UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File No. 0-28498
PARADIGM MEDICAL INDUSTRIES, INC.
(Name of small business issuer in its charter)
DELAWARE 87-0459536
(State or other jurisdiction IRS Identification
of incorporation or organization) Number
1127 West 2320 South, Suite A, Salt Lake City, Utah 84119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code (801) 977-8970
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
(None) (None)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes [X] No [ ]
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Registrant's revenues for the fiscal year ended December 31, 1998 were
$1,258,170
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 25, 1999 was approximately $19,157,908 based on the
closing price on that date on the Nasdaq SmallCap Market.
As of March 25, 1999, Registrant had outstanding 5,894,741 shares of Common
Stock, 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
DOCUMENTS INCORPORTED BY REFERENCE:
Additional documents set forth in Part IV hereof are incorporated by reference.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I
Item 1. Description of Business
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General
The Company develops, manufactures, sources, markets and sells
ophthalmic surgical and diagnostic equipment, instrumentation and related
accessories, including disposable products. The Company's surgical equipment is
designed for minimally invasive cataract treatment. The Company markets two
ultrasound cataract surgery systems with related instruments, accessories and
disposable products. One of the ultrasound systems, the Precisionist Thirty
Thousand(TM), is manufactured as the base surgery system for the Company's
Precisionist Thirty Thousand(TM) Ophthalmic Surgical Workstation(TM). The
Company is currently developing a laser cataract surgery system as an adjunct to
its ultrasound cataract surgery equipment. This product is currently undergoing
investigational trials in the United States. If successfully developed and
approved for medical uses, the Company plans to market the laser system as a
plug-in module for its Workstation(TM). The Company's ultrasound diagnostic
products include a pachymeter, an A-Scan, an A/B Scan and a biomicroscope, the
technology for which was acquired from Humphrey Systems in 1998. In addition,
the Company markets its Blood Flow AnalyzerTM. This product is a portable
computerized system for which the Company has secured a license granting it the
right to market the product in the United States. This product is designed for
the measurement of intraocular pressure and pulsatile ocular blood flow volume
for detection and treatment of glaucoma. The Company is currently developing
additional applications for all of its diagnostic products.
A cataract is a condition, which largely affects the elderly
population, in which the natural lens of the eye hardens and becomes cloudy,
thereby reducing visual acuity. Treatment consists of removal of the cloudy lens
and replacement with a synthetic lens implant which restores visual acuity.
Cataract surgery is the single largest volume and revenue producing outpatient
surgical procedure for ophthalmologists worldwide. The Health Care Finance
Administration reports that in the United States approximately 2 million
cataract removal procedures are performed annually, making this the largest
outpatient procedure reimbursed by Medicare. Most cataract procedures are
performed using a method called phacoemulsification or "phaco", which employs a
high frequency (40 kHz to 60 kHz) ultrasonic probe needle device to fragment the
cataract while still in the eye and remove it in pieces by suction through a
small incision.
The Company manufactures and sells two phaco systems with instruments,
accessories and disposable products. The Precisionist 3000 Plus(TM) system was
introduced in 1992 and is a low-cost portable system intended primarily for the
international market. At the present time, the Company does not plan to produce
the 3000 PlusTM in 1999. The Precisionist Thirty Thousand(TM) Ocular Surgery
Workstation(TM) is the Company's newest generation system which is the base for
its expandable surgical "workstation" platform. The Company's Precisionist
Thirty Thousand model includes a newly developed proprietary fluidics panel
which is completely non-invasive for improved sterility and to provide 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 the
safe operation at much higher vacuum settings by sampling changes in asperation
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
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damage.
Current phaco systems can be difficult for many ophthalmic surgeons to
master and are limited in their ability to be the most minimally invasive method
possible. The Company is developing its proprietary patented laser system and
unique patented probe for laser cataract removal which the Company believes can
address the difficulties associated with phaco systems. The laser system is a
plug-in module for its Workstation(TM) which will be available as an up-grade 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. Additionally, research and development work is being conducted by the
Company's engineering group and with MEOS Photonics through the University of
Utah Laser Laboratory.
The Company believes that in certain surgical conditions, its laser
system will be easier to use and safer than present phaco systems. The probe
will be smaller than typical probes which employ an ultrasonic needle 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 is one of the
complications associated with ultrasound phaco. In 1996, the Company received
FDA approval to conduct clinical trials in the United States with the Photon(TM)
laser system. During these Phase I clinical trials the Company discovered that
the Photon(TM) laser system was effective in removing softer grade cataracts.
The Company also discovered that the Photon(TM) laser System may not effectively
remove harder grade cataract, although hard cataracts can be removed using the
already existing ultrasound capability of the Workstation(TM). The Company
completed its Phase I clinical trials in 1997, and has received FDA approval to
proceed to an expanded Phase II clinical trial to refine the laser system and to
provide the statistical data required to approve the Photon(TM) laser system for
laser cataract removal. There is no assurance, however, that the Company will
successfully complete the Phase II clinical trials or be successful in improving
the laser system, or that additional disadvantages or problems unique to the
Photon(TM) laser system will not be discovered during the Phase II clinical
trials or following FDA approval of the system.
In addition to cataract surgery, the Company believes that its
Photon(TM) laser system is capable of being configured with specialty probes for
use in other ophthalmic surgical procedures. These potential applications could
represent substantial growth opportunities including additional sales of
equipment, instruments, accessories and disposables. However, there can be no
assurance that these applications will be developed or approved. Further there
is no guarantee that the laser will be accepted by the ophthalmic surgery market
in this capacity.
In June 1997, the Company received FDA clearance to market the Blood
Flow Analyzer(TM) for measurement of intraocular pressure and pulsatile ocular
blood flow for the detection of glaucoma and other retina related diseases.
Ocular blood flow is critical, the reduction of which may cause nerve fiber
bundle death through oxygen deprivation thus resulting in visual field loss
associated with glaucoma. The Company's Blood Flow Analyzer(TM) is a portable
automated in-office system that presents an affordable method for ocular blood
flow testing for the ophthalmic and optometric practitioner. The Company has
secured a license granting it the exclusive right to private label, package and
market the product in the United States, with full international marketing
rights.
On June 26, 1998, the Company entered into a Co-Distribution Agreement
with Pharmacia & Upjohn Company and National Healthcare Manufacturing
Corporation which provides for the
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marketing and sale of a range of ophthalmic products. Under the terms of the
Co-Distribution Agreement, the Company, Pharmacia & Upjohn and National
Healthcare will offer a comprehensive package of products to cataract surgeons,
including cataract surgical equipment, intraocular lens implants, intraocular
pharmaceuticals, surgical instruments and sterile procedural packs. The Company
will provide the Precisionist ThirtyThousand(TM) for distribution and sale under
the Co- Distribution Agreement. The Pharmacia & Upjohn products to be
distributed as part of the Co- Distribution Agreement include the Healon(R) and
Healon-GV(R) viscoelastic solution and the CeeOn line of foldable, small
intraocular lens implants, designed to replace the natural lens removed during
cataract surgery.
On July 23, 1998, the Company entered into an Agreement for Purchase
and Sale of Assets with the Humphrey Systems Division of Carl Zeiss, Inc. to
acquire the ownership and manufacturing rights to certain assets of Humphrey
Systems that are used in the manufacturing and marketing of an ultrasonic
microprocessor-based line of ophthalmic diagnostic instruments, including the
Ultrasonic Biometer Model 820, the A/B Scan System Model 837, the Ultrasound
Pachymeter Model 855, and the Ultrasound Biomicroscope Model 840, and all
accessories, packaging and end-user collateral materials for each of the product
lines for the sum of $500,000, payable in the form of 180,000 shares of Common
Stock which were issued to Humphrey Systems and 26,316 shares of Common Stock
which were issued to business broker Douglas Adams.
The rights to the ophthalmic diagnostic instruments which have been
purchased from Humphrey Systems under the Agreement complement both the
Company's cataract surgical equipment and its ocular Blood Flow Analyzer(TM).
The Ultrasonic Biometer calculates the prescription for the intraocular lens to
be implanted during cataract surgery. The Ultrasound Pachymeter measures corneal
thickness for the new refractive surgical applications that eliminate the need
for eyeglasses and for optometric applications including contact lense fitting.
The A/B Scan System combines the Ultrasonic Biometer and ultrasound imaging for
advanced diagnostic testing throughout the eye and is a viable tool for retinal
specialists. The Ultrasound Biomicroscope utilizes microscopic digital
ultrasound resolution for detection of tumors and improved glaucoma management.
Background
Corporate History. The Company's business originated with Paradigm
Medical, Inc., a California corporation formed in October 1989 ("PMI"). PMI
developed the Company's present ophthalmic business and was operated by its
founders Thomas F. Motter and Robert W. Millar. In May 1993, PMI merged with and
into the Company. At the time of the merger, the Company was a dormant public
shell existing under the name French Bar Industries, Inc. ("French Bar"). French
Bar had operated a mining and tourist business in Montana. Prior to its merger
with PMI in 1993, French Bar had disposed of its mineral and mining assets in a
settlement of outstanding debt and had returned to the status of a dormant
entity. Pursuant to the merger, the Company caused a 1-for-7.96 reverse stock
split of its shares of Common Stock. The Company then acquired all of the issued
and outstanding shares of Common Stock of PMI using shares of its own Common
Stock as consideration. As part of the merger, the Company changed its name from
French Bar Industries, Inc. to Paradigm Medical Industries, Inc. and the
management of PMI assumed control of the Company. In April 1994, the Company
caused a 1-for-5 reverse stock split of its shares of Common Stock. In February
1996, the Company redomesticated to Delaware pursuant to a reorganization.
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Overview
Disorders of the Eye. The human eye is a complex organ which functions
much like a camera, with a lens in front and a light-sensitive screen, the
retina, in the rear. The intervening space contains a transparent jelly-like
substance, the vitreous, which together with the outer layer, the sclera and
cornea, helps the eyeball to maintain its shape. Light enters through the
cornea, a transparent domed window at the front of the eye. The size of the
pupil, an aperture in the center of the iris, controls the amount of light that
is then focused by the lens onto the retina as an upside-down image. The lens is
the internal optical component of the eye and is responsible for adjusting
focus. The lens is enclosed in a capsule. The retina is believed to contain more
than 130 million light-receptor cells. These cells convert light into nerve
impulses that are transmitted right side up by the optic nerve to the brain,
where they are interpreted. Muscles attached to the eye control its movements.
Birth defects, trauma from accidents, disease and age related
deterioration of the components of the eye can all contribute to eye disorders.
The most common eye disorders are either pathological or refractive. Many
pathological disorders of the eye can be corrected by surgery. These include
cataracts (clouded lenses), glaucoma (elevated pressure in the eye), corneal
disorders such as scars, defects and irregular surfaces and vitro-retinal
disorders such as the attachment of membrane growths to the retina causing blood
leakage within the eye. All of these disorders can impair vision. Many
refractive disorders can be corrected through the use of eyeglasses and contact
lenses. Myopia (nearsightedness), hyperopia (farsightedness) and presbyopia
(inability to focus) are three of the most common refractive disorders.
Ultrasound Technology. Ultrasound devices have been used in
ophthalmology since the late 1960's for diagnostic and surgical applications
when treating or correcting eye disorders. In diagnostics, ultrasound
instruments are used to measure distances and shapes of various parts of the eye
for prescription of eyeglasses and contact lenses and for calculation of lens
implant prescriptions for cataract surgery treatment. These devices emit sound
waves through a hand-held probe that is placed onto or near the eye with the
sound waves emitted being reflected by the targeted tissue. The reflection
"echo" is computed into a distance value that is presented as a visual image, or
cross-section of the eye, with precise measurements displayed and printed for
diagnostic use by the surgeon.
Surgical use of ultrasound in ophthalmology is limited to treatment of
cataractous lenses in the eye through a procedure called phacoemulsification or
"phaco." A primary objective of cataract surgeries is the removal of the
opacified (cataractous) lens through an incision that is as small as possible.
The opacified lens is then replaced by a new synthetic lens intraocular implant
("IOL"). Phaco technology involves a process by which a cataract is broken into
small pieces using ultrasonic shock waves delivered through a hollow, open-ended
metal needle attached to a hand-held probe. The fragments of cataractous tissue
are then removed through aspiration. Phaco systems were first designed in the
late 1960's after various attempts by surgeons to use other techniques to remove
opacified lens, including crushing, cutting, freezing, drilling and applying
chemicals to the cataract. By the mid-1970's, ultrasound had proven to be the
most effective technology to fragment cataracts. Industry sources indicate that
phaco cataract treatment is the technology for cataract removal used in over 80%
of surgeries in the United States and over 20% of all foreign surgeries.
