As filed with the Securities and Exchange Commission on May 7, 1999
Commission File No. 333-77267
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PARADIGM MEDICAL INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 3841 87-0459536
(State of jurisdiction of (Primary Standard (I.R.S. Employer incorporation
or organization) Classification Identification Number)
Code Number
1127 West 2320 South, Suite A
Salt Lake City, Utah 84119
(801) 977-8970
(Address and telephone number of registrant's principal executive offices and
principal place of business)
Thomas F. Motter, President
1127 West 2320 South, Suite A
Salt Lake City, Utah 84119
(801) 977-8970
(Name, address and telephone number of agent for service)
----------------------
Copies to:
Randall A. Mackey, Esq.
Mackey Price & Williams
170 South Main Street, Suite 900
Salt Lake City, Utah 84101-1655
Telephone: (801) 575-5000
Approximate date of proposed sale to the
public: As soon as practicable after the Registration
Statement becomes effective.
-----------------------
If any of the securities being registered on this Form are being offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 (the "Securities Act"), check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. o
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. o
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CALCULATION OF REGISTRATION FEE
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Title of each Proposed Proposed
class of Amount maximum maximum Amount of
securities to be to be offering price aggregate registration
registered registered per Share offering price fee
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Resale of Common Stock issuable upon exercise of Win Capital Warrants 25,000 $ 4.00 $ 100,000 $ 27.80
Resale of Common Stock issuable upon exercise of Cyn Del Warrants. 75,000 $ 4.00 $ 300,000 $ 83.40
Resale of Common Stock issuable upon exercise of officer's Warrants 125,000 $ 2.63 $ 325,750 $ 91.39
Resale of Common Stock issued to an officer of the Company........ 50,000 $ 3.50 $ 175,000 $ 48.65
Resale of Common Stock issuable upon conversion of Series D Preferred
Stock....................................................... 1,140,000 $ 1.75 $ 1,596,000 (1)
Resale of Common Stock issuable upon exercise of KSH Investment Group
Warrants.................................................... 55,539 $ 2.50 $ 138,848 (1)
Resale of Common Stock issuable upon exercise of KSH Investment Group
Warrants.................................................... 10,461 $ 2.69 $ 28,140 (1)
Resale of Common Stock issuable upon exercise of KSH Investment Group
Warrants.................................................... 142,400 $ 2.38 $ 338,912 (1)
Resale of Common Stock issuable upon exercise of Win Capital Warrants 35,000 $ 2.30 $ 80,500 (1)
Resale of Common Stock issuable upon exercise of Cyn Del Warrants. 105,000 $ 2.30 $ 241,500 (1)
Resale of Common Stock issuable upon exercise of Class A Warrants 1,000,000 $ 7.50 $ 7,500,000 (2)
Resale of Common Stock issuable upon exercise of Underwriter's Warrants 100,000 $ 8.125 $ 812,500 (2)
Resale of Common Stock issuable upon exercise of Underwriter's Warrants 100,000 $ 7.50 $ 750,000 (2)
Resale of Common Stock issuable upon exercise of Win Capital Warrants 291,000 $ 3.00 $ 873,000 (2)
Resale of Common Stock issuable upon exercise of Note Holders' Warrants 287,500 $ 3.33 $ 975,375 (2)
Resale of Common Stock issuable upon exercise of Attorney's Warrants 25,000 $ 3.33 $ 83,250 (2)
Resale of Common Stock issuable upon conversion of Series C Preferred
Stock....................................................... 1,713,143 $ 1.75 $ 2,998,000 (2)
Resale of Common Stock issuable to Certain Holders of Common Stock 216,316 $ 2.875 $ 621,909 (2)
Resale of Common Stock issuable to Certain Holders of Common Stock 1,000,000 $ 2.875 $ 2,875,000 (2)
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Total Registration Fee...................................... $251.24
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(1) Registration fee was previously paid pursuant to Form SB-2 Registration
Statement No. 333-77267, filed on April 27, 1999.
