registrations for our trademarks associated with our
products. Consequently, we rely on common law trademark rights to protect
unregistered trademarks, although common law trademark rights do not provide
Paradigm 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.
Paradigm also relies on trade secret law to protect some aspects of its
intellectual property. All key employees, consultants and advisors are required
to enter into a confidentiality agreement with Paradigm. Most of our third-party
manufacturers and formulators are also bound by confidentiality agreements.
Regulation
Our surgical and diagnostic systems are regulated as medical devices by
the FDA under the Food, Drug and Cosmetics Act or 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 a 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
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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 Paradigm 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 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, 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 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 Paradigm will obtain
Section 510(k) premarket clearance for any of the future devices for it seeks
such clearance including the Photon(TM) Laser.
The FDA may determine that the device is "substantially equivalent" to
another legally marketed Class I, Class II or pre-1976 Class III device for
which the FDA has not called for a premarketing approval and allow the proposed
device to be marketed in the United States. The FDA may determine, however, that
the proposed device is not substantially equivalent, or may require further
information, such as additional test data, before the FDA is able to make a
determination regarding substantial equivalence. A "not substantially
equivalent" determination or a request for additional information could delay
Paradigm's market introduction of its products and could have a material adverse
effect on its 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 premarket approval or 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 Investigational Device Exemption 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
premarketing approval are derived primarily from this portion of the clinical
trial. The applicant may also, upon receipt of the FDA's permission, consolidate
one or more of such portions of the study. Sponsors of clinical trials are
permitted to sell those devices distributed in the course of the study, provided
such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. Although both approval methods may require
clinical testing of the device in question under an approved Investigational
Device Exemption, the premarket approval procedure is more complex and time
consuming.
Upon receipt of the premarketing approval application, the FDA makes a
threshold determination whether the application is sufficiently complete to
permit a substantive review. If the FDA determines that the 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
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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 Good Manufacturing Practice 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 approval will be obtained for any of Paradigm'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 Paradigm 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 our 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 Paradigm's products may be regulated by
various state agencies.
All lasers manufactured for Paradigm 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 Paradigm 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. We cannot be sure
that future changes in review guidelines, regulations or administrative
interpretations by the FDA or other regulatory bodies, with possible retroactive
effect, will not materially adversely affect us. In addition to the foregoing,
we are subject to numerous federal, state and local laws relating to such
matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of potentially hazardous substance.
There can be no assurance that we will not be required to incur significant
costs to comply with such laws and regulations and that such compliance will not
have a material adverse effect upon our ability to conduct business.
Paradigm and the manufacturers of its 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,
Paradigm cannot predict the content of any federal health care program, if any
is passed by Congress, or its effect on it 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 our business, operating results or financial condition.
Uncertainty concerning the features of any health care program considered by the
Congress, its adoption by the Congress and the effect of the program on our
business could result in volatility of the market price of our common stock.
Furthermore, the introduction of Paradigm's products in foreign
countries may require it to obtain foreign regulatory clearances. We believe
that only a limited number of foreign countries have extensive regulatory
requirements, including France, Germany, Korea and Japan. 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 premarket approval, Section 510(k) or approved Investigational
Device Exemption from the FDA is tantamount to approval in those countries.
These countries and most developing countries have simply deferred direct
discretion to licensed practicing surgeons to determine the nature of devices
that they will use in medical procedures. Paradigm's two ultrasound systems, the
Photon(TM) laser cataract system it 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 our effectiveness in
obtaining the necessary approvals. Having an approved IDE allows Paradigm to
export a product to qualified investigational sites.
Regulatory Status of Products
The Precisionist 3000 Plus(TM) and the Precisionist Thirty Thousand(TM)
Systems. Pursuant to Section 510(k) of the FDC Act, the FDA granted market
clearance for the commercialization of the Precisionist 3000 Plus(TM) system in
1990 and the Precisionist Thirty Thousand(TM) system in 1995, thereby allowing
Paradigm 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.
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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, we have provided the
Precisionist(TM) system to established dealers that have applied for approval in
those respective countries.
The Photon(TM) Laser Cataract System. We acquired permission from the
FDA to manufacture the device and approval to export it to qualified
investigator sites outside the United States under an open IDE granted by the
FDA in May 1995. Although the Photon(TM) laser cataract system is uniquely
configured in an original and proprietary manner, the laser system, a Nd:YAG
laser, is not proprietary to the device or to Paradigm and is widely used in the
medical industry and other industries as well. Of particular significance is the
fact that this particular component has received previous market clearance from
the FDA for other ophthalmic and medical applications. Also of significance is
our belief that the surgical treatment method used with the Photon(TM) laser
cataract is similar to the current ultrasound cataract treatment employed by
ophthalmologists. We thus believe that we can obtain Section 510(k) clearance
for the Photon(TM) laser cataract system sometime in 1999.
Paradigm submitted its Premarket Notification under Section 510(k) of
the FDC Act for the Photon(TM) laser cataract system in September 1993. The FDA
requested clinical support data for claims made in the Section 510(k) Premarket
Notification, and in October 1994 we submitted an IDE application to provide for
a "modest clinical study" in order to collect the data required by the FDA for
clearance of the Photon(TM) laser cataract system. The FDA granted this IDE in
May 1995. We began human clinical trials in April 1996 and completed the
clinical surgeries in December 1996. Through the clinical trials we discovered
that the Photon(TM) laser cataract system may not effectively remove harder
grade cataracts. We requested and received FDA approval to conduct Phase II
clinical studies at seven sites in hopes of refining the laser system and
surgical method to remove such cataracts and provide the statistical data
required to approve the Photon(TM) laser system for laser cataract removal.
There is no guarantee, however, that Paradigm will be successful in improving
the laser system to remove harder grade cataracts.
Blood Flow Analyzer(TM) (Paradigm BFA(TM)). The FDA granted market
clearance pursuant to Section 510(k) of the FDC Act, for the commercial sale of
our 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 Paradigm to
expand its product base into the ophthalmic office and optometric office with a
diagnostic system.
Employees
As of December 31, 1998, we had 20 full-time employees. This number
does not include manufacturer's representatives who are independent contractors
rather than our employees. We also utilize several consultants and advisors.
There can be no assurance that we will be successful in recruiting or retaining
key personnel. None of our employees is a member of a labor union and we have
never experienced any business interruption as a result of any labor disputes.
Facilities
Paradigm'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. We
leased an additional 3,700 square feet in October 1998 in a building adjacent to
our current facility, which is owned by the same landlord. The facility is
leased from Eden Roc, a California partnership, at a base monthly rate of $6,315
plus a monthly common maintenance area fee. The base monthly rent increases to
$6,415 and $6,518 for the second and third years of the lease. Pursuant to the
lease, we pay all real estate and personal property taxes and the insurance
costs on the premises. Paradigm believes that this facility is adequate and
satisfies its needs for the foreseeable future.
Legal Proceedings
Paradigm is not a party to any legal proceedings and is not aware of
any threatened legal proceedings which may be brought against it.
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MANAGEMENT
Directors and Executive Officers
The executive officers and directors of Paradigm, their ages and their
positions are set forth below:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Thomas F. Motter 50 Chairman of the Board, President and Chief Executive
Officer
Michael W. Stelzer 51 Vice President of Operations, Chief Operating Officer,
Secretary and Director
Robert W. Millar 42 Vice President of Engineering and Manufacturing, and
Director
John W. Hemmer 72 Vice president of Finance, Treasurer, Chief Financial
Officer and Director
Patrick M. Kolenik 47 Director
Robert L. Frome 59 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 Paradigm since
April 1993. Since December 12, 1997 and from May 1994 to August 1997, he has
served as President and Chief Executive Officer. From June 1989 to April 1993,
Mr. Motter served as Chief Executive Officer of Paradigm Medical, Inc. which
merged with Paradigm in May 1994. From September 1990 to April 1992, he was
employed by HGM Medical Laser Systems as general manager of their International
Division. From October 1978 to June 1989, Mr. Motter was employed by SmithKline
Beckman's Humphrey Instruments Division, which developed and manufactured
advanced ophthalmic diagnostic instruments, serving last as National Sales
Manager overseeing all domestic sales in its ophthalmic computer division. Mr.
Motter received a B.A. degree in English from Stephen's College in 1970 and an
M.B.A. degree from Pepperdine University in 1975.
Michael W. Stelzer has served as Vice President of Operations and Chief
Operating Officer since December 12, 1997 and its Secretary since July 30, 1998.
From August 8, 1997 to December 12, 1997, he served as President and Chief
Executive Officer. Mr. Stelzer joined our Board of Directors in April 1993. From
June 1989 to April 1993, he served as a General Counsel and a director of
Paradigm Medical, Inc. which merged with the Paradigm May 1994. From January
1995 to August 1997, Mr. Stelzer served as the Executive Vice President and
Chief Financial Officer of Rhino Marketing, Inc., a sports related holding
company, and was President of one of its subsidiaries. Prior to joining Rhino,
Mr. Stelzer was President and General Counsel for MarDec, Inc., a golf accessory
marketing company, from 1993 to 1995. Mr. Stelzer is a licensed attorney with
the state of California and has practiced law in California since 1980. From
March 1972 to January 1980, Mr. Stelzer was controller of Ponderosa Telephone
Company. Mr. Stelzer received a B.S. degree in business administration from the
University of California, Davis in 1970 and a Juris Doctorate from Humphreys
College of Law in 1979.
Robert W. Millar has served as Vice President of Engineering and
Manufacturing since December 12, 1997 and as a director since April 1993. From
April 1995 to December 12, 1997, Mr. Millar served as Executive Vice President.
From January 1991 to April 1993, he was employed as President by Paradigm
Medical, Inc., which merged with Paradigm in May 1994. From January 1990 to
January 1991, Mr. Millar was employed by HGM Medical Laser Systems, serving as
Director of Marketing and Product Management for all ophthalmic and surgical
markets. From October 1988 to December 1989, Mr. Millar was employed as Group
Products Manager for the Customer Products Division of Esselte Pendaflex
Corporation, a manufacturer and distributor of office supply products. From July
1986 to February 1988, Mr. Millar was employed by TechnaVision Inc., a company
engaged in the manufacture of ophthalmic diagnostic and other eyecare equipment.
From February 1980 to July 1986, he was employed by Pogue McJunkin & Associates,
a professional industrial design firm. Mr. Millar received a B.S. degree in
industrial design from the College of Design in Detroit, Michigan in 1979.
John W. Hemmer, C.F.A., has served as Vice President of Finance,
Treasurer and Chief Financial Officer and as a director since November 1995.
Since October 1989, Mr. Hemmer has served as a director and consultant for Sea
Pride Industries, Inc. and its subsidiaries in Gulf Breeze, Florida, which
developed the first offshore marine production system licensed and permitted for
use in the Gulf of Mexico. From March 1992 to July 1994, Mr. Hemmer was employed
as the Secretary and Vice President of Finance of Advance Electronics, Inc.,
which is engaged in the retail distribution of health and beauty products. From
November 1991 to December 1994, Mr. Hemmer was Secretary and Treasurer of Agro
Industrial Development, Ltd., which established a Free Trade Zone
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in Belize for the production and export of seafood. He was the President and
Chief Executive Officer of John W. Hemmer, Inc., a registered broker/dealer firm
from May 1987 to May 1989, which subsequently changed its name to Westfalia
Investments Inc., but retained his registered representative status until March
1995. Prior thereto, he was Vice President of Bankers Trust Company in charge of
venture capital and a member of the research and investment management
committees. Mr. Hemmer was Vice President of Corporate Finance at Dempsey,
Tegler & Company, Inc., a Senior Analyst at Lazard Freres & Company and an
Investment Officer of The Chase Manhattan Bank. Mr. Hemmer received a B. A.
degree in Economics from Queens College in 1951 and an M.S. degree in Banking
and Finance from Columbia University Graduate School of Business in 1952.
Patrick M. Kolenik has been a director since November 1997. Mr. Kolenik
has been Special Assistant to the President of International Heritage, Inc.
since 1996 and President and Co-Founder of Cyn Del & Co., Inc. since 1992. He
was a co-founder and director of Win Capital Corp., an investment banking firm,
but resigned as a director in 1996. As of July 1, 1998, Mr. Kolenik resumed an
affiliation with Win Capital Corp. From 1969 to 1989, Mr. Kolenik held various
positions at Sherwood Securities Corp., a securities firm, including President
and Chief Executive Officer, Executive Vice President of Trading, Executive Vice
President of Corporate Syndicate and Vice President of Corporate Finance. He
also served as a director of Sherwood Securities Corp. Mr. Kolenik attended
Baruch College where he majored in finance.
Robert L. Frome, Esq. has been a director since September 3, 1998. He
has been a Senior Partner at the Olshan Grundman Frome & Rosenzweig law firm in
New York City for over twenty years. He serves as a director of HealthCare
Services Group, Inc., the nation's largest provider of housekeeping, linen and
laundry services to long term care facilities, and of NUCO2, the nation's
largest provider of bulk carbon dioxide to restaurant, fast food outlets and
convenience stores. Mr. Frome is a trustee of Daytop Village Foundation and The
Hospital for Joint Diseases of New York University Medical Center. He received
an LL.B. from Harvard Law School in 1961 and LL.M. and B.S. degrees from New
York University in 1962 and 1958.
Technical and Medical Advisory Personnel
We utilize 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 Paradigm'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.
32
<PAGE>
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, 1998. The Audit Committee of the Board of Directors
consists of directors Michael W. Stelzer, Patrick M. Kolenik and Robert L.
Frome. The Audit Committee last met on September 14, 1998. The Audit Committee
is primarily responsible for reviewing the services performed by Paradigm's
independent public accountants and internal audit department and evaluating
accounting principles and its system of internal accounting controls. The
Compensation Committee of the Board of Directors consists of directors Robert M.
Millar, Michael W. Stelzer and Patrick M. Kolenik. The Compensation Committee
also last met on September 14, 1998. 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. We have and can
presently satisfy each of these requirements. Messrs. Kolenik and Frome 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
Paradigm, through an oversight, filed one late stock purchase transaction report
covering one transaction.
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, Paradigm's Chairman of the Board, President and
Chief Executive Officer, and all other executive officers (collectively, the
"Named Executive Officers") at December 31, 1998 whose salary and bonus for all
services in all capacities exceed $100,000 for the fiscal year ended December
31, 1998.
33
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards Payouts
Other Securities
Annual Restricted Underlying Long-term All Other
Name and Compensation Stock Options/ Incentive Compensation
Principal Position Period Salary($) Bonus($) ($)(6) Awards($) SARs(#) Payout($) (#)(5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas F. Motter, 1998(1) $122,497 0 0 0 0 0 6,000
Chairman of the 1997(2) 129,584 0 5,250 0 0 0 0
Board, President 1996(3) 33,750 0 0 0 0 0 0
and Chief 1996(4) 111,042 1,000 3,600 0 0 0 6,000
Executive Officer
Robert W. Millar, 1998(1) 121,019 0 0 0 0 0 6,000
Vice President of 1997(2) 114,675 0 5,250 0 0 0 0
Engineering and 1996(3) 31,250 0 0 0 0 0 0
Manufacturing 1996(4) 99,792 1,000 3,600 0 0 0 6,000
John W. Hemmer, 1998(1) 117,884 0 0 0 0 0 6,000
Treasurer, Chief 1997(2) 112,670 0 5,250 0 0 0 0
Financial Officer 1996(3) 30,000 0 0 0 0 0 0
and Director 1996(4) 80,000 0 3,600(6) 0 20,000(6) 0 4,000
</TABLE>
(1) For the fiscal year ended December 31, 1998.
(2) For the fiscal year ended December 31, 1997.
(3) For the three month period ended December 31, 1996.
(4) For the fiscal year ended September 30, 1996.
(5) The amounts indicated under "Other Annual Compensation" for 1996 and 1998
consist of payments related to the operation of automobiles by the named
executive.
(6) On February 16, 1996, Paradigm granted Mr. Motter and Mr. Millar options
to purchase 106,000 and 84,000 shares of its common stock at an exercise
price of $5.00 per share. These options expire on February 15, 2001. On
January 31, 1996, Paradigm granted Mr. Hemmer options to purchase 20,000
shares of its common stock at an exercise price of $5.00 per share. These
options expire January 30, 2001
The following table sets forth information concerning the exercise of
options to acquire shares of Paradigm's common stock by the officers named above
during the fiscal year ended December 31, 1998, as well as the aggregate number
and value of unexercised options held by these officers on December 31, 1998.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
Number of Securiites Underlying Value of Unexercised
Unexercised Options/SARs In-the-Money Options/SARs at
At December 31, 1997(#) December 31, 1997($)
Shares
Acquired
On Exercise Value
Name (#) Reali;zed ($) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Thomas F. Motter -0- -0- 106,000 -0- -0- -0-
Robert W. Millar -0- -0- 84,000 -0- -0- -0-
John W. Hemmer -0- -0- 20,000 -0- -0- -0-
Michael W. Stelzer -0- -0- 20,000 -0- -0- -0-
</TABLE>
Director Compensation
The outside directors were each granted stock options to purchase
75,000 shares of Paradigm's common stock at an exercise price of $4.00 per
share. Outside directors are also reimbursed for their expenses in attending
Board and committee meetings. Directors are not precluded from serving Paradigm
in any other capacity and receiving compensation therefor.
34
<PAGE>
Employee 401(k) Plan
In October 1996, Paradigm'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, Paradigm 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
We adopted a 1995 Stock Option Plan for our officers, employees,
directors and consultants on November 7, 1995. This plan authorized the granting
of stock options to purchase an aggregate of not more than 300,000 shares of
Paradigm's common stock. On February 16, 1996, options for substantially all
300,000 shares were granted. On June 9, 1997, the 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 each were granted to Michael W. Stelzer, Vice President of
Operations and Chief Operating Officer, and John W. Hemmer, Vice President of
Finance, Treasurer and Chief Financial Officer. On September 14, 1998, 37,450
options each were granted to Thomas F. Motter, President and Chief Executive
Officer, Robert W. Millar, Vice President of Engineering and Manufacturing, and
Messrs. Stelzer and Hemmer, and 75,000 options each to Patrick M. Kolenik and
Robert L. Frome, the two outside directors. There are presently outstanding
options to purchase 750,000 shares of common stock that have been granted under
the plan. None of these options has been exercised.
The plan is administered by the Compensation Committee. In general, the
Compensation Committee, will select the person to whom options will be granted
and will determine, subject to the terms of the plan, the number, exercise, and
other provisions of such options. Options granted under the plan will become
exercisable at such times as may be determined by the Compensation Committee.
Options under the plan may be either incentive stock options 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. Non-ISOs may be granted
to any person, including, but not limited to, employees, independent agents,
consultants, as the Compensation Committee believes has contributed, or will
contribute, to the Paradigm's succcess. The Compensation Committee 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 Paradigm'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 Paradigm'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 Paradigm'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 previously
have been granted, affect the rights of such employee under such option.
Employment Agreements
Paradigm entered into employment agreements with each of Thomas F.
Motter, Michael W. Stelzer, Robert W. Millar and John W. Hemmer and which
commenced on January 1, 1998 and expire on January 1, 2003. The agreements
require each employee to devote substantially all of his working time to
Paradigm, provide that each of them may be terminated for "cause" (as provided
in the agreements) and prohibit each of them from competing with Paradigm 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,
$100,000 to Mr. Stelzer, $125,000 to Mr. Millar and $120,000 to Mr. Hemmer, and
became effective as of January 1, 1998. In January 1998, Mr. Hemmer also
received a bonus of 50,000 shares of common stock in recognition of the services
previously rendered by him. The agreements provide for salary increases and
bonuses as shall be determined at the discretion of the Board of Directors.
Change of Control Termination Agreements
On September 14, 1998, Paradigm entered into a Change of Control
Termination Agreement with each of Thomas F. Motter, Michael W. Stelzer, Robert
W. Millar and John W. Hemmer. The agreements are effective as of January 1, 1998
and continue in
35
<PAGE>
effect through December 31, 2002. However, beginning on December 31, 2002 and
each December 31 thereafter, the term of each of the agreements shall
automatically be extended for one additional year unless, no later than the
preceding November 1, Paradigm shall have given notice that it does not wish to
extend such agreement. If a change of control occurs during the original or any
extended term of the agreement, the agreement shall continue in effect for a
period of 12 months beyond the month in which the change of control occurred.
The agreements provide that if there is a change of control of
Paradigm, and provided there has been no termination of employment on account of
death, disability, retirement or for cause, each of Messrs. Motter, Stelzer,
Millar and Hemmer shall be entitled to receive the following benefits in the
event their employment is terminated subsequent to the change of control:
- payment of full base salary through the date of termination of
employment at the rate in effect at the time of the change of
control, plus all other amounts and benefits to which each is
entitled under any compensation plan of Paradigm;
- in lieu of any further salary payments for periods subsequent to
the Termination Date, Paradigm shall pay a lump sum severance
payment equal to 2.99 times the sum of the annual base salary in
effect at the time of the change of control;
- payments of any deferred compensation, including deferred bonuses;
- in lieu of shares of common stock issuable upon the exercise of
outstanding options, an amount in cash shall be distributed equal
to the product of the excess of the closing price of the shares as
reported on the Nasdaq SmallCap Market on or nearest the
Termination Date over the per share exercise price of each option
times the number of shares covered by each such option; and
- all legal fees and expenses incurred as a result of such
termination including all fees and expenses incurred in contesting
or disputing any termination of employment or seeking to obtain or
enforce any right or benefit provided by the agreement.
For the purposes of the agreement, a change of control shall have
occurred if:
- any person becomes a beneficial owner of 30% or more of the
combined voting power of the then outstanding securities,
- during any period of two consecutive years (not including any
period prior to the execution of the agreement), individuals who
at the beginning of the period constitute Paradigm Board of
Directors and any new director whose election by the Board or
nomination for election by the shareholders was approved by a vote
of at least two-thirds of the directors then still in office who
either were directors at the beginning of the period or whose
election or nomination for election were previously so approved,
cease for any reason to constitute a majority,
- Paradigm enters an agreement resulting in the occurrence of a
change of control of Paradigm,
- the Board of Directors eliminates or otherwise reduces the
authority, duties and/or responsibilities of the Executive
Committee, or
- the shareholders approve a merger or consolidation of Paradigm
with any other corporation, other than a merger or consolidation
that would result in the voting securities of Paradigm outstanding
immediately prior to it continuing to represent (either by
remaining outstanding or by being converted into voting securities
of the surviving entity) at least 30% of the combined voting power
of the voting securities of Paradigm or such surviving entity
outstanding immediately after the merger or consolidation, or the
shareholders approve a plan of complete liquidation of Paradigm or
as agreement for the sale or disposition by Paradigm of all or
substantially all of its assets.
If any of the events constituting a change of control of Paradigm shall
occur, each of Messrs. Motter, Stelzer, Millar and Hemmer shall be entitled to
the benefits set forth above on the subsequent termination of their employment
during the term of the Agreements unless the termination is on account of death,
disability, or retirement, by Paradigm for cause, or by such individuals other
than for good reason. Termination for cause is defined in the agreement to
include termination on the willful and continued failure to substantially
perform their duties after a written demand for substantial performance is
delivered to the Board of Directors, which demand specifically identifies the
manner in which the board believes that they have not substantially performed
their duties, or the willful engaging by such individuals in conduct that is
demonstrably and materially injurious to Paradigm. No act, or failure to act, on
their part shall be deemed "willful" pursuant to the agreement unless done, or
omitted to be done, by such individuals not in good faith and without a
reasonable belief that their action or omission was in the best interest of
Paradigm. In addition, they shall not be deemed to have been terminated for
cause unless or until they shall have been delivered a copy of a resolution duly
adopted by the affirmative vote of not less than 75% of the entire membership of
the Board of Directors at a meeting called for such purpose.
36
<PAGE>
Under the terms of the agreements, each of Messrs. Motter, Stelzer,
Millar and Hemmer are entitled to terminate their respective agreement for good
reason. Good reason is defined in the Agreements to include:
- the assignment of any duties inconsistent with their status and
position immediately prior to a change in control, or substantial
adverse alteration in the nature or status of their
responsibilities and those in effect immediately prior to a change
in control;
- a reduction in their annual base salary as in effect on the date
of this Agreement or as such salary may be increased from time to
time except for across-the-board salary reductions similarly
effecting all key employees of Paradigm and all key employees of
any person in control of Paradigm;
- their relocation to a location not within 25 miles of Paradigm's
present executive offices;
- the failure by Paradigm, without their consent, to pay to them any
part of their current compensation, or to pay any part of an
installment of deferred compensation under any deferred
compensation program, within seven days of the date the
compensation is due;
- the failure by Paradigm to continue to effect any bonus which they
were entitled or any compensation plan which they participated
immediately prior to a change of control that is material to their
total compensation, including the 1995 Stock Option Plan, 401(k)
pretax retirement savings plan, and flexible benefit plan;
- the failure of Paradigm to continue to provide them with benefits
substantially similar to those enjoyed by them under Paradigm's
life insurance, medical, health and accident, or disability plans
which they are participating at the time of a change of control,
and for the failure to continue to provide them with an automobile
or allowance in lieu of it, if they were provided with such
automobile or allowance in lieu of it at the time of a change of
control; and
- the failure of Paradigm to obtain a satisfactory agreement with
any successor to assume and agree to perform the agreements.
Profit Sharing Plan
On February 16, 1996, Paradigm adopted a Profit Sharing Plan, under
which an amount equal to 10% of the pretax profits will be set aside for the
benefit of officers and key employees. This funding will be paid to the 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 qualified pretax
profits exceed $10,000,000 for any fiscal year beginning October 1, 1996 and
ending December 31, 2001. If the 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
Paradigm 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. Paradigm 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. Paradigm's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. This provision is
intended to allow the 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. Paradigm's Bylaws provide that it shall indemnify its officers
and directors to the fullest extent provided by Delaware law. The Bylaws
authorize the use of indemnification agreements and Paradigm 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 Paradigm as to which indemnification is
being sought, nor is Paradigm aware of any threatened litigation that may result
in claims for indemnification by any director, officer, employee or other agent.
37
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Paradigm
pursuant to the foregoing provisions, or otherwise, Paradigm has been advised
that in the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to
beneficial ownership of Paradigm's common stock as of March 31, 1999 for (i)
each executive officer of Paradigm, (ii) each director, (iii) each person known
to Paradigm to be the beneficial owner of more than 5% of the outstanding
shares, and (iv) all directors and officers as a group.
<TABLE>
<CAPTION>
Percent of
Name and Address(1) Number of Shares Ownership(2)
- ----------------------------------------------------------- ----------------------- ------------------
<S> <C> <C>
Thomas F. Motter (3)(6) 520,000 8.8%
Douglas MacLeod 418,451 7.1%
Robert W. Millar(4)(6) 336,105 5.7%
Michael W. Stelzer(5)(6) 62,935 1.1%
John W. Hemmer(5)(6) 20,513 *
Robert L. Frome(7) 14,000 *
Patrick M. Kolenski(8) 1,007 *
Executive officers and directors
as a group (6 persons) 1,373,011 23.3%
- -----------------------------
</TABLE>
* Less than 1%.
(1) The address for Mr. Motter, Mr. Millar and Mr. Stelzer is c/o Paradigm
Medical Industries, Inc., 1127 West 2320 South, Suite A, Salt Lake
City, Utah 84119. The address for Mr. MacLeod is 1002 South 10th
Street, Tacoma, Washington 98405. The address for Mr. Hemmer is 88
Meadow Road, Briarcliff Manor, New York 10510. The address for Mr.
Frome is 505 Park Avenue, 16th Floor New York, New York 10022. The
address for Mr. Kolenik is 35 Elizabeth Drive, Laurel Hollow, New York
11791.
(2) Assumes no exercise of the warrants described in this Prospects or any
other warrants that Paradigm may have issued and no conversion of
outstanding shares of Paradigm's Series A, Series B, Series C, and
Series D Preferred Stock into Common Stock.
(3) Does not include options to purchase 143,450 shares of Common Stock
granted to Mr. Motter under the 1995 Option Plan.
(4) Includes 2,000 shares held by William E. Millar, Mr. Millar's father,
10,000 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 options to
purchase 121,450 shares of Common Stock granted to Mr. Millar under the
1995 Option Plan.
(5) Does not include option to purchase 57,450 shares of Common Stock
granted to each of the two directors under the 1995 Option Plan.
(6) Does not include 250 shares of Series C Convertible Preferred Stock
held by each of the four management directors.
(7) Does not include 750 shares of Series C Convertible Preferred Stock
held by Mr. Frome or options to purchase 75,000 shares of Common Stock
granted to him.
(8) Does not include 2,000 shares of Series C Convertible Preferred Stock
held by Mr. Kolenik or options to purchase 75,000 shares of Common
Stock granted to him.
Item 12. Certain Relationships and Related Transactions
The information set forth herein describes certain transactions between
Paradigm and certain affiliated parties. Future transactions, if any, will be
approved by a majority of the disinterested members of the Board of Directors
and will be on terms no less favorable to Paradigm than those that could be
obtained from unaffiliated parties.
Paradigm subcontracts the manufacture of its Precisionist 3000 Plus(TM)
and Precisionist Thirty Thousand(TM) Workstation(TM) to one of its shareholders,
Zevex, Inc. which is located in Salt Lake City, Utah. On September 23, 1996, we
entered into a Design, Engineering and Manufacturing Agreement with Zevex for
the engineering and manufacture of the Workstation(TM) and Precisionist Thirty
Thousand(TM). As of December 31, 1998, Zevex has manufactured and delivered 39
systems. However, the agreement can be terminated at any time by Paradigm if
Zevex fails for two consecutive quarters to timely fulfill our purchase orders,
or by Zevex if Paradigm 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 Paradigm, which expires September
23, 1999, that prohibits Zevex from manufacturing complete ultrasound or laser
surgical systems for any other company, without permission. For the fiscal years
ended December 31, 1997 and December 31, 1998, Paradigm purchased design and
manufacturing services in the amounts of $1,070,000 and $48,663, respectively,
from Zevex.
38
<PAGE>
On January 8, 1997, Paradigm subcontracted the subassembly of the laser
module piece of the Photon(TM) Laser Phaco(TM) from Sunrise Technologies, Inc.
During the 12 month period ending December 31, 1997, we purchased 10 laser
module subassemblies for a total purchase price of $160,000, from Sunrise whose
president was a member of Paradigm's Board of Directors at the time the
manufacturing agreement was signed.
The Photon(TM) LaserPhaco(TM) system is protected under a United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. (U.S. Patent Number
4,694,828) for the utility and methods of laser ablation, aspiration and
irrigation of tissue through a hand-held probe of a unique design and assigned
to Photomed, a corporation owned in part by Dr. Eichenbaum. Paradigm secured the
exclusive worldwide right to this patent shortly after its issue, and to the
international patents pending, from Photomed by means of a License Agreement
that entitled Dr. Eichenbaum to royalty payments equal to 1% of the proceeds
from the net commercial sales of the Photon(TM) LaserPhaco(TM) system and
accessories in all medical specialties. The License Agreement terminates July 7,
2003. The License Agreement was amended on December 5, 1997 to allow Photomed
the right to conduct research, development and marketing utilizing the patent in
certain medical sub-specialties other than ophthalmology for which we would
receive royalty payments equal to 1% of the proceeds from the net sales of
products utilizing the patent.
Randall Mackey, a director of Paradigm from September 1995 to September
3, 1998, is President and a shareholder of the law firm of Mackey Price &
Williams, which rendered legal services to Paradigm in connection with
Paradigm's public offering and other corporate matters. Legal fees and expenses
paid to Mackey Price & Williams for the fiscal year ended December 31, 1997
totaled $118,765. For the fiscal year ended December 31, 1998, Paradigm paid
legal fees and expenses in the amount of $97,414 and at year end owed $16,371.
Paradigm also granted Mackey Price & Williams warrants to purchase 25,000 shares
of Common Stock at an exercise price of $3.33 per share in partial payment for
legal services relating to our July 1996 public offering.