Laser Technology. The term "laser" is an acronym for Light Amplification by
Stimulated Emission of Radiation. Lasers have been commonly used for a variety
of medical and ophthalmic
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procedures since the 1960's. Lasers emit photons of light into a highly intense
beam of energy that typically radiates at a single wavelength or color. Laser
energy is generated and intensified in a laser tube or solid-state cavity by
charging and exciting photons of energy contained within material called the
lazing medium. This stored light energy is then delivered to targeted tissue
through focusing lenses by means of optical mirrors or fiber optics. Most laser
systems use solid state crystals or gases as their lazing medium. Differing
wavelengths of laser light are produced by the selection of the lazing medium.
The medium selected determines the laser wavelength emitted, which in turn is
absorbed by the targeted tissue in the body. Different tissues absorb different
wavelengths or colors of laser light. The degree of absorption by the tissue
also varies with the choice of wavelength and is an important variable in
treating various tissue. In a surgical laser, light is emitted in either a
continuous stream or in a series of short duration "pulses," thus interacting
with the tissue through heat and shock waves, respectively. Several factors,
including the wavelength of the laser and the frequency and duration of the
pulse or exposure, determine the amount of energy that interacts with the
targeted tissue and, thus, the amount of surgical effect on the tissue.
Lasers are widely accepted in the ophthalmic community for treatment of
certain eye disorders and are popular for surgical applications because of their
relatively non-invasive nature. In general, ophthalmic lasers, such as argon,
Nd:YAG and excimer (argon-fluoride) are used to coagulate, cut or ablate
targeted tissue. The argon laser is used to treat leaking blood vessels on the
retina (retinopathy) and retinal detachment. The excimer laser was recently
tested in clinical trials for limited use in corneal refractive surgery. The
Nd:YAG pulsed laser is used to perforate clouded posterior capsules (posterior
capsulotomy) and to relieve glaucoma-induced elevated pressure in the eye
(iridotomy, trabeulorplasty, transcleral cyclophotocoqulation). Argon, Nd:YAG
and excimer lasers are primarily used for one or two clinical applications each.
In contrast to these conventional laser systems, the Company's Photon(TM) laser
cataract system is designed to be used for multiple ophthalmic applications,
including certain new applications that may be made possible with the Company's
proprietary technology. Such new applications, however, must be tested in
clinical trials and be approved by the FDA.
Products
The Company's principal surgical product is an ultrasonic system for
use by ophthalmologists to perform surgical treatment procedures to remove
cataracts. In 1990, the Company received clearance from the FDA pursuant to
Section 510(k) of the Food, Drug and Cosmetics Act (the "FDC Act") on its
Precisionist 3000(TM) phaco system for cataract surgery, which system was
upgraded to the Precisionist 3000 Plus(TM) in 1994. The Company also completed
its preclinical in vitro and in vivo (animal) testing of its Photon(TM) laser
cataract surgical system and submitted a Section 510(k) Premarket Notification
to the FDA for the Photon(TM) laser cataract system in September 1993, with a
follow-up Investigational Device Exemption ("IDE") application submitted in
October 1994 to provide additional clinical data through human cases to support
its earlier filing. The IDE was approved in May 1995. Phase I clinical trials
were begun in April 1996 with surgeries completed in December 1996. Patient
follow-up examinations as mandated by the FDA study were completed in July 1997,
and the Company submitted its final report to the FDA thereafter. During the
Phase I clinical trials the Company discovered that the Nd:YAG (Neodymium:
Yttrium-Aluminum-Garnet) laser system 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
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completion expected in the first half of 1999.
Precisionist 3000 Plus(TM) System. The Precisionist 3000 Plus(TM)
system (the "3000 Plus(TM)") is the Company's first cataract surgery system,
having been developed in 1992 and enhanced in 1994. The system is compact,
portable and simple to operate with a very low operating cost. The primary
market for the 3000 Plus(TM) is in foreign countries where phaco technology is
emerging and price-points are relatively low. The 3000 Plus(TM) is also a good
when used as a 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)
(the "Thirty Thousand(TM)") is the Company's core phaco surgical technology and
the base system for its Precisionist Thirty Thousand(TM) Ocular Surgery
Workstation(TM). The Thirty Thousand(TM) was placed into production and sale in
1997. As a phaco cataract surgery system, the Company believes the Thirty
Thousand(TM) with its new fluidics panel is equal or superior to the present
competitive systems in the United States. The system features a graphic color
display and unique proprietary on-board computer and graphic user interface
linked to soft-key membrane panel for flexible programmable operation. The
system provides real-time "on-the-fly" adjustment capabilities for each surgical
parameter during the surgical procedure for high-volume applications. In
addition, the Thirty Thousand(TM) provides one hundred pre- programmable surgery
set-ups, with a second level of sub-programmed custom modes within each major
surgical screen (i.e., ultrasound phaco and irrigation/aspiration modes). The
Thirty Thousand(TM) features the Company's newly developed proprietary fluidics
panel which is completely non-invasive for improved sterility and to provide 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 the
safe operation at much higher vacuum settings by sampling changes in asperation
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 the Company which uses the
expansive capabilities of today's advanced computer technology to offer seamless
open architecture expandability of the system hardware and software modules. The
Workstation(TM) utilizes an embedded computer developed for the Company. The
computer is controlled by a proprietary software system developed by the Company
that interfaces with all components of the system: ultrasound, fluidics
(irrigation), aspiration, venting, coagulation and anterior vitrectomy
(pneumatic). Each component is controlled as a peripheral module within this
fully integrated system. This approach allows for seamless expansion and
refinement of the Workstation(TM) with the ability to add other hardware and
software features. Expansion hardware such as the Company's Photon(TM) laser
system, when approved by the FDA, and hardware for additional surgical
applications are easily
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implemented by means of a pre-existing expansion rack which resides in the base
of the Workstation(TM). These expanded capabilities could include, but would not
be limited to: laser systems, video surgical fiber optic imaging, cutting and
electrosurgery equipment. However, there is no guarantee that the
Workstation(TM) will be accepted in the market place.
Photon(TM) Laser System. The Photon(TM) laser cataract system, which is
still subject to FDA approval, is designed to be installed as a seamless plug-in
upgrade or add-on to the Company's Precisionist Thirty Thousand(TM) Ocular
Surgery Workstation(TM). The plug-in platform concept is unique in the
ophthalmic surgical market for systems of this magnitude and presents a unique
market opportunity for the Company. The main elements of the laser system are
the Nd:YAG laser module, Photon(TM) laser software package and interchangeable
disposable hand-held fiber optic laser Photofragmentation Probe(TM) (the
"LCP(TM)"). The Photon(TM) laser utilizes the on-board microprocessor computer
of the Workstation(TM) to generate short pulse laser energy developed through
the patented LCP(TM) to targeted cataract tissue inside the eye, while
simultaneously irrigating the eye and aspirating the diseased cataract tissue
from the eye. The probe is smaller in diameter than conventional ultrasound
phaco needles and presents no damaging vibration or heat build-up in the eye.
The Company's Phase I clinical trials demonstrated that this probe can easily
reduce the size of the cataract incision from 3.0 mm to under 2.0 mm thereby
reducing surgical trauma and complementing current foldable intraocular implant
technology. The laser probe may also eliminate any possibility for burns around
the incision or at the cornea and may therefore be used with cataract surgery
techniques which utilize a more delicate clear cornea incision which can
eliminate sutures and be conducted with topical anesthesia. However, this system
may not effectively remove harder grade cataracts. Harder grade cataracts can be
removed using the already existing ultrasound capability of the Workstation(TM).
The Company intends to refine the laser delivery system and laser cataract
surgical technique used on soft cataracts through expanded research and clinical
studies. As far as the Company can determine, no integrated single laser
photofragmenting probe is presently available on the market that uses laser
energy directly, contained in an enclosed probe, to plasmatize cataract tissue
at a precise location inside the eye while simultaneously irrigating and
aspirating the site.
The Company's laser system is based upon the concept that pulsed laser
energy produced with the micro-processor controlled Nd:YAG laser system provides
ophthalmic surgeons with a more precise and less traumatic alternative in
cataract surgery. Although conventional ultrasonic surgical systems have proven
effective and reliable in clinical use for many years, their use of high
frequency shock waves and vibration to fragment the cataract can make the
procedure difficult and present risk of complication both during and after
surgery. In contrast, the Company's laser system, which utilizes short
centralized energy bursts, should permit the delivery of the laser beam with
less trauma to adjacent tissue. Therefore, unlike ultrasonic systems, whose
vibrations and shock waves affect (and can damage) non-cataractous tissues
within the eye, the Company's Photon(TM) laser cataract system should only
affect tissues it comes into direct contact with.
Surgical Instruments, Accessories and Disposables. In addition to the
cataract surgery equipment, the Company is aggressively pursuing development and
product introductions for a range of cataract surgery instruments and
accessories that will be sold with its surgical systems and to fit other
competitive systems. In January 1998, the Company received FDA 510(k) clearance
for a line of proprietary titanium ultrasonic phaco needles it produces at its
Salt Lake City facility. The needles were released for sale in May 1998 in a
sterile Phaco PAK(TM). In May 1998, the Company received FDA 510(k) clearance
for a line of irrigation/aspiration probes and tips. Product release occurred in
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October 1998. These products and additional instruments were previously sourced
from third-party vendors. The Company believes that by developing its own
instruments and accessories it can improve product performance, introduce
innovative differentiation and improve sales margins. The Company's surgical
systems utilize or will utilize accessory instruments and disposables, some of
which are proprietary to the Company. These include replacement ultrasound tips,
sleeves, tubing sets and fluidics packs, instrument drapes and laser cataract
probes. The Company intends to expand its disposable accessories as it further
penetrates the cataract surgery market and expands the treatment applications
for its Workstation(TM).
Diagnostic Eyecare Products. Glaucoma is a leading cause of blindness
in the world. Glaucoma is described as a partial or total loss of visual field
resulting from certain progressive disease or degeneration of the retina, macula
or nerve fiber bundle. The cause and mechanism of the glaucoma pathology is not
completely understood. Present detection methods focus on the measurement of
intraocular pressure in the eye to determine the possibility of pressure being
exerted upon the retina, and optic nerve fiber bundle, which can diminish visual
field. Recently, retinal blood circulation has been indicated as a key component
in the presence of glaucoma. Several companies produce color Doppler equipment
in the $150,000 price range intended to provide measurement of ocular blood flow
activity in order to diagnose and treat glaucoma at an earlier stage.
In June 1997, the Company received FDA clearance to market the Blood
Flow Analyzer(TM) for early detection and treatment management of glaucoma and
other retina related diseases. The device measures not only intraocular pressure
but also pulsatile ocular blood flow, the reduction of which may cause nerve
fiber bundle death through oxygen deprivation thus resulting in visual field
loss associated with glaucoma. The Company's Blood Flow Analyzer(TM) is a
portable automated in-office system that presents an affordable method for
ocular blood flow testing for the ophthalmic and optometric practitioner. The
Company has secured a license granting it the exclusive right to private label,
package and market the product in the United States, with full international
marketing rights.
Blood Flow Analyzer(TM). This is the Company's first diagnostic eyecare
device. The device is manufactured for the Company and is being marketed by the
Company pursuant to a license agreement. The device is a portable desktop system
that utilizes a proprietary patented pneumatic Air Membrane Applanation
Probe(TM) (the "AMAP(TM)") which is attached to any model of standard
examination slit lamp which is then placed on the cornea of the patient's eye to
measure the intraocular pressure within the eye. The device is unique in that it
reads a series of intraocular pressure pulses over a short period of time
(approximately five to ten seconds) and generates a wave form profile which can
be correlated to blood flow volume within the eye. The blood flow volume is
calculated by a proprietary software algorithm developed by David M. Silver,
Ph.D, at Johns Hopkins. The device presents a numerical intraocular pressure
reading and blood flow analysis rating in a concise printout which is affixed to
the patient history file. In addition, the data generated by the device can be
downloaded to a personal computer system for advanced database development and
management. The Company markets the Blood Flow Analyzer(TM) as a stand-alone
Model 100 SE unit, and packaged with a custom built computer system as the Model
100 LE. The Blood Flow Analyzer(TM) utilizes a single- use disposable cover for
its AMAP(TM) corneal probe which is shipped in sterile packages. The AMAP(TM)
probe tip cover provides accurate readings and acts as a prophylactic barrier
for the patient. The device has been issued a patent in the European Economic
Community and the United States and has a patent pending in Japan. The FDA
cleared the Blood Flow Analyzer(TM) for marketing in June 1997 and the Company
commenced selling the system in September 1997. In addition to the Humphrey
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products, this diagnostic product will permit the Company to expand its market
to approximately 35,000 optometric practitioners in the United States in
addition to the approximately 18,000 ophthalmic practitioners who currently
perform eye surgeries and are candidates for the Company's surgical systems.