(2) No registration fee is required as securities were previously registered
by Form SB-2 Registration Statement, No. 333-2496, effective as of July
10, 1996., Form SB-2 Registration Statement No. 333-57711, effective as of
September 14, 1998, and Form SB-2 Registration Statement No. 333-68471,
effective as of January 4, 1999. Pursuant to Rule 429, this is a combined
registration statement which relates to the securities previously
registered by the earlier registration statements and the securities being
registered by this registration statement.
The Registration hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective on
such date as the Commission acting pursuant to said Section 8(a), may determine.
<PAGE>
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PARADIGM MEDICAL INDUSTRIES, INC.
Cross Reference Sheet
Form SB-2 Item No. and Caption Prospectus Caption
<S> <C> <C>
Item 1. Front of Registration Statement and Outside Front Outside Front Cover
Cover Page of Prospectus
Item 2. Inside Front and Outside Back Cover Pages Inside Front and outside Back Cover Pages
of Prospectus
Item 3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
Item 4. Use of Proceeds Use of Proceeds
Item 5. Determination of Offering Price Not Applicable
Item 6. Dilution Not Applicable
Item 7. Selling Security Holders Not Applicable
Item 8. Plan of Distribution Outside Front Cover Page; Plan of Distribution
Item 9. Legal Proceedings Business - Legal Proceedings
Item 10. Directors, Executive Officers, Promoters Management
and Control Persons
Item 11. Security Ownership of Certain Beneficial Owners Principal Shareholders
and Management
Item 12. Description of Securities Outside Front Cover Page; Description of
Securities
Item 13. Interest of Named Experts and Counsel Legal Matters; Experts
Item 14. Disclosure of Commission Position on Description of Securities; Plan of Distribution
Indemnification for Securities Act Liabilities
Item 15. Organization Within the Last Five Years Certain Transactions
Item 16. Description of Business Business
Item 17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis or Plan of
Operation Operation
Item 18. Description of Property Business - Properties
Item 19. Certain Relationships and Certain Transactions
Related Transactions
Item 20. Market for Common Equity and Related Price Range of Common Stock and Class A
Stockholder Matters Warrants and Dividend Policy, Description of
Securities
Item 21. Executive Compensation Management - Executive Compensation
Item 22. Financial Statements Financial Statements;
Item 23. Changes in and Disagreements with Accountants on Not Applicable
Accounting and Financial Disclosure
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PROSPECTUS
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6,496,359 Shares
PARADIGM MEDICAL INDUSTRIES, INC.
Common Stock
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Paradigm Medical Industries, Inc. develops, manufactures and sells
diagnostic and surgical equipment for the eyes. We currently market two
ultrasonic surgery systems for removing cataracts and are developing a laser
surgery system for the next generation of cataract removal. We also have a Blood
Flow AnalyzerJ that detects and treats the eye condition glaucoma by diagnosing
blood flow in the eyes. In addition, we acquired exclusive technology and
manufacturing rights to four diagnostic eyecare instruments formerly
manufactured by the Humphrey Systems Division of Carl Zeiss, Inc. (AHumphrey
Systems@). Our sales come from our two ultrasonic surgery systems and related
medical supplies and the Blood Flow AnalyzerJ. We plan to market the four
diagnostic eyecare instruments acquired from Humphrey Systems. The laser system
is still being tested and needs approval from the Food and Drug Administration
before it can be sold.
Our primary purpose in registering Common Stock for resale is to
raise money to manufacture and market the four diagnostic eyecare instruments
acquired from Humphrey Systems and to bring the laser surgery system to market.
This will include significant manufacturing and marketing expenses, as well as
research and developments costs and other expenses. We are registering for
resale a total of 6,496,359 shares of Common Stock.
This Prospectus supercedes all prior registrations. Our shares are
listed for trading on The Nasdaq SmallCap Market under the symbols PMED and
PMEDW. On May 6, 1999, the closing sales price for our Common Stock was $3.50
per share and the closing sales price for our Class A Warrants was $.78 per
warrant.
Investing in the Common Stock involves a high degree of risk. You
should purchase shares only if you can afford a complete loss. See ARisk
Factors@ beginning on page 5.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities, or
determined if this Prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
This Prospectus is dated May ___, 1999.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It
may not contain all of the information that is important to you. To understand
this offering fully, you should read the entire prospectus carefully, including
the risk factors and the financial statements.