Mr. Kolenik, a director of Paradigm since November 1997, is a former
director of Win, the placement agent for the Series C Convertible Preferred
Stock offering. Under the terms of an agency agreement with Win, Paradigm 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. Paradigm has
also entered into an agreement with Win dated August 20, 1997, wherein Win
agreed to perform unspecified investment banking services for it for a two year
period, for which Paradigm 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 an agreement
entered into in February 1999, Win agreed to accept $7,500 in cash plus $60,500
in Common Stock valued at the close of business the day prior to the initial
close of the Series D Convertible Preferred stock offering in addition to a
$50,000 finders fee as it related to that offering. In addition, Paradigm issued
Win warrants to purchase 191,000 shares of Common Stock at an exercise price of
$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.
Prior to the initial closing of the Series D preferred stock offering,
Paradigm borrowed $75,000 from Cyn Del, of which Mr. Kolenik is President, a
director and a shareholder, and $25,000 from Win Capital. The combined $100,000
loan bears interest at a rate of 10% per annum, is payable pro rata monthly, and
is due on the 6-month anniversary of the loan. Paradigm issued to Cyn Del
five-year warrants to purchase 105,000 shares of Common Stock and Win Capital
warrants to purchase 35,000 share of Common Stock both at an initial exercise
price equal to the closing price of the Common Stock on the business day
immediately prior to the issuance date of the warrants, or $2.30 per share,
subject to adjustment according to the terms contained therein. Paradigm also
entered into a one-year consulting agreement dated January 19, 1999, for Win
Capital to provide financial consulting services to Paradigm in consideration
for a fee of $5,000 per month for the term of the agreement.
SECURITYHOLDERS REGISTERING SHARES
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1999 by each of the
holders of Series C Preferred Stock (the "Selling Series C Preferred
Stockholder"), assuming each of the Selling Series C Preferred Stockholders
elects to exercise his conversion rights to convert the Series C Preferred
shares (the "Series C Shares") into shares of Common Stock, at a conversion
price equal to $1.75 per share of Common Stock, the number of shares of
39
<PAGE>
Common Stock to be sold by each Selling Series C Preferred Shareholder, and the
percentage of each Selling Series C Preferred Stockholder after the sale of
Common Stock included in this Prospectus.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Owned After
Offering Number of Offering
Shares Being
Stockholders Number Percent Offered Number Percent
------------ ------ ------- ----------- ------ -------
<S> <C> <C> <C> <C> <C>
Robert M. Ball 7,143 * 7,143 0 *
Robert J. Braig 5,714 * 5,714 0 *
Thomas W. Brake 8,572 * 8,572 0 *
Craig S. Brewer 14,286 * 14,286 0 *
Consolidated Management Services, Inc. 11,429 * 11,429 0 *
Michael Demayo 11,429 * 11,429 0 *
C. Richard Dobson 7,143 * 7,143 0 *
Robert L. Frome 42,857 * 42,857 0 *
Steven F. Gallop and Karen M. Gallop, 5,714 * 5,714 0 *
JTWROS
William A. Gantz and Carol A. Gantz, 5,714 * 5,714 0 *
JTWROS
John A. Grue 5,714 * 5,714 0 *
Edward G. Hammond 14,286 * 14,286 0 *
Hi-Tel Group, Inc. 42,857 * 42,857 0 *
Rommie L. Honeycutt 5,714 * 5,714 0 *
Roy Lee Hounshell 5,714 * 5,714 0 *
Samuel C. Houser 5,714 * 5,714 0 *
Randy N. Humphrey 5,714 * 5,714 0 *
Jerry R. King 11,429 * 11,429 0 *
Terry F. King 11,429 * 11,429 0 *
Shannon E. Miller and Shannon S. 5,714 * 5,714 0 *
Miller, JTWROS
Joseph R. Nemeth 57,143 * 57,143 0 *
Dr. Joseph Nemeth, IRA 57,143 * 57,143 0 *
Christopher C. Northey 5,714 * 5,714 0 *
Eileen M. O'Dea 42,857 * 42,857 0 *
Laurence Leon Olive 5,714 * 5,714 0 *
John D. Phillips, Jr. 11,429 * 11,429 0 *
Richard D. Poling 5,714 * 5,714 0 *
Feliciano Sergio Sabates, III 8,572 * 8,572 0 *
Claude W. Savage and Jean G. Savage 5,714 * 5,714 0 *
JTWROS
Gregg Stokes 5,714 * 5,714 0 *
TSP Associates, Inc. 57,143 * 57,143 0 *
William E. Webb, III 7,428 * 7,428 0 *
Artas Corporation 28,571 * 28,571 0 *
United Growth Fund, Inc. Profit Sharing 28,571 * 28,571 0 *
Plan
Sterling Capital LLC 14,286 * 14,286 0 *
John W. Hemmer and Barbara Bean 34,799(2) * 14,286 20,513 *
Hemmer, JTWROS (1)
Gregory J. Lavin 14,286 * 14,286 0 *
Robert W. Millar(3) 350,391 5.8% 14,286 336,105 *
Thomas F. Motter(4) 534,285 8.9% 14,285 520,000 *
Marc N. Rubin 28,571 * 28,571 0 *
Thomas R. Wolf and Erica P. Wolf, 17,143 * 17,143 0 *
JTWROS
Dr. Thomas R. Wolf, SEP IRA 14,286 * 14,286 0 *
Canadian Advantage Limited Partnership 142,857 * 142,857 0 *
Paul N. Davis 17,143 * 17,143 0 *
RF Lafferty & Co. Profit Sharing Plan 114,286 * 114,286 0 *
FBO Henry Hackel
Roger Newman 28,571 * 28,571 0 *
Samuel Richman 14,286 * 14,286 0 *
40
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Jeffrey Zarry Schwartz 14,286 * 14,286 0 *
Richard C. Siskey 28,571 * 28,571 0 *
Jeffrey G. Straus 25,690 * 14,286 11,404 *
Wight Investment 28,571 * 28,571 0 *
Michael W. Stelzer and Paula J. Stelzer, 77,221(6) 1.3% 14,286 62,935(6) *
JTWROS(5)
Patrick Kolenik - IRA 28,571 * 28,571 0 *
Patrick Kolenik and Delores Kolenik, 29,578(8) * 28,571 1,007(8) *
JTWROS(7)
Roger C. Husted 14,286 * 14,286 0 *
Lincoln Trust Company FBO Michael B. 57,143 * 57,143 0 *
Limberg, M.D.
Charles F. Trapp 20,000 * 20,000 0 *
BCN Associates 28,571 * 28,571 0 *
Charles Thompson 20,646 * 14,286 6,360 *
Continental Stock Transfer & Trust Co. 28,571 * 28,571 0 *
Ronald A. and Karen A. Ballsin, 57,143 * 57,143 0 *
JTWROS
Michael Associates 57,143 * 57,143 0 *
Mark S. Richardson 14,286 * 14,286 0 *
Mark and Lori Cozens 8,572 * 8,572 0 *
Michael L. Salamone 14,286 * 14,286 0 *
Premier Alliance Group, Inc. 20,000 * 20,000 0 *
Gary Hammond 14,286 * 14,286 0 *
Jeffrey A. and Penny Strack 14,286 * 14,286 0 *
J. Michael Smith 14,286 * 14,286 0 *
Irwin Messer and Alexandra S. Urdang, 11,429 * 11,429 0 *
JTWROS
Sheila Sandman 14,286 * 14,286 0 *
Joseph Aufrino 28,571 * 28,571 0 *
Ted Levine 28,571 * 28,571 0 *
B. Michael Pisani 14,286 * 14,286 0 *
Alfred J. Ricciardi and Joseph Ricciardi, 28,571 * 28,571 0 *
JTWROS
Rose W. Zee 28,571 * 28,571 0 *
Patrick and Linda Vetere, JTWROS 14,286 * 14,286 0 *
------------ ---------------- --------------
TOTAL 2,671,467 1,713,143 958,324
- ----------------------------------------
* Less than 1%
(1) Mr. Hemmer is Vice President of Finance, Treasurer, Chief Financial Officer and a director of the Company.
(2) Includes 20,513 shares of Common Stock held by Mr. Hemmer.
(3) The Registering Securityholder is Vice President of Engineering and Manufacturing and a director of the Company.
(4) The Registering Securityholder is Chairman of the Board, President and Chief Executive Officer of the Company.
(5) Mr. Stelzer is Vice President of Operations, Chief Operating Officer and a director of the Company.
(6) Includes 62,935 shares of Common Stock held by Mr. Stelzer.
(7) Mr. Kolenick is a director of the Company.
(8) Includes 1,007 shares of Common Stock held by Mr. Kolenick.
</TABLE>
The Company is also registering for resale the 37,500 shares of Common
Stock issuable upon the conversion of a $75,000 12% Convertible, Redeemable
Promissory Note which is held by Bill L. Trahan.
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1999, by each of the
holders of Series D Preferred Stock (the "Selling Series D Preferred
Stockholders"), assuming each of the Selling Series D Preferred Stockholders
elects to exercise his conversion rights to convert the Series D Preferred
shares (the "Series D Shares") into shares of Common Stock, at a conversion
price equal to $1.75 per share of Common Stock, the number of
41
<PAGE>
shares of Common Stock to be sold by each Selling Series D Preferred
Stockholder, and the percentage of each Selling Series D Preferred Stockholder
after the sale of Common Stock included in this Prospectus.
<TABLE>
<CAPTION>
Shares Beneficially
Owned After
Offering
Number of
Shares Being
Stockholders Number Percent Offered Number Percent
------------ ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
A.J. Baccala 15,000 * 15,000 0 *
Jerry and Linda Bassin 25,000 * 25,000 0 *
Dr. Robert Bedrossian 5,000 * 5,000 0 *
Dr. Valery Berger 15,000 * 15,000 0 *
Bill D. and Claudia J. Berkley 10,000 * 10,000 0 *
Berkley Investments, Inc. 10,000 * 10,000 0 *
Paul and Judith Berkman 15,000 * 15,000 0 *
Edwin Bindseil 15,000 * 15,000 0 *
Dr. Kostaki Bis 5,000 * 5,000 0 *
Benjamin Bollag 70,000 * 70,000 0 *
Dr. Richard Bowe IRA 25,316 * 25,316 0 *
CarCap Co., LLC 10,000 * 10,000 0 *
James & Caren Cobb 40,000 * 40,000 0 *
Thomas C. Coleman 30,000 * 30,000 0 *
William & Marion Conley 5,000 * 5,000 0 *
Corman Foundation, Inc. 30,000 * 30,000 0 *
Brian & Irene Cotter 10,000 * 10,000 0 *
Jonathan Cress 5,000 * 5,000 0 *
Scott Crowther 10,000 * 10,000 0 *
George & JoAnn Dick 10,000 * 10,000 0 *
John Donohue, IRA 20,000 * 20,000 0 *
James A. Erb 10,000 * 10,000 0 *
Clifford A. Falkenau Trust 5,000 * 5,000 0 *
Helen Falkenau 5,000 * 5,000 0 *
Aaron I. Feder 10,000 * 10,000 0 *
Dale S. and Jack Feinblatt 9,000 * 9,000 0 *
Dr. Ronald Friedman, IRA 10,000 * 10,000 0 *
Dr. Leon Gallin 5,000 * 5,000 0 *
Anthony Gardocki 17,000 * 17,000 0 *
Shadow Capital, LLC, 40,000 * 40,000 0 *
Bonnie and Mort Goldberg 10,000 * 10,000 0 *
R. Steven Graves 10,000 * 10,000 0 *
Sean Greene 10,000 * 10,000 0 *
Halpert Enterprises Inc. 10,000 * 10,000 0 *
John Harte 15,000 * 15,000 0 *
Douglas and Alexis Hogue 10,000 * 10,000 0 *
Dr. Roger Husted 11,500 * 11,500 0 *
Irwin Kabat 6,000 * 6,000 0 *
A. William Kapler 10,000 * 10,000 0 *
Elaine Khalaf 10,000 * 10,000 0 *
Aaron Kirzner 5,000 * 5,000 0 *
Steven Kohn, IRA 9,356 * 9,356 0 *
Lyudmila Korets 5,000 * 5,000 0 *
Walter and Carol Koschak 28,000 * 28,000 0 *
Dr. Michael Limberg, IRA 100,000 * 100,000 0 *
Morris Macy 5,000 * 5,000 0 *
Robert Margolin, IRA 5,000 * 5,000 0 *
Michelle McDonough 15,000 * 15,000 0 *
Mid-Lakes P/S Trust 50,000 * 50,000 0 *
Dr. Joseph Nemeth 100,000 * 100,000 0 *
Jules M. Ness 10,000 * 10,000 0 *
James Pickett 5,000 * 5,000 0 *
Dr. Soleiman Rabanipour 10,000 * 10,000 0 *
Dr. Sheldon Rabin, IRA 20,000 * 20,000 0 *
Reinhard & Reinhard M/P Plan 8,000 * 8,000 0 *
Marsha and Barry Reiss 10,000 * 10,000 0 *
Alan Rothstein 15,000 * 15,000 0 *
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Dr. Steven Rubel 5,000 * 5,000 0 *
Melvyn and Lea Ruskin 10,000 * 10,000 0 *
Scott W. Sakin 10,000 * 10,000 0 *
Judy Shapiro 25,000 * 25,000 0 *
Larry and Katina Snyder 5,000 * 5,000 0 *
Jerold Stern 5,000 * 5,000 0 *
Steve Shook Construction P/S Plan
Dtd. 12/10/82 10,828 * 10,828 0 *
Joseph and Sandra Stewart 10,000 * 10,000 0 *
David Tadych 5,000 * 5,000 0 *
Miles and Rochelle Weinberg 10,000 * 10,000 0 *
Xanadu Associates, LLC 10,000 * 10,000 0 *
Dr. Alkis Zingas Trust 15,000 * 15,000 0 *
Dr. Igor Zlotin 5,000 * 5,000 0 *
Simon Zunamon Revocable Trust 20,000 * 20,000 0 *
----------- -----------
TOTAL 1,140,000 1,140,000
</TABLE>
DESCRIPTION OF SECURITIES
Paradigm's authorized capital stock 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. Paradigm has created four classes of Preferred
Stock, designated as Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, and Series D Convertible Preferred Stock.
Common Stock. The holders of Common Stock are entitled to one vote for
each share held of record on all matters to be voted on by stockholders. The
holders of Common Stock are entitled to receive such dividends, if any, as may
be declared from time to time by the Board of Directors in its discretion from
legally available funds. Upon liquidation or dissolution of Paradigm, the
holders of Common Stock are entitled to receive, pro rata, assets remaining
available for distribution to stockholders. The Common Stock has no cumulative
voting, preemptive or subscription rights and is not subject to any future
calls. There are no conversion or redemption rights applicable to the shares of
Common Stock. All the outstanding shares of Common Stock are fully paid and
nonassessable.
Preferred Stock. The Board of Directors is authorized, without further
action by the stockholders, to issue, from time to time, up to 5,000,000 shares
of Preferred Stock in one or more classes or series, and to fix or alter the
designations, power and preferences, and relative participation, option or other
rights, if any, and qualifications, limitations or restrictions thereof,
including, without limitation, dividend rights (and whether dividends are
cumulative), conversion rights, if any, voting rights (including the number of
votes, if any, per share), redemption rights (including sinking fund provisions,
if any), and liquidation preferences of any unissued shares or wholly unissued
series of preferred stock, and the number of shares constituting any such class
or series and its designation and to increase or decrease the number of such
class or series subsequent to the issuance of shares of such class or series,
but not below the number of shares of such class or series then outstanding. The
issuance of any series of preferred stock under certain circumstances could have
the effect of delaying, deferring or preventing a change in control and could
adversely affect the rights of the holders of the Common Stock. As of the date
of this Memorandum, Paradigm has created and issued shares of four classes of
preferred stock more fully discussed below.
Series A Preferred Stock. The Board of Directors has authorized the
issuance of a total of 500,000 shares of Series A Preferred Stock. Each share of
Series A Preferred Stock is convertible into shares of Common Stock at a rate of
1.2 shares of Common Stock for each share of Series A Preferred Stock. Paradigm
may, at its sole option, at any time, redeem all of the then-outstanding shares
of Series A Preferred Stock at a price of $4.50 per share, plus accrued and
unpaid dividends, if any. The holders of shares of Series A Preferred Stock are
entitled to non-cumulative preferred dividends at the rate of $0.24 per share of
Series A Preferred Stock per annum, payable in cash on or before December 31 of
each year, commencing December 31, 1995. Such dividends, however, can only be
paid from surplus earnings of Paradigm and further, because these dividends are
non-cumulative, no deficiencies in dividend payments from any calendar year can
be carried forward to the next calendar year. The Series A Preferred Stock has
priority rights to dividends over the Common Stock, but will not participate in
any dividends payable to the holders of shares of Common Stock. No dividends
will be paid to holders of shares of Common Stock unless and until all dividends
on shares of Preferred Stock have been paid in full for the same period. Except
upon the redemption of the Series A Preferred Stock or before the payment of
dividends on any shares of capital stock that are on par with or junior or
subordinate to the Series A Preferred Stock as to dividends, or upon the
liquidation, dissolution or winding-up of Paradigm, the payment of dividend from
surplus earnings was not mandatory prior to December 31, 1995. In the event of
any liquidation, dissolution or winding-up of Paradigm, the holders of shares of
Series A Preferred Stock are entitled to receive, prior and in preference to,
any distribution of any of the assets or surplus funds of Paradigm to the
holders of shares of Common Stock or any other stock of Paradigm ranking on
liquidation junior or subordinate to the Series A Preferred Stock, an amount
equal to $1.00 per share, plus accrued and unpaid dividends, if any. Holders of
shares of Series A Preferred Stock have no voting rights, except in those
instances required by Delaware law.
As of March 31, 1999, there were a total of 8,119 shares of Series A
Preferred Stock issued and outstanding. A total of 9,743 shares of Common Stock
has been set aside and reserved in the event that the holders of shares of
Series A Preferred Stock elect to
43
<PAGE>
convert those shares into shares of Common Stock. As of March 31, 1999, 114,645
shares of Series A Preferred Stock have been converted into 137,574 shares of
Common Stock.
Series B Preferred Stock. The Board of Directors has authorized the
issuance of a total of 500,000 shares of Series B Preferred Stock. Each share of
the Series B Preferred Stock is convertible into shares of Common Stock at a
rate of 1.2 shares of Common Stock for each share of Series B Preferred Stock.
Paradigm may, at its sole option, at any time, redeem all of the
then-outstanding shares of Series B Preferred Stock at a price of $4.50 per
share, plus accrued and unpaid dividends, if any. Except upon the redemption of
the Series B Preferred Stock or before the payment of dividends on any shares of
capital stock that are on par with or junior or subordinate to the Series B
Preferred Stock as to dividends, or upon the liquidation, dissolution or
winding-up of Paradigm, the payment of dividends from surplus earnings was not
mandatory prior to December 31, 1995. In the event of any liquidation,
dissolution or winding-up of Paradigm, the holders of shares of Series B
Preferred Stock are entitled to receive, prior and in preference to, any
distribution of any of the assets or surplus funds of Paradigm to the holders of
shares of Common Stock or any other stock of Paradigm ranking on liquidation
junior or subordinate to the Series B Preferred Stock, an amount equal to $4.00
per share, plus accrued and unpaid dividends, if any. Holders of shares of
Series B Preferred Stock have no voting rights, except in those instances
required by Delaware law.
As of March 31, 1999, there were a total of 31,236 shares of Series B
Preferred Stock issued and outstanding. A total of 37,483 shares of Common Stock
have been set aside and reserved in the event that the holders of shares of
Series B Preferred Stock elect to convert those shares into shares of Common
Stock. As of March 31, 1999, 461,764 shares of Series B Preferred Stock have
been converted into 554,116 shares of Common Stock.
Series C Preferred Stock. The Board of Directors has authorized the
issuance of a total of 30,000 shares of Series C Preferred Stock. Each share of
Series C Preferred Stock is convertible into shares of Common Stock at an
initial conversion price equal to $1.75 per share of Common Stock, subject to
adjustments for stock splits, stock dividends and certain combinations or
recapitalizations in respect of the Common Stock. The shares are also
automatically converted into Common Stock upon 30 days' written notice by
Paradigm to the holders of the shares after (i) the 30-day anniversary of the
effective date of the filing of a registration statement in which shares of
Common Stock issuable upon conversion of the shares were registered and (ii) the
average closing price of the Common Stock for the 20-day period immediately
prior to the date in which notice of conversion is given to the holders of the
shares is at least $3.50 per shares. Any shares still outstanding after January
1, 2002 shall be mandatorily converted at such date at the conversion price then
in effect. Holders of the shares have no redemption rights. The holders of
shares of Series C Preferred Stock are entitled to 12% non-cumulative preferred
dividends. However, the shares shall be entitled to dividends declared on the
Common Stock on an as-converted basis. Such dividends shall accrue from the date
of issuance or the last preferred dividend record date and be payable in cash or
shares of Common Stock. Such dividends, however, can only be paid at Paradigm's
sole option from surplus earnings and further, because these dividends are
non-cumulative, no deficiencies in dividend payments from any calendar year can
be carried forward to the next calendar year. In the event of any liquidation,
dissolution, sale of all or substantially all of the assets or merger or
consolidation of Paradigm (and, in case of a merger or consolidation, Paradigm
is not the surviving entity), the holders of Series C Preferred Stock shall be
entitled to receive, in preference to the holders of all other classes of
capital stock, whether now existing or hereinafter created (other than Series A
Preferred Stock and Series B Preferred Stock with which Series C Preferred Stock
shall, for purposes of a liquidation, rank junior), an amount per share equal to
the greater of (A) the amount such shares would have received had such holders
converted the Series C Preferred Stock into Common Stock immediately prior to
such liquidation, plus declared or unpaid dividends or (B) or the stated value,
$100 per share, subject to such liquidation plus declared but unpaid dividends.
Holders of shares of Series C Preferred Stock shall have no voting rights,
except in those instances required by Delaware law.
As of March 31, 1999, there were a total of 1,400 shares of Series C
Preferred Stock issued and outstanding. A total of 80,000 shares of Common Stock
has been set aside and reserved in the event that the holders of the Series C
Preferred Stock elect to convert those shares into shares of Common Stock. As of
March 31, 1999, 28,580 shares of Series C Preferred Stock have been converted
into 1,633,143 shares of Common Stock.
Series D Convertible Preferred Stock. The Board of Directors authorized
the issuance of a total of 1,140,000 shares of Series D Convertible Preferred
Stock. Each share of Series D Preferred Stock is convertible into one share of
Common Stock, subject to adjustments for stock splits, stock dividends and
certain combinations or recapitalizations in respect of the Common Stock. The
shares are also automatically converted into Common Stock upon 30 days' written
notice by Paradigm to the holders of the shares after (i) the 30-day anniversary
of the effective date of a registration statement in which shares of Common
Stock issuable upon conversion of the shares are registered and (ii) the average
closing price of the Common Stock for the 20-day period immediately prior to the
date in which notice of conversion is given to the holders of the shares is at
least $3.50 per share. Any shares still outstanding after January 1, 2002 shall
be mandatorily converted at such date at the conversion price then in effect.
Holders of the shares have no redemption rights. The holders of shares of Series
D Preferred Stock are entitled to 10% non-cumulative preferred dividends.
Additionally, holders of the shares will receive any dividends declared on the
Common Stock on an as-converted basis. Such dividends accrue from the date of
issuance or the last preferred dividend record date and are payable in cash or
shares of Common Stock. Such dividends, however, can only be paid at Paradigm's
sole option from surplus earnings and further because these dividends are
non-cumulative, no deficiencies in dividend payments from any calendar year can
be carried forward to the next calendar year. In the event of any liquidation,
dissolution, sale of all or substantially all of the assets or merger or
consolidation of Paradigm (and, in case of a merger or consolidation, Paradigm
is not the surviving entity), the holders of Series D Preferred Stock are
entitled to receive, in preference to the holders of all other classes of
capital stock, whether now existing or hereinafter created, other than Series A
Preferred Stock Series B Preferred Stock and Series C Preferred Stock with which
Series D Preferred Stock shall, for purposes of a liquidation, rank junior, an
amount per share equal to the greater of (A) the amount such shares would have
received had such holders converted the Series D Preferred Stock into Common
Stock immediately prior to such liquidation, plus declared or unpaid
44
<PAGE>
dividends or (B) or the stated value, $1.75 per share, subject to such
liquidation plus declared but unpaid dividends. Holders of shares of Series D
Preferred Stock have no voting rights, except in those instances required by
Delaware law.
As of March 31, 1999, there were a total of 1,140,000 shares of Series
d Preferred Stock issued and outstanding. A total of 1,140,000 shares of Common
Stock has been set aside and reserved in the event that the holders of the
Series D Preferred Stock elect to convert those shares into shares of Common
Stock. As of March 31, 1999, no shares of Series D Preferred Stock have been
converted into shares of Common Stock.
Rescission Offer to Series B Preferred Stockholders. The 493,000 shares
of Series B Preferred Stock issued to the Company's Series B Stockholders (the
"Series B Stockholders") may not have been sold in compliance with certain
aspects of California corporate law and federal and state securities laws.
Concurrently with its public offering, the Company provided the Series B
Stockholders with a rescission offer (the "Rescission Offer") to repurchase all
Series B Preferred shares (the "Rescission Shares") owned by the Series B
Stockholders. The Series B Stockholders were offered the right to rescind their
purchases and receive a refund of the price paid by them of $4.00 per share plus
an amount equal to the interest thereon at rates ranging from 6% to 10% per
annum from the date the Rescission Shares were purchased to July 25, 1996, the
date the Company's public offering closed and each rescinding shareholder was
paid by the Company. The original purchasers of approximately 93% of the Series
B Shares (460,250 shares) rejected the Rescission Offer. Two shareholders owning
a combined total of 32,750 shares have accepted the Rescission Offer.
Although the Company was not instructed by any regulatory body to
actually conduct the Rescission Offer, the Company decided to go forward with
the Rescission Offer to reduce any type of potential contingent liability it may
be exposed to in connection with its private placement of Series B Preferred
Stock. The Rescission Offer is designed to reduce such contingent liability by
placing the Series B Stockholders on notice of possible defects and presenting
them with an opportunity to avoid or mitigate damages. The Rescission Offer,
however, may not fully relieve the Company from exposure to contingent liability
under federal or state securities laws. See "Risk Factors -- Rescission Offer to
Series B Stockholders."
Class A Warrants. Each Class A Warrant entitles the holder to purchase
one share of Common Stock at an exercise price of $7.50 per share. Class A
Warrants are exercisable through July 10, 2001 provided that at the time of
exercise a current prospectus relating to the Common Stock is then in effect and
the Common Stock is qualified for sale or exempt from qualification under
applicable state securities laws. The Class A Warrants are subject to redemption
by the Company commencing July 10, 1997, upon 30 days' written notice, at a
price of $.05 per Class A Warrant if the average closing bid price of the Common
Stock for any 30 consecutive business days ending within 15 days of the date of
which the notice of redemption is given shall have exceeded $8.50 per share.
Holders of Class A Warrants automatically forfeit their rights to purchase the
shares of Common Stock issuable upon exercise of such Warrants unless the
Warrants are exercised before the close of business on the business day
immediately prior to the date set for redemption. All outstanding Class A
Warrants must be redeemed if any Class A Warrants are redeemed. A notice of
redemption shall be mailed to each of the registered holders of the Class A
Warrants by First Class mail, postage prepaid, 30 days before the date fixed for
redemption. The notice of redemption shall specify the redemption price, the
date fixed for redemption, the place where the Class A Warrant certificates
shall be delivered and the redemption price to be paid, and that the right to
exercise a Class A Warrant shall terminate at 5:00 p.m. (Salt Lake City time) on
the business day immediately preceding the date fixed for redemption.
The Class A Warrants may be exercised upon surrender of the
certificate(s) therefore on or prior to the expiration or the redemption date at
the offices of Continental Stock Transfer & Trust Company, the Company's warrant
agent (the "Warrant Agent") with the subscription form on the reverse side of
the certificate(s) completed and executed as indicated, accomplished by payment
(in the form of a certified or cashier's check payable to the order of the
Company) of the full exercise price for the number of warrants being exercised.
The Class A Warrants contain provisions that protect the holders
thereof against dissolution by adjustment of the exercise price per share and
the number of shares issuable upon exercise thereof upon the occurrence of
certain events including issuances of Common Stock (or securities convertible,
exchangeable or exercisable into Common Stock) at less than market value, stock
dividends, stock splits, mergers, sale of substantially all of the Company's
assets, and for other extraordinary events; provided, however, that no such
adjustment shall be made upon, among other things (i) the issuance or exercise
of options or other securities under employee benefit plans (ii) the sale or
exercise of outstanding options or warrants or the Class A Warrants, or (iii)
the conversion of shares of the Company's Preferred Stock to Common Stock.
The Company is not required to issue fractional shares of Common Stock,
and in lieu thereof will make a cash payment based upon the current market value
of such fractional shares. The holder of Class A Warrants will not possess any
right as a shareholder of the Company unless or until he or she exercises the
Class A Warrants. As of March 31, 1999, no Class A Warrants have been exercised.
Underwriter's Warrants. In connection with its public offering, the
Company issued and sold to the underwriters of that offering, warrants to
purchase 100,000 shares of Common Stock at $8.125 per share commencing July 10,
1998 and continuing to be exercisable until July 10, 2001, and an additional
100,000 shares of Common Stock at a price of $7.50 per share exercisable for the
same period of time. During the exercise period, holders of the Underwriter's
Warrants are entitled to certain demand and incidental registration rights with
respect to the securities issuable upon exercise of the Underwriter's Warrants.
The number of shares covered by the Underwriter's Warrants are subject to
adjustment in certain events to prevent dissolution. The Company may redeem the
Underwriter's Warrants beginning July 10, 1998 at a price of $.05 per warrant at
such time as the Company's Common Stock has been trading on The Nasdaq SmallCap
Market or an established exchange at a price equal to or above $10.00 per share
for a period
45
<PAGE>
of 30 consecutive business days ending within 15 days of the date of redemption.
Prior to July 10, 1998, the Underwriter's Warrants are not transferrable except
to officers and directors of the representative, co-underwriters, selling group
members and their officers or partners. As of March 31, 1999, no Underwriter's
Warrants have been exercised.
Win Capital Warrants. In connection with a letter agreement dated
August 20, 1997, wherein Win Capital agreed to perform unspecified investment
banking services, the Company issued Win Capital Warrants to purchase 191,000
shares of Common Stock at any time not later than August 19, 2000. The Company
issued additional Warrants to Win Capital to purchase 100,000 shares of Common
Stock at anytime no later than February 24, 2001 for services rendered in the
private placement of Series C Preferred Stock. Each of the Win Capital Warrants
entitles the holder to purchase one share of Common Stock at an exercise price
of $3.00 per share. The Win Capital Warrants may be exercised upon surrender of
the certificate(s) therefor on or prior to the expiration or the redemption date
(as explained above) at the offices of the Company's Warrant agent with the
subscription form on the reverse side of the certificate(s) completed and
executed as indicated, accomplished by payment (in the form of a certified or
cashier's check payable to the order of the Company) of the full exercise price
for the number of Warrants being exercised. The Company may redeem the Win
Capital Warrants at a price of $.05 per Warrant at such time as the Company's
Common Stock has been trading in the over-the-counter market as reported on The
Nasdaq SmallCap Market at a price equal to or above $5.00 for a period of 20
consecutive trading days ending within 20 days of the date of redemption. The
Win Capital Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price per share and the number of shares
issuable upon exercise thereof upon the occurrence of certain events, including
stock dividends, stock splits, mergers and the sale of substantially all of the
Company's assets. The Company is not required to issue fractional shares of
Common Stock, and in lieu thereof will make a cash payment based upon the
current market value of such fractional shares. The holder of the Win Capital
Warrants will not possess any rights as a shareholder of the Company unless and
until the holder exercises the Warrants. As of March 31, 1999, no Win Capital
Warrants have been exercised.
Note Holders' and Attorney's Warrants. In connection with certain
Bridge Financing, the Company issued Warrants to purchase 300,000 shares of
Common Stock to investors. Pursuant to a warrant agreement between the Company
and Mackey Price & Williams ("MP&W"), the Company issued Warrants to purchase
25,000 shares of Common Stock to MP&W. Each Warrant entitles the holder to
purchase one share of Common Stock at an exercise price of $3.33 per share. The
Note Holders' and Attorney's Warrants are exercisable through December 1, 2000.