International sales of the Blood Flow Analyzer(TM) will be further expanded in
1999.
Pachymetric Analyzer. Paradigm produces the Ultrasonic Pachymeter used
for measurement of corneal thickness. The Company anticipates steady monthly
sales with the positioning of this product for use in conjunction with the
popular LASIK (refractive laser surgery) procedure. Delivery of the Company's
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 the Company has
repositioned for broader market sales penetration. Formerly sold only to
glaucoma sub- specialty practitioners, the Company 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 the Company 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 and secured eight system sales with cash
deposits from domestic and foreign customers. At the time these orders
represented the Company's total projected unit sales for fiscal 1999. As a
result, and based on recently submitted foreign dealer sales forecasts, the
Company has revised its UBM unit sales projections upward and plans 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 the ophthalmologist, who in turn persuades the hospital to install
the latest technology system so that they
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can offer this procedure to their patients and the community.
Industry analysts report that the United States ophthalmic surgical
device market has been characterized by slower growth in recent years. This has
apparently been caused by the uncertainty and potential reforms associated with
the health care industry. Further, hospitals have been inclined to keep their
older phaco machines longer than expected as they have been forced to mind
budgets more carefully and have become less willing to invest in capital
equipment until more information on health care reform becomes available.
However, analysts predict that the ophthalmic surgical device market will see
renewed growth in the coming years as the health care environment stabilizes and
as the growing elderly population produces an increased number of cataract
surgeries. As a consequence of these factors, the market should see a greater
rate of replacement of older machines that hospitals and surgeons have been
postponing for longer than usual.
Current Market Acceptance and Potential. As of December 31, 1998, the
Company had distributed over 60 Precisionist 3000 and 3000 Plus(TM) phaco
systems since the introduction of the systems, fourteen of the new Precisionist
Thirty Thousand(TM) Workstation(TM)s and eleven Photon(TM) Laser Phaco(TM)
Workstation(TM). The principal purchasers have been ophthalmologists and clinics
in many countries throughout the world. The Company believes that the market for
its products is being driven by: (i) the aging of the population, which is
evidenced by the domestic and international cataract surgery volume growth trend
over the past ten years, (ii) the entry by emerging countries (including China,
Russia, and other countries in Asia, Eastern Europe and Africa) into advanced
technology medical care for their populations, (iii) increased awareness
worldwide of the benefits of the minimally invasive phaco cataract procedure and
(iv) the introduction of technology improvements such as the Company's laser
system.
Marketing Organization. The Company markets its products
internationally through a network of dealers and domestically through direct
sales representatives and manufacturer's representatives. As of December 31,
1998, the Company had six direct domestic sales representatives and one
manufacturer's representative in the United States and twenty-one foreign
dealers. This is in addition to the fifty-three ParadigmPharmacia&Upjohn
Alliance representatives domestically. All of these sales representatives are
assigned exclusive territories and have entered into contracts with the Company
that contain performance quotas. The Company also plans to continue to market
its products by identifying customers through internal market research, trade
shows and direct marketing programs. The Company also utilizes a Clinical
Advisory Board comprised of leading ophthalmic surgeons in the United States and
Europe who speak at conventions, train ophthalmologists and visit foreign
doctors and dealers to promote the Company's products.
The Company, when marketing its surgical Workstation(TM), will emphasize
the expandable features of the Workstation(TM). The Company's marketing approach
will be to focus on the upgradeability of the Workstation(TM) and to develop the
image of the Workstation(TM) as the most versatile, upgradeable and cost
effective surgical equipment available. The Company will continue to focus its
sales efforts towards ophthalmic hospital and surgical center facilities
specializing in cataract surgery. However, as systems are installed, the Company
will expand its focus to provide additional ophthalmic and non- ophthalmic
surgical applications as part of its Workstation(TM). Additional surgical
applications will expand the market for the Workstation(TM) as well as
associated sales of disposable surgical products.
The Company disseminated the innovative capabilities of its products
through advertisement and
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printed materials at the Company's annual exhibition at the annual meeting of
the American Academy of Ophthalmology in New Orleans, Louisiana in November
1998. The theme of the Company's advertisement for its Ocular Surgery
Workstation(TM) was "The Future of Phaco is the Future of Ophthalmic Surgery."
The Company will expand upon the concept of the "Workstation(TM)" with
additional advanced laser and surgical capabilities. The Company has also
launched a campaign for the Blood Flow Analyzer. The product was introduced to
the ophthalmic marketplace at the American Academy of Ophthalmology meeting in
October 1997 and to the Optometric marketplace at the California Optometric
Association and Vision Expo Easy New York meetings. The theme of the Company's
advertisement for its Blood Flow Analyzer was "Don't Miss Half of Your Glaucoma
Patients... A Fast, Clinically Proven Test For Ocular Blood Flow".
Product advertising is focused in the three industry trade newspapers,
Ocular Surgery News, Ophthalmology Times and the American Optometric Association
News. Most of the ophthalmologists or optometrists in the United States receive
one or more of these magazines through professional subscription programs. The
media has shown strong interest in the Company's technology and products, as
evidenced by several recent front page articles in these publications.
Manufacturing and Raw Materials. Currently, the Company has a small
manufacturing and warehousing facility located in Salt Lake City. All components
and the finished surgical systems are manufactured under subcontracting
arrangements. None of these companies manufactures products that compete with
the Company's products. All component and systems manufacturing is performed
under a system of quality control and testing. As a condition to such
contracting, each subcontractor's manufacturing facilities and personnel must
comply with the Good Manufacturing Practices (GMP) guidelines established by the
FDA, as well as similar guidelines established by foreign governments, including
CE Mark and IS0-9001.
The Company currently subcontracts the manufacture of its Precisionist
Thirty Thousand(TM) system to one of its stockholders, Zevex International, Inc.
("Zevex"), which is located in Salt Lake City, Utah. The remaining operating
elements of the Photon(TM) laser cataract system are resident in the
Precisionist Thirty Thousand(TM) system supplied by Zevex. Although substantial
reliance is currently placed with Zevex, the Company believes it would be able
to find alternative manufacturers for its products currently manufactured by
these two sources, including in-house manufacturing by the Company. The Company
also believes that there are multiple sources of raw materials that are used or
could be used in its products. See "Certain Transactions."
The laser cavity, optical train and power source for the Photon(TM) laser
cataract system are supplied by Sunrise Technologies, Inc. in Fremont,
California ("Sunrise"). The Company has established an internal laser cataract
probe manufacturing facility and plans to have all probe production take place
in Salt Lake City. The remaining operating elements of the Photon(TM) laser
cataract system, the computer controller, fluidics and ancillary surgical
modalities, are developed through Zevex. Although substantial reliance is
currently placed with Zevex and Sunrise, the Company believes it would be able
to find alternative manufacturers for its products currently manufactured by
these two sources. The Company also believes that there are multiple sources of
raw materials that could be used in its products.
The Company subcontracts the manufacturing of some of its ancillary
instruments, accessories and disposables through specified vendors in the United
States. These products are contracted in quantities
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and at costs consistent with the Company's financial purchasing capabilities and
pricing needs. The Company manufactures the LCP(TM) laser cataract probe and
some of its surgical instruments, accessories and fluidics surgical tubing sets
at its facility in Salt Lake City.
The Blood Flow Analyzer(TM) is manufactured by OBF Labs. The analyzer is
repackaged by the Company using a module cover designed by the Company and is
also being marketed under the Company's trade name and mark. The Company's
License and Manufacturing Agreement with OBF Labs continues through December 31,
2000 and is automatically renewable for successive one year additional terms,
unless either party gives written notice to the other party at least 90 days
prior to the expiration of the term. Service for the Company's products is
overseen from its Salt Lake City, Utah headquarters and is augmented by its
international dealer network, which dealers also provide technical service and
repair. Installation, on-site training and a 12 to 18 month warranty are
included as the standard terms of sale. The Company provides distributors with
replacement parts at no charge during the warranty period. To date, the Company
has incurred minimal expenses under this warranty program. International
distributors are responsible for installation, repair and other customer service
to installed systems in their territory. All system parts are modular
sub-components that are easily removed and replaced. The Company maintains an
adequate parts inventory and provides 24 hour replacement parts shipment to its
dealers. After the warranty period expires, the Company offers one year service
contracts to its domestic customers and will continue to sell parts to
international dealers who in turn create their own service plans with their
customers. As of December 31, 1998, the Company has not sold any one year
service contracts.
Product Service and Support. Service for the Company's products is
overseen from its Salt Lake City, Utah headquarters and is augmented by its
international dealer network who provide technical service and repair.
Installation, on-site training and a limited product warranty are included as
the standard terms of sale. The Company provides distributors with replacement
parts at no charge during the warranty period. To date, the Company has incurred
minimal expenses under this warranty program. International distributors are
responsible for installation, repair and other customer service to installed
systems in their territory. All systems parts are modular sub-components that
are easily removed and replaced. The Company maintains an adequate parts
inventory and provides overnight replacement parts shipment to its dealers.
After the warranty period expires, the Company offers one year and three year
service contracts to its domestic customers and will continue to sell parts to
international dealers who in turn create their own service plans with their
customers. As of December 31, 1998, the Company has not sold any service
contracts.
Third-Party Reimbursement. It is expected that the Company's laser systems
and diagnostic systems will generally be purchased by ophthalmologists and
hospitals as well as optometrists who will then bill various third-party payors
for the health care services provided to their patients. These payors include
Medicare, Medicaid and private insurers. Government agencies generally reimburse
at a fixed rate based on the procedure performed. Some of the potential
procedures for which the Photon(TM) laser cataract systems may be used, may be
determined to be elective in nature, and third-party reimbursement may not be
available for such procedures, even if approved by the FDA. In addition,
third-party payors may deny reimbursement if they determine that the procedure
was unnecessary, inappropriate, not cost-effective, experimental or used for a
non-approved indication. There can be no assurance that reimbursement from
third-party payors will be available, or if available, that reimbursement will
not be limited, thereby having a material adverse effect on the Company's
ability to develop new products on a profitable basis, its operating results and
financial
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condition.
Co-Distribution Agreement with Pharmacia & Upjohn Company and National
Healthcare Manufacturing Corporation. The Company has entered into a
Co-Distribution Agreement as of June 26, 1998 with Pharmacia & Upjohn Company
and National Healthcare Manufacturing Corporation, which provides for the
marketing and sale of a range of ophthalmic products. Under the terms of the
Co-Distribution Agreement, the Company, Pharmacia & Upjohn and National
Healthcare will offer a comprehensive package of products to cataract surgeons,
including cataract surgical equipment, intraocular lens implants, intraocular
pharmaceuticals, surgical instruments and sterile procedural packs. The Company
will provide the Precisionist ThirtyThousand(TM) for distribution and sale under
the Co-Distribution Agreement. The Pharmacia & Upjohn products to be distributed
as part of the Co- Distribution Agreement include Healon(R) and HealonGV(R)
viscoelastic solution and the CeeOn line of foldable, small intraocular lens
implants, designed to replace the natural lens removed during cataract surgery.
It is too soon to determine the full effect of these agreements on the Company.
However, some possible benefits may be lower marketing costs for the Company's
products and a greater appeal of the Company's products to hospitals and other
buyers who prefer a comprehensive and more cost-effective package.
Research and Development
The Company's primary market for its surgical products is the cataract
surgery market. However, the Company believes that its laser systems may
potentially have broader ophthalmic applications. Consequently, the Company
believes that a strong research and development capability is important for the
Company's future. The Company has enlisted several recognized and respected
consultants and other technical personnel to act in technical and medical
advisory capacities. Several of these consultants serve on the Company's
Clinical Advisory Board to provide expert and technical support for current and
proposed products, programs and services of the Company. In addition, the
Company is conducting research in conjunction with MEOS Photonics through the
University of Utah Medical Laser Laboratory. The research is aimed at improving
the laser system's performance for cataract surgery and exploring additional
surgical applications.
The Company believes its research and development capabilities provide it
with the ability to respond to regulatory developments, including new products,
new product features devised from its users and new applications for its
products on a timely and proprietary basis. The Company intends to continue
investing in research and development and to strengthen its ability to enhance
existing products and develop new products. The Company spent $288,854 on
research development in fiscal year ended September 30, 1996, $480,584 in the
three months ended December 31, 1996, $540,148 in fiscal year ended December 31,
1997 and $298,187 in the year ended December 31, 1998
Competition
General. The Company is subject to competition in the cataract and the
glaucoma surgery markets, and the glaucoma diagnostic market from two principal
sources: (i) manufacturers of competing ultrasound systems used when performing
cataract treatments and (ii) developers of technologies for ophthalmic
diagnostic and surgical instruments 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
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lines. The Company believes that the combined sales of five entities account for
over 90% of the ophthalmic surgery market. The remaining market is fragmented
among emerging smaller companies, some of which are foreign. The ophthalmic
diagnostic market has a similar composition.