THE COMPANY
We develop, manufacture and sell surgical and diagnostic equipment
and instrumentation for the eyes known as ophthalmic equipment with related
accessories, including disposable products. Our surgical equipment is designed
for cataract treatment with minimum invasion of the eye. We market two
ultrasonic cataract surgery systems with related instruments. One of the
ultrasound systems, the Precisionist Thirty ThousandJ, is manufactured as the
base surgery system for our Precisionist Thirty ThousandJ Ophthalmic Surgical
WorkstationJ (the "WorkstationJ"). We currently developing a laser cataract
surgery system as an adjunct to its Workstation. This product is currently
undergoing investigational trials in the United States. If successfully
developed and approved for medical uses, we plan to market the laser system as a
plug-in module for its WorkstationJ. We also have the exclusive rights to sell
the Blood Flow AnalyzerJ in the United States. This product is a portable
computerized system designed for diagnosis of blood flow volume in the eye for
detection and treatment of glaucoma. We are currently developing additional test
applications for this diagnostic product. In addition, we have acquired
exclusive technology and manufacturing rights to four diagnostic eyecare
instruments, formerly manufactured by Humphrey Systems. All product
manufacturing and service related to these instruments has been moved to our
Salt Lake City facility.
EYE SURGERY
A cataract is a condition, which largely affects the elderly population, in
which the natural lens of the eye hardens and becomes cloudy, reducing vision.
Treatment consists of removal of the cloudy lens and replacement with a
synthetic lens implant which restores visual clarity. Cataract surgery is the
single largest volume and revenue producing outpatient surgical procedure for
ophthalmologists worldwide. The Health Care Finance Administration reports that
in the United States approximately 2 million cataract removal procedures are
performed annually, making this the largest outpatient procedure reimbursed by
Medicare. Most cataract procedures are performed using a method called
phacoemulsification or "phaco", which employs a high frequency (40 kHz to 60
kHz) ultrasonic probe needle to fragment the cataract while still in the eye and
remove it in pieces by suction through a small incision.
SURGERY SYSTEMS
We manufacture and sell two phaco systems with accessories. The
Precisionist 3000 PlusJ system was introduced in 1992 and is a low-cost portable
system intended primarily for the international market. The Precisionist Thirty
ThousandJ Ocular Surgery WorkstationJ is our newest generation system which is
the base for our expandable surgical "workstation" platform. We believe that
current phaco systems can be difficult for many eye surgeons to master and that
other eye surgery systems can be developed that intrude less into the eye. We
are developing its proprietary PhotonJ laser system and unique patented probe
for laser cataract removal which we believe can address the difficulties
associated with phaco systems. We intend to make the PhotonJ laser system a
plug-in module for its WorkstationJ if and when cleared for market by the Food
and Drug Administration (the "FDA"). The development of the laser cataract
system is being done in cooperation with eye surgeons in the United States and
through research and development work being conducted by our engineering group,
and under contract with the Dixon Medical Laser Laboratory at the University of
Utah in Salt Lake City.
We believe that in certain surgical conditions, our laser system will be
easier to use and safer than present phaco systems. The probe will be smaller
than typical probes employing ultrasonic needle technology and will deliver
laser energy directly to the desired tissue area by means of a smooth blunt end.
The laser probe has been shown to eliminate high-frequency vibrations in the eye
and to significantly reduce heat build-up which are complications associated
with the phaco method. In 1996, we received FDA approval to conduct clinical
trials in the United States with the PhotonJ laser system. During these Phase I
clinical trials we discovered that the PhotonJ laser system was effective in
removing softer grade cataracts. We completed our Phase I clinical trials in
1997, and received FDA approval to proceed to an expanded Phase II clinical to
provide the statistical data required to approve the PhotonJ laser system for
laser cataract removal. There is no assurance, however, that we will
successfully complete the Phase II clinical trials or that additional
disadvantages or problems unique to the PhotonJ laser system will not be
discovered during the Phase II clinical trials or following FDA approval of the
system.