The Note Holders' and Attorney's Warrants may be exercised upon surrender of the
certificate(s) therefor on or prior to the expiration or the redemption date at
the offices of the Company's warrant agent with the subscription form on the
reverse side of the certificate(s) completed and executed as indicated,
accomplished by payment (in the form of a certified or cashier's check payable
to the order of the Company) of the full exercise price for the number of
Warrants being exercised. The Company may redeem the Note Holders' and
Attorney's Warrants at a price of $.05 per Warrant at such time as the Company's
Common Stock has been trading in the over-the-counter market as reported on The
Nasdaq SmallCap Market at a price equal to or above $10.00 for a period of 30
consecutive trading days ending within 15 days of the date of redemption. The
Note Holders' and Attorney's Warrants contain provisions that protect the
holders thereof against dilution by adjustment of the exercise price per share
and the number of shares issuable upon exercise thereof upon the occurrence of
certain events, including stock dividends, stock splits, mergers and the sale of
substantially all of the Company's assets. The Company is not required to issue
fractional shares of Common Stock, and in lieu thereof will make a cash payment
based upon the current market value of such fractional shares. The holder of the
Note Holders' and Attorney's Warrants will not possess any rights as a
shareholder of the Company unless and until the holder exercises the Warrants.
As of March 31, 1999, 12,500 Note Holders' Warrants have been exercised to
purchase 12,500 shares of Common Stock. No Attorney's Warrants have been
exercised as of that date.
KSH Investment Group Warrants. In connection with its Series D
Preferred private placement, the Company has issued KSH Investment Group, Inc.
Warrants to purchase 208,400 shares of Common Stock. These Warrants consist of
Placement Agent Warrants to purchase 68,400 shares of Common Stock at any time
not later than February 12, 2004 at exercise price of $2.50 per share for
Warrants to purchase 55,539 shares of Common Stock, $2.69 per share for Warrants
to purchase 10,461 shares, and $2.38 per share for Warrants to purchase 2,400
shares of Common Stock. The Investment Banking Fee Warrants consist of Warrants
to purchase 140,000 shares of Common Stock at any time no later than March 1,
2004 at an exercise price of $2.38 per share. The KSH Investment Group Warrants
contain provisions that protect holders thereof against dilution by adjustment
of the exercise price per share and the number of shares issuable upon exercise
thereof upon the occurrence of certain events, including stock dividends, stock
splits, mergers and the sale of substantially all of the Company's assets. The
Company is not required to issue fractional shares of Common Stock, and in lieu
thereof will make a cash payment based upon the current market value of such
fractional shares. The registered holders of the KSH Investment Group Warrants
also may elect to exercise their Warrants by way of cashless exercise of the
Warrants. The number of shares of Common Stock issuable on the cashless exercise
of the KSH Investment Group Warrants is equal to the total number of Warrants
issued to the holder times the difference between the then current market price
and the exercise price of the Warrants divided by the market price of the
Warrants. The holder of the KSH Investment Group Warrants will not possess any
rights as a shareholder of the Company unless and until the holder exercises the
Warrants. As of March 31, 1999, no KSH Investment Group Warrants have been
exercised.
Cyn Del and Win Capital Warrants. In connection with certain financing
Cyn Del and Win Capital provided to the Company, the Company issued Cyn Del
Warrants to purchase 105,000 shares of Common Stock and Win Capital Warrants to
purchase 35,000 shares of Common Stock. These Warrants are exercisable at any
time not later than January 15, 2004 at $2.30 per share. The Warrants contain
provisions that protect the holders thereof against dilution by adjustment of
the exercise price per share and the number of shares issuable upon exercise
thereof upon the occurrence of certain events, including stock dividends, stock
splits, mergers and the sale of substantially of the Company's assets. The
Company is not required to issue fractional shares of Common Stock, and in lieu
thereof will make a cash payment based upon the current market value of such
fractional shares. The holders of the Warrants will not possess any rights as
shareholders of the Company unless and until the holders exercise the Warrants.
As of March 31, 1999, no Warrants have been exercised.
46
<PAGE>
La Jolla Warrants. In connection with its Series A Preferred private
placement, the Company has issued La Jolla Securities Corporation ("La Jolla")
Warrants to purchase 11,600 shares of the Company's Series A Preferred. Each
warrant entitles La Jolla to purchase one share of Series A Preferred at a price
of $4.00 per share at any time prior to May 8, 1999. These warrants are subject
to redemption by the Company beginning on July 10, 1998 at a price of $0.05 per
warrant, if the Company's Common Stock has been trading at a price equal to or
above $7.50 per share for 20 consecutive business days ending within 15 days of
the date of redemption.
FAS Warrants. In connection with its Series B Preferred private
placement, the Company issued First Associated Securities Group, Inc. ("FAS")
Warrants to purchase 21,525 shares of the Company's Common Stock. Each warrant
entitles FAS to purchase one share of Common Stock at a price of $3.00 per
share. These warrants are currently exercisable and expire on December 31, 1999.
Certain Provisions of Certificate of Incorporation. Paradigm's
Certificate of Incorporation provides that to the fullest extent permitted by
Delaware law, its directors shall not be liable to it and its stockholders. The
Certificate of Incorporation also contains provisions entitling the officers and
directors to indemnification by Paradigm to the fullest extent permitted by the
Delaware General Corporation Law.
Indemnification Agreements. Paradigm has entered into Indemnification
Agreements with its officers and directors. Such Indemnification Agreements
provide that Paradigm will indemnify its officers and directors against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
arising out of threatened, pending or completed legal action against any officer
or director to the fullest extent permitted by the Delaware General Corporate
Law.
Transfer and Warrant Agent. Paradigm's transfer agent and registrar for
its Common Stock and the Warrant Agent for the Class A Warrants is Continental
Stock Transfer & Trust Company, New York, New York.
PLAN OF DISTRIBUTION
The Company may solicit the exercise of Class A Warrants and Note
Holders' Warrants through a registered or licensed broker-dealer. Upon exercise
of Class A Warrants or Note Holders' Warrants, the Company will pay such
soliciting broker-dealer a fee of 5% of the aggregate exercise price of Class A
Warrants and Note Holders' Warrants exercised, if: (i) the market price of the
Common Stock on the date the Class A Warrant or the Note Holders' Warrant is
exercised is greater than the then exercise price of the Class A Warrant or the
Note Holders' Warrant, respectively; (ii) the exercise of the Class A Warrant or
the Note Holders' Warrant was solicited by a member of the National Association
of Securities Dealers, Inc.; (iii) the Class A Warrant or the Note Holders'
Warrant is not held in a discretionary account; (iv) disclosure of the
compensation arrangements was made by delivery of this Prospectus or otherwise)
both at the time of the offering and at the time of exercise of the Class A
Warrant or the Note Holders' Warrant; and (v) the solicitation of exercise of
the Class A Warrant or the Note Holders' Warrant is not in violation of
Regulation M.
In connection with the solicitation of the Class A Warrant or the Note
Holders' Warrant exercises, the soliciting broker-dealer will be prohibited from
engaging in any market-making activities with respect to the Company's
securities for the period commencing either two or nine business days (depending
on the market price of the Common Stock) prior to any solicitation activity for
the exercise of Class A Warrants or Note Holders' Warrants until the later of
(i) the termination of such solicitation activity, or (ii) the termination (by
waiver or otherwise) of any right which the soliciting broker-dealer may have to
receive a fee for the exercise of Class A Warrants or Note Holders' Warrants
following such solicitation. As a result, the soliciting broker-dealer may be
unable to provide a market for the Company's securities, should it desire to do
so, during certain periods while the respective Class A Warrants or Note
Holders' Warrants are exercisable.
The Company does not plan to solicit Series C or Series D Preferred
Stockholders regarding the conversion of their Series C or Series D Preferred
Shares into shares of Common Stock which have been registered for resale upon
conversion.
The resale of the Common Stock by the Series C and Series D Preferred
stockholders that elect to convert their shares of Series C and Series D
Preferred Stock to shares of Common Stock and the holders of Class A Warrants,
Underwriter's Warrants, Win Capital Warrants, Note Holder's Warrants, Attorney's
Warrants, KSH Investment Group Warrants and Cyn Del Warrants, that elect to
exercise their respective warrants and purchase Company Stock (collectively, the
"Selling Securityholders"), may be effected from time to time in transactions
(which may include block transactions by or for the account of the Selling
Securityholders) in The Nasdaq SmallCap Market or in negotiated transactions, a
combination of such methods of sale or otherwise. Sales may be made at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices.
Selling Securityholders may effect such transactions by selling their
shares of Common Stock directly to purchasers, through broker-dealers acting as
agents for the Selling Securityholders or to broker-dealers who may purchase
securities as principals and thereafter sell the Common Stock from time to time
in the over-the-counter market, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers for whom such broker-dealers act as agents or to whom they may sell
as principals or otherwise (which compensation as to a particular broker-dealer
may exceed customary commissions). The Selling Securityholders will pay all
commissions, transfer taxes, and other expenses associated with the sale of
Common Stock by them.
The Selling Securityholders and broker-dealers, if any, acting in
connection with such sales may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act and any commission received by them and
any profit on the
47
<PAGE>
resale of the securities by them might be deemed to be underwriting discounts
and commissions under the Securities Act. The Company has agreed to indemnify
the Selling Securityholders against certain liabilities under the Securities
Act.
From time to time this Prospectus will be supplemented and amended as
required by the Securities Act. During any time when a supplement or amendment
is so required, the Selling Securityholders are to cease sales until the
Prospectus has been supplemented or amended. Pursuant to the registration rights
granted to certain of the Selling Securityholders, the Company has agreed to
update and maintain the effectiveness of this Prospectus. Certain of the Selling
Securityholders also may be entitled to sell their Shares without the use of
this Prospectus, provided that they comply with the requirements of Rule 144
promulgated under the Securities Act.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered
hereby and certain other legal matters in connection have been passed upon for
the Company by Mackey Price & Williams, Salt Lake City, Utah. The Company
granted Mackey Price & Williams, the Company's counsel, Warrants to purchase
25,000 shares of Common Stock at $3.33 per share in partial payment for legal
services in connection with the Company's public offering which was completed in
July 1996. See "Description of Securities -- Bridge and Attorneys' Warrants."
INDEPENDENT AUDITORS
The financial statements included in this prospectus, to the extent and
for the periods indicated in their reports, have been audited by Tanner & Co.,
independent auditors, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
auditing and accounting.
DEFINITIONS
Unless the context indicates otherwise, the following words and terms,
as used in this Prospectus, shall have the following meanings:
Ablation. To surgically remove with laser energy breaking down the
tissue.
Acuity. The ability to se objects in focus. Perfect visual acuity is
referred to as 20/20 vision or emmetropia.
Anterior Chamber. The front section of the eye containing the cornea,
lens and Iris, which refract and focuses light images onto the retina.
Aspiration. Removal of tissue and fluids from the eye through suction.
Cataract. Hardened opaque lens of the eye. Generally an age elated
pathology. Cataracts become harder and more opaque over time, which reduces
visual ability to the point of complete blindness. Cataracts can also be caused
by genetic disorders and accidental trauma.
Common Stock. The shares of voting Common Stock of the Company. See
"Terms of the Offering - Common Stock."
The Company. Paradigm Medical Industries, Inc., a Delaware corporation,
and its predecessors.
Cornea. The clear front exterior surface of the eye. Its domed
curvature refracts images through the and to the retina. Its posterior surface
inside the eye is the endothelium that is sensitive to shock or vibration.
ECCE. Acronym for extracapsular cataract extraction. A cataract removal
method using steel surgical instruments requiring a larger incision that is more
invasive than phaco surgery.
Emmetropia. Normal visual acuity, 20/20 vision.
Exchange Act. The Securities Exchange Act of 1934, as amended.
Fiber Optic. A small, flexible quartz strand that transmits
concentrated laser light energy for precise delivery to tissue in surgery.
FDA. The United States Food and Drug Administration.
IOL. Acronym for intra-ocular lens. A clear plastic prosthetic implant
that replaces the natural human lens after cataract removal surgery to restore
sight.
48
<PAGE>
Internal Revenue Service. The United States Internal Revenue Service,
the governmental agency that is responsible for administering the federal tax
laws of the United States government.
Intraocular Pressure. The pressure within the orbit of the eye usually
expressed in millimeters mercury ("MM/Hg") abnormally high and low pressures of
which are used as indicators of ocular pathologies.
Investor Questionnaire and Subscription Agreement. The Investor
Questionnaire and Subscription Agreement attached hereto as Exhibit "B".
Investors. Those persons or entities acquiring the Notes in the
Offering.
In Vitro. Refers to studies and/or phenomena that take place outside
the body (for example, in test tubes).
In Vivo. Refers to studies and/or phenomena that take place in animals
or humans.
Laser. An acronym for "Light Amplification by Stimulated Emission of
Radiation." Lasers emit light in a highly intense beam of energy that radiates
at a single wave length. Laser light energy can be selectively directed for a
specific effect on body tissue and pin-pointed to a specific location through a
small fiber optic for a wide variety of surgical purposes.
Lens. The clear crystalline substance in the anterior chamber of the
eye that accommodates focusing of images on the retina for visual acuity.
Nasdaq. Abbreviation and registered service mark of The Nasdaq Stock
Market, Inc.
Note. The Company's 12% Convertible, Redeemable Promissory Note.
Phaco. Contraction of phacoemulsification. Ophthalmic medical term for
the microsurgical cataract removal procedure and related surgical devises (i.e.,
to perform a phaco surgery, or to use a phaco instrument).
Phacoemulsification. Minimally invasive surgical procedure for removing
a hardened cataract from the eye. The process involves using an ultrasonic probe
with a hollow vibrating needle that fragments the hardened cataract, while in
the eye, and aspirates the unwanted cataract tissue from the eye. Generally
considered a superior, less invasive alternative to ECCE.
Posterior Chamber. The rear section of the eye containing the retina,
vitreous and optic nerve, responsible for receiving light images from the
anterior chamber and processing these into visual information to the brain.
Pulsatile Intraocular Blood Flow. A measurement of blood reaching the
retina derived from readings of intraocular pressure over a fixed period of time
which is one determinate of the condition of the retina.
Retina. Rear surface of the posterior chamber responsible for receiving
and processing visual images.
Round lot holder. A holder of 100 shares or more of a normal unit of
trading.
Section 510(k). Section 510(k) of the FDA Act providing medical device
manufacturers premarket notification to facilitate sales of a device that is new
to the manufacturer, but "substantially equivalent" to a device already legally
marketed.
Series A Preferred. The Company's Series A 6% Convertible Redeemable
Preferred Stock, $.001 par value per share.
Series B Preferred. The Company's Series B 12% Convertible Redeemable
Preferred Stock, $.001 par value per share.
Series C Preferred. The Company's Series C Convertible Preferred Stock,
$.001 par value per share, $100 stated value.
Securities Act. The Securities Act of 1933, as amended.
Vitreous. Optically clear, fibrous gel-like fluid medium located in the
posterior chamber that comprises the majority of the volume in the eye, and
serves to give the eye its shape.
49
<PAGE>
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Paradigm Medical Industries, Inc.
We have audited the balance sheet of Paradigm Medical Industries, Inc. (the
Company) as of December 31, 1998, and the related statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1998 and
1997. 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, 1998, and the results of its operations and its cash
flows for the years ended December 31, 1998 and 1997, in conformity with
generally accepted accounting principles.
TANNER + Co.
Salt Lake City, Utah
March 5, 1999
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Balance Sheets
December 31, 1998
- ----------------------------------------------------------------------------------------------------------
Assets
Current assets:
<S> <C>
Cash $ 114,000
Receivables, net 566,000
Inventories 720,000
Prepaid expenses 15,000
------------------
Total current assets 1,415,000
Capitalized engineering and design charges, net 235,000
Property and equipment, net 547,000
Other 44,000
------------------
Total assets $ 2,241,000
------------------
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Payables $ 316,000
Accrued liabilities 163,000
Current portion of long-term debt 13,000
------------------
Total current liabilities 492,000
------------------
Long-term debt 33,000
------------------
Commitments -
Stockholders' equity:
Preferred stock, $.001 par value:
Series A, 500,000 shares authorized, 34,619 shares
issued and outstanding (aggregate liquidation
preference of $34,619) -
Series B, 500,000 shares authorized; 31,236 shares
issued and outstanding (aggregate liquidation
preference of $124,944) -
Series C, 30,000 shares authorized, 6,900 shares
issued and outstanding -
Common stock, $.001 par value, 20,000,000 shares
5,500,306 shares issued and outstanding 5,000
Additional paid-in capital 17,704,000
Treasury stock, at cost (4,000)
Unearned compensation (94,000)
Stock subscription receivable (8,000)
Accumulated deficit (15,887,000)
------------------
Total stockholders' equity 1,716,000
------------------
Total liabilities and stockholders' equity $ 2,241,000
------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Operations
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------
<S> <C> <C>
Sales $ 1,258,000 $ 464,000
-----------------------------------
Cost of sales 739,000 272,000
Amortization of capitalized engineering and design changes 74,000 61,000
-----------------------------------
813,000 333,000
-----------------------------------
Gross profit 445,000 131,000
-----------------------------------
Operating expenses:
Marketing and selling 1,021,000 591,000
General and administrative 1,841,000 1,802,000
Research and development 298,000 540,000
-----------------------------------
Total operating expenses 3,160,000 2,933,000
-----------------------------------
Operating loss (2,715,000) (2,802,000)
-----------------------------------
Other income (expense):
Interest income 49,000 57,000
Interest expense (33,000) (265,000)
Other (60,000) -
-----------------------------------
(44,000) (208,000)
-----------------------------------
Loss before provision for income taxes (2,759,000) (3,010,000)
Provision for income taxes - -
-----------------------------------
Net loss $ (2,759,000) $ (3,010,000)
-----------------------------------
Loss per common share - basic and diluted $ (.69) $ (.82)
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Stockholders' Equity
Years Ended December 31, 1998 and 1997
- -------------------------------------------------------------------------------------------------
Preferred Stock
-------------------------------------------------------
Series A Series B Series C Common Stock
----------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997 121,704 $ - 448,398 $ - - $ - 3,194,061 $ 3,000
Conversion of
preferred stock
to common stock (71,582) - (403,015) - - - 569,518 1,000
Issuance of common
stock for compensation - - - - - - 22,852 -
Warrants exercised for
common stock - - - - - - 12,500 -
Issuance of warrants
in connection with
the issuance of debt - - - - - - - -
Amortization of
unearned compensation
- - - - - - - -
Difference between the
convertible notes
payable conversion
price and common
stock fair value - - - - - - - -
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Stock Gain
Additional Unearned Sub- Accum- on
Paid-In Treasury Stock Compen- scription ulated Marketable
-----------------
Capital Shares Amount sation Receivable Deficit Securities
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997 $ 8,162,000 2,600 $ (4,000) $ (63,000) $ - $ (5,248,000) $ 10,000
Conversion of
preferred stock to
common stock - - - - - - -
Issuance of common
stock for compensation 78,000 - - - - - -
Warrants exercised for
common stock 42,000 - - - - - -
Issuance of warrants
in connection with
the issuance of debt 317,000 - - - - - -
Amortization of
unearned compensation
- - - 63,000 - - -
Difference between the
convertible notes
payable conversion
price and common
stock fair value 235,000 - - - - - -
- --------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Stockholders' Equity
Years Ended December 31, 1998 and 1997
- ---------------------------------------------------------------------------------------------------
Preferred Stock
-------------------------------------------------------
Series A Series B Series C Common Stock
------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net change in
unrealized gain on
marketable securities - - - - - - - -
Net loss - - - - - - - -
-----------------------------------------------------------------------------
Balance at
December 31, 1997 50,122 - 45,383 - - - 3,798,931 4,000
Issuance of Series C
preferred stock for:
Cash - - - - 19,937 - - -
Debt - - - - 9,950 - - -
Subscription
receivable - - - - 93 - - -
Conversion of
preferred stock to
common stock (15,503) - (14,147) - (23,080) - 1,354,424 1,000
Issuance of common
stock for:
Services - - - - - - 93,135 -
Payables - - - - - - 90,000 -
Debt - - - - - - 37,500 -
Assets - - - - - - 126,316 -
Issuance of stock
options for services - - - - - - - -
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Stock Gain
Additional Unearned Sub- Accum- on
Paid-In Treasury Stock Compen- scription ulated Marketable
-----------------
Capital Shares Amount sation Receivable Deficit Securities
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net change in
unrealized gain on
marketable securities - - - - - - (10,000)
Net loss - - - - - (3,010,000) -
-----------------------------------------------------------------------
Balance at
December 31, 1997 8,834,000 2,600 (4,000) - - (8,258,000) -
Issuance of Series C
preferred stock for:
Cash 1,739,000 - - - - - -
Debt 829,000 - - - - - -
Subscription
receivable 8,000 - - - (8,000) - -
Conversion of preferred
stock to common stock (1,000) - - - - - -
Issuance of common
stock for:
Services 290,000 - - (94,000) - - -
Payables 399,000 - - - - - -
Debt 75,000 - - - - - -
Assets 500,000 - - - - - -
Issuance of stock
options for services 161,000 - - - - - -
- ---------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Stockholders' Equity
Years Ended December 31, 1998 and 1997
- ------------------------------------------------------------------------------------------------
Preferred Stock
-------------------------------------------------------
Series A Series B Series C Common Stock
----------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Difference between
the series C preferred
stock conversion
price and common stock
fair value - - - - - - - -
Net loss - - - - - - - -
---------------------------------------------------------------------------
Balance at
December 31, 1998 34,619 $ - 31,236 $ - 6,900 $ - 5,500,306 $ 5,000
---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Stock Gain
Additional Unearned Sub- Accum- on
Paid-In Treasury Stock Compen- scription ulated Marketable
------------------
Capital Shares Amount sation Receivable Deficit Securities
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Difference between
the series C preferred
stock conversion
price and common stock
fair value 4,870,000 - - - - (4,870,000) -
Net loss - - - - - (2,759,000) -
--------------------------------------------------------------------------------
Balance at
December 31, 1998 $ 17,704,000 2,600 $ (4,000) $ (94,000) $ (8,000) $ (15,887,000) $ -
--------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Cash Flows
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (2,759,000) $ (3,010,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 106,000 209,000
Loss on disposal of equipment - 12,000
Issuance of common stock for services 196,000 78,000
Interest and stock compensation expenses related
to common stock options/warrants 161,000 235,000
Provision for losses on receivables 30,000 -
(Increase) decrease in:
Receivables (475,000) (102,000)
Inventories 240,000 (592,000)
Debt offering cost 259,000 -
Prepaid expenses 1,000 8,000
Increase (decrease) in:
Payables 14,000 466,000
Accrued liabilities (187,000) 72,000
-----------------------------------
Net cash used in
operating activities (2,414,000) (2,624,000)
-----------------------------------
Cash flows from investing activities:
Purchase of property and equipment (48,000) (32,000)
Notes receivable (44,000) -
Capitalized engineering and design charges - (370,000)
Proceeds from the sale of marketable securities - 500,000
-----------------------------------
Net cash (used in) provided by
investing activities (92,000) 98,000
-----------------------------------
Cash flows from financing activities:
Proceeds from issuance of Series C preferred stock 1,739,000 -
Principal payments on long-term debt (6,000) (3,000)
Proceeds from issuance of notes payable - 1,070,000
Proceeds from lines of credit - 980,000
Payment on lines of credit - (980,000)
Payment of debt offering costs - (165,000)
Proceeds from exercise of warrants - 42,000
-----------------------------------
Net cash provided by
financing activities 1,733,000 944,000
-----------------------------------
Net decrease in cash (773,000) (1,582,000)
Cash, beginning of year 887,000 2,469,000
-----------------------------------
Cash, end of year $ 114,000 $ 887,000
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-8
</TABLE>
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Organization
Paradigm Medical Industries, Inc. (the Company) is a California
Corporation incorporated in October 1989.
The Company is 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 toward
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.
During the year ended December 31, 1998, the Company acquired, the rights to
begin manufacturing an established product line, which consists of ultrasound
diagnostic devices used in eye care.
Liquidity
The Company incurred a net loss of $2,759,000 and negative cash flows from
operating activities of $2,414,000 for the year ended December 31, 1998. As of
December 31, 1998, the Company had an accumulated deficit of $15,887,000. In
March 1999, the Company completed the private placement of 1,140,000 shares of
Series D Preferred Stock at $100 per share (see Note 7), resulting in net
proceeds of approximately $1,649,000, net of offering costs. Management believes
that if sales projections are realized these net proceeds, plus existing working
capital, will be sufficient to assure continuation of the Company's operations
through December 31, 1999. However, no assurances can be given that management's
plans will be successful in achieving profitability to positive cash flows.
- --------------------------------------------------------------------------------
F-9
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Continued
Cash Equivalents
For purposes of the statement of cash flows, cash includes all cash and
investments with original maturities to the Company of three months or less.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such account and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Marketable Securities
The Company classifies its marketable debt and equity securities as "held to
maturity" if it has the positive intent and ability to hold the securities to
maturity. All other marketable debt and equity securities are classified as
"available for sale." Securities classified as "available for sale" are carried
in the financial statements at fair value. Realized gains and losses, determined
using the specific identification method, are included in earnings; unrealized
holding gains and losses are reported as a separate component of stockholders'
equity. Securities classified as held to maturity are carried at amortized cost.
For both categories of securities, declines in fair value below amortized cost
that are other than temporary are included in earnings.
Inventories
Inventories are stated at the lower of cost or market, cost is determined using
the weighted average method.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation on property and equipment is determined using the straight-line
method over the estimated useful lives of the assets or terms of the lease.
Expenditures for maintenance and repairs are expensed when incurred and
betterments are capitalized. Gains and losses on sale of property and equipment
are reflected in operations.
- --------------------------------------------------------------------------------
F-10
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Continued
Capitalized Engineering and Design Charges
The capitalized portion of payments to a manufacturer for engineering and design
services are being amortized using the straight line method over a five year
period. At December 31, 1998 and 1997, the accumulated amortization was $135,000
and $61,000, respectively. Amortization expense for the years ended December 31,
1998 and 1997 was $74,000 and $61,000, respectively.
Income Taxes
Deferred income taxes are provided in amounts sufficient to give effect to
temporary differences between financial and tax reporting, principally related
to depreciation and accrued liabilities.
Earnings Per Share
The computation of basic earnings per common share is based on the weighted
average number of shares outstanding during each year.
The computation of diluted earnings per common share is based on the weighted
average number of shares outstanding during the year plus the common stock
equivalents, which would arise from the exercise of stock options and warrants
outstanding using the treasury stock method and the average market price per
share during the year. Common stock equivalents are not included in the diluted
earnings per share calculation when their effect is antidilutive.
Revenue Recognition
Revenues for sales of the Photon product, are recognized upon installation and
acceptance by the customer. Revenues for sales of the Precisionist and
ultrasound diagnostic devices are recognized when the product is shipped.
The Company offers the Precisionist with an unconditional arrangement under
which the customer may trade in their Precisionist to upgrade to other systems,
such as the Photon. Under this agreement, the customer will receive full credit
for the purchase price of the Precisionist against the price of the other
system.
Research and Development
Costs incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects as well as fees paid to various entities that
perform certain research on behalf of the Company.
- --------------------------------------------------------------------------------
F-11
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Continued
Concentration of Risk
The market for ophthalmic lasers is subject to rapid technological change,
including advances in laser and other technologies and the potential development
of alternative surgical techniques or new pharmaceutical products. Development
by others of new or improved products, processes or technologies may make
products developed by the Company obsolete or less competitive.
The Company's high technology product line requires the Company to deal with
suppliers and subcontractors supplying highly specialized parts, operating
highly sophisticated and narrow tolerance equipment and performing highly
technical calculations and tasks. Substantially all of the Company's current
products are manufactured and assembled by two companies, one of which is a
related party (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 $2 million per claim with an aggregate policy limit of $2 million. Any losses
that the Company many suffer from any product liability litigation could have a
material adverse effect on the Company.
A significant portion of the Company's product sales are in foreign 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.
- --------------------------------------------------------------------------------
F-12
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Continued
Concentration of Risk - Continued
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.
The Company maintains its cash in bank deposit accounts, which at times, may
exceed federally insured limits. The Company has not experienced any losses in
such account and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Use of Estimates in the Preparation of Financial Statements The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassifications
Certain accounts in the 1997 financial statements have been reclassified to
conform with the presentation of the current year financial statements.
2. Detail of Certain Balance Sheet Accounts
Receivables:
Trade receivables $ 566,000
Employee receivables 9,000
Other 21,000
Allowance for doubtful accounts (30,000)
------------------
$ 566,000
------------------
Inventory:
Finished goods $ 493,000
Raw materials 227,000
------------------
$ 720,000
------------------
- --------------------------------------------------------------------------------
F-13
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Detail of Certain Balance Sheet Accounts
Continued
Payables:
Accounts payable $ 209,000
Related party payables 107,000
------------------
$ 316,000
------------------
3. Property and Equipment
Property and equipment consists of the following:
Production rights $ 374,000
Office equipment 135,000
Computer equipment 84,000
Automobile 26,000
Furniture and fixtures 21,000
-----------------
640,000
Accumulated depreciation and
amortization (93,000)
-----------------
$ 547,000
-----------------
4. Long-Term Debt
Long-term debt consists of the following:
Note payable to a bank in monthly installments of
$418, including interest at 9.95% secured by an
automobile and due September 2001 $ 12,000
Capital lease obligations (see note 5) 34,000
-----------------
46,000
Less current portion (13,000)
-----------------
$ 33,000
-----------------
- --------------------------------------------------------------------------------
F-14
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Long-Term Debt
Continued
Future maturities are as follows:
Year Ending December 31, Amount
-----------------
1999 $ 13,000
2000 16,000
2001 17,000
-----------------
$ 46,000
-----------------
5. Lease Obligations
During the year ended December 31, 1998 the Company leased certain computer
equipment under noncancellable capital leases. These leases provide the Company
the option to purchase the leased assets at the end of the initial lease term.
Assets under capital leases included in fixed assets and are as follows:
Computer equipment $ 36,000
Less accumulated amortization (2,000)
-----------------
$ 34,000
-----------------
Amortization expense on assets under capital leases during the year ended
December 31, 1998 was $2,000.
- --------------------------------------------------------------------------------
F-15
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Lease Obligations
Continued
Capital lease obligations have imputed interest rates of 22% and are payable in
monthly installments of approximately $1,200 trough 2001. The leases are secured
by computer equipment. Future minimum payments on the capital lease obligations
are as follows:
1999 $ 16,000
2000 16,000
2001 14,000
-----------------
46,000
Less amount representing interest (12,000)
-----------------
$ 34,000
-----------------
The Company leases office and warehouse space under operating lease agreements.
Future minimum rental payments under noncancelable operating leases as of
December 31, 1998 are as follows:
Year Ending December 31, Amount
-----------------
1999 $ 94,000
2000 94,000
-----------------
Total future minimum rental
payments $ 188,000
-----------------
Rent expense related to the noncancelable operating leases was approximately
$41,000 and $62,000 for the years ended December 31, 1998 and 1997,
respectively.
- --------------------------------------------------------------------------------
F-16
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Income Taxes
The provision for income taxes is different than amounts which would be provided
by applying the statutory federal income tax rate to loss before provision for
income taxes for the following reasons:
Years Ended
December 31,
---------------------------------
1998 1997
---------------------------------
Federal income tax benefit at
statutory rate $ 938,000 $ 1,174,000
Other 45,000 -
Change in valuation allowance (983,000) (1,174,000)
---------------------------------
$ - $ -
---------------------------------
Deferred tax assets (liabilities) are comprised of the following:
December 31,
1998
-----------------
Net operating loss carryforward $ 3,606,000
Depreciation (18,000)
Research and development tax credit
carryforwards 34,000
Allowance and reserves 31,000
-----------------
3,653,000
Valuation allowance (3,653,000)
-----------------
$ -
-----------------
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $9,600,000 and research and development tax credit carryforwards
of approximately $34,000. These carryforwards are available to offset future
taxable income and begin to expire in 2006. The utilization of the net operating
loss carryforwards is dependent upon the tax laws in effect at the time the net
operating loss carryforwards can be utilized. The Tax Reform Act of 1986
significantly limits the annual amount that can be utilized for certain of these
carryforwards as a result of the change in ownership.