Most major competitors either entered or expanded into the cataract or
glaucoma markets through the acquisition of smaller, entrepreneurial
high-technology manufacturing companies. Therefore, because existing competitors
or other entities desiring to enter the market could conceivably acquire current
entrepreneurial enterprises with small market activity, any and all competitors
must be considered to be formidable.
The Cataract Surgical System Industry. Presently, products currently in
use are offered by the major manufacturers utilizing ultrasonic technology.
Those systems rely on accessories including single-use cassette packs and other
ancillary surgical disposables such as saline solution, sutures and intraocular
lenses for their profits. The cassette packs are required for fluid and tissue
collection during the surgical procedure. The cassette packs are generally
unique and proprietary to their respective systems and represent a barrier to
entry for third-party, lower-cost after-market suppliers. While there is growing
market resistance in the United States and internationally to single-use
cassettes, the Company anticipates that manufacturers of ultrasound equipment
will continue to develop and enhance their present ultrasound products in order
to protect their investments in system and cassette technology and to protect
their profits from sales of these cassettes and accessories. The Company's
Precisionist Thirty Thousand(TM) ultrasonic phaco system has the ability to use
either reusable or single-use disposable components. The Photon(TM) laser
cataract system will utilize probes and cassette packs designed for single-use
and semi-disposable instruments priced at a level consistent with the demands of
health care cost containment. This will allow the health care providers a
substantial measure of cost containment, while providing the Company with the
quality control and income capability of cassette sales.
The typical list price of a competitive advanced ultrasonic system ranges
from approximately $60,000 to $100,000. Lower cost models generally have a list
price ranging from approximately $30,000 to $60,000. The list price for the
Precisionist Thirty Thousand(TM) ocular surgery system is $89,900. The Company's
Photon(TM) Laser Phaco(TM) will be sold at a price of approximately $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 has provided a niche for
the emerging smaller companies discussed above.
Ultrasound Equipment Manufacturers. As a relatively recent entrant into
the cataract surgical equipment market with a newer equipment line, the Company
is establishing itself and, as yet, does not hold a significant share of the
market. The Company currently recognizes Bausch & Lombe, Alcon Laboratories, and
Allergan Medical Optics as its primary competitors in the ultrasound phaco
cataract equipment market.
Laser Equipment Manufacturers. To the Company's knowledge, there are
several other companies attempting to develop laser equipment for cataract
surgery. Based on the information currently available to the Company, these
competitive laser companies appear to offer a less viable
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means of treating cataracts using laser technology. The Company believes that
there is presently no directly competing Nd:YAG laser-assisted cataract surgical
system available in the market. The Company also believes that its product is
sufficiently distinctive and, if properly marketed, can capture a significant
share of the cataract surgical device market. However, there are substantial
risks in undertaking a new venture in an established and already highly
competitive industry. In the short-term, the Company is seeking to exploit these
opportunities. Depending upon further developments, the Company may ultimately
exploit those opportunities through a merger with a stronger entity already
established or one that desires to enter the medical industry.
The Company believes that its ability to compete successfully will depend
on its capability to create and maintain advanced technology, develop
proprietary products, attract and retain scientific personnel, obtain patent or
other proprietary protection for its products and technologies, obtain required
regulatory approvals and manufacture, assemble and successfully market products
either alone or through third parties.
The Retinal Diagnostic Market. The Glaucoma Research Foundation suggests
that with the aging of the so-called baby boom generation, there will be an
increase of macular degeneration and glaucoma in the United States, the leading
causes of adult blindness worldwide. The damage caused by these diseases is
irreversible. The preconditions for the onset of macular degeneration or
glaucoma are low ocular blood flow and/or high intraocular pressure. Diagnostic
screening is important for individuals susceptible to these diseases. People in
high risk categories include: African Americans over 40 years of age, all
persons over 60 years of age, persons with a family history of glaucoma or
diabetes, and the very near sighted. The Glaucoma Research Foundation recommends
that these high risk individuals be tested once every two years for glaucoma.
According to the U.S. Census Bureau, in 1995 there were over 30 million adults
65 years of age and older and 8 million African Americans 45 years of age and
older. The Glaucoma Research Foundation reports that glaucoma currently accounts
for more than 7 million visits to physicians annually.
The Company is subject to intense competition in the ophthalmic diagnostic
market from well-financed, established companies with recognizable trade names
and product lines and new and developing technologies. The industry is dominated
by several large entities which the Company believes account for the majority of
diagnostic equipment sales. The Company expects to derive revenues from the sale
of its newly acquired ultrasound diagnostic equipment and blood flow analyzer.
The blood flow analyzer 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 the Company's analyzer
retail at comparable prices. The Company thus believes that it can compete in
the diagnostic market place based upon the lower price and improved diagnostic
functions of the analyzer.
The Glaucoma Surgery Market. The glaucoma surgery market is similar in
composition to the retinal diagnostic market. The market is dominated by several
large companies. Because there are existing glaucoma and laser surgery products
in the market, the Company hopes to be able to enter the market relatively
quickly through FDA Section 510(k) clearance of its new systems and products.
The Company believes that it can compete in this established marketplace since
it will be offering its glaucoma surgery system as an add-on to its
Workstation(TM). The Company believes that its Workstation(TM) will give the
Company a competitive advantage to gain a position in the marketplace.
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Intellectual Property Protection
The Company's cataract surgical products are proprietary in design,
engineering and performance. The Company's ultrasonic products have not been
patented to date because the primary technology for ultrasonic tissue
fragmentation, as available to all competitors in the market, is mainly in the
public domain.
The Photon(TM) laser cataract probe is protected under a United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. and subsequently assigned by
Photomed International, Inc. ("Photomed") and a Japanese patent issued in 1997
to the Company for the utility and methods of laser ablation, aspiration and
irrigation of tissue through a hand-held probe of a unique design. The Company
secured the exclusive worldwide right to this patent shortly after its issue,
and to the international patents pending, from Photomed by means of a license
agreement (the "License Agreement"). The License Agreement was amended on
December 5, 1997 to allow Photomed the right to conduct research, development
and marketing utilizing the patent in certain medical sub-specialties other than
ophthalmology for which the Company would receive royalty payments equal to 1%
of the proceeds from the net sales of products utilizing the patent. See
"Management" and "Certain Relationships and Related Transactions."
OBF Labs, the manufacturer of the Blood Flow Analyzer(TM) that the Company
markets in the United States under a non-exclusive license agreement, has been
granted a patent in the European Economic Community and the United States and
has a patent pending in Japan.
Although the Company's trademarks are important to its business, it is not
the Company's policy to pursue trademark registrations for its trademarks
associated with its products. Consequently, the Company relies on common law
trademark rights to protect its unregistered trademarks, although common law
trademark rights do not provide the Company with the same level of protection as
would U.S. federal registered trademarks. Common law trademark rights only
extend to the geographical area in which the trademark is actually used while
U.S. federal registration prohibits the use of the trademark by any party
anywhere in the United States.
The Company also relies on trade secret law to protect some aspects of its
intellectual property. All of the Company's key employees, consultants and
advisors are required to enter into a confidentiality agreement with the
Company. Most of the Company's third-party manufacturers and formulators are
also bound by confidentiality agreements with the Company.
Regulation
The Company's surgical and diagnostic systems are regulated as medical
devices by the FDA under the FDC Act. As such, these devices require Premarket
clearance or approval by the FDA prior to their marketing and sale. Such
clearance or approval is premised on the production of evidence sufficient for
the Company to show reasonable assurance of safety and effectiveness regarding
its products. Pursuant to the FDC Act, the FDA regulates the manufacture,
distribution and production of medical devices in the United States and the
export of medical devices from the United States. Noncompliance with applicable
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, denial of
Premarket clearance or
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approval for devices, recommendations by the FDA that the Company not be allowed
to enter into government contracts, and criminal prosecution.
Following the enactment of the Medical Device Amendments to the FDC Act in
May 1976, the FDA began classifying medical devices in commercial distribution
into one of three classes: Class I, II or III. This classification is based on
the controls that are perceived to be necessary to reasonably ensure the safety
and effectiveness of medical devices. Class I devices are those devices, the
safety and effectiveness of which can reasonably be ensured through general
controls, such as adequate labeling, advertising, Premarket notification and
adherence to the FDA's Good Manufacturing Practice ("GMP") regulations. Some
Class I devices are exempt from some of the general controls. Class II devices
are those devices the safety and effectiveness of which can reasonably be
assured through the use of special controls, such as performance standards,
postmarket surveillance, patient registries and FDA guidelines. Class III
devices are devices that must receive Premarket approval by the FDA to ensure
their safety and effectiveness. Generally, Class III devices are limited to
life-sustaining, life- supporting or implantable devices, or to new devices that
have been found not to be substantially equivalent to legally marketed devices.
There are two principal methods by which FDA approval may be obtained. One
method is to seek FDA approval through a Premarket notification filing under
Section 510(k) of the FDC Act. If a manufacturer or distributor of a medical
device can establish that a proposed device is "substantially equivalent" to a
legally marketed Class I or Class II medical device or to a pre-1976 Class III
medical device for which the FDA has not called for a PMA, the manufacturer or
distributor may seek FDA Section 510(k) Premarket clearance for the device by
filing a Section 510(k) Premarket notification. The Section 510(k) notification
and the claim of substantial equivalence will likely have to be supported by
various types of data and materials, possibly including clinical testing
results, obtained under an IDE granted by the FDA. The manufacturer or
distributor may not place the device into interstate commerce until an order is
issued by the FDA granting Premarket clearance for the device. There can be no
assurance that the Company will obtain Section 510(k) Premarket clearance for
any of the future devices for which the Company seeks such clearance including
the Photon(TM) Laser.
The FDA may determine that the device is "substantially equivalent" to
another legally marketed Class I, Class II or pre-1976 Class III device for
which the FDA has not called for a PMA, and allow the proposed device to be
marketed in the United States. The FDA may determine, however, that the proposed
device is not substantially equivalent, or may require further information, such
as additional test data, before the FDA is able to make a determination
regarding substantial equivalence. A "not substantially equivalent"
determination or a request for additional information could delay the Company's
market introduction of its products and could have a material adverse effect on
the Company's business, operating results and financial condition.
The alternate method to seek approval is to obtain Premarket approval from
the FDA. If a manufacturer or distributor of a medical device cannot establish
that a proposed device is substantially equivalent to another legally marketed
device, whether or not the FDA has made a determination in response to a Section
510(k) notification, the manufacturer or distributor will have to seek Premarket
approval for the proposed device. A PMA application would have to be submitted
and be supported by extensive data, including preclinical and clinical trial
data to prove the safety and efficacy of the device. If human clinical trials of
a proposed device are required and the device presents a "significant risk," the
manufacturer or the distributor of the device will have to file an IDE
application with the
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FDA prior to commencing human clinical trials. The IDE application must be
supported by data, typically including the results of animal and mechanical
testing. If the IDE application is approved, human clinical trials may begin at
a specific number of investigational sites, and the approval letter could
include the number of patients approved by the FDA. An IDE clinical trial can be
divided into several parts or Phases. Sometimes, a company will conduct a
feasibility study to confirm that a device functions according to its design and
operating parameters. This is usual clinical trial site. If the Phase I results
are promising, the applicant may, with the FDA's permission, expand the number
of clinical trial sites and the number of patients to be treated to assure
reasonable stability of clinical results. Phase II studies are performed to
confirm predictability of results and the absence of adverse reactions. The
applicant may, upon receipt of the FDA's authorization, subsequently expand the
study to a third phase with a larger number of clinical trial sites and a
greater number of patients. This involves longer patient follow-up times and the
collection of more patient data. Product claims, labeling and core data for the
PMA are derived primarily from this portion of the clinical trial. The applicant
may also, upon receipt of the FDA's permission, consolidate one or more of such
portions of the study. Sponsors of clinical trials are permitted to sell those
devices distributed in the course of the study, provided such compensation does
not exceed recovery of the costs of manufacture, research, development and
handling. Although both approval methods may require clinical testing of the
device in question under an approved IDE, the Premarket approval procedure is
more complex and time consuming.
Upon receipt of the PMA application, the FDA makes a threshold
determination whether the application is sufficiently complete to permit a
substantive review. If the FDA determines that the PMA is sufficiently complete
to permit a substantive review, the FDA will "file" the application. Once the
submission is filed, the FDA has by regulation 90 days to review it; however,
the review time is often extended significantly by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee may also evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's GMP requirements prior to approval of a PMA.