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In addition to cataract surgery, we believe that our PhotonJ laser system
is capable of being configured with specialty probes for use in other ophthalmic
surgical procedures. These potential applications could represent substantial
growth opportunities including additional sales of equipment, instruments,
accessories and disposables. However, there can be no assurance that these
applications will be developed or approved. Further there is no guarantee that
the laser will be accepted by the eye surgery market in this capacity.
BLOOD FLOW ANALYZER
In June 1997, we received FDA clearance to market the Blood Flow AnalyzerJ
for detection of glaucoma and other retina related diseases. The device measures
not only pressure in the eye but also blood flow in the eye. Reduced blood flow
in the eye may cause nerve fiber bundle death from lack of oxygen resulting in
loss of vision associated with glaucoma. Our Blood Flow AnalyzerJ is a portable
automated system that presents an affordable method for such blood flow testing
for ophthalmic and optometric doctors. We have an exclusive licence to private
label, package and market the product in the United States, with full
international marketing rights. See "Business - General."
MARKETING AGREEMENT
In June, 1998, we entered into a Co-Distribution Agreement with Pharmacia &
Upjohn Company and Natural Healthcare Manufacturing Corporation, which provides
for the marketing and sale of a range of ophthalmic products. Under the terms of
the Co-Distribution Agreement, we, Parmacia & Upjohn and National Healthcare
will offer a comprehensive package of products to cataract surgeons, including
cataract surgical equipment, intraocular lens, implants, intraocular
pharmaceuticals, surgical instruments and sterile procedural packs. See
"Business - General."
ACQUISITION OF DIAGNOSTIC INSTRUMENTS
In July 1998, we entered into an Agreement for Purchase and Sale of Assets
with the Humphrey Systems to acquire the exclusive technology and manufacturing
rights to four diagnostic eyecare instruments, formerly manufactured by Humphrey
System. These instruments are ultrasound-based products which represent one of
the Company=s core technology areas and include the Ultrasonic Biometer 820, the
A/B Scan System Model 837, the Ultrasound Pachymeter Model 855, and the
Ultrasound Biomicroscope Model 840 and all accessories, packaging and end-user
collateral products for each of the product lines. All product manufacturing and
service has been moved to our Salt Lake City facility. Product shipments of the
Ultrasound Pachymeter Model 855 resumed in December 1998. Product shipments of
the Ultrasonic Biometer 820 are expected to resume in the second quarter of 1999
and product shipments of the A/B Scan System Model 837 and the Ultrasound
Biomicroscope Model 840 are expected to resume in the third quarter of 1999. The
acquisition gives us a fast track entry into the expanding eyecare diagnostics
market. In addition, the ultrasound products compliment our cataract and
glaucoma product offerings and expand our market into optometry. See "Business -
General."
2
<PAGE>
The Offering
Securities Offered .............. The resale of 6,496,359 shares of Common
Stock, consisting of the resale of 2,251,900
shares of Common Stock issuable upon the
exercise of the Class A Warrants,
Underwriter's Warrants, Win Capital Warrants,
Note holders' Warrants, Attorney's Warrants,
KSH Investment Group Warrants and Cyn Del
Warrants; the resale of 1,713,143 shares of
Common Stock issuable upon the conversion of
the Series C Convertible Preferred Stock (the
"Series C Preferred Stock"); the resale of
1,140,000 shares of Common Stock issuable
upon the conversion of the Series D
Convertible Preferred Stock (the "Series D
Preferred Stock"); the resale of 216,316
shares of Common Stock consisting of the
resale of 90,000 shares for satisfaction of
debt pursuant to the Stock Exchange for
Satisfaction of Debt Agreement with Zevex
International, Inc. ("Zevex") and 126,316
shares for purchase of assets pursuant to the
Agreement for Purchase and Sale of Assets
with Humphrey Systems Division of Carl Zeiss,
Inc. ("Humphrey Systems"); the resale of
1,000,000 shares of Common Stock for purchase
of assets from Humphrey Systems pursuant to
the Agreement for Purchase and Sale of Assets
and for raising additional working capital;
and the resale of 50,000 shares of Common
Stock issued to John W. Hemmer, Vice
President of Finance, Treasurer, Chief
Financial Officer and a director of the
Company for services to the Company and the
resale of 125,000 shares of Common Stock
issuable upon the exercise of Warrants issued
to Mr. Hemmer in connection with his
retirement. Each Class A Warrant entitles the
holder to purchase one share of common Stock
at an exercise price of $7.50 per share. Each
Underwriter's Warrant entitles the holder to
purchase one share of common Stock at an
exercise price of $7.50 to $8.125 per share.