- --------------------------------------------------------------------------------
F-17
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Capital Stock
The Company has established four series of preferred stock with a total of
5,000,000 authorized shares and a par value of $.001, the series included
certain rights and privileges, and one series of common stock with a par value
of $.001 and a total of 20,000,000 authorized shares.
Series A Preferred Stock
On September 1, 1993, the Company established a series of non-voting preferred
shares designated as the 6% Series A Preferred Stock, consisting of 500,000
shares with $.001 par value. The Series A Preferred Stock has the following
rights and privileges:
1. The holders of the shares are entitled to dividends at the rate of
twenty-four cents ($.24) per share per annum, payable in cash only from
surplus earnings of the Company or in additional shares of Series A
Preferred Stock. The dividends are non-cumulative and therefore
deficiencies in dividend payments from one year are not carried forward to
the next year.
2. Upon the liquidation of the Company, the holders of the Series A Preferred
Stock are entitled to receive, prior to any distribution of any assets or
surplus funds to the holders of shares of common stock or any other stock,
an amount equal to $1.00 per share, plus any accrued and unpaid dividends
related to the fiscal year in which such liquidation occurs.
3. The shares are convertible at the option of the holder at any time into
common shares, based on an initial conversion rate of one share of Series A
Preferred Stock for 1.2 common shares.
4. The holders of the shares have no voting rights.
5. The Company may, at its option, redeem all of the then outstanding share of
the Series A Preferred Stock at a price of $4.50 per share, plus accrued
and unpaid dividends related to the fiscal year in which such redemption
occurs.
- --------------------------------------------------------------------------------
F-18
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Capital Stock
Continued
Series B Preferred Stock
On May 9, 1994, the Company established a series of non-voting preferred shares
designated at 12% Series B Preferred Stock, consisting of 500,000 shares with
$.001 par value. The Series B Preferred Stock have the following rights and
privileges:
1. The holders of the shares are entitled to dividends at the rate of
forty-eight cents ($.48) per share per annum, payable in cash only from
surplus earnings of the Company or in additional shares of Series B
Preferred Stock. The dividends are non-cumulative and therefore
deficiencies in dividend payments from one year are not carried forward to
the next year.
2. Upon the liquidation of the Company, the holders of the Series B
Preferred Stock are entitled to receive, prior to any distribution of any
assets or surplus funds to the holders of shares of common stock or
any other stock, an amount equal to $4.00 per share, plus any
accrued and unpaid dividends related to the fiscal year in which such
liquidation occurs. Such right, however, is subordinate to the right of
the holders of Series A Preferred Stock to receive a distribution of
$1.00 per share plus accrued and unpaid dividends.
3. The shares are convertible at the option of the holder at any time into
common shares, based on an initial conversion rate of one share of Series B
Preferred Stock for 1.2 common shares.
4. The holders of the shares have no voting rights.
5. The Company may, at its option, redeem all of the then outstanding share of
the Series B Preferred Stock at a price of $4.50 per share, plus accrued
and unpaid dividends related to the fiscal year in which such redemption
occurs.
- --------------------------------------------------------------------------------
F-19
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Capital Stock
Continued
Series C Preferred Stock
In January 1998, the Company authorized the issuance of a total of 30,000 shares
of Series C Preferred Stock, $.001 par value, $100 stated value. The Series C
Preferred Stock have the following rights and privileges:
1. The holders of the shares are entitled to dividends at the rate of 12% per
share per annum of the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in dividend payments from one
year are not carried forward to the next year.
2. Upon the liquidation of the Company, the holders of the Series C Preferred
Stock are entitled to receive an amount per share equal to the greater of
(a) the amount they would have received if they had converted the shares
into shares of Common Stock immediately prior to such liquidation plus
declared but unpaid dividends; or (b) the stated value, subject to
adjustment.
3. Each share is convertible, at the option of the holder at any time until
January 1, 2002, into approximately 57.14 shares of common stock at an
initial conversion price, subject to adjustments for stock splits, stock
dividends and certain combination or recapitalization of the common stock,
equal to $1.75 per share of common stock.
4. The holders of the shares have no voting rights.
Series D Preferred Stock
In January 1999, the Company's Board of Directors authorized the issuance of a
total of 1,140,000 shares of non-voting Series D Preferred Stock, $.001 par
value per share, $1.75 stated value. Each share initially is convertible into
one share of Common Stock. Each share, which remains outstanding on January 1,
2002, shall be automatically converted into one share of Common Stock. Holders
of the shares of Series D Preferred Stock are entitled to 10% non-cumulative
dividends.
In March 1999, the Company closed a private placement of Series D Preferred
Stock, selling 1,140,000 shares at a price of $1.75 per share. The net proceeds
to the Company from the private placement were approximately $1.6 million.
- --------------------------------------------------------------------------------
F-20
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Capital Stock
Continued
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.
8. Stock Option Plan and Warrants
In November 1995, the Company's Board of Directors and shareholders approved the
Company's 1995 Stock Option Plan (the Option Plan) which reserved 300,000 shares
of the Company's authorized but unissued common stock for the granting of stock
options. In June 1997, the Company's shareholders approved an amendment to the
Plan to increase the number of shares of common stock reserved for issuance
thereunder by an aggregate of 300,000 shares.
The Option Plan provides for the grant of incentive stock options and
non-qualified stock options to employees and non-employee directors of the
Company. Incentive stock options may be granted only to employees. The Option
Plan is administered by the Board of Directors or a Compensation Committee,
which determines the terms of options granted including the exercise price, the
number of shares subject to the option, and the exercisability of the option.
In addition, the Company has granted warrants to purchase the Company's common
stock to various entities. During the years ended December 31, 1998 and 1997,
the Company granted the following warrants:
o In connection with the Company issuing Series C Preferred Stock, the
Company issued warrants to purchase up to 100,000 shares of common stock at
a purchase price of $3.00 per share. The warrant is currently exercisable
and expires on February 24, 2001. The fair value of the warrant of $336,000
has been netted against gross proceeds from issuance of Series C Preferred
Stock.
o The Company issued warrants to purchase 100,00 shares of the Company's
common stock at a price of $4.00 per share to an individual, as
consideration for consulting legal services. The warrants are exercisable
beginning in January 1999 and expire on December 18, 2008.
- --------------------------------------------------------------------------------
F-21
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Stock Option Plan and Warrants
Continued
o In connection with an investment banking agreement (see Note 7), the
Company issued a warrant to Win Capital to purchase up to 191,000 shares of
common stock at a purchase price of $3.00 per share. The warrant is
currently exercisable and expires on August 19, 2000. The fair value of the
warrant of $317,060 was recorded as debt offering costs and was amortized
over the term of the debt.
A schedule of the options and warrants is as follows:
Exercise
Number of Price Per
----------------------------
Options Warrants Share
------------------------------------------
Outstanding at January 1, 1997 378,940 1,558,125 $ 3.00 - 8.13
Granted 135,000 191,000 3.00 - 5.00
Exercised - (12,500) 3.33
Expired (63,740) - 5.00
------------------------------------------
Outstanding at December 31,
1997 450,200 1,736,625 3.00 - 8.13
Granted 319,960 200,000 2.31 - 5.00
Forfeited (50,000) - 5.00
------------------------------------------
Outstanding at December 31,
1998 720,160 1,936,625 $ 3.00 - 8.13
------------------------------------------
- --------------------------------------------------------------------------------
F-22
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Earnings Per Share
Financial accounting standards requires companies to present basic earnings per
share (EPS) and diluted earnings per share along with additional informational
disclosures. Information related to earnings per share is as follows:
Years Ended
December 31,
------------------------------------
1998 1997
------------------------------------
Basic and Diluted EPS:
Net loss available to common
stockholders $ (2,759,000) $ (3,010,000)
------------------------------------
Weighted average common shares 4,022,000 3,663,000
------------------------------------
Net loss per share $ (.69) $ (.82)
------------------------------------
10. Stock-Based Compensation
The Company adopted the disclosure only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation expense has been recognized for stock options
granted to employees. Had compensation expense for the Company's stock options
been determined based on the fair value at the grant date for awards in 1998 and
1997 consistent with the provisions of SFAS No. 123, the Company's results of
operations would have been reduced to the pro forma amounts indicated below:
Years Ended
December 31,
------------------------------------
1998 1997
------------------------------------
Net loss - as reported $ (2,759,000) $ (3,010,000)
Net loss - pro forma $ (3,044,000) $ (3,168,000)
Loss per share - as reported $ (.69) $ (.82)
Loss per share - pro forma $ (.76) $ (.86)
------------------------------------
- --------------------------------------------------------------------------------
F-23
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Stock-Based Compensation
Continued
The fair value of each option grant is estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions:
December 31,
-----------------------------------
1998 1997
-----------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 82% 102%
Risk-free interest rate 5.0% 5.5%
Expected life of options 6 years 5 years
-----------------------------------
The weighted average fair value of options granted during the years ended
December 31, 1998 and 1997 are $1.85 and $3.31, respectively.
The following table summarizes information about stock options and warrants
outstanding at December 31, 1998:
Outstanding Exercisable
------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 12/31/98 (Years) Price 12/31/98 Price
- --------------------------------------------------------------------------------
$2.30 - 2.75 20,160 9.86 2.47 - $ -
3.00 - 4.00 736,625 2.91 3.29 644,958 3.19
5.00 - 8.13 1,900,000 2.87 6.53 1,814,400 6.61
- --------------------------------------------------------------------------------
$2.30 - 8.13 2,656,785 2.94 5.60 2,459,358 $ 5.57
- --------------------------------------------------------------------------------
11. Related Party Transactions
The Company has 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 paid a total of $1,000,000 to the Manufacturer at
various milestone dates for engineering and design services. $630,000 of this
amount was charged to expense as research and development; the balance was
recorded as capitalized engineering and design charges.
- --------------------------------------------------------------------------------
F-24
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Related Party Transactions
Continued
In addition, the Company will pay the actual cost of tooling, plus a two percent
mark-up, which is not expected to be significant. All items for tooling purposes
will belong to the Company. The Agreement establishes the purchase price of the
systems at the lesser of a fixed purchase price or the actual cost of
manufacturing plus a markup.
The Company purchased research and development services, design and
manufacturing services and systems from the Manufacturer in the amount of
approximately $49,000 and $1,070,000 during the year ended December 31, 1998 and
1997, respectively.
The Agreement prohibits the manufacturer from participating in any activities,
including manufacturing, related to laser surgical systems for any other company
for a period of two years beyond the term of any renewed term of the Agreement.
The Agreement includes certain termination provisions, which include the event
that the Company is unable to obtain governmental or regulatory approvals. The
Agreement is renewable for successive one year additional terms.
In 1997, the Company signed an amended exclusive patent license agreement with a
company which owns the patent for the laser-probe used on the 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, 1998, no significant royalties have been paid under this
agreement.
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 $97,000, and $119,000
for the year ended December 31, 1998 and 1997, respectively. As of December 31,
1998, the Company owed this firm $16,000, which is included in accounts payable.
- --------------------------------------------------------------------------------
F-25
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Supplemental Cash Flow Information
During the year ended December 31, 1998:
o The Company issued Series C Preferred Stock in exchange for long-term debt
of $995,000 and debt-offering costs of $166,000.
o The Company issued common stock for future services in the amount of
$94,000.
o The Company issued common stock in exchange for long-term debt of $75,000.
o The Company issued common stock in exchange for a related-party payable of
$399,000.
o The Company issued common stock in exchange for production rights of
$374,000 and inventory of $126,000.
o The Company increased the accumulated deficit and additional paid-in
capital by $4,870,000 due to the difference between the Series C preferred
stock conversion price and the common stock fair value.
o The Company acquired computer equipment in exchange for long-term debt of
$36,000.
During the year ended December 31, 1997, the Company issued warrants valued at
$317,060 in exchange for services.
Actual amounts paid for interest and income taxes are as follows:
Years Ended
December 31,
-----------------------------------
1998 1997
-----------------------------------
Interest $ 33,000 $ 22,000
-----------------------------------
Income taxes $ - $ -
-----------------------------------
- --------------------------------------------------------------------------------
F-26
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Export Sales
Total sales include export sales by major geographic area as follows:
Years Ended
December 31,
-----------------------------------
Geographic Area 1998 1997
- ---------------
-----------------------------------
Middle East $ 150,000 $ 2,000
South America 140,000 -
Europe 11,000 38,000
Far East 3,000 18,000
-----------------------------------
$ 304,000 $ 58,000
-----------------------------------
14. Employment Agreements
Effective January 1, 1998, the Company entered into employment agreements with
four officers which expire on January 1, 2003. The agreements provide for
aggregate annual compensation of $480,000. In addition, the Company has entered
into agreements which provide for additional payments to be made to these
officers in the event the Company has a change of control.
15. Profit Sharing Plan
The Company has 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 prior
to December 31, 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 up to 3% of a participant's compensation. During the
years ended December 31, 1998 and 1997, the Company contributed $10,646 and
$36,136 to the Plan, respectively.
- --------------------------------------------------------------------------------
F-27
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
17. Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. The Company believes that the
adoption of SFAS 133 will not have any material effect on the financial
statements of the Company.
18. Restatement of the 1997 Financial Statements
The Company had previously issued financial statements for the year ended
December 31, 1997. The accompanying revised 1997 financial statements reflect an
adjustment due to correction of an error. The adjustment to the financial
statements arises from the expense recognition for the difference between the
conversion price and the fair value of the common stock into which the security
is convertible.
The following schedule summarizes the adjustment leading to the restatement of
the 1997 financial statements:
As Originally
Category Reported Restated
- ---------------------------------------------------------------------------
Net loss $ (2,775,000) $ (3,010,000)
Interest expense $ 30,000 $ 265,000
The revised net loss reflects a change involving the recognition of a non-cash
expense for the difference between the convertible notes payable conversion
price and the fair value of the common stock, on the debt issuance date and has
been recorded in interest expense for the year ended December 31, 1997. This
adjustment resulted in an increase to the net loss and interest expense of
$235,000.
- --------------------------------------------------------------------------------
F-28
<PAGE>
No dealer, salesman or any other person has been authorized to give
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of any offer
to buy any of the securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof.
---------------------
TABLE OF CONTENTS
Page
Prospectus Summary....................................................... 1
Risk Factors ........................................................... 5
Use of Proceeds.......................................................... 11
Capitalization........................................................... 12
Selected Financial Data.................................................. 14
Price of Common Stock and Class A
Warrants and Dividend Policy........................................... 15
Management's Discussion and Analysis .................................... 15
Business ................................................................ 18
Management............................................................... 31
Principal Shareholders................................................... 38
Certain Transactions..................................................... 38
Securityholders Registering Shares....................................... 39
Description of Securities ............................................... 43
Plan of Distribution..................................................... 47
Legal Matters............................................................ 48
Experts.................................................................. 48
Definitions.............................................................. 49
Index of Financial Statements............................................ F-1
6,258,859 Shares of Common Stock Issuable
Upon Exercise of Warrants and
Conversion of Series C and
Series D Preferred Stock and Note
PARADIGM MEDICAL INDUSTRIES, INC.
-----------------
PROSPECTUS
-----------------
May ___, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any person who is,
or is threatened to be made, a party to any threatened, pending or completed
legal action, suit or proceedings, whether civil, criminal, administrative or
investigative (other than action by or in the right of such corporation), by
reason of the fact that such person was an officer or director of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the corporation's best interests, and, for criminal
proceedings, had no reasonable cause to believe his or her conduct was illegal.
A Delaware corporation may indemnify officers and directors in an action by or
in the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation in the performance of his
or her duty. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses which such officer or director
actually and reasonably incurred.
In accordance with the Delaware Law, the Certificate of Incorporation of
the Company contains a provision to limit the personal liability of the
directors of the Company for violations of their fiduciary duty. This provision
eliminates each director's liability to the Registrant or its stockholders for
monetary damages except (i) for any breach of the director's duty of loyalty to
the Registrant or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit. The effect of this provision is to eliminate the personal liability of
directors for monetary damages for actions involving a breach of their fiduciary
duty of care, including any such actions involving gross negligence.
The Company may not indemnify an individual unless authorized and a
determination is made in the specific case that indemnification of the
individual is permissible in the circumstances because his or her conduct was in
good faith, he or she reasonably believed that his or her conduct was in, or not
opposed to, the Company's best interests and, in the case of any criminal
proceeding, he or she had no reasonable cause to believe his or her conduct was
unlawful. The Company may not advance expenses to an individual to whom the
Company may ultimately be responsible for indemnification unless authorized in
the specific case after the individual furnishes the following to the Company: a
written affirmation of his or her good faith belief that his or her conduct was
in good faith, that he or she reasonably believed that his or her conduct was
in, or not opposed to, the Company's best interests and, in the case of any
criminal proceeding, he or she had no reasonable cause to believe his or her
conduct was unlawful and (2) the individual furnishes to the Company a written
undertaking, executed personally or on his or her behalf, to repay the advance
if it is ultimately determined that he or she did not meet the standard of
conduct referenced in part (1) of this sentence. In addition to the individual
furnishing the aforementioned written affirmation and undertaking, in order for
the Company to advance expenses, a determination must also be made that the
facts then- known to those making the determination would not preclude
indemnification.
All determinations relative to indemnification must be made as follows:
(1) by the Board of Directors of the Company by a majority vote of those present
at a meeting at which a quorum is present, and only those directors not parties
to the proceeding shall be counted in satisfying the quorum requirement; or (2)
if a quorum cannot be obtained as contemplated in part (1) of this sentence, by
a majority vote of a committee of the Board of Directors designated by the Board
of Directors of the Company, which committee shall consist of two or more
directors not parties to the proceeding, except that directors who are parties
to the proceeding may participate in the designation of directors for the
committee; or (3) by special legal counsel selected by the Board of Directors or
its committee in the manner prescribed in part (1) or part (2) of this sentence
(however, if a quorum of the Board of Directors cannot be obtained under part
(1) of this sentence and a committee cannot be designated under part (2) of this
sentence, then a special legal counsel shall be selected by a majority vote of
the full board of directors, in which selection directors who are parties to the
proceeding may participate); or (4) by the shareholders, by a majority of the
votes entitled to be cast by holders of qualified shares present in person or by
proxy at a meeting.
The Company has also entered into Indemnification Agreements with its
executive officers and directors. These Indemnification Agreements are
substantially similar in effect to the Bylaws and the provisions of the
Company's Certificate of Incorporation relative to providing indemnification to
the maximum extent and in the manner permitted by the Delaware General
Corporation Law. Additionally, such Indemnification Agreements contractually
bind the Company with respect to indemnification and contain certain
II-2
<PAGE>
exceptions to indemnification, but do not limit the indemnification available
pursuant to the Company's Bylaws, the Company's Certificate of Incorporation or
the Delaware General Corporation Law.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the expenses payable by the Company in
connection with the issuance and distribution of the securities being
registered, other than underwriting discount (all amounts except the Securities
and Exchange Commission filing fee and the NASD fee are estimated):
Filing fee - Securities and Exchange Commission................. $ 673
NASD fee........................................................ 2,000
Printing and engraving expenses................................. 200
Legal fees and disbursements.................................... 3,500
Accounting fees and disbursements............................... 1,500
Blue Sky fees and expenses (including legal fees)............... 500
Miscellaneous................................................... 627
--------
Total expenses.................................................. $ 9,000
Item 26. Recent Sales of Unregistered Securities
The following information is furnished with regard to all issuances of
unregistered shares of the Company's securities during the past three years.
Each of the following transactions was exempt from registration under the
Securities Act by virtue of the provisions of Section 4(2) of the Securities Act
and, where indicated, by either Rule 504 or 505 of Regulation D promulgated
under the Securities Act.
None of the following transactions involved a distribution or public
offering. All share and per share information presented below have been adjusted
to give retroactive effect to a 1-for-7.96 reverse stock split, which was
approved in April 1993 and a 1-for-5 reverse stock split, which was approved in
April 1994.
I. 12% Convertible, Redeemable Promissory Notes
During the period from October 24, 1997 to December 8, 1998, the
Company sold a total of 21.4 Units of 12% Convertible, Redeemable Promissory
Notes to the 23 persons identified below in this Part III of Item 26, "Recent
Sales of Unregistered Securities" (all of whom were accredited investors),
through a private placement under Rule 505 of Regulation D promulgated under the
Securities Act at a price of $50,000 per Unit, each Unit consisting of a $50,000
Unsecured 12% Convertible, Redeemable Promissory Note. The Company received
$1,070,000 in cash as a result of the private placement transaction and paid
$128,400 in commissions and expenses to Win Capital Corp., the exclusive
placement agent of the offering.
A. On December 8, 1997, the Company issued one Unit to
Continental Stock Transfer Corp. for a cash investment of
$50,000.
B. On December 8, 1997, the Company issued one Unit to Robert L.
Frome for a cash investment of $50,000.
C. On December 8, 1997, the Company issued two Units to Ronald A.
Balkin, M.D. and Karen A. Balkin, JTWROS for a cash investment
of $100,000.
D. On December 8, 1997, the Company issued two Units to Michael
Associates for a cash investment of $100,000.
E. On December 8, 1997, the Company issued .50 Unit to Mark S.
Richardson for a cash investment of $25,000.
F. On December 8, 1997, the Company issued .30 Unit to Mark E.
Cozens for a cash investment of $15,000.
G. On December 8, 1997, the Company issued .50 Unit to Michael L.
Salamone for a cash investment of $25,000.
H. On December 8, 1997, the Company issued .70 Unit to Premier
Alliance Group, Inc. for a cash investment of $35,000.
I. On December 8, 1997, the Company issued .50 Unit to Gary W.
Hammond for a cash investment of $25,000.
J. On December 8, 1997, the Company issued .50 Unit to Jeffrey A.
Strack and Penny Strack, JTROS for a cash investment of
$25,000.
II-3
<PAGE>
K. On December 8, 1997, the Company issued .50 Unit to J. Michael
Smith for a cash investment of $25,000.
L. On December 8, 1997, the Company issued .50 Unit to Eileen M.
O'Dea for a cash investment of $25,000.
M. On December 8, 1997, the Company issued .40 Unit to Irwin W.
Messer and Alexandra S. Urdang, JTWROS for a cash investment
of $20,000.
N. On December 8, 1997, the Company issued .50 Unit to Sheila
Sandman for a cash investment of $25,000.
O. On December 8, 1997, the Company issued one Unit to Joseph
Aufiero for a cash investment of $50,000.
P. On December 8, 1997, the Company issued one Unit to Ted Levine
for a cash investment of $50,000.
Q. On December 8, 1997, the Company issued .50 Unit to B. Michael
Pisani for a cash investment of $25,000.
R. On December 8, 1997, the Company issued one Unit to Alfred J.
Riccairdi and Joseph Riccairdi, JTWROS and for a cash
investment of $50,000.
S. On December 8, 1997, the Company issued two Units to R.F.
Lafferty Profit Sharing Plan FBO Henry Hackel for a cash
investment of $100,000.
T. On December 8, 1997, the Company issued one Unit to Rose W.
Zee for a cash investment of $50,000.
U. On December 8, 1997, the Company issued .50 Unit to Patrick F.
Vetere, M.D. and Linda A. Vetere JTWROS for a cash investment
of $25,000.
V. On December 8, 1997, the Company issued two Units to MLPF&S
Tax ID 13-3180817 FBO Dr. Joseph Nemeth IRA for a cash
investment of $100,000.
W. On December 8, 1997, the Company issued 1.5 Units to Bill L.
Trahan for a cash investment of $75,000.
II. Series C Preferred Stock
During the period from February 2, 1998 to April 11, 1998, the Company
sold a total of 20,300 shares of Series C Preferred Stock to the 58 persons
identified below in this part IV. of Item 26, "Recent Sales of Unregistered
Securities" (all of whom were accredited investors) through a private placement
under Rule 505 of Regulation D promulgated under the Securities Act at a price
of $100.00 per share. The Company received $2,003,000 in cash as a result of the
private placement transaction and paid $235,360 in commissions and expenses to
Win Capital Corp., the exclusive placement agent of the offering.
A. On March 4, 1998, the Company issued 125 shares of Series C
Preferred Stock to Robert M. Ball for a cash investment of
$12,500.
B. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Robert J. Braig for a cash investment of
$10,000.
C. On March 4, 1998, the Company issued 150 shares of Series C
Preferred Stock to Thomas W. Brake for a cash investment of
$15,000.
D. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Craig S. Brewer for a cash investment of
$25,000.
E. On March 4, 1998, the Company issued 200 shares of Series C
Preferred Stock to Consolidated Management Services, Inc. for
a cash investment of $20,000.
F. On March 4, 1998, the Company issued 200 shares of Series C
Preferred Stock to Michael Demayo for a cash investment of
$20,000.
G. On March 4, 1998, the Company issued 125 shares of Series C
Preferred Stock to C. Richard Dobson for a cash investment of
$12,500.
II-4
<PAGE>
H. On March 4, 1998, the Company issued 750 shares of Series C
Preferred Stock to Robert L. Frome for a cash investment of
$75,000.
I. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Steven F. Gallop and Karen M. Gallop,
JTWROS for a cash investment of $10,000.
J. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to William A. Gantz and Carol A. Gantz, JTWROS
for a cash investment of $10,000.
K. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to John A. Grue for a cash investment of
$10,000.
J. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Edward G. Hammond for a cash investment of
$25,000.
L. On March 4, 1998, the Company issued 750 shares of Series C
Preferred Stock to Hi-Tel Group, Inc. for a cash investment of
$75,000.
M. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Rommie L. Honeycutt for a cash investment
of $10,000.
N. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Roy Lee Hounshell for a cash investment of
$10,000.
O. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Samuel C. Houser and Robin B. Houser,
JTWROS for a cash investment of $10,000.
P. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Randy N. Humphrey for a cash investment of
$10,000.
Q. On March 4, 1998, the Company issued 200 shares of Series C
Preferred Stock to Jerry R. King for a cash investment of
$20,000.
R. On March 4, 1998, the Company issued 200 shares of Series C
Preferred Stock to Terry F. King for a cash investment of
$20,000.
S. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Shannon E. Miller and Shannon S. Miller,
JTWROS for a cash investment of $10,000.
T. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to Joseph R. Nemeth for a cash investment of
$100,000.
U. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to Dr. Joseph Nemeth, IRA for a cash
investment of $100,000.
V. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Christopher C. Northey for a cash
investment of $10,000.
W. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Eileen M. O'Dea for a cash investment of
$75,000.
X. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Laurence Leon Olive for a cash investment
of $10,000.
Y. On March 4, 1998, the Company issued 200 shares of Series C
Preferred Stock to John D. Phillips, Jr. for a cash investment
of $20,000.
Z. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Richard D. Poling for a cash investment of
$10,000.
AA. On March 4, 1998, the Company issued 150 shares of Series C
Preferred Stock to Feliciano Sergio Sabates, III for a cash
investment of $15,000.
II-5
<PAGE>
BB. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Claude W. Savage and Jean G. Savage, JTWROS
for a cash investment of $10,000.
CC. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Gregg Stokes for a cash investment of
$10,000.
DD. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to TSP Associates, Inc. for a cash investment
of $100,000.
EE. On March 4, 1998, the Company issued 130 shares of Series C
Preferred Stock to William E. Webb, III for a cash investment
of $13,000.
FF. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Artas Corporation for a cash investment of
$50,000.
GG. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to United Growth Fund, Inc. Profit Sharing
Plan for a cash investment of $50,000.
HH. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Sterling Capital LLC for a cash investment
of $25,000.
II. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to John W. Hemmer and Barbara Bean Hemmer,
JTWROS for a cash investment of $25,000.
JJ. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Gregory J. Lavin for a cash investment of
$25,000.
KK. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Robert W. Millar for a cash investment of
$25,000.
LL. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Thomas F. Motter for a cash investment of
$25,000.
MM. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Marc N. Rubin for a cash investment of
$50,000.
NN. On March 4, 1998, the Company issued 300 shares of Series C
Preferred Stock to Thomas R. Wolf and Erica P. Wolf, JTWROS
for a cash investment of $30,000.
OO. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Dr. Thomas R. Wolf, SEP IRA for a cash
investment of $25,000.
PP. On March 4, 1998, the Company issued 2,500 shares of Series C
Preferred Stock to Canadian Advantage Limited Partnership for
a cash investment of $250,000.
QQ. On March 4, 1998, the Company issued 300 shares of Series C
Preferred Stock to Paul N. Davis for a cash investment of
$30,000.
RR. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to RF Lafferty & Co. Profit Sharing Plan FBO
Henry Hackel for a cash investment of $100,000.
SS. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Roger Newman for a cash investment of
$50,000.
TT. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Samuel Richman for a cash investment of
$25,000.
UU. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Jeffrey Zarry Schwartz for a cash
investment of $25,000.
VV. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Richard C. Siskey for a cash investment of
$50,000.
II-6
<PAGE>
WW. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Jeffrey G. Straus for a cash investment of
$25,000.
XX. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Wight Investment for a cash investment of
$50,000.
YY. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Michael W. Stelzer and Paula J. Stelzer,
JTWROS for a cash investment of $25,000.
ZZ. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Patrick Kolenik - IRA for a cash investment
of $50,000.
AAA. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Patrick Kolenik and Dolores Kolenik, JTWROS
for a cash investment of $50,000.
BBB. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Roger C. Husted for a cash investment of
$25,000.
CCC. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to Lincoln Trust Company FBO Michael B.
Limberg, M.D. for a cash investment of $100,000.
DDD. On April 6, 1998, the Company issued 300 shares of Series C
Preferred Stock to Charles F. Trapp for a cash investment of
$35,000.
EEE. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to BCN Associates for a cash investment of
$50,000.
FFF. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Charles R Thompson, Jr., M.D. for a cash
investment of $25,000.
GGG. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Continental Stock Transfer & Trust for a
cash investment of $50,000.
HHH. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to Ronald A. and Karen A. Ballsin, JTWROS for
a cash investment of $100,000.
III. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to Michael Associates for a cash investment of
$100,000.
JJJ. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Mark S. Richardson for a cash investment of
$25,000.
KKK. On March 4, 1998, the Company issued 150 shares of Series C
Preferred Stock to Mark and Lori Cozins for a cash investment
of $15,000.
LLL. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Michael L. Salamone for a cash investment
of $25,000.
MMM. On March 4, 1998, the Company issued 350 shares of Series C
Preferred Stock to Premier Alliance Group, Inc. for a cash
investment of $35,000.
NNN. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Gary Hammond for a cash investment of
$25,000.
OOO. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Jeffrey A. and Penny Strack for a cash
investment of $25,000.
PPP. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to J. Michael Smith for a cash investment of
$25,000.
QQQ. On March 4, 1998, the Company issued 200 shares of Series C
Preferred Stock to Irwin Messer and Alexandra S. Urdang for a
cash investment of $20,000.
II-7
<PAGE>
RRR. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Sheila Sandman for a cash investment of
$25,000.
SSS. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Joseph Aufrino for a cash investment of
$50,000.
TTT. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Ted Levine for a cash investment of
$50,000.
UUU. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to B. Michael Pisani for a cash investment of
$25,000.
VVV. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Alfred J. Ricciardi and Joseph Ricciardi
for a cash investment of $50,000.
WWW. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Rose W. Zee for a cash investment of
$50,000.
XXX. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Patrick and Linda Vetere, JTWROS, for a
cash investment of $50,000.
III. Common Stock
A. On August 4, 1998, the Company issued 90,000 shares of Common
Stock to Zevex International, Inc. ("Zevex") pursuant to the
Stock Exchange for Satisfaction of Debt Agreement in which the
Company agreed to issue such shares in exchange for the
satisfaction of $400,000 in debt which the Company then owed
to Zevex.
B. On August 4, 1998, the Company issued 79,929 shares of Common
Stock to Humphrey Systems Division of Carl Zeiss, Inc.