While the FDA has responded to PMA applications within the allotted time period,
PMA reviews generally take approximately 12 to 18 months or more from the date
of filing to approval. The PMA process is lengthy and expensive, and there can
be no assurance that such approval will be obtained for any of the Company's
products determined to be subject to such requirements. A number of devices for
which PMA approval has been sought by other companies have never been approved
for marketing.
Any products manufactured or distributed by the Company pursuant to a
premarket clearance notification or PMA are or will be subject to pervasive and
continuing regulation by the FDA. The FDC Act also requires that the Company's
products be manufactured in registered establishments and in accordance with GMP
regulations. Labeling, advertising and promotional activities are subject to
scrutiny by the FDA and, in certain instances, by the Federal Trade Commission.
The export of medical devices is also subject to regulation in certain
instances. In addition, the use of the Company's products may be regulated by
various state agencies.
All lasers manufactured for the Company are subject to the Radiation
Control for Health and Safety Act administered by the Center for Devices and
Radiological Health of the FDA. The law requires laser manufacturers to file new
product and annual reports and to maintain quality control, product testing and
sales records, to incorporate certain design and operating features in lasers
sold to
18
<PAGE>
end users pursuant to specific performance standards, and to comply with
labeling and certification requirements. Various warning labels must be affixed
to the laser, depending on the class of the product, as established by the
performance standards.
Although the Company believes that it and its manufacturers currently
comply and will continue to comply with all applicable regulations regarding the
manufacture and sale of medical devices, such regulations are always subject to
change and depend heavily on administrative interpretations. There can be no
assurance that future changes in review guidelines, regulations or
administrative interpretations by the FDA or other regulatory bodies, with
possible retroactive effect, will not materially adversely affect the Company.
In addition to the foregoing, the Company is subject to numerous federal, state
and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of potentially hazardous substance. There can be no assurance that the
Company will not be required to incur significant costs to comply with such laws
and regulations and that such compliance will not have a material adverse effect
upon the Company's ability to conduct business.
The Company and the manufacturers of the Company's products may be
inspected on a routine basis by both the FDA and individual states for
compliance with current GMP regulations and other requirements.
Congress has considered several comprehensive federal health care programs
designed to broaden coverage and reduce the costs of existing government and
private insurance programs. These programs have been the subject of criticism
within Congress and the health care industry, and many alternative programs and
features of programs have been proposed and discussed. Therefore, the Company
cannot predict the content of any federal health care program, if any is passed
by Congress, or its effect on Company and its business. Some measures that have
been suggested as possible elements of a new program, such as government price
ceilings on nonreimbursable procedures and spending limitations on hospitals and
other healthcare providers for new equipment, could have an adverse effect on
the Company's business, operating results or financial condition. Uncertainty
concerning the features of any health care program considered by the Congress,
its adoption by the Congress and the effect of the program on the Company's
business could result in volatility of the market price of the Company's Common
Stock.
Furthermore, the introduction of the Company's products in foreign
countries may require the Company to obtain foreign regulatory clearances. The
Company believes that only a limited number of foreign countries have extensive
regulatory requirements, including France, Germany, Korea and Japan. The time
involved for regulatory approval in foreign countries varies and can take a
number of years. A number of European and other economically advanced countries,
including Italy, Norway, Spain and Sweden, have not developed regulatory
agencies for intensive supervision of such devices. Instead, they generally have
been willing to accept the approval of the FDA. Therefore, a PMA, Section 510(k)
or approved IDE from the FDA is tantamount to approval in those countries. These
countries and most developing countries have simply deferred direct discretion
to licensed practicing surgeons to determine the nature of devices that they
will use in medical procedures. The Company's two ultrasound systems, the
Photon(TM) laser cataract system the Company is developing and the ocular blood
flow analyzer are all devices which require FDA approval. Therefore, a
significant aspect of the acceptance of the devices in the market is the
effectiveness of the Company in obtaining the necessary approvals. Having an
approved IDE allows the Company to export a product to qualified
19
<PAGE>
investigational sites.
Regulatory Status of Products
The Precisionist 3000 Plus(TM) and the Precisionist Thirty Thousand(TM)
Systems. Pursuant to Section 510(k) of the FDC Act, the FDA granted market
clearance for the commercialization of the Precisionist 3000 Plus(TM) system in
1990 and the Precisionist Thirty Thousand(TM) system in 1995, thereby allowing
the Company to sell these devices in the United States for their intended use as
cataract surgical systems. That clearance, in turn, has allowed for similar
approvals in several foreign countries, allowing sales to be undertaken in all
of those countries. Because no approvals are required in many developing
countries, including several countries in the Middle East and Latin America,
those areas are potentially viable markets.
Applications for approval in other western countries, including Germany
and France, are currently pending. Under present circumstances, although there
is no assurance, approval of the German application is expected. Because France
places substantial credence in German approvals, it is expected that approval in
France will follow sometime thereafter. In Japan and Korea, the Company has
provided the Precisionist(TM) system to established dealers that have applied
for approval in those respective countries.
The Photon(TM) Laser Cataract System. The Company acquired permission from
the FDA to manufacture the device and approval to export it to qualified
investigator sites outside the United States under an open IDE granted by the
FDA in May 1995. Although the Photon(TM) laser cataract system is uniquely
configured in an original and proprietary manner, the laser system, a Nd:YAG
laser, is not proprietary to the device or the Company and is widely used in the
medical industry and other industries as well. Of particular significance is the
fact that this particular component has received previous market clearance from
the FDA for other ophthalmic and medical applications. Also of significance is
the Company's belief that the surgical treatment method used with the Photon(TM)
laser cataract is similar to the current ultrasound cataract treatment employed
by ophthalmologists. The Company thus believes that it can obtain Section 510(k)
clearance for the Photon(TM) laser cataract system sometime in 1999.
The Company submitted its Premarket Notification under Section 510(k) of
the FDC Act for the Photon(TM) laser cataract system in September 1993. The FDA
requested clinical support data for claims made in the Section 510(k) Premarket
Notification, and in October 1994 the Company submitted an IDE application to
provide for a "modest clinical study" in order to collect the data required by
the FDA for clearance of the Photon(TM) laser cataract system. The FDA granted
this IDE in May 1995. The Company began human clinical trials in April 1996 and
completed the clinical surgeries in December 1996. Through the clinical trials
the Company discovered that the Photon(TM) laser cataract system may not
effectively remove harder grade cataracts. Hard cataracts can be removed using
the already existing ultrasound capability of the Workstation(TM). The Company
has 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
cataracts and provide the statistical data required to approve the Photon(TM)
laser system for laser cataract removal. There is no guarantee, however, that
the Company will be successful in improving the laser system to remove harder
grade cataracts.
Blood Flow Analyzer(TM) (Paradigm BFA(TM)). The FDA granted market
clearance pursuant to Section
20
<PAGE>
510(k) of the FDC Act, for the commercial sale of the Paradigm Blood Flow
Analyzer in June 1997 for the intended use and claims of applanation tonometry
and blood flow analysis. The clearance allows immediate marketing in the United
States for this new product and allows the Company to expand its product base
into the ophthalmic office and optometric office with a diagnostic system.
Employees
As of December 31, 1998, the Company had 20 full-time employees. This
number does not include the Company's manufacturer's representatives who are
independent contractors rather than employees of the Company. The Company also
utilizes several consultants and advisors. There can be no assurance that the
Company will be successful in recruiting or retaining key personnel. None of the
Company's employees is a member of a labor union and the Company has never
experienced any business interruption as a result of any labor disputes.
Item 2. Description of Property
- -------------------------------
The Company's executive offices are currently located at 1127 West 2320
South, Suite A, Salt Lake City, Utah. This facility consists of approximately
4,397 square feet of leased office space under a three year lease that will
expire on December 31, 2000 with an additional three year renewal option. An
additional 3700 square feet were added in October, 1998 in the building adjacent
to its current facility, which is owned by the same landlord. These facilities
are leased from Eden Roc, a California partnership, at a base monthly rate of
$6,315 plus a variable 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,
respectively. Pursuant to the lease, the Company pays all real estate and
personal property taxes and the insurance costs on the premises. The Company
believes that these facilities are adequate and satisfy its needs for the
foreseeable future.
Item 3. Legal Proceedings
- -------------------------
The Company is not a party to any material legal proceedings and is not
aware of any threatened legal proceedings which may be brought against it.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None.
PART II
-------
Item 5. Market for Common Equity and related Stockholder Matters
- ----------------------------------------------------------------
The Authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, $.001 par value per share, and 5,000,000 shares of Preferred
Stock, $.001 par value per share. The Company has created four classes of
Preferred Stock, designated as Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock.
The Company's Common Stock and Class A Warrants trade on The Nasdaq
SmallCap Market under the respective symbols of "PMED" and "PMEDW." Prior to
July 22, 1996, there was no public market for the Common Stock. As of March 25,
1999 the closing sale prices of the Common
21
<PAGE>
Stock and Class A Warrants were $3.250 per share and $.531 per warrant,
respectively. The following are the high and low sales prices for the Common
Stock and Class A Warrants by quarter as reported by Nasdaq since July 22, 1996.
<TABLE>
<CAPTION>
Common Stock Class A Warrants
Price Range Price Range
Period (Calendar Year) High Low High Low
<S> <C> <C> <C> <C>
1996
Third Quarter (since July 22, 1996)..... 6 2 1-3/16 1/8
Fourth Quarter.......................... 5-5/8 2-7/8 1-7/16 7/16
1997
First Quarter........................... 6-3/8 3 1-9/16 3/4
Second Quarter.......................... 5-3/4 3 1 1/2
Third Quarter........................... 6 1-9/16 1-3/8 1/8
Fourth Quarter.......................... 4-5/8 2-7/16 7/8 1/4
1998
First Quarter........................... 4-11/16 2-7/8 15/16 1/4
Second Quarter.......................... 6-1/2 3-13/16 1-5/16 1/4
Third Quarter........................... 4-9/16 2-1/2 11/16 7/16
Fourth Quarter.......................... 3 1-9/16 1-3/16 7/16
</TABLE>
The Company's Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock are not publicly traded.
As of March 25,1999, there were 653 record holders of Common Stock, 8 record
holders of Series A Preferred Stock, 6 record holders of Series B Preferred
Stock, 3 record holders of Series C Preferred Stock and 72 record holders of
Series D Preferred Stock.
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future. The Company must pay cash dividends to holders of its Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred Stock
before it can pay any cash dividend to holders of its Common Stock. Dividends
paid in cash pursuant to outstanding shares of the Company's Series A, Series B,
Series C and Series D Preferred Stock are only payable from surplus earnings of
the Company and are non-cumulative and therefore, no deficiencies in dividend
payments from one year will be carried forward to the next. The Company
currently intends to retain future earnings, if any, to fund the development and
growth of the Company's proposed business and operations. Any payment of cash
dividends in the future on the Common Stock will be dependent upon the Company's
financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, restrictions, if any, under any debt
obligations, as well as other factors that the Company's Board of Directors
deems relevant. The Company issued 6,764 shares of its Series A Preferred and
6,017 shares of its Series B Preferred on January 8, 1996 as a stock dividend to
Series A and Series B shareholders of record as of December 31, 1994.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -----------------------------------------------------------------
General
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations, contains forward looking statements which involve
risks and uncertainty. The Company's actual results could differ materially from
those anticipated in these forward looking statements as a
22
<PAGE>
result of certain factors discussed in this section. The Company has changed its
fiscal year to the period from January 1 to and including December 31.
The Company is engaged in the design, development, manufacture and sale of
high technology eye care products. The Company's surgical equipment is designed
to perform minimally invasive cataract surgery and is comprised of surgical
devices and related instruments and accessories, including disposable products.
The Company's ultrasound diagnostic products include a pachymeter, an A-Scan, an
A/B Scan and a biomicroscope, the technology for which was acquired from
Humphrey Systms in 1998. In addition, the Company markets its Blood Flow
AnalyzerTM. Paradigm's activities for the twelve months ended December 31, 1998
include 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, the Company announced the acquisition of the exclusive
manufacturing rights to four FDA-approved ophthalmic diagnostic instruments from
Humphrey Sysems, a division of Carl Zeiss, Inc. which complement the Company's
cataract surgical equipment and its Blood Flow AnylyzerTM. The Company 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. The Company expects 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. 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, should commence shipments in the third
quarter of 1999. In summary, management expects 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.