("Humphrey Systems") and 26,315 shares of Common Stock to
Douglas Adams as consideration under an Agreement for Purchase
and Sale of Assets in which the Company acquired the ownership
and manufacturing rights to certain diagnostic instruments of
Humphrey Systems.
C. On November 19, 1998, the Company issued 21,053 shares of
Common Stock to Humphrey Systems as consideration under an
Agreement for Purchase and Sale of Assets in which the Company
acquired the ownership and manufacturing rights to certain
diagnostic instruments of Humphrey Systems.
IV. Series D Convertible Preferred Stock
During the period from January 14, 1999 to March 1, 1999, the Company
sold a total of 1,140,000 shares of Series D Preferred Stock to the 71 persons
identified below in this Part V of Item 26, "Recent Sales of Unregistered
Securities" (all of whom were accredited investors) through a private placement
under Rule 506 of Regulation D promulgated under the Securities Act at a price
of $1.75 per share. The Company received $1,995,000 in cash as a result of the
private placement transaction and paid $199,500 in commissions and expenses to
KSH Investment Group, Inc., the placement agent of the offering. It also issued
warrants to purchase shares to
A. On February 12, 1999, the Company issued 15,000 shares of
Series D Preferred Stock to A.J. Baccala for a cash investment
of $26,250.
B. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Dr. Robert Bedrossian for a cash
investment of $8,750.
C. On February 12, 1999, the Company issued 15,000 shares of
Series D Preferred Stock to Dr. Valery Berger for a cash
investment of $26,250.
D On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Berkeley Investments, Inc. for a
cash investment of $17,500.
E. On February 12, 1999, the Company issued 15,000 shares of
Series D Preferred Stock to Paul and Judith Berkman for a cash
investment of $26,250.
F. On February 12, 1999, the Company issued 15,000 shares of
Series D Preferred Stock to Edwin Bindseil for a cash
investment of $26,750.
II-8
<PAGE>
G On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Dr. Kostaki Bis for a cash
investment of $8,750.
H. On February 12, 1999, the Company issued 70,000 shares of
Series D Preferred Stock to Benjamin Bollag for a cash
investment of $122,500.
I. On February 12, 1999, the Company issued 23,316 shares of
Series D Preferred Stock to Dr. Richard Bowe, IRA for a cash
investment of $44,303.
J. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to CarCap Co., LLC for a cash
investment of $8,750.
K. On February 12, 1999, the Company issued 40,000 shares of
Series D Preferred Stock to James and Caren Cobb for a cash
investment of $70,000.
L On February 12, 1999, the Company issued 30,000 shares of
Series D Preferred Stock to the Corman Foundation, Inc. for a
cash investment of $52,500.
M. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Brian and Irene Cotter for a cash
investment of $17,500.
N. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Jonathan Cress for a cash
investment of $8,750
O. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Scott Crowther for a cash
investment of $17,500.
P. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to George and JoAnn Dick for a cash
investment of $17,500.
Q. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to James A. Erb for a cash investment
of $17,500.
R. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Clifford A. Falkenau for a cash
investment of $8,750.
S. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Helen Falkenau for a cash
investment of $8,750.
T. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Aaron I. Feder for a cash
investment of $17,500.
U. On February 12, 1999, the Company issued 9,000 shares of
Series D Preferred Stock to Dale S. and Jack Feinblatt for a
cash investment of $15,750.
V. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Dr. Ronald Friedman, IRA for a
cash investment of $17,500.
W. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Dr. Leon Gallin for a cash
investment of $8,750.
X. On February 12, 1999, the Company issued 17,000 shares of
Series D Preferred Stock to Anthony Gardocki for a cash
investment of $29,750.
Y. On February 12, 1999, the Company issued 40,000 shares of
Series D Preferred Stock to Shadow Capital, LLC for a cash
investment of $70,000.
Z. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Bonnie and Mort Goldberg for a
cash investment of $17,500.
AA. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to R. Steven Graves for a cash
investment of $17,500.
II-9
<PAGE>
BB. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Sean Greene for a cash investment
of $17,500.
CC On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Halpert Enterprises, Inc. for a
cash investment of $17,500.
DD On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Douglas and Alexis Hogue for a
cash investment of $17,500
EE. On February 12, 1999, the Company issued 11,500 shares of
Series D Preferred Stock to Dr. Roger Husted for a cash
investment of $20,125.
FF. On February 12, 1999, the Company issued 6,000 shares of
Series D Preferred Stock to Irwin Kabat for a cash investment
of $10,500.
GG. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to A. William Kapler for a cash
investment of $17,500.
HH. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Elaine Khalaf for a cash
investment of $17,500.
II. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Aaron Kirzner for a cash
investment of $8,750.
JJ. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Lyudmila Korets for a cash
investment of $8,750.
KK. On February 12, 1999, the Company issued 28,000 shares of
Series D Preferred Stock to Walter and Carol Koschak for a
cash investment of $49,000.
LL. On February 12, 1999, the Company issued 100,000 shares of
Series D Preferred Stock to Dr. Michael Limberg, IRA a cash
investment of $175,000.
MM. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Morris Macy for a cash investment
of $8,750.
NN. On February 12, 1999, the Company issued 15,000 shares of
Series D Preferred Stock to Michelle McDonough for a cash
investment of $26,250.
OO. On February 12, 1999, the Company issued 100,000 shares of
Series D Preferred Stock to Dr. Joseph Nemeth for a cash
investment of $175,000.
PP. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Jules M. Ness for a cash
investment of $17,500.
QQ. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to James Pickett for a cash
investment of $8,750.
RR On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Dr. Soleiman Rabanipour for a cash
investment of $17,500.
SS On February 12, 1999, the Company issued 20,000 shares of
Series D Preferred Stock to Dr. Sheldon Rabin, IRA for a cash
investment of $35,000.
TT On February 12, 1999, the Company issued 8,000 shares of
Series D Preferred Stock to the Reinhard & Reinhard M/P Plan
for a cash investment of $14,000.
UU On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Marsha and Barry Reiss for a cash
investment of $17,250.
VV On February 12, 1999, the Company issued 15,000 shares of
Series D Preferred Stock to Alan Rothstein for a cash
investment of $26,250.
II-10
<PAGE>
WW On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Scott W. Sakin for a cash
investment of $17,500.
XX On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Larry and Katina Snyder for a cash
investment of $8,750.
YY On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Jerold Stern for a cash investment
of $8.750.
ZZ On February 12, 1999, the Company issued 10,828 shares of
Series D Preferred Stock to Steve Shook Construction P/S Plan
for a cash investment of $18,949.
AAA. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Joseph and Sandra Stewart for a
cash investment of $17,500.
BBB On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to David Tadych for a cash investment
of $8.750.
CCC On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Miles and Rochelle Weinberg for a
cash investment of $17,500.
DDD On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Xanadu Associates, LLC for a cash
investment of $17,500
EEE On February 12, 1999, the Company issued 15,000 shares of
Series D Preferred Stock to Dr. Alkis Zingas Trust for a cash
investment of $26,250.
FFF On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Dr. Igor Zlotin for a cash
investment of $8,750.
GGG On February 12, 1999, the Company issued 20,000 shares of
Series D Preferred Stock to Simon Zunamon Revocable Trust for
a cash investment of $35,000.
HHH. On February 23, 1999, the Company issued 25,000 shares of
Series D Preferred Stock to Jerry and Linda Bassin for a cash
investment of $43,750.
III. On February 23, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Bill D. and Claudia J. Berkeley
for a cash investment of $17,500
JJJ. On February 23, 1999, the Company issued 30,000 shares of
Series D Preferred Stock to Thomas C. Coleman for a cash
investment of $52,500.
KKK. On February 23, 1999, the Company issued 9,356 shares of
Series D Preferred Stock to Steven Kohn, IRA for a cash
investment of $16,373.
LLL. On February 23, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Robert Margolin, IRA for a cash
investment of $8,750.
MMM. On February 23, 1999, the Company issued 50,000 shares of
Series D Preferred Stock to Mid-Lakes P/S Trust for a cash
investment of $87,500.
NNN. On February 23, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Dr. Steven Rubel for a cash
investment of $8.750.
OOO. On February 23, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Melvyn and Lea Ruskin for a cash
investment of $17,500.
PPP. On February 23, 1999, the Company issued 25,000 shares of
Series D Preferred Stock to Judy Shapiro for a cash investment
of $43,750.
QQQ. On March 1, 1999, the Company issued 5,000 shares of Series D
Preferred Stock to William and Marion Conley for a cash
investment of $8,750.
II-11
<PAGE>
RRR. On March 1, 1999, the Company issued 20,000 shares of Series D
Preferred Stock to John Donahue, IRA for a cash investment of
$35,000.
SSS. On March 1, 1999, the Company issued 15,000 shares of Series D
Preferred Stock to John Harte for a cash investment of
$26,250.
Item 27. Exhibits
Exhibit
Number Document Dexcription
(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
Warrant to Purchase Common Stock with Note Holders re bridge
financing(1) 4.7 Warrant to Purchase Common Stock with Mackey
Price & Williams(1) 4.8 Warrant to Purchase Common Stock with
Win Capital Corp.(6) 4.9 Specimen Series C Convertible
Preferred Stock Certificate(6)
4.10 Certificate of the Designations, Powers, Preferences and Rights
of the Series C Convertible Preferred Stock(6)
4.11 Specimen Series D Convertible Preferred Stock Certificate
4.12 Certificate of the Designations, Powers, Preferences and Rights
of the Series D Convertible Preferred Stock
4.13 Warrant to Purchase Common Stock with Win Capital Corp.
4.14 Warrant to Purchase Common Stock with Cyn Del & Co.
4.15 Warrant Agreement with KSH Investment Group, Inc.
5. Opinion of Mackey Price & Williams
10.1 Exclusive Patent License Agreement with Photomed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 Confidential Disclosure Agreement with Zevex, Inc.(1)
10.4 Indemnity Agreement with Zevex International, Inc.(1)
10.5 Manufacturing Agreement with Sunrise Technologies, Inc.(1)
10.6 Royalty Agreement dated January 30, 1992, with Dennis L.
Oberkamp Design Services(1)
10.7 Indemnity Agreement dated January 30, 1992, with Dennis L.
Oberkamp Design Services(1)
10.8 Royalty Agreement (for Ultrasonic Phaco Handpiece) with Dennis
L. Oberkamp Design Services(1)
10.9 Lease Agreement with Eden Roc (6)
10.10 Settlement and Release Agreement with Douglas A. MacLeod(1)
10.11 Form of Indemnification Agreement(1)
10.12 1995 Stock Option Plan and forms of Stock Option Grant
Agreements(1)
10.13 Form of Promissory Note with Note Holders re bridge
financing(1)
II-12
<PAGE>
10.14 Employee's Lock-Up Agreement(1)
10.15 Registering Shareholders Lock-Up Agreement(3)
10.16 Amendment of Settlement and Release Agreement with Douglas A.
MacLeod(3)
10.17 Design, Engineering and Manufacturing Agreement with Zevex,
Inc.(5)
10.18 License and Manufacturing Agreement with O.B.F. Labs, Ltd.(6)
10.19 Settlement Agreement with Estate of H.L. Federman(6)
10.20 Agreement with Win Capital Corp.(6)
10.21 12% Convertible, Redeemable Promissory Note(6)
10.22 Securities Exchange Agreement(6)
10.23 Stock Exchange for Satisfaction of Debt Agreement with Zevex
International, Inc. (7)
10.24 Co-Distribution Agreement with Pharmacia & Upjohn Company and
National Healthcare Manufacturing Corporation (7)
10.25 Agreement for Purchase and Sale of Assets with Humphrey Systems
Division of Carl Zeiss, Inc. (7)
10.26 Employment Agreement with Thomas F. Motter(9)
10.27 Employment Agreement with Robert W. Millar(9)
10.28 Employment Agreement with Jack W. Hemmer(9)
10.29 Employment Agreement with Michael W. Stelzer (9)
10.30 Change of Control Termination with Thomas F. Motter (9)
10.31 Change of Control Termination with Robert W. Millar (9)
10.32 Change of Control Termination with John W. Hemmer (9)
10.33 Change of Control Termination with Michael W. Stelzer (9)
10.34 Promissory Note with Win Capital Corp.
10.35 Promissory Note with Cyn Del & Co.
10.36 Consulting Agreement with Win Capital Corp.
23.1 Consent of Medical Laser Insight(3)
23.2 Consent of Frost & Sullivan(3)
23.3 Consent of Ophthalmologists Times(3)
23.4 Consent of Mackey Price & Williams
23.5 Consent of Tanner & Co.
27. Financial Data Schedule
----------------------------
(1) Incorporated by reference from Registration Statement on Form
SB-2, as filed on March 19, 1996.
(2) Incorporated by reference from Amendment No. 1 to Registration
Statement on Form SB-2, as filed on May 14, 1996.
(3) Incorporated by reference from Amendment No. 2 to Registration
Statement on Form SB-2, as filed on June 13, 1996.
(4) Incorporated by reference from Amendment No. 3 to Registration
Statement on Form SB-2, as filed on June 28, 1996.
(5) Incorporated by reference from Annual Report on Form 10-KSB, as
filed on December 30, 1996
(6) Incorporated by reference from Annual Report on Form 10-KSB, as
filed on April 16, 1998
(7) Incorporated by reference from Quarterly Report on Form 10-QSB,
as filed on August 19, 1998.
(8) Incorporated by reference from Registration Statement on Form
SB-2, as filed on June 15, 1998.
(9) Incorporated by reference from Quarterly Report on Form 10-QSB,
as filed on November 12, 1998.
(b) Reports on Form 8-K
None
II-13
<PAGE>
Undertakings
The undersigned Registrant hereby undertakes (a) subject to the terms and
conditions of Section 15(d) of the Securities Exchange Act of 1934, to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section; (b) to provide the Underwriter at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in the names as required by the Underwriters to
permit prompt delivery to each purchaser; (c) if any public offering by the
Underwriters is to be made on terms differing from those set forth on the cover
page of the Prospectus, to file a post-effective amendment setting forth the
terms of such offering; and (d) to deregister, by means of a post-effective
amendment, any securities covered by this Registration Statement that remain
unsold at the termination of this offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or preceding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant also undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering of those securities.
The undersigned Registrant further undertakes that it will file, during
any period in which it offers or sells securities, a post-effective amendment to
this Registration Statement to (i) include any prospectus required by Section
10(a)(3) of the Securities Act, (ii) reflect in the prospectus any facts or
events which, individually or together, represent a fundamental change in the
information in the Registration Statement, and (iii) include any additional or
changed material information on the plan of distribution.
II-14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in Salt Lake City,
State of Utah, on April 27, 1999.
PARADIGM MEDICAL INDUSTRIES, INC.
By: /s/ Thomas F. Motter
----------------------------------
Thomas F. Motter, Chairman of the Board,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Thomas F. Motter as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Registration Statement, and to file the same, with
all Exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Thomas F. Motter Chairman of the Board, April 27, 1999
- -------------------------
Thomas F. Motter President and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael W. Stelzer Vice President of Operations, Chief April 27, 1999
Michael W. Stelzer Operating Officer, Secretary and Director
/s/ Robert W. Millar Vice President of Engineering and April 27, 1999
- ------------------------
Robert W. Millar Manufacturing and Director
/s/ John W. Hemmer Treasurer, Chief Financial Officer and April 27, 1999
- ------------------------
John W. Hemmer Director (Principal financial and
Accounting Officer)
Director April __, 1999
- ------------------------
Patrick M. Kolenik
Director April __, 1999
- ------------------------
Robert L. Frome
</TABLE>
II-15
<PAGE>
As filed with the Securities and Exchange Commission on April 27, 1999
Registration Statement No. 33-_______
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
EXHIBITS
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
PARADIGM MEDICAL INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 3841 87-0459536
(State of jurisdiction of (Primary Standard (I.R.S. Employer incorporation
or organization) Classification Code Number Identification Number)
1127 West 2320 South, Suite A
Salt Lake City, Utah 84119
(801) 977-8970
(Address and telephone number of registrant's principal executive offices
and principal place of business)
Thomas F. Motter, President
1127 West 2320 South, Suite A
Salt Lake City, Utah 84119
(801) 977-8970
(Name, address and telephone number of agent for service)
----------------------
Copies to:
Randall A. Mackey, Esq.
Mackey Price & Williams
170 South Main Street, Suite 900
Salt Lake City, Utah 84101-1655
Telephone: (801) 575-5000
<PAGE>
EXHIBIT INDEX
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
Warrant to Purchase Common Stock with Note Holders re bridge
financing(1) 4.7 Warrant to Purchase Common Stock with Mackey
Price & Williams(1) 4.8 Warrant to Purchase Common Stock with
Win Capital Corp.(6) 4.9 Specimen Series C Convertible
Preferred Stock Certificate(6)
4.10 Certificate of the Designations, Powers, Preferences and Rights
of the Series C Convertible Preferred Stock(6)
4.11 Specimen Series D Convertible Preferred Stock Certificate
4.12 Certificate of the Designations, Powers, Preferences and Rights
of the Series D Convertible Preferred Stock
4.13 Warrant to Purchase Common Stock with Win Capital Corp.
4.14 Warrant to Purchase Common Stock with Cyn Del & Co.
4.15 Warrant Agreement with KSH Investment Group, Inc.
5. Opinion of Mackey Price & Williams
10.1 Exclusive Patent License Agreement with Photomed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 Confidential Disclosure Agreement with Zevex, Inc.(1)
10.4 Indemnity Agreement with Zevex International, Inc.(1)
10.5 Manufacturing Agreement with Sunrise Technologies, Inc.(1)
10.6 Royalty Agreement dated January 30, 1992, with Dennis L.
Oberkamp Design Services(1)
10.7 Indemnity Agreement dated January 30, 1992, with Dennis L.
Oberkamp Design Services(1)
10.8 Royalty Agreement (for Ultrasonic Phaco Handpiece) with Dennis
L. Oberkamp Design Services(1)
10.9 Lease Agreement with Eden Roc (6)
10.10 Settlement and Release Agreement with Douglas A. MacLeod(1)
10.11 Form of Indemnification Agreement(1)
10.12 1995 Stock Option Plan and forms of Stock Option Grant
Agreements(1)
10.13 Form of Promissory Note with Note Holders re bridge
financing(1)
10.14 Employee's Lock-Up Agreement(1)
10.15 Registering Shareholders Lock-Up Agreement(3)
10.16 Amendment of Settlement and Release Agreement with Douglas A.
MacLeod(3)
10.17 Design, Engineering and Manufacturing Agreement with Zevex,
Inc.(5)
10.18 License and Manufacturing Agreement with O.B.F. Labs, Ltd.(6)
10.19 Settlement Agreement with Estate of H.L. Federman(6)
10.20 Agreement with Win Capital Corp.(6)
10.21 12% Convertible, Redeemable Promissory Note(6)
10.22 Securities Exchange Agreement(6)
10.23 Stock Exchange for Satisfaction of Debt Agreement with Zevex
International, Inc. (7)
10.24 Co-Distribution Agreement with Pharmacia & Upjohn Company and
National Healthcare Manufacturing Corporation (7)
10.25 Agreement for Purchase and Sale of Assets with Humphrey Systems
Division of Carl Zeiss, Inc. (7)
<PAGE>
10.26 Employment Agreement with Thomas F. Motter(9)
10.27 Employment Agreement with Robert W. Millar(9)
10.28 Employment Agreement with Jack W. Hemmer(9)
10.29 Employment Agreement with Michael W. Stelzer (9)
10.30 Change of Control Termination with Thomas F. Motter (9)
10.31 Change of Control Termination with Robert W. Millar (9)
10.32 Change of Control Termination with John W. Hemmer (9)
10.33 Change of Control Termination with Michael W. Stelzer (9)
10.34 Promissory Note with Win Capital Corp.
10.35 Promissory Note with Cyn Del & Co.
10.36 Consulting Agreement with Win Capital Corp.
23.1 Consent of Medical Laser Insight(3)
23.2 Consent of Frost & Sullivan(3)
23.3 Consent of Ophthalmologists Times(3)
23.4 Consent of Mackey Price & Williams
23.5 Consent of Tanner & Co.
27. Financial Data Schedule
----------------------------
(1) Incorporated by reference from Registration Statement on Form
SB-2, as filed on March 19, 1996.
(2) Incorporated by reference from Amendment No. 1 to Registration
Statement on Form SB-2, as filed on May 14, 1996.
(3) Incorporated by reference from Amendment No. 2 to Registration
Statement on Form SB-2, as filed on June 13, 1996.
(4) Incorporated by reference from Amendment No. 3 to Registration
Statement on Form SB-2, as filed on June 28, 1996.
(5) Incorporated by reference from Annual Report on Form 10-KSB, as
filed on December 30, 1996
(6) Incorporated by reference from Annual Report on Form 10-KSB, as
filed on April 16, 1998
(7) Incorporated by reference from Quarterly Report on Form 10-QSB,
as filed on August 19, 1998.
(8) Incorporated by reference from Registration Statement on Form
SB-2, as filed on June 15, 1998.
(9) Incorporated by reference from Quarterly Report on Form 10-QSB,
as filed on November 12, 1998.
Exhibit 4.11
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
NUMBER _________ "SPECIMEN" ________ SHARES
PARADIGM MEDICAL
INDUSTRIES, INC.
SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
SERIES D CONVERTIBLE PREFERRED STOCK
PAR VALUE $.001 EACH
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO ANY SHAREHOLDER WHO SO REQUESTS
THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR
OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
This is to Certify that is the owner of
----------------------------------------
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE SERIES D CONVERTIBLE PREFERRED STOCK
OF
PARADIGM MEDICAL INDUSTRIES, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney, upon surrender of this Certificate, properly
endorse.
Witness, the seal of the Corporation and the signatures of its duly authorized
officers.
Dated: ___________________
- ---------------------------------- --------------------------------
SECRETARY/TREASURER PRESIDENT
<PAGE>
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenant in common UNIF GIFT MIN ACT . . Custodian. .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of Under Uniform Gifts to Minors
Survivorship and not as tenants in
common Act . . . . . . . . . . .
(State)
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto PLEASE INSERT SOCIAL
SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
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________________________________________________________________________ Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
___________________________________________________________________ Attorney to
transfer the said Shares on the books of the within named Corporation with full
power of substitution in the premises.
Dated ___________________
In presence of
-------------------------------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Exhibit 4.12
CERTIFICATE OF THE DESIGNATIONS, POWERS,
PREFERENCES AND RIGHTS
OF THE
SERIES D 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 1,140,000 shares, $.001 par value per share, to be
designated "Series D 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 D
Convertible Preferred Stock, which resolution is as follows:
RESOLVED, that the Board of Directors, pursuant to the
authority vested in it by the provisions of the Corporation's
Certificate of Incorporation, hereby creates a series of Preferred
Stock of the Corporation, $.001 par value per share, to be issued from
the Corporation's currently authorized Preferred Stock, $.001 par value
per share, which series shall be designated as "Series D Convertible
Preferred Stock" and will consist of an aggregate of 1,140,000 shares
with such rights, preferences, privileges and restrictions, which
Certificate of Designations Powers, Preferences and Rights shall be
filed with the Delaware Secretary of State in the form as follows:
220178.2
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<PAGE>
1. Designations and Amount. One Million One Hundred Forty
Thousand (1,140,000) shares of the Preferred Stock of the Corporation, $.001 par
value per share, shall constitute a class of Preferred Stock designated as
"Series D Convertible Preferred Stock" (the "Series D Preferred Stock").
2. Dividends.
(a) The holders of each share of Series D 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, non-cumulative dividends at the rate per share of ten percent (10%)
per annum of the aggregate Stated Value (the "Aggregate Stated Value") of the
Series D Preferred Stock (the "Preferred Dividends"). The "Stated Value" of each
share of Series D Preferred Stock shall be $1.75. Such Preferred Dividends shall
be payable to holders of record of Series D 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 the Corporation, out of
funds legally available for that purpose, unless sooner declared by the Board of
Directors. If less than the full Preferred Dividend is paid to the holders of
Series D Preferred Stock in any calendar year, the unpaid amount shall lapse and
shall not cumulate and add to the Preferred Dividends in any subsequent year,
whether or not the earnings of the Corporation were sufficient to cover the
Preferred Dividend in the year in which it was not fully paid. 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 D 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 D Preferred Stock (with
respect to rights to dividends and on liquidation, the Series D Preferred Stock
shall rank prior to the Common Stock (as hereinafter defined)), any declared but
unpaid Preferred Dividends must be paid. All Preferred Dividends declared upon
the Series D Preferred Stock shall be declared pro rata per share. Holders of
shares of Series D 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 D 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 its common stock, $.001
par value per share (the "Common Stock"), then a dividend or distribution on
each share of Series D 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 D
Preferred Stock shall receive such distribution that a holder of Series D
Preferred Stock would have received if such holder had converted its shares of
Series D 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 D Preferred
220178.2
-2-
<PAGE>
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 D 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 D 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 D 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 hereafter created or any
other class of the Corporation's capital stock hereafter created, 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 D Preferred Stock into shares of Common
Stock immediately prior to such Liquidation plus all declared but unpaid
dividends on such shares of Series D 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 D 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 D 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 D Preferred Stock
shall not be entitled to vote on any matter except as required by law.
220178.2
-3-
<PAGE>
5. Conversion of Series D Preferred Stock.
(a) The holders of Series D Preferred Stock initially 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 D Preferred Stock
is first issued and until January 1, 2002, to convert each share of Series D
Preferred Stock into one share of Common Stock, subject to adjustment herein
(the "Conversion Ratio"). The holder of any shares of Series D 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 D Preferred Stock up to and
including the respective conversion date of such shares of Series D Preferred
Stock.
(b) Each share of Series D Preferred Stock shall, subject to
adjustment as provided in this Section 5, automatically be converted into one
share of Common Stock subject to adjustment herein (i) on January 1, 2002 or
(ii) upon 30 days' written notice by the Company to the holders of the Shares,
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 D Preferred Stock are 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 D Preferred Stock is at least $3.50 per share.
(c) Before any holder of Series D 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 D 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 D 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 D 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 Ratio 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 D 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
220178.2
-4-
<PAGE>
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 Ratio shall be appropriately decreased so that the
number of shares of Common Stock issuable upon conversion of each share of such
Series D 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 day the Series D Preferred Stock is issued is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Ratio shall be appropriately increased so that the
number of shares of Common Stock issuable upon conversion of each share of
Series D Preferred Stock shall be decreased in proportion to such decrease in
outstanding shares.
(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 2(b) 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 D 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 D 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 D Preferred Stock
shall thereafter be entitled to receive upon conversion of the Series D
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 D
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 D 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 D Preferred Stock against impairment.
220178.2
-5-
<PAGE>
(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
D 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 D 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 D 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 D 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 D Preferred Stock.
(i) (i) No fractional shares shall be issued upon the
conversion of any share or shares of the Series D 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 SmallCap Market (if the Common Stock is
regularly quoted on the Nasdaq National Market or SmallCap 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.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Ratio, 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 D Preferred Stock a statement 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 D 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 D Preferred Stock.
220178.2
-6-
<PAGE>
(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 D 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 D 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 D
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 D Preferred Stock, in addition to such other
remedies as shall be available to the holder of such Series D 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 D
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 D 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 D 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 D Preferred Stock shall
be converted pursuant to Section 5 hereof or otherwise reacquired by the
Corporation, the shares so converted or reacquired shall be canceled. 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.
220178.2
-7-
<PAGE>
6. No Pre-emptive Rights. No holder of shares of the Series D
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 D Preferred
Stock shall have no redemption rights.
IN WITNESS WHEREOF, Paradigm Medical Industries, Inc. has
caused this Certificate of Designation to be executed this 8 day of
February, 1999.
PARADIGM MEDICAL INDUSTRIES, INC.
By: /s/ Thomas F. Motter
______________________________
Name: Thomas F. Motter
Title: President
By: /s/ Michael W. Stelzer
______________________________
Name: Michael W. Stelzer
Title: Secretary
220178.2
-8-
Exhibit 4.13
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR APPLICABLE STATE SECURITIES LAWS. NEITHER THIS WARRANT NOR ANY OF SUCH
SHARES MAY BE SOLD, ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF REGISTRATION UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE
SECURITIES OR BLUE SKY LAWS OR EXEMPTIONS FROM SUCH REGISTRATION. THIS WARRANT
MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT UPON THE
CONDITIONS SPECIFIED IN THIS WARRANT, AND NO SALE, ASSIGNMENT, TRANSFER, OR
OTHER DISPOSITION OF THIS WARRANT SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL
THERE SHALL HAVE BEEN COMPLIANCE WITH SUCH CONDITIONS.
Dated: January 15, 1999
WARRANT
To purchase up to 35,000 shares of Common Stock
PARADIGM MEDICAL INDUSTRIES, INC.
Expiring January 15, 2004
THIS IS TO CERTIFY THAT, for value received, WIN CAPITAL
CORP., a New York corporation, (the "Holder"), is entitled, subject to certain
conditions set forth in Sections 1.01 and 1.02 hereof, to purchase from PARADIGM
MEDICAL INDUSTRIES, INC., a Delaware corporation (the "Company"), at the
Company's principal executive office, at the Exercise Price, up to the number of
shares of Common Stock, $.001, par value per share (the "Shares"), of the
Company shown above, all subject to adjustment and upon the terms and conditions
as hereinafter provided, and is entitled also to exercise the other appurtenant
rights, powers and privileges hereinafter described.
Certain terms used in this Warrant are defined in Article IV
hereof.
ARTICLE I
METHOD OF EXERCISE
1.01. Time of Exercise. Subject to the provisions of Sections
1.02 and 1.03 hereof, this Warrant may be exercised at any time and from time to
time after 9:00 a.m. New York Time on the first day immediately following the
date first written above and prior to the Expiration Time.
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1.02. Method of Exercise. To exercise this Warrant in whole or
in part, the Holder shall deliver to the Company, at the Company's principal
executive office (a) this Warrant, (b) a written notice of such Holder's
election to exercise this Warrant, which notice shall specify the number of
Shares to be purchased, but in no event less than 1,000 shares, the
denominations of the share certificate or certificates desired and the name or
names in which such certificates are to be registered, and (c) payment of the
Exercise Price with respect to such shares. Such payment may be made, at the
option of the Holder, in cash, by certified or bank cashier's check, money order
or wire transfer, in the manner specified in the next succeeding paragraph, or
in any other manner consented to in writing by the Company, or any combination
thereof.
The Company shall, as promptly as practicable after receipt of
the items required by the preceding paragraphs of this Section 1.02, execute and
deliver or cause to be executed and delivered, in accordance with such notice, a
certificate or certificates representing the aggregate number of Shares
specified in such notice. The share certificate or certificates so delivered
shall be in such denominations as shall be specified in such notice and shall be
issued in the name of the Holder or, provided, in an opinion of counsel
reasonably acceptable to the Company, the following is permitted under the
Securities Act and applicable state securities laws, such other name as shall be
designated in such notice. Such certificate or certificates shall be deemed to
have been issued, and such Holder or Holders or any other person so designated
to be named therein shall be deemed for all purposes to have become a Holder of
record of such shares, as of the date the aforementioned notice is received by
the Company. If this Warrant shall have been exercised only in part, the Company
shall, at the time of delivery of the certificate or certificates, deliver to
the Holder a new Warrant evidencing the right to purchase the remaining Shares
called for by this Warrant, which new Warrant shall in all other respects be
identical with this Warrant, or, at the request of the Holder, appropriate
notations may be made on this Warrant which shall then be returned to the
Holder. The Company shall pay all expenses, taxes and other charges payable in
connection with the preparation, issuance and delivery of share certificates and
new Warrants, except that, if share certificates or new Warrants shall be
registered in a name or names other than the name of the Holder, funds
sufficient to pay all transfer taxes, if any, payable as a result of such
transfer shall be paid by the Holder at the time of delivering the
aforementioned notice of exercise or promptly upon receipt of a written request
of the Company for payment.
1.03. Shares To Be Fully Paid and Nonassessable. All Shares
issued upon the exercise of this Warrant shall be validly issued, fully paid and
nonassessable and, if the Shares are then
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eligible for listing on any national securities exchanges (as defined in the
Exchange Act), or quoted on Nasdaq, shall be duly listed or quoted thereon or
application made therefor, as the case may be.