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 certain software and hardware revisions
were identified and corrected. With the introduction of teh new fluidic system
in March 1999 for the Precisionist Thirty Thousand WorkstationTM, coupled with
the shippment of the four new ophthalmic diagnostic intruments, management
anticipates 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,
23
<PAGE>
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 the Company 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.
The Company 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.
Upgrades
To garner sales, the Company offers the ultrasonic Precisionist(TM) system
with an unconditional arrangement under which the customer may trade in their
Precisionist(TM) system to upgrade to a Precisionist Thirty Thousand(TM) Ocular
Surgery System(TM). Under this arrangement, the customer receives full credit
for the trade in purchase price of the Precisionist(TM) system against the price
of the new Precisionist Thirty Thousand(TM) Ocular Surgery System(TM). As of
December 31, 1998, the Company has distributed approximately 51 Precisionist(TM)
systems under this provision. The gross margin on these original sales was
approximately $295,000 or 32%. If all of these customers were to exercise their
upgrade privilege, the Company would exchange the Precisionist(TM) system for
the Company's new Precisionist Thirty Thousand(TM) Ocular Surgery System(TM) and
refurbish the ultrasonic Precisionist(TM) systems and sell them in the
international market. Any losses on the sale of the refurbished Precisionist(TM)
systems, which are not expected to be significant, would reduce the gross margin
on the Precisionist Thirty Thousand(TM) Ocular Surgery System(TM) sales. The
total gross margin on the upgrade sales is estimated to be $1,677,000 or 41%.
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
The Company 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
24
<PAGE>
decrease of cash used by operating activities in 1998 is primarily attributable
to a lower net loss. The Company 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,
the Company 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, the Company 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, the Company completed a private placement of 1,140,000
shares of Series D Convertible Preferred Stock at $1.75 per share with the net
proceeds to the Company 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 the Company's 1999 budget and the net proceeds from
the 1999 Preferred Stock offering, management believes that funds are sufficient
to continue operations through December 31, 1999. However, no assurances can be
given that management's plan will be successful in achieving positive cash flow
or profitability.
The Company will seek funding to meet its working capital requirements
through collaborative arrangements and strategic alliances, additional public
offerings and/or private placements of its securities or bank borrowings. There
can be no assurance, however, that additional funds, if required, will be
available from any of the foregoing or other sources on favorable terms, if at
all.
The Company's 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,
management has 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
quarerly sales, tends to fluctuate widely depending on the Company's purchase
orders with the manufacturers, the time lags between cusomer's 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, the Company 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. The
Company's ability to use its NOLs to offset future income is dependant upon the
tax laws in effect at the time the NOL's can be utilized. The Tax Reform Act of
1996 significantly limits the annual amount that can be utilized for certain of
these carry forwards as a result of change of ownership.
Effect of Inflation and Foreign Currency Exchange
The Company has not realized a reduction in the selling price of the
Precisionist phaco system as a result of domestic inflation. Nor has the Company
experienced unfavorable profit reductions due to currency exchange fluctuations
or inflation with its foreign customers.
25
<PAGE>
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. The Company believes that the
adoption of SFAS 133 will not have any material effect on the financial
statements of the Company.
The Company has reviewed all other recently issued accounting standards in
order to determine their effects, if any, on the results of operations or
financial position of the Company. Based on that review, the Company believes
that none of these pronouncements will have a significant effect on current or
future earnings or operations.
Year 2000
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Management of the
Company does not anticipate that any significant modification or replacement of
the Company's software will be necessary for its computer systems to properly
utilize dates beyond December 31, 1999 or that the Company will incur
significant operating expenses to make any such computer system improvements.
The Company is not able to determine, however, whether any of its suppliers,
lenders, or service providers will need to make any such software modifications
or replacements or whether the failure to make such software corrections will
have an effect on the Company's operations or financial condition.
Item 7. Financial Statements
Report of Independent Accountants F-2
Balance Sheet F-3
Statement of Operations F-4
Statement of Changes in Stockholders' Equity F-5 to F-7
Statement of Cash Flows F-8
Notes to Financial Statements F-9 to F-28
<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
- --------------------------------------------------------------------------------
F-2
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Balance Sheet
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>
Item 8. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosurec
- --------------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
- --------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act.
- ---------------------------------------
26
<PAGE>
The executive officers and directors of the Company, their ages and their
positions are set forth below:
Name Age Position
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
The directors are elected for one year terms which expire at the next
annual meeting of shareholders. Executive officers are elected annually by the
Board of Directors to hold office until the first meeting of the Board following
the next annual meeting of shareholders and until their successors have been
elected and qualified.
Thomas F. Motter has served as Chairman of the Board of the Company since
April 1993. Since December 12, 1997 and from May 1994 to August 1997, he has
served as President and Chief Executive Officer of the Company. From June 1989
to April 1993, Mr. Motter served as Chief Executive Officer of Paradigm Medical,
Inc. which merged with the Company in May 1994. From September 1990 to April
1992, he was employed by HGM Medical Laser Systems as general manager of their
International Division. From October 1978 to June 1989, Mr. Motter was employed
by SmithKline Beckman's Humphrey Instruments Division, which developed and
manufactured advanced ophthalmic diagnostic instruments, serving last as
National Sales Manager overseeing all domestic sales in its ophthalmic computer
division. Mr. Motter received a B.A. degree in English from Stephen's College in
1970 and an M.B.A. degree from Pepperdine University in 1975.
Michael W. Stelzer has served as Vice President of Operations and Chief
Operating Officer of the Company since December 12, 1997 and its Secretary since
July 30, 1998. From August 8, 1997 to December 12, 1997, he served as President
and Chief Executive Officer of the Company. Mr. Stelzer joined the Company's
Board of Directors in April 1993. From June 1989 to April 1993, he served as a
General Counsel and a director of Paradigm Medical, Inc. which merged with the
Company in May 1994. From January 1995 to August 1997, Mr. Stelzer served as the
Executive Vice President and Chief Financial Officer of Rhino Marketing, Inc., a
sports related holding company, and was President of one of its subsidiaries.
Prior to joining Rhino, Mr. Stelzer was President and General Counsel for
MarDec, Inc., a golf accessory marketing company, from 1993 to 1995. Mr. Stelzer
is a licensed attorney with the state of California and has practiced law in
California since 1980. From March 1972 to January 1980, Mr. Stelzer was
controller of Ponderosa Telephone Company. Mr. Stelzer received a B.S. degree in
business administration from the University of California, Davis in 1970 and a
Juris Doctorate from Humphreys College of Law in 1979.
Robert W. Millar has served as Vice President of Engineering and
Manufacturing of the Company
27
<PAGE>
since December 12, 1997 and as a director of the Company since April 1993. From
April 1995 to December 12, 1997, Mr. Millar served as Executive Vice President
of the Company. From January 1991 to April 1993, he was employed as President by
Paradigm Medical, Inc., which merged with the Company in May 1994. From January
1990 to January 1991, Mr. Millar was employed by HGM Medical Laser Systems,
serving as Director of Marketing and Product Management for all ophthalmic and
surgical markets. From October 1988 to December 1989, Mr. Millar was employed as
Group Products Manager for the Customer Products Division of Esselte Pendaflex
Corporation, a manufacturer and distributor of office supply products. From July
1986 to February 1988, Mr. Millar was employed by TechnaVision Inc., a company
engaged in the manufacture of ophthalmic diagnostic and other eyecare equipment.
From February 1980 to July 1986, he was employed by Pogue McJunkin & Associates,
a professional industrial design firm. Mr. Millar received a B.S. degree in
industrial design from the College of Design in Detroit, Michigan in 1979.
John W. Hemmer, C.F.A., has served as Vice President of Finance, Treasurer
and Chief Financial Officer of the Company and as a director since November
1995. Since October 1989, Mr. Hemmer has served as a director and consultant for
Sea Pride Industries, Inc. and its subsidiaries in Gulf Breeze, Florida, which
developed the first offshore marine production system licensed and permitted for
use in the Gulf of Mexico. From March 1992 to July 1994, Mr. Hemmer was employed
as the Secretary and Vice President of Finance of Advance Electronics, Inc.,
which is engaged in the retail distribution of health and beauty products. From
November 1991 to December 1994, Mr. Hemmer was Secretary and Treasurer of Agro
Industrial Development, Ltd., which established a Free Trade Zone in Belize for
the production and export of seafood. He was the President and Chief Executive
Officer of John W. Hemmer, Inc., a registered broker/dealer firm from May 1987
to May 1989, which subsequently changed its name to Westfalia Investments Inc.,
but retained his registered representative status until March 1995. Prior
thereto, he was Vice President of Bankers Trust Company in charge of venture
capital and a member of the research and investment management committees. Mr.
Hemmer was Vice President of Corporate Finance at Dempsey, Tegler & Company,
Inc., a Senior Analyst at Lazard Freres & Company and an Investment Officer of
The Chase Manhattan Bank. 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 of the Company since November 1997.
Mr. Kolenik has been Special Assistant to the President of International
Heritage, Inc. since 1996 and President and Co- Founder of Cyn Del & Co., Inc.
("Cyn Del") since 1992. He was a co-founder and director of Win Capital Corp.
("Win"), an investment banking firm, but resigned as a director in 1996. As of
July 1, 1998, Mr. Kolenik resumed an affiliation with Win. From 1969 to 1989,
Mr. Kolenik held various positions at Sherwood Securities Corp., a securities
firm, including President and Chief Executive Officer, Executive Vice President
of Trading, Executive Vice President of Corporate Syndicate and Vice President
of Corporate Finance. He also served as a director of Sherwood Securities Corp.
Mr. Kolenik attended Baruch College where he majored in finance.
Robert L. Frome, Esq. has been a director of the Company since September
3, 1998. He has been a Senior Partner at the Olshan Grundman Frome Rosenzweig &
Wolosky LLP 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 Inc., the nation's largest provider of bulk carbon dioxide to restaurant,
fast food outlets and
28
<PAGE>
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, respectively.
Technical and Medical Advisory Personnel
The Company utilizes an informal Clinical Advisory Board of recognized
practicing ophthalmic surgeons in technical and medical advisory capacities.
Outside consultants are generally used on an ad hoc basis and such individuals
do not meet together as a group and are not compensated. The Members of the
Company's Clinical Advisory Board are as follows:
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
29
<PAGE>
performed his residency at Louisiana State University.
Marc A. Michelson M.D. -- Dr. Michelson is an ophthalmologist in
Birmingham, Alabama. He received his medical degree at the University of Alabama
in 1975, and performed his residency at the Eye Foundation Hospital in
Birmingham, Alabama.
Lawrence E. Noble M.D. -- Dr. Noble is an ophthalmologist in Provo, Utah.
He received his medical degree at the University of Oregon in 1964, and
performed his residency at the Good Samaritan Hospital.
Jaswant Singh Pannu, M.D. -- Dr. Pannu is an ophthalmologist in Lauderdale
Lakes, Florida. He received his medical degree at the University of Miami in
1967 and performed his residency at the Milwaukee, Wisconsin Veterans
Administration Hospital and at Evanston Hospital in Evanston, Illinois.
David M. Schneider, M.D. -- Dr. Schneider is an ophthalmologist in
Cincinnati, Ohio. He received his medical degree at the University of Cincinnati
in 1975, and performed his residency at the University of Cincinnati.
Jeffrey G. Straus, M.D. -- Dr. Straus is an ophthalmologist in Metairie,
Louisiana. He received his medical degree at State University of New York at
Buffalo in 1984 and performed his residency at Ochsner Foundation Hospital and
Clinic in New Orleans, Louisiana.
Gerald Zelman, M.D. -- Dr. Zelman is a Ophthalmologist in Manhasset, New
York. He received his medical degree at the University of Lausanne in 1964, and
performed his residency at the Brooklyn Eye and Ear facility in Brooklyn, New
York.
Board Meetings and Committees
The Board of Directors held a total of five meetings during the fiscal
year ended December 31, 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 the Company's
independent public accountants and internal audit department and evaluating the
Company's accounting principles and its system of internal accounting controls.
The Compensation Committee of the Board of Directors consists of directors
Robert M. Millar, 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 1998 fiscal year.
Pursuant to Nasdaq corporate governance requirements recently made
applicable to Nasdaq SmallCap Market companies, the Company must have (i) a
minimum of two independent directors; (ii) an audit committee with a majority of
independent directors; and (iii) an annual stockholders meeting. The Company has
and can presently satisfy each of these requirements. Messrs. Kolenik and Frome
qualify as independent directors.
30
<PAGE>
Compliance with Section 16(a) of the Securities and Exchange Act of 1934
Effective May 1, 1991, the Securities and Exchange Commission adopted
revised rules regarding reporting of beneficial ownership of securities by
officers, directors and owners of more than 10% of any class of a company's
equity securities. During fiscal 1997, George J. Barenholtz, then a director of
the Company, through an oversight, filed one late stock purchase transaction
report covering one transaction.