1.04. No Fractional Shares To Be Issued. The Company shall not
be required to issue fractions of Shares upon exercise of this Warrant. If any
fractions of a share would, but for this Section, be issuable upon any exercise
of this Warrant, in lieu of such fractional share the Company shall pay to the
holder, in cash, an amount equal to the same fraction of the Closing Price per
Share for the Trading Day immediately prior to the date of such exercise.
1.05. Share Legend. Each certificate for Shares issued upon
exercise of this Warrant, unless at the time of exercise such shares are
registered under the Securities Act, shall bear a legend substantially as
follows:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH ACT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF SUCH ACT AND APPLICABLE STATE SECURITIES LAWS,
SUPPORTED BY AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO
THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT
REQUIRED.
Any certificate issued at any time in exchange or substitution
for any certificate bearing such legend (except a new certificate issued upon
completion of a public distribution pursuant to a registration statement under
the Securities Act) shall also bear such legend unless, in the opinion of
counsel reasonably acceptable to the Company, the securities represented thereby
need no longer be subject to restrictions on resale under the Securities Act.
ARTICLE II
REPLACEMENTS OF WARRANT CERTIFICATES
2.01. Loss, Theft or Destruction of Warrant Certificates. Upon
receipt of evidence satisfactory to the Company of the loss, theft, destruction
or mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Company,
or, in the case of any such mutilation, upon surrender and cancellation of the
Warrant, the Company will make and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor and
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representing the right to purchase the same aggregate number of
Shares.
2.02. Change of Principal Executive Office. In the event the
Company shall change the address of its principal executive office, the Company
shall give the holder of this Warrant notice of any such change.
ARTICLE III
ANTIDILUTION PROVISIONS
3.01 Adjustments Generally. The Exercise Price and the number
of Shares (or other securities or property) issuable upon exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events, as provided in this Article III.
3.02 Common Stock Reorganization. If the Company shall
subdivide its outstanding shares of Common Stock, $.001 par value per share
("Common Stock"), into a greater number of shares or consolidate its outstanding
shares of Common Stock into a smaller number of shares (any such event being
called a "Common Stock Reorganization"), then (a) the Exercise Price shall be
adjusted, effective immediately after the record date at which the holders of
shares of Common Stock are determined for purposes of such Common Stock
Reorganization, to a price determined by multiplying the Exercise Price in
effect immediately prior to such record date by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding on such record
date before giving effect to such Common Stock Reorganization and the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such Common Stock Reorganization, and (b) the number of
Shares subject to purchase upon exercise of this Warrant shall be adjusted,
effective at such time, to a number determined by multiplying the number of
Shares subject to purchase upon exercise of this Warrant immediately before such
Common Stock Reorganization by a fraction, the numerator of which shall be the
number of shares then outstanding after giving effect to such Common Stock
Reorganization and the denominator of which shall be the number of shares of
Common Stock outstanding immediately before such Common Stock Reorganization.
3.03 Special Dividends. If the Company shall issue or
distribute to all or substantially all holders of shares of Common Stock
evidences of indebtedness, any other securities of the Company, or any cash,
property or other assets, and if such issuance or distribution does not
constitute a cash dividend or distribution out of surplus or net profits legally
available therefor, or a Common
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Stock Reorganization (any such nonexcluded event being herein called a "Special
Dividend"), the Exercise Price shall be adjusted, effective immediately after
the record date at which the holders of shares of Common Stock are determined
for purposes of such Special Dividend, to a price determined by multiplying the
Exercise Price then in effect by a fraction, the numerator of which shall be the
Market Price per share of Common Stock on such record date less the then fair
market value (as reasonably determined in good faith by the Board of Directors
of the Company) of the evidences of indebtedness, securities or property or
other assets issued or distributed in such Special Dividend with respect to one
share of Common Stock, and the denominator of which shall be the Closing Price
per share of Common Stock on such record date.
3.04 Capital Reorganizations. If there shall be any
consolidation or merger to which the Company is a party, other than a
consolidation or a merger in which the Company is a continuing corporation and
which does not result in any reclassification of, or change (other than a Common
Stock Reorganization or a change in par value) in, outstanding shares of Common
Stock, or any sale or conveyance of the property of the Company as an entirety
or substantially as an entirety (any such event being called a "Capital
Reorganization"), then effective upon the effective date of such Capital
Reorganization, the Holder shall have the right to purchase, upon exercise of
this Warrant, the kind and amount of shares of stock and other securities and
property (including cash) which the Holder would have owned or have been
entitled to receive after such Capital Reorganization if this Warrant had been
exercised immediately prior to such Capital Reorganization. As a condition to
effecting any Capital Reorganization, the Company or the successor or surviving
corporation, as the case may be, shall execute and deliver to each Holder an
agreement as to the Holders' rights in accordance with this Section 3.04,
providing for subsequent adjustments as nearly equivalent as may be practicable
to the adjustments provided for in this Article III. The provisions of this
Section 3.04 shall similarly apply to successive Capital Reorganizations.
3.05. Certain Other Events. If any event occurs as to which
the foregoing provisions of this Article III are not strictly applicable or, if
strictly applicable, would not, in the good faith judgment of the Board of
Directors of the Company, fairly protect the purchase rights of the Warrants in
accordance with the essential intent and principles of such provisions, then
such Board shall make such adjustments in the application of such provisions, in
accordance with such essential intent and principles, as shall be reasonably
necessary, in the good faith opinion of such Board, to protect such purchase
rights as aforesaid, but in no event shall any such adjustment have the effect
of increasing the Exercise Price or
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decreasing the number of Shares subject to purchase upon exercise of
this Warrant.
3.06. Adjustment Rules. (a) Any adjustments pursuant to
this Article III shall be made successively whenever an event
referred to therein shall occur.
(b) If the Company shall set a record date to determine the
holders of shares of Common Stock for purposes of a Common Stock Reorganization
or Capital Reorganization, and shall legally abandon such action prior to
effecting such action, then no adjustment shall be made pursuant to this Article
III in respect of such action.
(c) All calculations under this Article III shall be made to
the nearest cent or to the nearest one hundredth (1/100th) of a share, as the
case may be. Notwithstanding any provision of this Article III to the contrary,
no adjustment in the Exercise Price shall be made if the amount of such
adjustment would be less than $0.05, but any such amount shall be carried
forward and an adjustment with respect thereto shall be made at the time of and
together with any subsequent adjustment which, together with such amount and any
other amount or amounts so carried forward, shall aggregate $0.05 or more.
(d) In any case in which the provisions of this Article III
shall require that an adjustment shall become effective immediately after a
record date for an event, the Company may defer until the occurrence of such
event (i) issuing to the holder of any Warrant exercised after such record date
and before the occurrence of such event the additional shares of Common Stock
issuable upon such conversion by reason of the adjustment required by such event
over and above the Shares issuable upon such exercise before giving effect to
such adjustment and (ii) paying to such holder any amount of cash in lieu of a
fractional share of Common Stock pursuant to Section 1.04; provided that the
Company upon request shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's rights to receive such
additional shares, and such cash, upon the occurrence of the event requiring
such adjustment.
3.07 Proceedings Prior to Any Action Requiring Adjustment. As
a condition precedent to the taking of any action that would require an
adjustment pursuant to this Article III, the Company shall take any action which
may be necessary in order that the Company may thereafter validly and legally
issue as fully paid and nonassessable all Shares that the Holders are entitled
to receive upon exercise of this Warrant.
3.08 Statement Regarding Adjustment. Whenever the
Exercise Price or the number of shares received upon exercise of the
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Warrants shall be adjusted as provided in this Article III, the Company shall
forthwith file, at the office of any transfer agent for the Warrants and at the
principal executive office of the Company, a statement showing in detail the
facts requiring such adjustment and the Exercise Price and the number of shares
received upon exercise of the Warrants that shall be in effect after such
adjustment, and the Company shall also cause a copy of such statement to be sent
by mail, first class postage prepaid, to each Holder, at its address appearing
on the Company's records. Where appropriate, such copy may be given in advance
and may be included as part of a notice required to be mailed under the
provisions of this Article III. Failure to give such notice, or any defect
therein, shall not affect the legality or validity of any such action.
3.09 Notice to Holders. In the event the Company shall propose
to take any action of the type described in this Article III (but only if the
action of the type described in this Article III would result in an adjustment
in the Exercise Price or the number of shares received upon exercise of the
Warrants), or to declare any cash dividends or distribution out of surplus or
net profits legally available therefor, the Company shall give notice to each
Holder in the manner set forth in Section 3.08, which notice shall specify the
record date, if any, with respect to any such action and the approximate date on
which such action is to take place. Such notice shall also set forth such facts
with respect thereto as shall be reasonably necessary to indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Exercise Price and the number, kind or class of shares or other
securities or property which shall be deliverable or purchasable upon the
occurrence of such action or deliverable upon exercise of the Warrants. In the
case of any action that would require the fixing of a record date, such notice
shall be given at least 10 days prior to the date so fixed, and in case of all
other action, such notice shall be given at least 15 days prior to the taking of
such proposed action. Failure to give such notice, or any defect therein, shall
not affect the legality or validity of any such action.
ARTICLE IV
DEFINITIONS
The following terms, as used in this Warrant, have the
following respective meanings:
"Capital Reorganization" shall have the meaning set forth
in Section 3.04 hereof.
"Closing Price" on any day means (a) if the Common Stock
is listed or admitted for trading on a national securities exchange,
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the reported last sales price or, if no such reported sale occurs on such day,
the average of the closing bid and asked prices on such day, in each case on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading, (b) if the Common Stock is not listed or admitted to
trading on any national securities exchange, the average of the closing bid and
asked prices in the over-the-counter market on such day as reported by Nasdaq or
any comparable system or, if not so reported, as reported by any New York Stock
Exchange member firm selected by the Company for such purpose or (c) if no such
quotations are available on such day, the fair market value of one share of
Common Stock on such day as determined in good faith by the Board of Directors
of the Company.
"Common Stock" shall have the meaning set forth in Section
3.02 hereof.
"Common Stock Reorganization" shall have the meaning set forth
in Section 3.02 hereof.
"Company" shall have the meaning set forth in the first
paragraph of this Warrant.
"Demand Registration" shall have the meaning set forth in
Section 6.01(a).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and any similar or successor Federal statute, and the rules and
regulations of the Securities and Exchange Commission (or its successor)
thereunder, all as the same shall be in effect at the time.
"Exercise Price" means $2.30, the Closing Price of a share of
Common Stock on the Trading Day immediately preceding the issuance of this
Warrant.
"Expiration Time" means 5:00 p.m. New York Time on January
19, 2004.
"Holder" shall have the meaning set forth in the first
paragraph of this Warrant and "Holders" shall include any and all successors and
assigns of the initial Holder with respect to this Warrant.
"Market Price" on any day means the average of the daily
Closing Prices of a share of Common Stock for the 20 consecutive Trading Days
ending on the most recent Trading Day for which a closing price is available and
if the shares of Common Stock are not then publicly traded Market Price shall be
determined in good faith by the Board of Directors of the Company.
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"NASD" means The National Association of Securities
Dealers, Inc.
"Nasdaq" means The National Association of Securities
Dealers, Inc. Automated Quotation System.
"New York Time" means Eastern Daylight Time or Eastern
Standard Time, whichever is in effect on the relevant date.
"Permitted Interruption" shall have the meaning set forth
in Section 6.01(e).
"Prospectus" means the prospectus included in any Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A), as amended or supplemented
by any prospectus supplement, relating to the terms of the offering of any
portion of the Registra ble Securities covered by such Registration Statement
and all other amendments and supplements to the Registration Statement or
prospectus, as the case may be, including post-effective amendments, and all
material incorporated or deemed to be incorporated by reference in such
prospectus.
"Registrable Securities" means the Shares issuable upon
exercise of this Warrant.
"Registration Statement" means any registration statement of
the Company that covers any of the Registrable Securities pursuant to the
provisions of this Warrant, including the Prospectus, amendments and supplements
to such registration statement or the Prospectus, as the case may be, including
post-effective amendments, all exhibits, and all material incorporated or deemed
to be incorporated by reference in such registration statement.
"Securities Act" means the Securities Act of 1933, as amended,
and any similar or successor Federal statute, and the rules and regulations of
the Securities and Exchange Commission (or its successor) thereunder, all as the
same shall be in effect at the time.
"Shares" shall have the meaning set forth in the first
paragraph of this Warrant, subject to adjustment pursuant to Article III.
"Trading Day" means (a) if the Common Stock is listed or
admitted to trading on a national securities exchange, a day on which the
principal national securities exchange on which the Common Stock is listed or
admitted to trading is open for business or (b) if the
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Common Stock is not so listed or admitted to trading, a day on which any New
York Stock Exchange member firm is open for business.
"Warrant" and "Warrants" shall mean this warrant and any
warrants issued upon the partial exercise of this warrant.
ARTICLE V
REDEMPTION AND CANCELLATION OF WARRANTS
5.01 Redemption of Warrants. The Warrants are not redeemable
by the Company and the Company has no right to purchase or otherwise acquire the
Warrants.
5.02 Cancellation of Warrants. The Company shall cancel any
Warrant surrendered for transfer, exchange or exercise.
ARTICLE VI
REGISTRATION RIGHTS
6.01 Demand Registration. (a) Subject to the provisions of
Section 6.01(b) hereof and during the period commencing on the day immediately
following the date first written above and expiring at the Expiration Time, the
Holder may make a written request to the Company for registration under and in
accordance with the provisions of the Securities Act of all, and not less than
all, of the Registrable Securities held by the Holder(a "Demand Registration").
Except in the event that the Company is advised by counsel that the filing of a
Registration Statement would not be permitted under the Securities Act due to
the Company's not having current audited financial statements, in which event
within five (5) business days after completion of such audited financial
statements the Company shall file such Registration Statement, the Company will
file as soon as practicable, and in any event within sixty (60) days of receipt
of such request, and to use its best efforts to cause to become effective as
soon as practicable, the Registration Statement, subject to the terms of this
Warrant.
(b) Number of Registrations. The Holder is entitled to one
Demand Registration. The Holder agrees that if the Company determines that there
are material developments which the Company determines require the filing of a
post-effective amendment to the Registration Statement, then the Holder agrees
to refrain from selling any Registrable Securities until the post-effective
amendment is declared effective. The Company agrees to file and attempt to have
declared effective such post-effective amendment as soon as
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possible. The Company shall not be deemed to have effected a Demand Registration
unless and until such Demand Registration is declared effective.
(c) Reduction Size of Demand Registrations. If the managing
underwriter or underwriters of a Demand Registration advise the Company in
writing that in its or their opinion the principal amount and/or number of
Registrable Securities proposed to be sold in such Demand Registration exceeds
the principal amount and/or number of Registrable Securities which can be sold
in such offering without an adverse effect on such offering, the Company will
include in such registration only the number of Registrable Securities which, in
the opinion of such underwriter or underwriters, can be sold. The Holder shall
be entitled to an additional Demand Registration hereunder (with all expenses of
registration relating to such additional Demand Registration to be borne by the
Company) on the same terms and conditions as would have applied had such earlier
Demand Registration not been made in the event that all Registrable Securities
requested to be included in the Demand Registration are not so included.
(d) Selection of Underwriters and Counsel. If any Demand
Registration is an underwritten offering with respect to any issue of
Registrable Securities, the Holder will select the investment banker or bankers
and manager or managers to administer the offering and counsel to the Holder;
provided, that such investment bankers and managers be of nationally recognized
standing and reasonably satisfactory to the Company. The Holder shall pay all
underwriting discounts and commissions of such investment banker or bankers and
manager or managers.
(e) Notwithstanding the provisions of Section 6.01(a) hereof,
the Company shall have the right at any time on one occasion in respect of any
Registration Statement to delay the filing of such Registration Statement or to
withdraw such Registration Statement (or notify the Holder not to sell such
Registrable Securities pursuant to such Registration Statement) after the filing
and the effective date thereof (each such delay, withdrawal or notice is
referred to herein as a "Permitted Interruption") for a reasonable period of
time (not to exceed 45 days in any 12-month period in any such case, which may
not thereafter be extended) if, at such time: (i) the Holder is in possession of
material non-public information in respect of the Company; (ii) the Company is
engaged in any active program for repurchase of shares of Common Stock and
furnishes a certificate to that effect to the Holder; or (iii) the Board of
Directors of the Company shall determine in good faith that such offering will
interfere with a pending or contemplated financing, merger, acquisition, sale of
assets, recapitalization or other similar corporate action of the Company and
the Company furnishes a certificate to that effect to the Holder. After such
Permitted
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Interruption, the Company shall use its best efforts to restore such
Registration or to effect such Registration (as the case may be) within 30 days
without further request from the Holder, unless such Demand Registration request
has been withdrawn by written notice of the Holder.
6.02 Piggyback Registration Rights.
(a) If the Company at any time or from time to time subsequent
to the date of this Warrant proposes to register any securities under the
Securities Act either for its own account or the account of any selling security
holders (other than pursuant to (i) a registration statement on Forms S-4 or S-8
or any successor or similar forms, (ii) a registration relating solely to a
Commission Rule 145 offering, or (iii) a registration on any form that does not
permit secondary sales), it will give written notice to each of the Holders of
its intention at least ten (10) days in advance of the filing of any
registration statement with respect thereto. Upon the written request of any of
the Holders given within five (5) days after receipt of such notice, the Company
will use its best efforts to include in such registration, and in any
underwriting involved therein, all the Registrable Securities included in such
request.
(b) Upon making a request pursuant to this Section 6.02, the
Holders shall specify the number of shares of Registrable Securities to be
registered on their behalf and the intended method of disposition thereof. The
Company may require the Holders to furnish to the Company such information in
writing 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 Securities 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.
ARTICLE VII
MISCELLANEOUS
7.01 Notices. All notices, requests and other communications
provided for herein shall be in writing, and shall be deemed to have been made
or given when delivered or mailed, first class, postage prepaid, or sent by
telex or other telegraphic communications equipment. Such notices and
communications shall be addressed:
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(a) if to the Company, to
Paradigm Medical Industries, Inc.
1127 West 2320 South, Suite A
Salt Lake City, Utah 84119
Attention: Chief Executive Officer; or
(b) if to the Holder, to
Win Capital Corp.
26 Ludlam Avenue
Bayville, New York 11709
7.02 Waivers; Amendments. No failure or delay of the Holder in
exercising any right, power or privilege, hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof, or any abandonment or
discontinuance of steps to enforce such a right, power or privilege, preclude
any other or further exercise thereof or the exercise of any other right, power
or privilege. The rights and remedies of the Holder are cumulative and not
exclusive of any rights or remedies which it would otherwise have. The
provisions of this Warrant may be amended, modified or waived if, but only if,
such amendment, modification or waiver is in writing and is signed by the
Company and a majority of the Holders; provided that no amendment, modification
or waiver may change the exercise price of the Warrant or the number of Shares
in which this Warrant is exercisable (including without limitation any
adjustments or any provisions with respect to adjustments, the expiration of or
the manner of exercising the Warrants) without the consent in writing of all of
the Holders.
7.03 Governing Law. This Warrant shall be construed in
accordance with and governed by the laws of the State of New York.
7.04 Survival of Agreements; Representations and Warranties,
etc. All warranties, representations and covenants made by the Company herein or
in any certificate or other instrument delivered by or on behalf of it in
connection herewith shall be considered to have been relied upon by the Holders
and shall survive the issuance and delivery of the Warrants and the Shares, and
shall continue in full force and effect so long as this Warrant is outstanding.
All statements in any such certificate or other instrument shall constitute
representations and warranties hereunder.
7.05 Covenants To Bind Successor and Assigns. All the
covenants, stipulations, promises and agreements in this Warrant
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contained by or on behalf of the Company shall bind its successors
and assigns, whether or not so expressed.
7.06 Severability. In case any one or more of the provisions
contained in this Warrant shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
provisions contained herein and therein shall not in any way be affected or
impaired in such jurisdiction and shall not invalidate or render illegal or une
nforceable such provision in any other jurisdiction.
7.07 Headings. The headings used herein are for convenience of
reference only and shall not be deemed to be a part of this Warrant.
7.08 No Rights as Stockholder. This Warrant shall not entitle
the Holder to any rights as a stockholder of the Company.
7.09 Pronouns. The pronouns "it" and "its" herein shall be
deemed to mean "he" and "his" or "she" and "hers", as the context requires.
IN WITNESS WHEREOF, Paradigm Medical Industries, Inc. has
caused this Warrant to be executed in its corporate name by one of its officers
thereunto duly authorized as of the day and year first above written.
PARADIGM MEDICAL INDUSTRIES, INC.
By: /s/ Thomas F. Motter
------------------------------
Name: Thomas F. Motter
Title: CEO
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Exhibit 4.14
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR APPLICABLE STATE SECURITIES LAWS. NEITHER THIS WARRANT NOR ANY OF SUCH
SHARES MAY BE SOLD, ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF REGISTRATION UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE
SECURITIES OR BLUE SKY LAWS OR EXEMPTIONS FROM SUCH REGISTRATION. THIS WARRANT
MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT UPON THE
CONDITIONS SPECIFIED IN THIS WARRANT, AND NO SALE, ASSIGNMENT, TRANSFER, OR
OTHER DISPOSITION OF THIS WARRANT SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL
THERE SHALL HAVE BEEN COMPLIANCE WITH SUCH CONDITIONS.
Dated: January 19, 1999
WARRANT
To purchase up to 105,000 shares of Common Stock
PARADIGM MEDICAL INDUSTRIES, INC.
Expiring January 19, 2004
THIS IS TO CERTIFY THAT, for value received, CYNDEL & CO., a
New York corporation, (the "Holder"), is entitled, subject to certain conditions
set forth in Sections 1.01 and 1.02 hereof, to purchase from PARADIGM MEDICAL
INDUSTRIES, INC., a Delaware corporation (the "Company"), at the Company's
principal executive office, at the Exercise Price, up to the number of shares of
Common Stock, $.001, par value per share (the "Shares"), of the Company shown
above, all subject to adjustment and upon the terms and conditions as
hereinafter provided, and is entitled also to exercise the other appurtenant
rights, powers and privileges hereinafter described.
Certain terms used in this Warrant are defined in Article IV
hereof.
ARTICLE I
METHOD OF EXERCISE
1.01. Time of Exercise. Subject to the provisions of Sections
1.02 and 1.03 hereof, this Warrant may be exercised at any time and from time to
time after 9:00 a.m. New York Time on the first day immediately following the
date first written above and prior to the Expiration Time.
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1.02. Method of Exercise. To exercise this Warrant in whole or
in part, the Holder shall deliver to the Company, at the Company's principal
executive office (a) this Warrant, (b) a written notice of such Holder's
election to exercise this Warrant, which notice shall specify the number of
Shares to be purchased, but in no event less than 1,000 shares, the
denominations of the share certificate or certificates desired and the name or
names in which such certificates are to be registered, and (c) payment of the
Exercise Price with respect to such shares. Such payment may be made, at the
option of the Holder, in cash, by certified or bank cashier's check, money order
or wire transfer, in the manner specified in the next succeeding paragraph, or
in any other manner consented to in writing by the Company, or any combination
thereof.
The Company shall, as promptly as practicable after receipt of
the items required by the preceding paragraphs of this Section 1.02, execute and
deliver or cause to be executed and delivered, in accordance with such notice, a
certificate or certificates representing the aggregate number of Shares
specified in such notice. The share certificate or certificates so delivered
shall be in such denominations as shall be specified in such notice and shall be
issued in the name of the Holder or, provided, in an opinion of counsel
reasonably acceptable to the Company, the following is permitted under the
Securities Act and applicable state securities laws, such other name as shall be
designated in such notice. Such certificate or certificates shall be deemed to
have been issued, and such Holder or Holders or any other person so designated
to be named therein shall be deemed for all purposes to have become a Holder of
record of such shares, as of the date the aforementioned notice is received by
the Company. If this Warrant shall have been exercised only in part, the Company
shall, at the time of delivery of the certificate or certificates, deliver to
the Holder a new Warrant evidencing the right to purchase the remaining Shares
called for by this Warrant, which new Warrant shall in all other respects be
identical with this Warrant, or, at the request of the Holder, appropriate
notations may be made on this Warrant which shall then be returned to the
Holder. The Company shall pay all expenses, taxes and other charges payable in
connection with the preparation, issuance and delivery of share certificates and
new Warrants, except that, if share certificates or new Warrants shall be
registered in a name or names other than the name of the Holder, funds
sufficient to pay all transfer taxes, if any, payable as a result of such
transfer shall be paid by the Holder at the time of delivering the
aforementioned notice of exercise or promptly upon receipt of a written request
of the Company for payment.
1.03. Shares To Be Fully Paid and Nonassessable. All Shares
issued upon the exercise of this Warrant shall be validly issued, fully paid and
nonassessable and, if the Shares are then
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eligible for listing on any national securities exchanges (as defined in the
Exchange Act), or quoted on Nasdaq, shall be duly listed or quoted thereon or
application made therefor, as the case may be.
1.04. No Fractional Shares To Be Issued. The Company shall not
be required to issue fractions of Shares upon exercise of this Warrant. If any
fractions of a share would, but for this Section, be issuable upon any exercise
of this Warrant, in lieu of such fractional share the Company shall pay to the
holder, in cash, an amount equal to the same fraction of the Closing Price per
Share for the Trading Day immediately prior to the date of such exercise.
1.05. Share Legend. Each certificate for Shares issued upon
exercise of this Warrant, unless at the time of exercise such shares are
registered under the Securities Act, shall bear a legend substantially as
follows:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH ACT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF SUCH ACT AND APPLICABLE STATE SECURITIES LAWS,
SUPPORTED BY AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO
THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT
REQUIRED.
Any certificate issued at any time in exchange or substitution
for any certificate bearing such legend (except a new certificate issued upon
completion of a public distribution pursuant to a registration statement under
the Securities Act) shall also bear such legend unless, in the opinion of
counsel reasonably acceptable to the Company, the securities represented thereby
need no longer be subject to restrictions on resale under the Securities Act.
ARTICLE II
REPLACEMENTS OF WARRANT CERTIFICATES
2.01. Loss, Theft or Destruction of Warrant Certificates. Upon
receipt of evidence satisfactory to the Company of the loss, theft, destruction
or mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Company,
or, in the case of any such mutilation, upon surrender and cancellation of the
Warrant, the Company will make and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor and
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representing the right to purchase the same aggregate number of
Shares.
2.02. Change of Principal Executive Office. In the event the
Company shall change the address of its principal executive office, the Company
shall give the holder of this Warrant notice of any such change.
ARTICLE III
ANTIDILUTION PROVISIONS
3.01 Adjustments Generally. The Exercise Price and the number
of Shares (or other securities or property) issuable upon exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events, as provided in this Article III.
3.02 Common Stock Reorganization. If the Company shall
subdivide its outstanding shares of Common Stock, $.001 par value per share
("Common Stock"), into a greater number of shares or consolidate its outstanding
shares of Common Stock into a smaller number of shares (any such event being
called a "Common Stock Reorganization"), then (a) the Exercise Price shall be
adjusted, effective immediately after the record date at which the holders of
shares of Common Stock are determined for purposes of such Common Stock
Reorganization, to a price determined by multiplying the Exercise Price in
effect immediately prior to such record date by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding on such record
date before giving effect to such Common Stock Reorganization and the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such Common Stock Reorganization, and (b) the number of
Shares subject to purchase upon exercise of this Warrant shall be adjusted,
effective at such time, to a number determined by multiplying the number of
Shares subject to purchase upon exercise of this Warrant immediately before such
Common Stock Reorganization by a fraction, the numerator of which shall be the
number of shares then outstanding after giving effect to such Common Stock
Reorganization and the denominator of which shall be the number of shares of
Common Stock outstanding immediately before such Common Stock Reorganization.
3.03 Special Dividends. If the Company shall issue or
distribute to all or substantially all holders of shares of Common Stock
evidences of indebtedness, any other securities of the Company, or any cash,
property or other assets, and if such issuance or distribution does not
constitute a cash dividend or distribution out of surplus or net profits legally
available therefor, or a Common
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Stock Reorganization (any such nonexcluded event being herein called a "Special
Dividend"), the Exercise Price shall be adjusted, effective immediately after
the record date at which the holders of shares of Common Stock are determined
for purposes of such Special Dividend, to a price determined by multiplying the
Exercise Price then in effect by a fraction, the numerator of which shall be the
Market Price per share of Common Stock on such record date less the then fair
market value (as reasonably determined in good faith by the Board of Directors
of the Company) of the evidences of indebtedness, securities or property or
other assets issued or distributed in such Special Dividend with respect to one
share of Common Stock, and the denominator of which shall be the Closing Price
per share of Common Stock on such record date.
3.04 Capital Reorganizations. If there shall be any
consolidation or merger to which the Company is a party, other than a
consolidation or a merger in which the Company is a continuing corporation and
which does not result in any reclassification of, or change (other than a Common
Stock Reorganization or a change in par value) in, outstanding shares of Common
Stock, or any sale or conveyance of the property of the Company as an entirety
or substantially as an entirety (any such event being called a "Capital
Reorganization"), then effective upon the effective date of such Capital
Reorganization, the Holder shall have the right to purchase, upon exercise of
this Warrant, the kind and amount of shares of stock and other securities and
property (including cash) which the Holder would have owned or have been
entitled to receive after such Capital Reorganization if this Warrant had been
exercised immediately prior to such Capital Reorganization. As a condition to
effecting any Capital Reorganization, the Company or the successor or surviving
corporation, as the case may be, shall execute and deliver to each Holder an
agreement as to the Holders' rights in accordance with this Section 3.04,
providing for subsequent adjustments as nearly equivalent as may be practicable
to the adjustments provided for in this Article III. The provisions of this
Section 3.04 shall similarly apply to successive Capital Reorganizations.
3.05. Certain Other Events. If any event occurs as to which
the foregoing provisions of this Article III are not strictly applicable or, if
strictly applicable, would not, in the good faith judgment of the Board of
Directors of the Company, fairly protect the purchase rights of the Warrants in
accordance with the essential intent and principles of such provisions, then
such Board shall make such adjustments in the application of such provisions, in
accordance with such essential intent and principles, as shall be reasonably
necessary, in the good faith opinion of such Board, to protect such purchase
rights as aforesaid, but in no event shall any such adjustment have the effect
of increasing the Exercise Price or
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decreasing the number of Shares subject to purchase upon exercise of
this Warrant.
3.06. Adjustment Rules. (a) Any adjustments pursuant to
this Article III shall be made successively whenever an event
referred to therein shall occur.
(b) If the Company shall set a record date to determine the
holders of shares of Common Stock for purposes of a Common Stock Reorganization
or Capital Reorganization, and shall legally abandon such action prior to
effecting such action, then no adjustment shall be made pursuant to this Article
III in respect of such action.
(c) All calculations under this Article III shall be made to
the nearest cent or to the nearest one hundredth (1/100th) of a share, as the
case may be. Notwithstanding any provision of this Article III to the contrary,
no adjustment in the Exercise Price shall be made if the amount of such
adjustment would be less than $0.05, but any such amount shall be carried
forward and an adjustment with respect thereto shall be made at the time of and
together with any subsequent adjustment which, together with such amount and any
other amount or amounts so carried forward, shall aggregate $0.05 or more.
(d) In any case in which the provisions of this Article III
shall require that an adjustment shall become effective immediately after a
record date for an event, the Company may defer until the occurrence of such
event (i) issuing to the holder of any Warrant exercised after such record date
and before the occurrence of such event the additional shares of Common Stock
issuable upon such conversion by reason of the adjustment required by such event
over and above the Shares issuable upon such exercise before giving effect to
such adjustment and (ii) paying to such holder any amount of cash in lieu of a
fractional share of Common Stock pursuant to Section 1.04; provided that the
Company upon request shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's rights to receive such
additional shares, and such cash, upon the occurrence of the event requiring
such adjustment.
3.07 Proceedings Prior to Any Action Requiring Adjustment. As
a condition precedent to the taking of any action that would require an
adjustment pursuant to this Article III, the Company shall take any action which
may be necessary in order that the Company may thereafter validly and legally
issue as fully paid and nonassessable all Shares that the Holders are entitled
to receive upon exercise of this Warrant.