Item 10. Executive Compensation
The following table sets forth, for each of the last three fiscal years
and for the three month period ended December 31, 1996, the compensation
received by Thomas F. Motter, the Company's Chairman of the Board, President and
Chief Executive Officer, and all other executive officers (collectively, the
"Named Executive Officers") at December 31, 1998 whose salary and bonus for all
services in all capacities exceed $100,000 for the fiscal year ended December
31, 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards Payouts
Other Securities
Annual Restricted Underlying Long-term All Other
Name and Compensa- Stock Options/ Incentive Compensa-
Principal Position Period Salary($) Bonus($) tion($)(6) Awards($) SARs(#) Payout($) tion ($)(5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas F. Motter, 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 Executive 1996(4) 111,042 $1,000 3,600 0 0 0 6,000
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 1997
consist of payments related to the operation of automobiles by the named
executive.
(6) On February 16, 1996, the Company granted Mr. Motter and Mr. Millar
options to purchase 106,000 and 84,000 shares, respectively, of the
Company's Common Stock at an exercise price of $5.00 per share. These
options expire on February 15, 2001. On January 31, 1996, the Company
granted Mr. Hemmer options to purchase 20,000 shares of the Company's
Common Stock at an exercise price of $5.00 per share.
These options expire January 30, 2001.
The following table sets forth information concerning the exercise of
options to acquire shares of the Company's Common Stock by the Named Executive
Officers during the fiscal year ended December 31,
31
<PAGE>
1998, as well as the aggregate number and value of unexercised options held by
the Named Executive Officers on December 31, 1998.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs In-the-Money Options/SARs at
at December 31, 1997(#) December 31, 1997($)
Shares Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Thomas F. Motter -0- -0- 106,000 -0- -0- -0-
Robert W. Millar -0- -0- 84,000 -0- -0- -0-
John W. Hemmer -0- -0- 20,000 -0- -0- -0-
Michael W. -0- -0- 20,000 -0- -0- -0-
Stelzer
</TABLE>
Director Compensation
The outside directors were each granted stock options to purchase 75,000
shares of the Company'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 the Company in any
other capacity and receiving compensation therefor.
Employee 401(k) Plan
In October 1996, the Company's Board of Directors adopted a 401(k)
Retirement Savings Plan. Under the terms of the 401(k) plan, effective as of
November 1, 1996, the Company may make discretionary employer matching
contributions to its employees who choose to participate in the plan. The plan
allows the Board to determine the amount of the contribution at the beginning of
each year. The Board adopted a contribution formula specifying that such
discretionary employer matching contributions would equal 100% of the
participating employee's contribution to the plan up to a maximum discretionary
employee contribution of 3% of a participating employee's compensation, as
defined by the plan. All persons who have completed at least six months' service
with the Company and satisfy other plan requirements are eligible to participate
in the 401(k) plan.
1995 Stock Option Plan
The Company adopted a 1995 Stock Option Plan (the "Plan"), for officers,
employees, directors and consultants of the Company on November 7, 1995. The
Plan authorized the granting of stock options ("Plan Options") to purchase an
aggregate of not more than 300,000 shares of the Company's Common Stock. On
February 16, 1996, options for substantially all 300,000 shares were granted. On
June 9, 1997, the Company's shareholders approved an amendment to the Plan to
increase the number of shares of Common Stock reserved from issuance thereunder
by an aggregate of 300,000 shares. That same day, 20,000 options each were
granted to Michael W. Stelzer, Vice President of Operations and Chief Operating
Officer of the Company, and John W. Hemmer, Vice President of Finance, Treasurer
and Chief Financial Officer of the Company. On September 14, 1998, 37,450
options each were granted to Thomas F. Motter, President and Chief Executive
Officer of the Company, Robert W. Millar, Vice President of Engineering and
Manufacturing, and Messrs. Stelzer and Hemmer, and 75,000 options each to
Patrick M.
32
<PAGE>
Kolenik and Robert L. Frome, the two outside directors of the Company. There are
presently outstanding options to purchase 750,000 shares of the Company's Common
Stock that have been granted under the Plan. No such options have been
exercised.
The Plan is administered by the Board of Directors or a Compensation
Committee of not less than two disinterested members of the Board of Directors.
In general, the Board of Directors or the Compensation Committee, as the case
may be, will select the person to whom options will be granted and will
determine, subject to the terms of the Plan, the number, exercise, and other
provisions of such options. Options granted under the Plan will become
exercisable at such times as may be determined by the Board of Directors or the
Compensation Committee, as the case may be.
Options under the Plan may be either incentive stock options ("ISOs"), as
such term is defined in the Internal Revenue Code of 1986, as amended, or
non-ISOs. ISOs may only be granted to persons who are employees of the Company.
Non-ISOs may be granted to any person, including, but not limited to, employees
of the Company, independent agents, consultants, as the Board of Directors or
the Compensation Committee, as the case may be, believes has contributed, or
will contribute, to the success of the Company. The Board of Directors or the
Compensation Committee as the case may be, shall determine the exercise price of
options granted under the Plan, provided that, in the case of ISOs, such price
may not be less than 100% (110% in the case of ISOs granted to holders of 10% of
voting power of the Company's stock) of the fair market value (as defined in the
Plan) of the Common Stock on the date of grant. The aggregate fair market value
(determined at the time of option grant) of stock with respect to which ISOs
become exercisable for the first time in any year cannot exceed $100,000.
The term of each option shall not be more than 10 years (five years in the
case of ISOs granted to holders of 10% of the voting power of the Company's
stock) from the date of grant. The Board of Directors has a right to amend,
suspend or terminate the Plan at any time; provided, however, that unless
ratified by the Company's stockholders, no amendment or change in the Plan will
be effective which would increase the total number of shares which may be issued
under the Plan, materially increase the benefits accruing to persons granted
under the Plan or materially modify the requirements as to eligibility and
participation in the Plan. No amendment, supervision or termination of the Plan
shall, without the consent of an employee to whom an option shall heretofore
have been granted, affect the rights of such employee under such option.
Employment Agreements
The Company entered into employment agreements with each of Thomas F.
Motter, 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 the
Company, provide that each of them may be terminated for "cause" (as provided in
the agreements) and prohibit each of them from competing with the Company for
two years following the termination of his employment agreement. The agreements
provide for the payment of an initial base salary of $135,000 to Mr. Motter,
$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 the Company's 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.
33
<PAGE>
Change of Control Termination Agreements
On September 14, 1998, the Company entered into a Change of Control
Termination Agreement (the "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 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, the Company 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 the
Company, 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 with the Company is terminated subsequent to the change
of control: (i) payment of full base salary through the date of termination of
employment (the "Termination Date") 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 the Company; (ii) in lieu of any further salary
payments for periods subsequent to the Termination Date, the Company 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; (iii) payments of any deferred
compensation, including deferred bonuses; (iv) in lieu of shares of the
Company's 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 Company's 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 (v) 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 (a) any person becomes a beneficial owner of 30% or more of the combined
voting power of the Company's then outstanding securities, (b) 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 the
Company's Board of Directors and any new director whose election by the Board or
nomination for election by the Company's 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, (c) the Company enters an agreement resulting in the occurrence of a
change of control of the Company, (d) the Board of Directors eliminates or
otherwise reduces the authority, duties and/or responsibilities of the Executive
Committee, or (e) the shareholders approve a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation that
would result in the voting securities of the Company 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 the Company or such surviving
entity outstanding immediately after the merger or consolidation, or the
shareholders of the Company approve a plan of complete liquidation of the
Company or as agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets.
If any of the events constituting a change of control of the Company shall
occur, each of Messrs. Motter, Stelzer, Millar and Hemmer shall be entitled to
the benefits set forth above on the subsequent termination of
34
<PAGE>
their employment during the term of the Agreements unless the termination is on
account of death, disability, or retirement, by the Company 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 with the Company 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 the
Company. 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 the Company. 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.
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 (1) the assignment of any
duties inconsistent with their status and position immediately prior to a change
in control of the Company, or substantial adverse alteration in the nature or
status of their responsibilities and those in effect immediately prior to a
change in control; (2) 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 the Company and all key employees of any person in control of the
Company; (3) their relocation to a location not within 25 miles of the Company's
present executive offices; (4) the failure by the Company, 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 of the Company, within seven days of the date the compensation is due;
(5) the failure by the Company 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
Company's 1995 Stock Option Plan, 401(k) pretax retirement savings plan, and
flexible benefit plan; (6) the failure of the Company to continue to provide
them with benefits substantially similar to those enjoyed by them under the
Company's life insurance, medical, health and accident, or disability plans
which they are participating at the time of a change of control of the Company,
and for the failure to continue to provide them with a Company 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 (7) the failure of the
Company to obtain a satisfactory agreement with any successor to assume and
agree to perform the Agreements.
Profit Sharing Plan
On February 16, 1996, the Company adopted a Profit Sharing Plan, pursuant
to which an amount equal to 10% of the pretax profits of the Company will be set
aside for the benefit of the Company's officers and key employees. This funding
will be paid to the Company's officers and key employees as follows: Thomas W.
Motter, Chairman of the Board, President and Chief Executive Officer--30%;
Robert W. Millar, Vice President of Engineering and Manufacturing--25%; John W.
Hemmer, Chief Financial Officer and Treasurer--20%; and a pool of 25% to be
allocated among the other officers and key employees as determined by the
Compensation Committee and approved by the Board of Directors. This funding will
only be paid if the Company's qualified pretax profits exceed $10,000,000 for
any fiscal year beginning October 1, 1996 and ending December 31, 2001. If the
Company's pretax profits reach $10,000,000 for any fiscal year, the entire
pretax profits for that year will qualify for the funding. The plan expires at
the end of its fifth fiscal year on December 31, 2001, when all funds held will
be disbursed.
35
<PAGE>
Limitation of Liability and Indemnification
The Company reincorporated in Delaware in February 1996, in part, to take
advantage of certain provisions in Delaware's corporate law relating to
limitations on liability of corporate officers and directors. The Company
believes that the reincorporation into Delaware, the provisions of its
Certificate of Incorporation and Bylaws and the separate indemnification
agreements outlined below are necessary to attract and retain qualified persons
as directors and officers. The Company's Certificate of Incorporation limits the
liability of directors to the maximum extent permitted by Delaware law. This
provision is intended to allow the Company's directors the benefit of Delaware
General Corporation Law which provides that directors of Delaware corporations
may be relieved of monetary liabilities for breach of their fiduciary duties as
directors, except under certain circumstances, including breach of their duty of
loyalty, acts or omissions not in good faith or involving intentional misconduct
or a knowing violation of law, unlawful payments of dividends or unlawful stock
repurchases or redemptions or any transaction from which the director derived an
improper personal benefit. The Company's Bylaws provide that the Company shall
indemnify its officers and directors to the fullest extent provided by Delaware
law. The Bylaws authorize the use of indemnification agreements and the Company
has entered into such agreements with each of its directors and executive
officers.
There is no pending litigation or proceeding involving a director,
officer, employee or other agent of the Company as to which indemnification is
being sought, nor is the Company aware of any threatened litigation that may
result in claims for indemnification by any director, officer, employee or other
agent.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the SEC, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of September 30, 1998 for
(i) each executive officer of the Company (ii) each director of the Company
(iii) each person known to the Company to be the beneficial owner of more than
5% of the outstanding shares, and (iv) all directors and officers as a group.
36
<PAGE>
Percent of
Name and Address(1) Number of Shares Ownership(2)
Thomas F. Motter(3)(6) 520,000 12.0%
Douglas MacLeod 418,451 9.6%
Robert W. Millar(4)(6) 336,105 7.7%
Michael W. Stelzer(5)(6) 62,935 1.4%
John W. Hemmer(5)(6) 20,513 *
Robert L. Frome(7) 14,000 *
Patrick M. Kolenik(8) 1,007 *
Executive officers and
directors as a group (6 persons) 954,560 22.0%
- ---------------
* Less than 1%.
(1) The address for Mr. Motter, Mr. Millar and Mr. Stelzer is c/o Paradigm
Medical Industries, Inc., 1127 West 2320 South, Suite A, Salt Lake City,
Utah 84119. The address for Mr. MacLeod is 1002 South 10th Street, Tacoma,
Washington 98405. The address for Mr. Hemmer is 88 Meadow Road, Briarcliff
Manor, New York 10510. The address for Mr. Frome is 505 Park Avenue, 16th
Floor, New York, New York 10022. The address for Mr. Kolenik is 35
Elizabeth Drive, Laurel Hollow, New York 11791.