3.08 Statement Regarding Adjustment. Whenever the
Exercise Price or the number of shares received upon exercise of the
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Warrants shall be adjusted as provided in this Article III, the Company shall
forthwith file, at the office of any transfer agent for the Warrants and at the
principal executive office of the Company, a statement showing in detail the
facts requiring such adjustment and the Exercise Price and the number of shares
received upon exercise of the Warrants that shall be in effect after such
adjustment, and the Company shall also cause a copy of such statement to be sent
by mail, first class postage prepaid, to each Holder, at its address appearing
on the Company's records. Where appropriate, such copy may be given in advance
and may be included as part of a notice required to be mailed under the
provisions of this Article III. Failure to give such notice, or any defect
therein, shall not affect the legality or validity of any such action.
3.09 Notice to Holders. In the event the Company shall propose
to take any action of the type described in this Article III (but only if the
action of the type described in this Article III would result in an adjustment
in the Exercise Price or the number of shares received upon exercise of the
Warrants), or to declare any cash dividends or distribution out of surplus or
net profits legally available therefor, the Company shall give notice to each
Holder in the manner set forth in Section 3.08, which notice shall specify the
record date, if any, with respect to any such action and the approximate date on
which such action is to take place. Such notice shall also set forth such facts
with respect thereto as shall be reasonably necessary to indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Exercise Price and the number, kind or class of shares or other
securities or property which shall be deliverable or purchasable upon the
occurrence of such action or deliverable upon exercise of the Warrants. In the
case of any action that would require the fixing of a record date, such notice
shall be given at least 10 days prior to the date so fixed, and in case of all
other action, such notice shall be given at least 15 days prior to the taking of
such proposed action. Failure to give such notice, or any defect therein, shall
not affect the legality or validity of any such action.
ARTICLE IV
DEFINITIONS
The following terms, as used in this Warrant, have the
following respective meanings:
"Capital Reorganization" shall have the meaning set forth
in Section 3.04 hereof.
"Closing Price" on any day means (a) if the Common Stock
is listed or admitted for trading on a national securities exchange,
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the reported last sales price or, if no such reported sale occurs on such day,
the average of the closing bid and asked prices on such day, in each case on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading, (b) if the Common Stock is not listed or admitted to
trading on any national securities exchange, the average of the closing bid and
asked prices in the over-the-counter market on such day as reported by Nasdaq or
any comparable system or, if not so reported, as reported by any New York Stock
Exchange member firm selected by the Company for such purpose or (c) if no such
quotations are available on such day, the fair market value of one share of
Common Stock on such day as determined in good faith by the Board of Directors
of the Company.
"Common Stock" shall have the meaning set forth in Section
3.02 hereof.
"Common Stock Reorganization" shall have the meaning set forth
in Section 3.02 hereof.
"Company" shall have the meaning set forth in the first
paragraph of this Warrant.
"Demand Registration" shall have the meaning set forth in
Section 6.01(a).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and any similar or successor Federal statute, and the rules and
regulations of the Securities and Exchange Commission (or its successor)
thereunder, all as the same shall be in effect at the time.
"Exercise Price" means $2.30, the Closing Price of a share of
Common Stock on the Trading Day immediately preceding the issuance of this
Warrant.
"Expiration Time" means 5:00 p.m. New York Time on January
19, 2004.
"Holder" shall have the meaning set forth in the first
paragraph of this Warrant and "Holders" shall include any and all successors and
assigns of the initial Holder with respect to this Warrant.
"Market Price" on any day means the average of the daily
Closing Prices of a share of Common Stock for the 20 consecutive Trading Days
ending on the most recent Trading Day for which a closing price is available and
if the shares of Common Stock are not then publicly traded Market Price shall be
determined in good faith by the Board of Directors of the Company.
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"NASD" means The National Association of Securities
Dealers, Inc.
"Nasdaq" means The National Association of Securities
Dealers, Inc. Automated Quotation System.
"New York Time" means Eastern Daylight Time or Eastern
Standard Time, whichever is in effect on the relevant date.
"Permitted Interruption" shall have the meaning set forth
in Section 6.01(e).
"Prospectus" means the prospectus included in any Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A), as amended or supplemented
by any prospectus supplement, relating to the terms of the offering of any
portion of the Registra ble Securities covered by such Registration Statement
and all other amendments and supplements to the Registration Statement or
prospectus, as the case may be, including post-effective amendments, and all
material incorporated or deemed to be incorporated by reference in such
prospectus.
"Registrable Securities" means the Shares issuable upon
exercise of this Warrant.
"Registration Statement" means any registration statement of
the Company that covers any of the Registrable Securities pursuant to the
provisions of this Warrant, including the Prospectus, amendments and supplements
to such registration statement or the Prospectus, as the case may be, including
post-effective amendments, all exhibits, and all material incorporated or deemed
to be incorporated by reference in such registration statement.
"Securities Act" means the Securities Act of 1933, as amended,
and any similar or successor Federal statute, and the rules and regulations of
the Securities and Exchange Commission (or its successor) thereunder, all as the
same shall be in effect at the time.
"Shares" shall have the meaning set forth in the first
paragraph of this Warrant, subject to adjustment pursuant to Article III.
"Trading Day" means (a) if the Common Stock is listed or
admitted to trading on a national securities exchange, a day on which the
principal national securities exchange on which the Common Stock is listed or
admitted to trading is open for business or (b) if the
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Common Stock is not so listed or admitted to trading, a day on which any New
York Stock Exchange member firm is open for business.
"Warrant" and "Warrants" shall mean this warrant and any
warrants issued upon the partial exercise of this warrant.
ARTICLE V
REDEMPTION AND CANCELLATION OF WARRANTS
5.01 Redemption of Warrants. The Warrants are not redeemable
by the Company and the Company has no right to purchase or otherwise acquire the
Warrants.
5.02 Cancellation of Warrants. The Company shall cancel any
Warrant surrendered for transfer, exchange or exercise.
ARTICLE VI
REGISTRATION RIGHTS
6.01 Demand Registration. (a) Subject to the provisions of
Section 6.01(b) hereof and during the period commencing on the day immediately
following the date first written above and expiring at the Expiration Time, the
Holder may make a written request to the Company for registration under and in
accordance with the provisions of the Securities Act of all, and not less than
all, of the Registrable Securities held by the Holder(a "Demand Registration").
Except in the event that the Company is advised by counsel that the filing of a
Registration Statement would not be permitted under the Securities Act due to
the Company's not having current audited financial statements, in which event
within five (5) business days after completion of such audited financial
statements the Company shall file such Registration Statement, the Company will
file as soon as practicable, and in any event within sixty (60) days of receipt
of such request, and to use its best efforts to cause to become effective as
soon as practicable, the Registration Statement, subject to the terms of this
Warrant.
(b) Number of Registrations. The Holder is entitled to one
Demand Registration. The Holder agrees that if the Company determines that there
are material developments which the Company determines require the filing of a
post-effective amendment to the Registration Statement, then the Holder agrees
to refrain from selling any Registrable Securities until the post-effective
amendment is declared effective. The Company agrees to file and attempt to have
declared effective such post-effective amendment as soon as
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possible. The Company shall not be deemed to have effected a Demand Registration
unless and until such Demand Registration is declared effective.
(c) Reduction Size of Demand Registrations. If the managing
underwriter or underwriters of a Demand Registration advise the Company in
writing that in its or their opinion the principal amount and/or number of
Registrable Securities proposed to be sold in such Demand Registration exceeds
the principal amount and/or number of Registrable Securities which can be sold
in such offering without an adverse effect on such offering, the Company will
include in such registration only the number of Registrable Securities which, in
the opinion of such underwriter or underwriters, can be sold. The Holder shall
be entitled to an additional Demand Registration hereunder (with all expenses of
registration relating to such additional Demand Registration to be borne by the
Company) on the same terms and conditions as would have applied had such earlier
Demand Registration not been made in the event that all Registrable Securities
requested to be included in the Demand Registration are not so included.
(d) Selection of Underwriters and Counsel. If any Demand
Registration is an underwritten offering with respect to any issue of
Registrable Securities, the Holder will select the investment banker or bankers
and manager or managers to administer the offering and counsel to the Holder;
provided, that such investment bankers and managers be of nationally recognized
standing and reasonably satisfactory to the Company. The Holder shall pay all
underwriting discounts and commissions of such investment banker or bankers and
manager or managers.
(e) Notwithstanding the provisions of Section 6.01(a) hereof,
the Company shall have the right at any time on one occasion in respect of any
Registration Statement to delay the filing of such Registration Statement or to
withdraw such Registration Statement (or notify the Holder not to sell such
Registrable Securities pursuant to such Registration Statement) after the filing
and the effective date thereof (each such delay, withdrawal or notice is
referred to herein as a "Permitted Interruption") for a reasonable period of
time (not to exceed 45 days in any 12-month period in any such case, which may
not thereafter be extended) if, at such time: (i) the Holder is in possession of
material non-public information in respect of the Company; (ii) the Company is
engaged in any active program for repurchase of shares of Common Stock and
furnishes a certificate to that effect to the Holder; or (iii) the Board of
Directors of the Company shall determine in good faith that such offering will
interfere with a pending or contemplated financing, merger, acquisition, sale of
assets, recapitalization or other similar corporate action of the Company and
the Company furnishes a certificate to that effect to the Holder. After such
Permitted
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Interruption, the Company shall use its best efforts to restore such
Registration or to effect such Registration (as the case may be) within 30 days
without further request from the Holder, unless such Demand Registration request
has been withdrawn by written notice of the Holder.
6.02 Piggyback Registration Rights.
(a) If the Company at any time or from time to time subsequent
to the date of this Warrant proposes to register any securities under the
Securities Act either for its own account or the account of any selling security
holders (other than pursuant to (i) a registration statement on Forms S-4 or S-8
or any successor or similar forms, (ii) a registration relating solely to a
Commission Rule 145 offering, or (iii) a registration on any form that does not
permit secondary sales), it will give written notice to each of the Holders of
its intention at least ten (10) days in advance of the filing of any
registration statement with respect thereto. Upon the written request of any of
the Holders given within five (5) days after receipt of such notice, the Company
will use its best efforts to include in such registration, and in any
underwriting involved therein, all the Registrable Securities included in such
request.
(b) Upon making a request pursuant to this Section 6.02, the
Holders shall specify the number of shares of Registrable Securities to be
registered on their behalf and the intended method of disposition thereof. The
Company may require the Holders to furnish to the Company such information in
writing 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 Securities 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.
ARTICLE VII
MISCELLANEOUS
7.01 Notices. All notices, requests and other communications
provided for herein shall be in writing, and shall be deemed to have been made
or given when delivered or mailed, first class, postage prepaid, or sent by
telex or other telegraphic communications equipment. Such notices and
communications shall be addressed:
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(a) if to the Company, to
Paradigm Medical Industries, Inc.
1127 West 2320 South, Suite A
Salt Lake City, Utah 84119
Attention: Chief Executive Officer; or
(b) if to the Holder, to
Cyndel & Co.
26 Ludlam Avenue
Bayville, New York 11709
7.02 Waivers; Amendments. No failure or delay of the Holder in
exercising any right, power or privilege, hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof, or any abandonment or
discontinuance of steps to enforce such a right, power or privilege, preclude
any other or further exercise thereof or the exercise of any other right, power
or privilege. The rights and remedies of the Holder are cumulative and not
exclusive of any rights or remedies which it would otherwise have. The
provisions of this Warrant may be amended, modified or waived if, but only if,
such amendment, modification or waiver is in writing and is signed by the
Company and a majority of the Holders; provided that no amendment, modification
or waiver may change the exercise price of the Warrant or the number of Shares
in which this Warrant is exercisable (including without limitation any
adjustments or any provisions with respect to adjustments, the expiration of or
the manner of exercising the Warrants) without the consent in writing of all of
the Holders.
7.03 Governing Law. This Warrant shall be construed in
accordance with and governed by the laws of the State of New York.
7.04 Survival of Agreements; Representations and Warranties,
etc. All warranties, representations and covenants made by the Company herein or
in any certificate or other instrument delivered by or on behalf of it in
connection herewith shall be considered to have been relied upon by the Holders
and shall survive the issuance and delivery of the Warrants and the Shares, and
shall continue in full force and effect so long as this Warrant is outstanding.
All statements in any such certificate or other instrument shall constitute
representations and warranties hereunder.
7.05 Covenants To Bind Successor and Assigns. All the
covenants, stipulations, promises and agreements in this Warrant
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contained by or on behalf of the Company shall bind its successors
and assigns, whether or not so expressed.
7.06 Severability. In case any one or more of the provisions
contained in this Warrant shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
provisions contained herein and therein shall not in any way be affected or
impaired in such jurisdiction and shall not invalidate or render illegal or une
nforceable such provision in any other jurisdiction.
7.07 Headings. The headings used herein are for convenience of
reference only and shall not be deemed to be a part of this Warrant.
7.08 No Rights as Stockholder. This Warrant shall not entitle
the Holder to any rights as a stockholder of the Company.
7.09 Pronouns. The pronouns "it" and "its" herein shall be
deemed to mean "he" and "his" or "she" and "hers", as the context requires.
IN WITNESS WHEREOF, Paradigm Medical Industries, Inc. has
caused this Warrant to be executed in its corporate name by one of its officers
thereunto duly authorized as of the day and year first above written.
PARADIGM MEDICAL INDUSTRIES, INC.
By: /s/ Thomas F. Motter
-------------------------------------
Name: Thomas F. Motter
Title: CEO
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Exhibit 4.15
WARRANT AGREEMENT
AGREEMENT, dated as of this 12th day of February, 1999, by and between
PARADIGM MEDICAL INDUSTRIES, INC. (the ACompany") and KSH INVESTMENT GROUP, INC.
(the "Warrant Holder").
WITNESSETH:
WHEREAS, the Warrant Holder is serving as placement agent for the
Company with respect to the offer and sale, in a private placement (the "Private
Placement"), of a minimum of 572,000 shares and a maximum of 1,066,340 shares of
the Company=s Series D Convertible Preferred Stock, $.001 par value (the "Series
D Preferred Stock");
WHEREAS, pursuant to the Selling Agreement dated December 11, 1998, as
modified by the letter agreement dated February 2, 1999, between the Company and
the Warrant Holder, the Company agreed to issue pursuant to this Warrant
Agreement to the Warrant Holder as compensation in part for its services as
placement agent and investment banking services (i) Placement Agent Warrants to
be issued to the Warrant Holder at each closing under the Private Placement to
purchase at any time from the date of such closing through the applicable
Warrant Expiration Date a number of shares of Common Stock of the Company equal
to 6% of the number of shares of Common Stock into which the Series D Preferred
Stock sold at such closing is convertible at a purchase price equal to the
applicable Market Price (as defined in Section 1 hereof) for the date of such
closing and (ii) Investment Banking Fee Warrants (to be issued to the Warrant
Holder at the last closing under the Private Placement) to purchase for the
applicable Market Price for such date at any time through the applicable Warrant
Expiration Date 87,500 shares of Common Stock if a gross cumulative amount of
$1,000,000 is raised, additional identical Investment Banking Fee Warrants to
purchase an additional 17,500 shares of Common Stock for every additional
$250,000 raised up to $1,750,000 and additional identical Investment Banking Fee
Warrants to purchase up to an additional 17,500 shares of Common Stock if the
final $116,095 is raised, up to a maximum of Investment Banking Fee Warrants to
purchase 140,000 shares of Common Stock; it is understood that the Investment
Banking Fee Warrants will be issued by the Company dated, and exercisable for
the number of shares of Common Stock applicable to, the actual last closing date
under the Private Placement, even if at the time of the actual last closing date
a further closing was anticipated; and
WHEREAS, the Company desires to set forth the terms and conditions
relating to the issuance, registration, transfer, exchange and redemption of the
Placement Agent Warrants and the Investment Banking Fee Warrants, the issuance
of certificates representing the Warrants substantially in the form of Warrant
Certificate annexed as Exhibit A hereto, with such changes therein as shall be
applicable to the particular Warrant, the exercise of the Warrants, and the
rights of the holder or holders thereof.
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NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company and the Warrant
Holder, the parties hereto agree as follows:
1. Definitions. As used herein, the following terms shall have the following
meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean the common stock of the Company which at
the date hereof consists of 20,000,000 authorized shares, $ .001 par value, and
shall also include any capital stock of any class of the Company thereafter
authorized which shall not be limited to a fixed sum or percentage in respect to
the rights of the holders thereof to participate in dividends and in the
distribution of assets upon the voluntary liquidation, dissolution or winding up
of the Company; provided, however, that the shares issuable upon exercise of the
Warrants shall include (i) only shares of such class designated in the Company's
Certificate of Incorporation as Common Stock on the date of the original issue
of the Warrants, or (ii) in the case of any reclassification, change,
consolidation, merger, sale or conveyance of the character referred to in
Section 8(b) hereof, the stock, securities or property provided for in such
section; or (iii) in the case of any reclassification or change in the
outstanding shares of Common Stock issuable upon exercise of the Warrants as a
result of a subdivision or combination or a change in par value, or from par
value to no par value, or from no par value to par value, such shares of Common
Stock as so reclassified or changed.
(b) "Corporate Office" shall mean the office of the Company at which at
any particular time its principal business shall be administered, which office
is located at the date hereof at 1127 West 2320 South, Suite A, Salt Lake City,
Utah 84119.
(c) "Exercise Date" shall mean, as to any Warrant, the date on which
the Company shall have received both (a) the Warrant Certificate representing
such Warrant, with the exercise form thereon duly executed by the Registered
Holder (as defined below) thereof or his attorney duly authorized in writing,
and (b) payment in cash, or by official bank or certified check made payable to
the Company, of an amount in lawful money of the United States of America equal
to the applicable Purchase Price (as defined below).
(d) "Initial Warrant Exercise Date" shall mean, with respect to each
Warrant, the date of original issuance thereof in accordance with the provisions
hereof.
(e) "Purchase Price," with respect to a Warrant issued on any date,
shall mean the purchase price per share to be paid upon exercise of such Warrant
in accordance with the terms hereof, which price shall be the Market Price,
subject to adjustment from time to time pursuant to the terms and provisions of
Section 8 hereof.
(f) "Market Price" at any date shall be deemed to be the (i) last
reported sale price on the prior trading day, as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted to
trading, or (ii) if the Common Stock is not listed or admitted to trading on any
national securities exchange but is listed or quoted on the Nasdaq Stock Market
(National Market or SmallCap Market) (referred to hereinafter as "Nasdaq"), the
closing sales price on the prior trading day, or, (iii) if the Common Stock is
not listed or admitted to trading on any national securities exchange or Nasdaq,
but quotes for the Common Stock are available in the OTC Bulletin Board or "pink
sheets" the closing bid price on the last trading day, or (iv) in the event the
Common Stock is not traded upon a principal exchange and not listed on Nasdaq
and quotes are not available on the OTC Bulletin Board, the price as determined
in good faith by resolution of the Board of Directors of the Company, based on
the best information available to it.
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(g) "Registered Holder" shall mean as to any Warrant and as of any
particular date, the person in whose name the certificate representing the
Warrant shall be registered on that date on the books maintained by the Company
pursuant to Section 6.
(h) "Warrant Expiration Date" shall mean, with respect to the Placement
Agent Warrants, 5:00 P. M. (New York time) on the fifth anniversary of the date
of the initial closing under the Private Placement and, with respect to the
Investment Banking Fee Warrants, the fifth anniversary of the date of the last
closing under the Private Placement; provided that if any such date shall in the
State of New York be a holiday or a day on which banks are authorized or
required to close, then in lieu thereof 5:00 P.M. (New York time) on the next
following day which in the State of New York is not a holiday or a day on which
banks are authorized or required to close. Upon thirty (30) days' written notice
to all warrant holders, the Company shall have the right to extend the Warrant
Expiration Date of the Placement Agent Warrants or the Investment Banking Fee
Warrants.
(i) "Warrant Shares" shall have the meaning ascribed thereto in Section
2(a).
2. Warrants and Issuance of Warrant Certificates.
(a) A Warrant initially shall entitle the Registered Holder of the
Warrant to purchase the number of shares of Common Stock issuable upon the
exercise thereof (sometimes referred to as the "Warrant Shares"), in accordance
with the terms hereof and thereof, subject to modification and adjustment as
provided in Section 8.
(b) At each closing under the Private Placement, warrant certificates
("Warrant Certificates") in the form of Exhibit A annexed hereto shall be issued
and delivered by the Company to the Placement Agent representing the number of
Placement Agent Warrants and Investment Banking Fee Warrants required to be
delivered to the Placement Agent at such closing as provided in the second
WHEREAS clause at the head of this Agreement.
(c) From time to time, up to the applicable Warrant Expiration Date,
the Company shall or shall cause its transfer agent to countersign and deliver
stock certificates in required whole number denominations representing the
shares of Common Stock issuable, subject to adjustment as described herein, upon
the exercise of Warrants in accordance with this Agreement.
(d) From time to time, up to the applicable Warrant Expiration Date,
the Company shall countersign and deliver Warrant Certificates in required whole
number denominations to the persons entitled thereto in connection with any
transfer or exchange permitted under this Agreement; provided that no Warrant
Certificates shall be issued except (i) those initially issued hereunder, (ii)
those issued on or after the applicable Initial Warrant Exercise Date, upon the
exercise of fewer than all Warrants represented by any Warrant Certificate, to
evidence any unexercised Warrants held by the exercising Registered Holder,
(iii) those issued upon any transfer or exchange pursuant to Section 6; (iv)
those issued in replacement of lost, stolen, destroyed or mutilated Warrant
Certificates pursuant to Section 7; and (v) those issued at the option of the
Company, in such form as may be approved by the its Board of Directors, to
reflect any adjustment or change made pursuant to Section 8 hereof in the
Purchase Price or the number of shares of Common Stock purchasable upon exercise
of the Warrants.
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3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the form
attached hereto as Exhibit A (the provisions of which are hereby incorporated
herein) and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements thereon as the Company
may deem appropriate and as are not inconsistent with the provisions of this
Agreement, or as may be required to comply with any law or with any rule or
regulation, or to conform to usage or to the requirements of Section 2(b). The
Warrant Certificates shall be dated the date of issuance thereof (whether upon
initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or
destroyed Warrant Certificates) and issued in registered form. Warrant
Certificates representing Placement Agent Warrants and Investment Banking Fee
Warrants shall each be numbered serially and designated with the letters PA and
IBF, respectively.
(b) Warrant Certificates shall be executed on behalf of the Company by
its President, or any Vice President and by its Secretary or an Assistant
Secretary, by manual signatures.
4. Exercise; Cashless Exercise.
(a) Each Warrant may be exercised by the Registered Holder thereof at
any time on or after the Initial Warrant Exercise Date, but not after the
Warrant Expiration Date, upon the terms and subject to the conditions set forth
herein and in the applicable Warrant Certificate. A Warrant shall be deemed to
have been exercised immediately prior to the close of business on the Exercise
Date and the person entitled to receive the securities deliverable upon such
exercise shall be treated for all purposes as the holder of those securities
upon the exercise of the Warrant as of the close of business on the Exercise
Date. Promptly following, and in any event within three (3) business days after
the date of such exercise, the Company shall cause to be issued and delivered to
the person or persons entitled to receive the same, a certificate or
certificates for the securities deliverable upon such exercise (plus a
certificate for any remaining unexercised Warrants of the Registered Holder).
(b) Notwithstanding any provisions herein to the contrary, in lieu of
exercising any Warrant as hereinabove permitted, the Registered Holder may elect
to exercise a Warrant or a portion thereof and to pay for the Warrant Shares
issuable upon such exercise by way of cashless exercise by surrendering the
certificate representing such Warrant at the Corporate Office of the Company,
together with the Subscription Form, in which event the Company shall issue to
the Registered Holder that number of Warrant Shares computed using the following
formula:
WS x (MP B EP)
CS = --------------------
MP
Where:
CS equals the number of Warrant Shares to be issued to the Holder;
WS equals the number of Warrant Shares purchasable under the Warrant
or, if only a portion of the Warrant is being exercised, the portion of the
Warrant being exercised (at the date of such calculation);
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MP equals the Market Price of the Warrant Shares; and
EP equals the Exercise Price of the Warrant Shares.
Solely for the purposes of this Section 4(b), Market Price shall be
calculated on the date on which the form of election attached to the Warrant
Certificate is (i) if mailed by the Warrant Holder, the date it is post marked
or (ii) if sent via facsimile, the date the facsimile is received by the Company
("Notice Date").
5. Reservation of Shares, Listing Payment of Taxes, etc.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of Warrants, such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company covenants
that all shares of Common Stock which shall be issuable upon exercise of the
Warrants shall, at the time of delivery, be duly and validly issued, fully paid,
non-assessable and free from all taxes, liens and charges with respect to the
issue thereof (other than those which the Company shall promptly pay or
discharge) and that upon issuance such shares shall be listed on each national
securities exchange or eligible for inclusion in each automated quotation
system, if any, on which the other shares of outstanding Common Stock of the
Company are then listed or eligible for inclusion.
(b) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants, or the issuance, or delivery of any shares upon exercise of the
Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate representing any Warrant being exercised, then no such delivery
shall be made unless the person requesting the same has paid to the Company the
amount of transfer taxes or charges incident thereto, if any.
6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part only to an officer or partner of
the Warrant Holder. Warrant Certificates to be exchanged shall be surrendered to
the Company at its Corporate Office, and upon satisfaction of the terms and
provisions hereof, the Company shall execute, issue and deliver in exchange
therefor the Warrant Certificate or Certificates which the Registered Holder
making the exchange shall be entitled to receive. The Registered Holder shall
pay all transfer taxes, if any, for any transfer of Warrant Certificates.
(b) The Company shall keep at its office books in which, subject to
such reasonable regulations as it may prescribe, it shall register Warrant
Certificates and the transfer thereof in accordance with its regular practice.
Upon due presentment for registration of transfer of any Warrant Certificate at
such office, the Company shall execute, issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates of like kind and tenor
representing an equal aggregate number of Warrants.
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(c) With respect to all Warrant Certificates presented for registration
or transfer, or for exchange or exercise, the assignment or subscription form
attached thereto shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company, duly executed by the Registered Holder or his attorney-in-fact duly
authorized in writing.
(d) All Warrant Certificates surrendered for exercise or for exchange
in case of mutilated Warrant Certificates shall be promptly canceled by the
Company and thereafter retained by the Company until termination of this
Agreement.
(e) Prior to due presentment for registration of transfer thereof, the
Company may deem and treat the Registered Holder of any Warrant Certificate as
the absolute owner thereof and of each Warrant represented thereby
(notwithstanding any notations of ownership or writing thereon made by anyone
other than a duly authorized officer of the Company) for all purposes and shall
not be affected by any notice to the contrary.
7. Loss or Mutilation. Upon receipt by the Company of evidence
satisfactory to it of the ownership of and loss, theft, destruction or
mutilation of any Warrant Certificate and (in case of loss, theft or
destruction) of indemnity satisfactory to it, and (in the case of mutilation)
upon surrender and cancellation thereof, the Company shall execute (in the
absence of notice to the Company that the Warrant Certificate has been
transferred pursuant to the terms of Section 6(a) hereof) and deliver to the
Registered Holder in lieu thereof a new Warrant Certificate of like tenor
representing an equal aggregate number of Warrants. Applicants for a substitute
Warrant Certificate shall comply with such other reasonable regulations and pay
such other reasonable charges as the Company may prescribe.
8. Adjustment of Exercise Price and Number of Shares of Common Stock or
Warrants.
(a) In the event the Company shall, at any time or from time to time
after the date hereof, issue any shares of Common Stock as a stock dividend to
the holders of Common Stock, or subdivide or combine the outstanding shares of
Common Stock into a greater or lesser number of shares, then, and thereafter
upon each further such stock dividend, subdivision or combination, the Purchase
Price with respect to each Warrant in effect immediately prior to such stock
dividend, subdivision or combination shall be proportionately adjusted.
Upon each adjustment of the Purchase Price with respect to a Warrant
pursuant to this Section 8, the total number of shares of Common Stock
purchasable upon the exercise of such Warrant shall (subject to the provisions
contained in Section 8(b) hereof) be such number of shares (calculated to the
nearest tenth) purchasable at the Purchase Price in effect immediately prior to
such adjustment multiplied by a fraction, the numerator of which shall be the
Purchase Price in effect immediately prior to such adjustment and the
denominator of which shall be the Purchase Price in effect immediately after
such adjustment.
(b) In case of any reclassification, capital reorganization or other
similar change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other similar change of outstanding shares of Common Stock),
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or in case of any sale or conveyance to another corporation of the property of
the Company as, or substantially as, an entirety (other than a sale leaseback,
mortgage or other financing transaction), the Company shall cause effective
provision to be made so that each holder of a Warrant then outstanding shall
have the right thereafter, by exercising such Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization or other similar
change, consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock that might have been purchased upon exercise of such
Warrant immediately prior to such reclassification, capital reorganization or
other similar change, consolidation, merger, sale or conveyance. Any such
provision shall include provision for adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
8. The Company shall not effect any such consolidation, merger or sale unless
prior to or simultaneously with the consummation thereof the successor (if other
than the Company) resulting from such consolidation or merger or the corporation
purchasing assets or other appropriate corporation or entity shall assume, by
written instrument executed and delivered to the Company, the obligation to
deliver to the holder of each Warrant such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such holders may be entitled to
purchase and the other obligations under this Agreement. The foregoing
provisions shall similarly apply to successive reclassifications, capital
reorganizations and other similar changes of outstanding shares of Common Stock
and to successive consolidations, mergers, sales or conveyances.
(c) Irrespective of any adjustments or changes in the Purchase Price or
the number of shares of Common Stock purchasable upon exercise of the Warrants,
the Warrant Certificates theretofore issued shall, unless the Company shall
exercise its option to issue new Warrant Certificates pursuant to Section
2(d)(v) hereof, continue to express the Purchase Price per share and the number
of shares purchasable thereunder as the Purchase Price per share and the number
of shares purchasable were expressed in the Warrant Certificates when the same
were originally issued.
(d) After each adjustment of the Purchase Price for any Warrant
pursuant to this Section 8, the Company will promptly prepare a certificate
signed by the President or a Vice President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company
setting forth: (i) the Purchase Price as so adjusted, (ii) the number of shares
of Common Stock purchasable upon exercise of such Warrant after such adjustment,
and (iii) a brief statement of the facts accounting for such adjustment. The
Company will promptly cause a brief summary thereof to be sent by ordinary first
class mail to each Registered Holder of Warrants at his last address as it shall
appear on the registry books of the Company. No failure to mail such notice nor
any defect therein or in the mailing thereof shall affect the validity thereof.
The affidavit of the Secretary or an Assistant Secretary of the Company that
such notice has been mailed shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.
(e) No adjustment of the Purchase Price shall be made unless such
adjustment would require an increase or decrease of at least $.10 in such price;
provided that any adjustments which by reason of this Section 8(e) are not
required to be made shall be carried forward and shall be made at the time of
and together with the next subsequent adjustment which, together with any
adjustment(s) so carried forward, shall require an increase or decrease of at
least $.10 in the Purchase Price then in effect hereunder.
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<PAGE>
(f) Any determination as to whether an adjustment in the Purchase Price
in effect hereunder is required pursuant to Section 8, or as to the amount of
any such adjustment, if required, shall be binding upon the holders of the
Warrants and the Company if made in good faith by the Board of Directors of the
Company.
(g) If and whenever the Company shall contemplate the grant to all the
holders of Common Stock, as such, rights or warrants to subscribe for or to
purchase, or any options for the purchase of, Common Stock or securities
convertible into or exchangeable for or carrying a right, warrant or option to
purchase Common Stock, the Company shall give each Registered Holder notice of
such contemplated grant at the same time it gives the holders of its Common
Stock notice of such grant, but in any event not later that 10 days prior to the
record date for such grant. No Registered Holder shall be entitled to such
rights, warrants or options unless, prior to the record date for such
transaction, such Registered Holder shall have exercised its Warrant and shall
have become a holder of Common Stock. Any Registered Holder that does exercise
its Warrant prior to such record date shall be entitled to receive such rights,
warrants or options that are attributable to the number of shares of Common
Stock held by such Registered Holder.
9. Private Placement.
The Warrants and the Warrant Shares have not been registered
under the Securities Act. Upon exercise, in part or in whole, of this Warrant,
certificates representing the Warrant Shares shall bear the following legend:
These securities have not been registered under the Securities
Act of 1933. Such securities may not be sold or offered for
sale, transferred, hypothecated or otherwise assigned in the
absence of an effective registration statement with respect
thereto under such Act or an opinion of counsel reasonably
satisfactory to the Company that an exemption from
registration for such sale, offer, transfer, hypothecation or
other assignment is available under such Act.
10. Registration of Warrant Shares.
(a) The Company agrees to include the Warrant Shares in the
registration statement which the Company has agreed to file with the Securities
and Exchange Commission (the "SEC") promptly after the last closing date under
the Private Placement to register the sale of the shares of Common Stock
issuable upon conversion of the Series D Preferred Stock sold in the Private
Placement. The Company will use its best efforts to have such registration
statement declared effective and will keep such registration statement current
until such time as the Warrant Shares are fully tradeable pursuant to Rule 144
(k) promulgated under the Securities Act.
(b) In connection with any registration of Warrant Shares under this
Section 10, the Company covenants and agrees as follows:
(i) The Company shall pay all costs (excluding fees and expenses of
counsel of any holder of Warrants Shares and any underwriting or selling
commissions or other charges of any broker-dealer acting on behalf of any
holder(s)), fees and expenses in connection with the registration statement
filed pursuant to Section 10(a) hereof including, without limitation, the
Company's legal and accounting fees, printing expenses and blue sky fees and
expenses.
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(ii) The Company will take all necessary action that may be required in
qualifying or registering the Warrants Shares for offering and sale under the
securities or blue sky laws of such states as reasonably are requested by the
holder(s) of the Warrants, provided that the Companv shall not be obligated to
qualify as a foreign corporation to do business under the laws of any such
jurisdiction.
(iii) The Company shall indemnify the holder(s) of the Warrant Shares
to be sold pursuant to the registration statement and each person, if any, who
controls such holder(s) within the meaning of Section 15 of the Securities Act
or Section 20(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Securities Act, the Exchange Act or any other statute, common law or
otherwise, arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in such registration statement executed
by the Company or based upon written information furnished by the Company filed
in any jurisdiction in order to qualify the Warrant Shares under the securities
laws thereof or filed with the SEC, any state securities commission or agency,
the National Association of Securities Dealers, Inc., Nasdaq or any securities
exchange, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements contained
therein not misleading, unless such statement or omission was made in reliance
upon and in conformity with written information furnished to the Company by the
holder(s) expressly for use in such registration statement, any amendment or
supplement thereto or any application, as the case may be. If any action is
brought against the holder(s) or any controlling person of the holder(s) in
respect of which indemnity may be sought against the Company pursuant to this
Section 10(b)(iii), the holder(s) or such controlling person shall, within
thirty (30) days after the receipt of a summons or complaint, notify the Company
in writing of the institution of such action and the Company shall assume the
defense of such action, including, the employment and payment of reasonable fees
and expenses of counsel (which counsel shall be reasonably satisfactory to the
holder(s) or such controlling person), but the failure to give such notice shall
not affect such indemnified person's right to indemnification hereunder except
to the extent that the Company's defense of such action was materially adversely
affected thereby. The holder(s) or such controlling person shall have the right
to employ its or their own counsel in any such case, but the fees and expenses
of such counsel shall be at the expense of the holder(s) or such controlling
person unless the employment of such counsel shall have been authorized in
writing by the Company in connection with the defense of such action, the
Company shall not have employed counsel to have charge of the defense of such
action or such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them which are different from or
additional to those available to the Company (in which case the Company shall
not have the right to direct the defense of such action on behalf of the
indemnified party or parties) in any of which events the fees and expenses of
not more than one additional firm of attorneys for the holder(s) and/or such
controlling person shall be borne by the Company. Except as expressly provided
in the previous sentence, in the event that the Company shall have assumed the
defense of any such action or claim, the Company shall not thereafter be liable
to the holder(s) or such controlling person in investigating, preparing or
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defending any such action or claim. The Company agrees promptly to notify the
holder(s) of the commencement of any litigation or proceedings against the
Company or any of its officers, directors or controlling persons in connection
with the resale of the Warrant Shares or in connection with such registration
statement.
(iv) The holders of the Warrant Shares to be sold pursuant to the
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act, against all loss, claim,
damage, expense or liability (including all expenses reasonable incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Securities Act, the Exchange Act or otherwise,
arising from written information furnished by or on behalf of such holder(s), or
their successors or assigns, expressly for use in such registration statement.
As used in this Section 10, references to "holders of the Warrant
Shares" shall include the holders of the Warrants not yet exercised.
11. Fractional Warrants and Fractional Shares.
If the number of shares of Common Stock purchasable upon the exercise
of each Warrant is adjusted pursuant to Section 8 hereof, the Company
nevertheless shall not be required to issue fractions of shares, upon exercise
of the Warrants or otherwise, or to distribute certificates that evidence
fractional shares. In such event, the Company may at its option elect to round
up the number of shares to which the Holder is entitled to the nearest whole
share or to pay cash in respect of fractional shares in accordance with the
following: 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 Price of one share of Common Stock.
12. Warrant Holders Not Deemed Stockholders. No holder of Warrants
shall, as such, be entitled to vote or to receive dividends or be deemed the
holder of Common Stock that may at any time be issuable upon exercise of such
Warrants for any purpose whatsoever, nor shall anything contained herein be
construed to confer upon the holder of Warrants, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue or reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger or conveyance or otherwise), or to receive
notice of meetings, or to receive dividends or subscription rights, until such
Holder shall have exercised such Warrants and been issued shares of Common Stock
in accordance with the provisions hereof.
13. Rights of Action. All rights of action with respect to this
Agreement are vested in the respective Registered Holders of the Warrants, and
any Registered Holder of a Warrant or of the holder of any other Warrant, may,
in his own behalf and for his own benefit, enforce against the Company his right
to exercise his Warrants for the purchase of shares of Common Stock in the
manner provided in the Warrant Certificate and this Agreement.
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<PAGE>
14. Agreement of Warrant Holders. Every holder of a Warrant, by his
acceptance thereof, consents and agrees with the Company, and every other holder
of a Warrant that:
(a) The Warrants are transferable only on the registry books of the
Company by the Registered Holder thereof in person or by his attorney-in-fact
duly authorized in writing and only if the Warrant Certificates representing
such Warrants are surrendered at the office of the Company, duly endorsed or
accompanied by a proper instrument of transfer satisfactory to the Company in
its discretion, together with payment of any applicable transfer taxes; and
(b) The Company may deem and treat the Registered Holder as the
absolute, true and lawful owner of the Warrants represented thereby for all
purposes, and the Company shall not be affected by any notice or knowledge to
the contrary.
15. Cancellation of Warrant Certificates. If the Company shall purchase
or acquire any Warrant, the Warrant Certificate or Warrant Certificates
evidencing the same shall thereupon be delivered to the Company and canceled by
it and retired. The Company shall also cancel any Warrant Certificates following
exercise of any of the Warrants Certificates represented thereby or delivered to
it for transfer, split up, combination or exchange.
16. Modification of Agreement. This Agreement shall not be modified,
supplemented or altered in any respect except with the consent in writing of the
Company and the Warrant Holder, other than such changes as are specifically
prescribed by this Agreement as originally executed or are made in compliance
with applicable law.
17. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first class registered or certified mail, postage prepaid as
follows: if to the Registered Holder of a Warrant Certificate, at the address of
such holder as shown on the registry books maintained by the Company; if to the
Company, 1127 West 2320 South, Suite A, Salt Lake City, Utah 84119 or such other
address as the Company may specify.
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without reference to
principles of conflicts of laws.
19. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Company and the Registered Holders, and their respective
successors and assigns, and the holders from time to time of Warrant
Certificates. Nothing in this Agreement is intended or shall be construed to
confer upon any other person any right, remedy or claim, in equity or at law, or
to impose upon any other person any duty, liability or obligation.
20. Termination. This Agreement shall terminate at the close of
business on the latest Warrant Expiration Date of all the Warrants or such
earlier date upon which all Warrants have been exercised.
-11-
<PAGE>
21. Counterparts. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
PARADIGM MEDICAL INDUSTRIES, INC.
By: /s/ Thomas F. Motter
_____________________________________
Name: Thomas F. Motter
Title: CEO
KSH INVESTMENT GROUP, INC.
By: /s/ Cary W. Sucoff
_____________________________________
Name: Cary W. Sucoff
Title: Managing Director
-12-
<PAGE>
EXHIBIT A
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. SUCH SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE, TRANSFERRED,
HYPOTHECATED OR OTHERWISE ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT WITH RESPECT THERETO UNDER SUCH ACT OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM REGISTRATION FOR
SUCH SALE, OFFER, TRANSFER, HYPOTHECATION OR OTHER ASSIGNMENT IS AVAILABLE UNDER
SUCH ACT.
FORM OF WARRANT CERTIFICATE
No. ____
WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
PARADIGM MEDICAL INDUSTRIES, INC.
THIS CERTIFIES THAT
FOR VALUE RECEIVED _______________________________________ or
registered assigns (the "Registered Holder") is the owner of the number of
Common Stock Purchase Warrants ("Warrants") specified above. Each Warrant
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and non-assessable share of Common Stock,
$.001 par value ("Common Stock"), of PARADIGM MEDICAL INDUSTRIES, INC., a
Delaware corporation (the "Company"), at any time between the Initial Exercise
Date (as herein defined) and the Expiration Date (as hereinafter defined), upon
the presentation and surrender of this Warrant Certificate with the Subscription
Form attached hereto duly executed, at the corporate office of the Company,
accompanied by payment of $ (see footnote 1) per share of common stock, subject
to adjustment from time to time pursuant to the terms and provisions of Section
8 of the Warrant Agreement in lawful money of the United States of America in
cash or by official bank or certified check made payable to the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement") dated February 12,
1999, by and between the Company and the Registered Holder. Terms not defined
herein shall have the meanings assigned to them in the Warrant Agreement.
- --------------------
1 The blanks in the form of warrant certificate shall be completed in the
actual Warrant Certificates in accordance with the terms and provisions
of the Warrant Agreement and the Placement Agency Agreement.
-13-
<PAGE>
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and/or the number of shares of Common Stock
subject to purchase upon the exercise of each Warrant represented hereby are
subject to modifications or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Initial Exercise Date" shall mean as of the date hereof.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on (see
footnote 1), 2004. If such date shall in the State of New York be a holiday or a
day on which the banks are authorized to close, then the Expiration Date shall
mean 5:00 p.m. (New York time) the next following day which in the State of New
York is not a holiday or a day on which banks are authorized to close.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York, without reference to
principles of conflicts of laws.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by its officer thereunto duly
authorized.
PARADIGM MEDICAL INDUSTRIES, INC.
By:___________________________________
Name:
Title:
Date:_________________________________
-14-
<PAGE>
SUBSCRIPTION FORM
(To Be Executed by the Registered Holder in Order to Exercise Warrants)
--------------------------
Date:______________________
The Undersigned hereby elects irrevocably to exercise the
within Warrant and to purchase ____________ Shares of Common Stock of
Paradigm Medical Industries, Inc. and hereby makes payment of
$_____________________ (at the rate of $______________ per share) in
payment of the Exercise Price pursuant thereto. Please issue the
shares as to which this Warrant is exercised in accordance with the
instructions given below.
OR
The Undersigned hereby elects irrevocably to exercise the
within Purchase Option and to purchase ___________ Shares of Common
Stock of Paradigm Medical Industries, Inc. by surrender of the
unexercised portion of the within Warrant. Please issue the Common
Stock comprising the Warrant in accordance with the instructions given
below.
------------------------------
Signature
------------------------------
Signature Guaranteed
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name________________________________________________________________________
(Print in Block Letters)
Address_____________________________________________________________________
NOTICE: The signature to this form must correspond with the
name as written upon the face of the within Warrant in every
particular without alteration or enlargement or any change whatsoever,
and must be guaranteed by a bank, other than a savings bank, or by a
trust company or by a firm having membership on a registered national
securities exchange.
<PAGE>
ASSIGNMENT
(To Be Executed by the Registered Holder in Order to Assign Warrants)
---------------------------
FOR VALUE RECEIVED, the Undersigned Registered Holder hereby sells,
assigns and transfers unto
------------------------------------------
(insert name)
whose taxpayer identification or other identifying number is:
____________________ and whose address is:
------------------------------------------
------------------------------------------
------------------------------------------
------------------------------------------
(please print or type address)
the following number of the Warrants represented by this Warrant Certificate:
___________________, and hereby irrevocably constitutes and appoints
___________________ Attorney to transfer this Warrant Certificate on the books
of the Company, with full power of substitution in the premises.
---------------------------
(Date)
---------------------------
(Signature)
2
Exhibit 5.
April 27, 1999
Paradigm Medical Industries, Inc.
1127 West 2300 South, Suite A
Salt Lake City, Utah 84119
Re: Form SB-2 Registration Statement
Ladies and Gentlemen:
We have acted as your counsel in connection with the registration for
resale on a Form SB-2 Registration Statement (the "Registration Statement") of
(i) an aggregate of 1,000,000 shares of common stock, $.001 par value (the
"Common Stock") issuable upon the exercise of 1,000,000 Class A Warrants (the
"Class A Warrants") which were issued in connection with the Company's public
offering in July 1996; (ii) an aggregate of 200,000 shares of Common Stock
issuable upon the exercise of 200,000 warrants issued to Kenneth Jerome &
Company, Inc. (the "Underwriter's Warrants"); (iii) an aggregate of 291,000
shares of Common Stock issuable upon the exercise of 291,000 warrants issued to
Win Capital Corporation (the "Win Capital Warrants"); (iv) an aggregate of
207,500 shares of Common Stock issuable upon the exercise of 207,500 warrants
issued to certain investors participating in the Company's bridge financing (the
"Note Holders' Warrants"); (v) an aggregate of 25,000 shares of Common Stock
issuable upon the exercise of 25,000 warrants issued to Mackey Price & Williams
(the "Attorney's Warrants"); (vi) an aggregate of 1,713,142 shares of Common
Stock issuable upon conversion of its Series C Convertible Preferred Stock (the
"Series C Preferred Stock"); (vii) 75,000 shares of Common Stock issuable upon
conversion of a 12% Convertible, Redeemable Promissory Note (the "Note"); (viii)
an aggregate of 216,316 shares of Common Stock, of which 126,316 shares are
issuable to Humphrey Systems of Carl Zeiss, Inc. ("Humphrey Systems") pursuant
to an Agreement for Purchase and Sale of Assets dated July 23, 1998 with
Humphrey Systems (the "Agreement for Purchase and Sale of Assets") and 90,000
shares are issuable to Zevex International, Inc. ("Zevex") pursuant to a Stock
Purchase for the Satisfaction of Debt Agreement dated June 29, 1988 with Zevex;
and (viii) 1,000,000 shares of Common Stock for the purchase of assets from
Humphrey Systems pursuant to the Agreement for Purchase and Sale of Assets and
for raising additional working capital. These shares of Common Stock were
<PAGE>
Paradigm Medical Industries, Inc.
April 27, 1999
Page 2
- -----------------------------------
previously registered by Form SB-2 Registration Statements, No. 333-68471,
effective as of January 4, 1999, No. 333-57711, effective as of September 14,
1998, and No. 333-2496, effective as of July 10, 1996.
The Company is further registering for resale 1,140,000 shares of
Common Stock issuable upon the conversion of its Series D Convertible Preferred
Stock and 348,400 shares of Common Stock issuable upon the exercise of warrants
issued to KSH Investment Group, Inc., Cyn Del & Co. and Win Capital Corp.
In such connection, we have examined certain corporate records and
proceedings of the Company, including the proceedings taken in connection with
the authorization and issuance of the securities described above, including the
shares of Common Stock issuable upon the exercise of the Class A Warrants,
Underwriter's Warrants, Note Holders' Warrants, Attorney's Warrants, Win Capital
Warrants, KSH Investment Group Warrants and Cyn Del Warrants; the shares of
Common Stock issuable upon the conversion of the Series C Preferred Stock, Note,
and Series D Preferred Stock; and the shares of Common Stock issuable for the
purchase of assets from Humphrey Systems pursuant to the Agreement for Purchase
and Sale of Assets, for the satisfaction of debt pursuant to the Stock Purchase
for the Satisfaction of Debt Agreement with Zevex and for raising additional
working capital (hereinafter collectively referred to as the "Securities") and
such other investigation as we deemed necessary. Based upon the foregoing, we
are of the opinion that when sold or registered as contemplated by the
Registration Statement, the Securities will be validly issued, fully paid and
nonassessable.
We hereby consent to being named in the Registration Statement and in
the Prospectus constituting a part thereof, as amended from time to time, as
issuer's counsel and the attorneys who will pass upon legal matters in
connection with the issuance or registration of the Securities, and to the
filing of this opinion as an Exhibit to the Registration Statement.
Very truly yours,
/s/ Randall A. Mackey
Mackey Price & Williams
TR-425M.PMI
Exhibit 10.34
January 19, 1999 $25,000
Non-Negotiable Promissory Note
Due July 19, 1999
Paradigm Medical Industries, Inc., a Delaware corporation
("Borrower"), for value received hereby promises to pay to Win Capital Corp., a
New York corporation ("Noteholder"), by certified check or wire transfer of
immediately available funds the principal sum of Twenty-Five Thousand Dollars
($25,000) ("Note Amount") on July 19, 1999 (the "Maturity Date").
1. Terms of Note. The Note Amount shall bear interest at the
rate of 10.0% per annum, with interest accruing from the date hereof through and
including the Maturity Date. All computations of interest payable hereunder
shall be on the basis of a 360-day year and actual days elapsed in the period
for which such interest is payable. Interest shall be payable monthly in
arrears, with the final payment due on the Maturity Date.
Whenever any payment on this Note shall be stated to be due on
a Saturday, a Sunday or a day on which banking institutions in the City of New
York 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 be included in
the computation of the payment of interest on this Note.
2. Transfer. This Note is not assignable or transferable by
Noteholder. Borrower may assign its obligations hereunder without the prior
written consent of Noteholder.
3. No Waiver. No failure on the part of Noteholder to
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
4. Costs; Expenses. In the event Noteholder initiates an
action to enforce the provisions of this Note, then the prevailing party in such
action, as determined by the court, agency, tribunal or other body with
jurisdiction over the action, shall be reimbursed by the other party its
reasonable fees and out-of-pocket expenses of counsel in connection with such
action.
222997.1
-1-
<PAGE>
5. Amendment. No amendment or waiver of any provision of this
Note, nor consent to any departure by Borrower herefrom, shall in any event be
effective unless the same shall be in writing and signed by Noteholder and
Borrower and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
222997.1
-2-
<PAGE>
6. Waivers. Borrower hereby waives any requirements of demand,
presentment for payment, notice of dishonor, notice of protest and protest.
7. Acceleration. If the Note Amount is not paid by Borrower on
the Maturity Date, and remains unpaid thirty business days thereafter, an "Event
of Default" shall have occurred. If suit is brought to collect the Note Amount,
Noteholder shall be entitled to collect all reasonable costs and expenses of
suit, including, but not limited to, reasonable attorney's fees. If prior to the
occurrence of an Event of Default, but following the Maturity Date, Borrower
shall pay all overdue payments due and owing hereunder to Noteholder, then no
Event of Default shall have occurred.
8. No Set Off. This Note is not subject to any right of set
off.
9. Prepayment. Borrower may prepay the Note Amount in full or
in part and any accrued but unpaid interest thereon without penalty at any time.
Any partial prepayment shall be applied in inverse order against the Note Amount
outstanding.
10. Governing Law; Forum. THIS NOTE AND THE LEGAL RELATIONS
BETWEEN THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW RULES OF
SUCH STATE. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF ANY NEW YORK STATE COURT OR FEDERAL COURT SITTING IN
THE STATE OF NEW YORK OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO THIS NOTE AND THE TRANSACTIONS CONTEMPLATED HEREBY AND EACH OF THE PARTIES
HERETO HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE OR FEDERAL COURT.
EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
LEGALLY POSSIBLE, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF
SUCH ACTION OR PROCEEDING.
IN WITNESS WHEREOF, the undersigned has caused this Note to be
executed as of the date first above written.
PARADIGM MEDICAL INDUSTRIES, INC.
By: /s/ Thomas F. Motter
---------------------------
Name: Thomas F. Motter
Title: CEO
222997.1
-3-
Exhibit 10.35
January 19, 1999 $75,000
Non-Negotiable Promissory Note
Due July 19, 1999
Paradigm Medical Industries, Inc., a Delaware corporation
("Borrower"), for value received hereby promises to pay to Cyndel & Co., a New
York corporation ("Noteholder"), by certified check or wire transfer of
immediately available funds the principal sum of Seventy-Five Thousand Dollars
($75,000) ("Note Amount") on July 19, 1999 (the "Maturity Date").
1. Terms of Note. The Note Amount shall bear interest at the
rate of 10.0% per annum, with interest accruing from the date hereof through and
including the Maturity Date. All computations of interest payable hereunder
shall be on the basis of a 360-day year and actual days elapsed in the period
for which such interest is payable. Interest shall be payable monthly in
arrears, with the final payment due on the Maturity Date.
Whenever any payment on this Note shall be stated to be due on
a Saturday, a Sunday or a day on which banking institutions in the City of New
York 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 be included in
the computation of the payment of interest on this Note.
2. Transfer. This Note is not assignable or transferable by
Noteholder. Borrower may assign its obligations hereunder without the prior
written consent of Noteholder.
3. No Waiver. No failure on the part of Noteholder to
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
4. Costs; Expenses. In the event Noteholder initiates an
action to enforce the provisions of this Note, then the prevailing party in such
action, as determined by the court, agency, tribunal or other body with
jurisdiction over the action, shall be reimbursed by the other party its
reasonable fees and out-of-pocket expenses of counsel in connection with such
action.
221838.3
-1-
<PAGE>
5. Amendment. No amendment or waiver of any provision of this
Note, nor consent to any departure by Borrower herefrom, shall in any event be
effective unless the same shall be in writing and signed by Noteholder and
Borrower and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
6. Waivers. Borrower hereby waives any requirements of demand,
presentment for payment, notice of dishonor, notice of protest and protest.
7. Acceleration. If the Note Amount is not paid by Borrower on
the Maturity Date, and remains unpaid thirty business days thereafter, an "Event
of Default" shall have occurred. If suit is brought to collect the Note Amount,
Noteholder shall be entitled to collect all reasonable costs and expenses of
suit, including, but not limited to, reasonable attorney's fees. If prior to the
occurrence of an Event of Default, but following the Maturity Date, Borrower
shall pay all overdue payments due and owing hereunder to Noteholder, then no
Event of Default shall have occurred.
8. No Set Off. This Note is not subject to any right of set
off.
9. Prepayment. Borrower may prepay the Note Amount in full or
in part and any accrued but unpaid interest thereon without penalty at any time.
Any partial prepayment shall be applied in inverse order against the Note Amount
outstanding.
10. Governing Law; Forum. THIS NOTE AND THE LEGAL RELATIONS
BETWEEN THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW RULES OF
SUCH STATE. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF ANY NEW YORK STATE COURT OR FEDERAL COURT SITTING IN
THE STATE OF NEW YORK OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO THIS NOTE AND THE TRANSACTIONS CONTEMPLATED HEREBY AND EACH OF THE PARTIES
HERETO HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE OR FEDERAL COURT.
EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
LEGALLY POSSIBLE, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF
SUCH ACTION OR PROCEEDING.
IN WITNESS WHEREOF, the undersigned has caused this Note to be
executed as of the date first above written.
PARADIGM MEDICAL INDUSTRIES, INC.
By: /s/ Thomas F. Motter
------------------------
Name: Thomas F. Motter
Title: CEO
221838.3
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Exhibit 10.36
CONSULTING AGREEMENT
This Agreement is made and entered into the 19th day of
January, 1999, by and between Paradigm Medical Industries, Inc., a Delaware
corporation (the "Company"), and Win Capital Corp., a New York corporation (the
"Consultant").
In consideration of and for the mutual promises and covenants
contained herein, and for other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Purpose. The Company hereby retains the Consultant during
the term specified in Section 2 hereof to render consulting advice to the
Company as is reasonably required by the Company, upon the terms and conditions
as set forth herein.
2. Term. This Agreement shall be effective for a period (the
"Consulting Period") commencing as of the date of this Agreement and ending on
the one-year anniversary of the date of this Agreement.
3. Duties of Consultant. During the Consulting Period, the
Consultant will provide the Company with such regular and customary consulting
advice as is reasonably requested by the Company, provided that the Consultant
shall not be required to undertake duties not reasonably within the scope of the
consulting advisory services contemplated by this Agreement. In performance of
these duties, the Consultant shall provide the Company with the benefits of his
best judgment and efforts. It is understood and acknowledged by the parties that
the value of the Consultant's advice is not measurable in any quantitative
manner, and that the Consultant shall be obligated to render advice, upon the
request of the Company, in good faith. The Consultant's duties may include, but
will not necessarily be limited, to advice with regard to formulating a plan for
the reduction of expenses of the Company and an increase in revenues of the
Company. The Consultant shall report to Thomas Motter.
4. Consultant's Liability. In the absence of negligence or
willful misconduct on the part of the Consultant, or the Consultant's breach of
this Agreement, the Consultant shall not be liable to the Company, or to any
officer, director, employee, partner or creditor of the Company, for any act or
omission in the course of or in connection with the rendering or providing of
advice hereunder. Except in those cases where the negligence or willful
misconduct of the Consultant or the breach by the Consultant of this Agreement
is alleged and proven, the Company agrees to defend, indemnify and hold the
Consultant harmless from and against any and all liability (but not any fees or
expenses of any kind, including legal fees paid by the Consultant) which may in
any way result from services rendered by the Consultant pursuant to or in any
connection with this Agreement. Notwithstanding any contrary provision contained
in this Agreement, the indemnity provided for in this Paragraph 4 shall survive
any termination of this Agreement.
221656.3
-1-
<PAGE>
5. Expenses. Subject to the prior approval of the
Company and upon receipt of appropriate supporting documentation, the Company
shall reimburse the Consultant for any and all reasonable out-of-pocket expenses
incurred by the Consultant in connection with services rendered by the
Consultant to the Company pursuant to this Agreement, including, but not limited
to, hotel, food and associated expenses, all charges for travel and
long-distance telephone calls and all other expenses incurred by the Consultant
in connection with services rendered by the Consultant to the Company pursuant
to this Agreement. Expenses payable by the Company under this Section 5 shall
not include allocable overhead expenses of the Consultant, including, but not
limited to, secretarial charges and rent.
6. Compensation. As compensation for the services to be
rendered by the Consultant to the Company pursuant to Section 3 hereof, the
Company shall pay the Consultant a consulting fee of $5,000 per month during the
Consulting Period. The initial monthly payment of the consulting fee described
in this Section 6 shall be due on the first business day of the first month
immediately following the month in which the initial closing of a private
placement of Series D Convertible Preferred Stock, $.001 par value per share, of
the Company occurs, and each subsequent monthly payment shall be due on the
first business day of each of the next eleven months thereafter.
7. Limitation Upon the Use of Advice and Services.
(a) No person or entity, other than the Company or
any of its affiliates, or any of their respective officers, directors,
employees, partners and authorized agents shall be entitled to make use of or
rely upon the advice of the Consultant to be given hereunder, and the Company
shall not transmit such advice to others, or encourage or facilitate the use or
reliance upon such advice by others, without the written prior consent of the
Consultant.
(b) Except as may be reasonably required for the
Consultant to perform his duties hereunder, at no time during the term of this
Agreement shall the Consultant, individually or jointly with others, publish,
disclose, use, or authorize anyone else to publish, disclose, or use, any secret
or confidential material or information relating to any aspect of the business
or operations of the Company that the Consultant learns about as a result of his
engagement hereunder, including, without limitation, any secret or confidential
information relating to the business, customers, trade or industrial practices,
trade secrets, technology or know-how of the Company.
(c) During the Consulting Period, the Consultant
shall not, without the prior written approval of the Company, directly or
indirectly solicit, raid, entice or induce any person who presently is, or at
any time during the Consulting Period shall be, an employee, director, partner
or officer of the Company or any of its affiliates, to become employed by the
Consultant or any of his affiliates; provided, however, that the limitations
contained in this subparagraph (c) shall not apply to any employee, director,
partner or officer of the Company or any of its affiliates employed by the
Consultant or any of its affiliates as of the date of this Agreement.
-2-
<PAGE>
8. Severability. Every provision of this Agreement is intended
to be severable. If any term or provision hereof is deemed unlawful or invalid
for any reason whatsoever, such unlawfulness or invalidity shall not affect the
validity of the remainder of this Agreement.
9. Representation by Counsel. All parties hereto acknowledge
that Olshan Grundman Frome Rosenzweig & Wolosky LLP ("OGFRW") represented the
Company in connection with this Agreement and the transactions contemplated
hereby, and that OGFRW is not prohibited from representing the Company on any
matter in the future relating to this Agreement. The parties further acknowledge
that OGFRW advised the Consultant to seek independent counsel with respect to
this Agreement and the transactions contemplated hereby.
10. Miscellaneous.
(a) Any notice or other communication between the
parties hereto shall be sent by certified or registered mail, postage prepaid,
if to the Company, addressed to it at Paradigm Medical Industries, Inc., 1127
West 2320 South, Suite A, Salt Lake City, Utah 84119, Attention: Chief Executive
Officer, or, if to the Consultant, addressed to it at 26 Ludlam Avenue,
Bayville, New York 11709, or to such address as may hereafter be designated in
writing by one party to the other. Such notice or other communication shall be
deemed to be given on the date of receipt.
(b) This Agreement has been duly authorized, executed
and delivered by and on behalf of the Company and the Consultant.
(c) This Agreement shall be construed and interpreted
in accordance with the laws of the State of New York, without giving effect to
conflicts of laws rules of such state.
(d) It is agreed that the Consultant is an
independent contractor vis-a-vis the Company and shall have no authority to
execute instruments or act in any supervisory or other capacity on behalf of the
Company or to represent the Company as an officer or employee thereof.
(e) This Agreement and the rights hereunder may not
be assigned by either party (except by operation of law) and shall be binding
upon and inure to the benefit of the parties and their respective successors,
assigns and legal representatives.
(f) This Agreement may be executed in more than one
counterpart with the same effect as if the parties executing the several
counterparts had each executed one counterpart.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date hereof.
PARADIGM MEDICAL INDUSTRIES, INC.
By: /s/ Thomas F. Motter
---------------------------
Name: Thomas F. Motter
Title: CEO
WIN CAPITAL CORP.
By:
--------------------------
Name:
Title:
221656.3
-3-
Exhibit 23.4
Included in Exhibit 5
Exhibit 23.5
CONSENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement on Form
SB-2 of our report dated March 5, 1999, relating to the financial statements of
Paradigm Medical Industries, Inc., and to the reference to our Firm under the
caption "Experts" in the Prospectus.
TANNER + CO.
Salt Lake City, Utah
April 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
PARADIGM MEDICAL INDUSTRIES, INC., FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 114,000
<SECURITIES> 0
<RECEIVABLES> 596,000
<ALLOWANCES> 30,000
<INVENTORY> 720,000
<CURRENT-ASSETS> 1,415,000
<PP&E> 640,000
<DEPRECIATION> 93,000
<TOTAL-ASSETS> 2,241,000
<CURRENT-LIABILITIES> 492,000
<BONDS> 33,000
0
0
<COMMON> 5,000
<OTHER-SE> 1,711,000
<TOTAL-LIABILITY-AND-EQUITY> 2,241,000
<SALES> 1,258,000
<TOTAL-REVENUES> 1,258,000
<CGS> 813,000
<TOTAL-COSTS> 3,973,000
<OTHER-EXPENSES> 11,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,000
<INCOME-PRETAX> (2,759,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,759,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,759,000)
<EPS-PRIMARY> (0.69)
<EPS-DILUTED> (0.69)
</TABLE>