(2) Assumes no exercise of the Class A Warrants, the Bridge Warrants and the
Attorney's Warrants and no conversion of outstanding shares of the
Company's Series A, Series B and Series C Preferred Stock into Common
Stock.
(3) Does not include options to purchase 143,450 shares of Common Stock
granted to Mr. Motter under the Company's 1995 Option Plan.
(4) Includes 2,000 shares held by William E. Millar, Mr. Millar's father,
1,000 shares held by Michael S. Millar, Mr. Millar's brother; and 100
shares to Nathan Glynn, Mr. Millar's nephew. Mr. Millar disclaims
beneficial ownership of these 3,100 shares. Does not include options to
purchase 121,450 shares of Common Stock granted to Mr. Millar under the
Company's 1995 Option Plan.
(5) Does not include options to purchase 57,450 shares of Common Stock granted
to each of the two directors under the Company's 1995 Option Plan.
(6) Does not include 250 shares of Series C Convertible Preferred Stock held
by each of the four management directors.
(7) Does not include 750 shares of Series C Convertible Preferred Stock held
by Mr. Frome 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
the Company and certain affiliated parties. Future transactions, if any, will be
approved by a majority of the disinterested members of the Company and will be
on terms no less favorable to the Company than those that could be obtained from
37
<PAGE>
unaffiliated parties.
The Company subcontracts the manufacture of its Precisionist 3000 Plus(TM)
and Precisionist Thirty Thousand(TM) Workstation(TM) to one of its shareholders,
Zevex, Inc. ("Zevex") which is located in Salt Lake City, Utah. On September 23,
1996, the Company entered into a Design, Engineering and Manufacturing Agreement
with Zevex for the engineering and manufacture of the Workstation(TM) and
Precisionist Thirty Thousand(TM). As of December 31, 1998, Zevex has
manufactured and delivered 39 systems to the Company. However, the agreement can
be terminated at any time by the Company if Zevex fails for two consecutive
quarters to timely fulfill the Company's purchase orders, or by Zevex if the
Company fails to timely make the payments required by the agreement after having
received a 20 day notice from Zevex demanding payment. Zevex is also under an
exclusive contract with the Company, which expires September 23, 1999, that
prohibits Zevex from manufacturing complete ultrasound or laser surgical systems
for any other company, without permission from the Company. For the fiscal years
ended September 30, 1996, the three month period ended December 31, 1996, the
fiscal year ended December 31, 1997and the fiscal year ended December 31, 1998,
the Company purchased design and manufacturing services in the amounts of
$353,949, $30,386, $1,070,000 and $48,663, respectively, from Zevex.
On January 8, 1997, the Company subcontracted the subassembly of the laser
module piece of the Photon(TM) Laser Phaco(TM) from Sunrise Technologies, Inc.
("Sunrise"). During the 12 month period ending December 31, 1997, the Company
purchased 10 laser module subassemblies for a total purchase price of $160,000,
from Sunrise whose president was a member of the Company's Board of Directors at
the time the manufacturing agreement was signed.
On December 19, 1995, the Company entered into a settlement and release
agreement (the "Settlement Agreement") with Douglas A. MacLeod, a significant
shareholder of the Company. Pursuant to this agreement, Mr. MacLeod agreed to
terminate certain anti-dilution rights granted to him by the Company. Under the
terms of this Settlement Agreement, Mr. MacLeod agreed to terminate his
anti-dilution rights in consideration for the following: (i) Mr. Motter agreeing
to sell to Mr. MacLeod from his personal holdings 61,111 shares of the Company's
Common Stock at a purchase price of $611.11, (ii) Mr. Millar agreeing to sell to
Mr. MacLeod from his personal holdings 38,889 shares of the Company's Common
Stock at a purchase price of $388.89, and (iii) the Company agreeing to issue to
MacLeod an additional 20,000 shares of Common Stock. Based on the value assigned
by the Company's investment banker, Kenneth Jerome & Company, Inc., of $1.50 per
share, the Company recognized $30,000 of expense for the 20,000 shares issued by
the Company and $149,000 of expense and additional paid-in-capital for the
100,000 shares sold by Mr. Motter and Mr. Millar. The Company represented in the
Settlement Agreement that a public offering of the Company's securities would be
completed by June 1, 1996. On May 24, 1996, the Company and Mr. MacLeod amended
the Settlement Agreement to indicate that a public offering of the Company's
securities would be completed by July 15, 1996. By order dated July 10, 1996,
the SEC declared the Company's Registration Statement to be effective and
following the sale of the Company's securities, the closing of the public
offering occurred on July 25, 1996.
The Photon(TM) LaserPhaco(TM) system is protected under a United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. (U.S. Patent Number
4,694,828) for the utility and methods of laser ablation, aspiration and
irrigation of tissue through a hand-held probe of a unique design and assigned
to Photomed, a corporation owned in part by Dr. Eichenbaum. The Company secured
the exclusive worldwide right to this patent shortly after its issue, and to the
international patents pending, from Photomed by means of a License Agreement
that entitled Dr. Eichenbaum to royalty payments equal to 1% of the proceeds
from the net commercial sales of the Photon(TM) LaserPhaco(TM) system and
accessories in all medical specialties. The License Agreement terminates
38
<PAGE>
July 7, 2003. The License Agreement was amended on December 5, 1997 to allow
Photomed the right to conduct research, development and marketing utilizing the
patent in certain medical sub-specialties other than ophthalmology for which the
Company would receive royalty payments equal to 1% of the proceeds from the net
sales of products utilizing the patent.
Mr. Mackey, a director of the Company from September 1995 to September 3,
1998, is President and a shareholder of the law firm of Mackey Price & Williams,
which has rendered legal services to the Company since February 1995 in
connection with the Company's public offering and other corporate matters. Legal
fees and expenses paid to Mackey Price & Williams for the fiscal year ended
December 31, 1997, the three month period ended December 31, 1996 and the fiscal
year ended September 30, 1996 totaled $118,765, $25,468 and $234,504,
respectively. For the fiscal year ended December 31, 1998, The Company paid
legal fees and expenses in the amount of $97,414 and at year end owed $16,371.
The Company 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 the Company's public offering.
Mr. Kolenik, a director of the Company 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, the Company
agreed to pay to Win a commission equal to 9% of the aggregate purchase price of
the Shares sold, or $269,820. Win was also paid a non-accountable expense
allowance equal to 3% of the aggregate purchase price of the Shares sold. The
Company has also entered into an agreement with Win dated August 20, 1997,
wherein Win agreed to perform unspecified investment banking services for the
Company for a two year period, for which the Company agreed to pay Win a monthly
retainer of $2,000 for the first six months of the agreement, $4,000 per month
for the second six months, and $6,000 per month for the remainder of the
agreement. In 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 Preferred Offering in addition to
a $50,000 finders fee as it relates to the Series D Preferred Stock Offering.
In addition, the Company 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 (collectively, the "Win
Warrants").
Prior to the initial closing of the Offering, the Company 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 shall bear interest at
a rate of 10% per annum, which shall be payable pro rata monthly, and shall be
due on the 6-month anniversary of the loan. The Company shall issue 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 Company's Common Stock on the business
day immediately prior to the issuance date of the warrants, subject to
adjustment according to the terms contained therein. The Company also entered
into a one-year consulting agreement, wherein WIN Capital will provide financial
consulting services to the Company in consideration for a fee of $5,000 per
month for the term of the agreement.
PART IV
39
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-B or are incorporated by reference to previous filings.
Table No. Document
2.1 Amended Agreement and Plan of Merger between Paradigm Medical Industries,
Inc., a California corporation and Paradigm Medical Industries, Inc., a
Delaware corporation(1)
3.1 Certificate of Incorporation(1)
3.2 Bylaws(1)
4.1 Warrant Agency Agreement with Continental Stock Transfer & Trust
Company(3)
4.2 Specimen Common Stock Certificate (2)
4.3 Specimen Class A Warrant Certificate(2)
4.4 Form of Class A Warrant Agreement(2)
4.5 Underwriter's Warrant with Kenneth Jerome & Co., Inc.(3)
4.6 Attorney's Warrant with Mackey Price & Williams(1)
4.7 Warrant to Purchase Common Stock with Win Capital Corp.
4.8 Specimen Series C Convertible Preferred Stock Certificate
4.9 Certificate of the Designations, Powers, Preferences and Rights of the
Series C Convertible Preferred Stock
10.1 Exclusive Patent License Agreement with Photomed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 Confidential Disclosure Agreement with Zevex, Inc.(1)
10.4 Indemnity Agreement with Zevex International, Inc.(1)
10.5 Manufacturing Agreement with Sunrise Technologies, Inc.(1)
10.6 Royalty Agreement dated January 30, 1992, with Dennis L. Oberkamp Design
Services(1)
10.7 Indemnity Agreement dated January 30, 1992, with Dennis L. Oberkamp Design
Services(1)
10.8 Royalty Agreement (for Ultrasonic Phaco Handpiece) with Dennis L. Oberkamp
Design Services(1)
10.9 Lease Agreement with Eden Roc
10.10 Settlement and Release Agreement with Douglas A. MacLeod(1)
10.11 Form of Indemnification Agreement(1)
10.12 1995 Stock Option Plan and forms of Stock Option Grant Agreements(1)
10.13 Form of Promissory Note between the Company and third parties(1)
10.14 Form of Warrant to Purchase Common Stock between the Company and third
parties(1)
10.15 Employee's Lock-Up Agreement(1)
10.16 Registering Shareholders Lock-Up Agreement(3)
10.17 Amendment of Settlement and Release Agreement with Douglas A. MacLeod (3)
10.18 Design, Engineering and Manufacturing Agreement with Zevex, Inc.(5)
10.19 License and Manufacturing Agreement with O.B.F. Labs, Ltd. (6)
10.20 Settlement Agreement with Estate of H.L. Federman (6)
10.21 Agreement with Win Capital Corp. (6)
10.22 12% Convertible, Redeemable Promissory Note (6)
10.23 Securities Exchange Agreement (6)
40
<PAGE>
10.24 Stock Exchange for Satisfaction of Debt Agreement with Zevex
International, Inc. (7)
10.25 Co-Distribution Agreement with Pharmacia & Upjohn Company and National
Healthcare Manufacturing Corporation (7)
10.26 Agreement for Purchase and Sale of Assets with Humphrey Systems Division
of Carl Zeiss, Inc. (7)
10.27 Employment Agreement with Thomas F. Motter (8)
10.28 Employment Agreement with Robert W. Millar (8)
10.29 Employment Agreement with John W. Hemmer (8)
10.30 Employment Agreement with Michael W. Stelzer (8)
10.31 Change of Control Termination Agreement with Thomas F. Motter (8)
10.32 Change of Control Termination Agreement with Robert W. Millar (8)
10.33 Change of Control Termination Agreement with John W. Hemmer (8)
10.34 Change of Control Termination Agreement with Michael W. Stelzer (8)
23.1 Consent of Medical Laser Insight(3)
23.2 Consent of Frost & Sullivan(3)
23.3 Consent of Ophthalmologists Times(3)
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 Quarter Report on Form 10-QSB, as filed on
August 19, 1998.
(8) Incorporated by reference from Quarter Report on Form 10-QSB, as filed on
November 12, 1998.
(b) Reports on Form 8-K
-------------------
On January 7, 1998, the Company filed a report on Form 8-K regarding pro
forma financial statements as of November 30, 1997.
On February 18, 1998, the Company filed a report on Form 8-K regarding pro
forma financial statements as of December 31, 1997.
On February 27, 1998, the Company filed a report on Form 8-K regarding pro
forma financial statements as of January 31, 1998.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PARADIGM MEDICAL INDUSTRIES, INC.
Dated: March 30, 1999 By: /s/Thomas F. Motter
----------------------------------------
Thomas F. Motter, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons in counterpart on behalf of the Company
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Thomas F. Motter Chairman of the Board, March 30, 1999
- ---------------------- President and Chief Executive Officer
Thomas F. Motter (Principal Executive Officer)
/s/Michael W. Stelzer Vice President of Operations, Chief March 30, 1999
- ---------------------- Operating Officer, Secretary and Director
Michael W. Stelzer
/s/Robert W. Millar Vice President of Engineering and March 30, 1999
- ---------------------- Manufacturing and Director
Robert W. Millar
/s/John W. Hemmer Vice President of Finance, March 30, 1999
- ---------------------- Treasurer, Chief Financial Officer and
John W. Hemmer Director (Principal Financial and
Accounting Officer)
/s/ Patrick M. Kolenik Director March 30, 1999
- ----------------------
Patrick M. Kolenik
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Robert L. Frome Director March 30, 1999
- ----------------------
Robert L. Frome
</TABLE>
10K-410M.PMI
43
<PAGE>
<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
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</TABLE>