Each Win Capital Warrant entitles the holder
to purchase one share of Common Stock at an
exercise price of $2.30 to $4.00 per share.
Each of the Note Holders' Warrants and
Attorney's Warrants entitles the holder to
purchase one share of Common Stock at an
exercise price of $3.33 per share. Each KSH
Investment Group Warrant entitles the holder
to purchase one share of Common Stock at an
exercise price of $2.38 to $2.69 per share.
Each Cyn Del Warrant entitles the holder to
purchase one share of Common Stock at an
exercise price of $2.30 to $4.00 per share.
Each Warrant issued to Mr. Hemmer entitles
him to purchase one share of Common Stock at
an exercise price of $2.63 per share. Each
share of Series C Preferred Stock and Series
D Preferred Stock is convertible at a
conversion price of $1.75 per share. The Note
is convertible at a conversion price of $2.00
per share. The Class A Warrants,
Underwriter's Warrants, Win Capital Warrants,
Note Holders' Warrants and Attorney's
Warrants are subject in certain circumstances
to earlier redemption by us. The Series C
Preferred Stock, Note and Series D Preferred
Stock are subject in certain circumstances to
automatic conversion. See "Securityholders
Registering Shares" and "Description of
Securities."
Common Stock outstanding
prior to the offering ........... 5,894,741 shares.
Common Stock outstanding
after the offering (1)........... 12,391,100 shares.
Use of Proceeds.................. All funds received by us upon the exercise of
the Warrants will be used for general
corporate purposes. We will not receive any
proceeds from the conversion of the Series C
Preferred Stock or the Series D Preferred
Stock. See "Use of Proceeds."
Risk Factors/Dilution............ The offering involves a high degree of risk.
See "Risk Factors."
Nasdaq Symbols
Common Stock................ PMED
Class A Warrants............ PMEDW
3
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Summary Financial Information
For the For the For the
year ended year ended year ended
September 30, December 31, December 31,
1996 1997 1998
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Statement of Operations Data:
<S> <C> <C> <C>
Sales................................................... $ 252,000 $ 464,000 $ 1,258,000
Costs of sales.......................................... 180,000 333,000 813,000
Operating expenses...................................... 1,328,000 2,933,000 3,160,000
Operating loss.......................................... (1,256,000) (2,802,000) (2,715,000)
Other income (expense).................................. (193,000) 208,000 44,000
Net loss................................................ (1,449,000) (3,010,000) (2,759,000)
Net loss attributable to common shareholders
After non-cash preferred dividend.................... (1,448,000) (3,010,000) (2,759,000)
Net loss per common share............................... (0.66) (0.82) (.69)
Shares used in computing net loss per share............. 2,193,000 3,663,000 4,022,000
Cash dividends per share................................ None None None
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As of As of
December 31, December 31,
1997 1998
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Balance Sheet Data:
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Current assets........................................... $ 1,857,000 $ 1,415,000
Current liabilities..................................... 1,055,000 492,000
Working capital........................................ 802,000 923,000
Total assets........................................... 2,713,000 2,241,000
Long-term debt, less current portion.................... 1,082,000 33,000
Accumulated deficit...................................... (8,258,000) (15,887,000)
Stockholders' equity..................................... 576,000 1,716,000
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RISK FACTORS
Before you invest in our Common Stock, you should be aware that there are
various risks, including those described below. You should consider carefully
these risk factors together with all of the other information included in this
Prospectus before you decide to purchase shares of our Common Stock. No
investment should be made by any person who is not in a position to lose the
entire amount of his investment.
Some of the information in this Prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. These statements discuss future expectations,
contain projections of results of operations or of financial condition or state
other "forward-looking" information. When considering such forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this Prospectus. The risk factors noted in this section and other
factors noted throughout this prospectus, including certain risks and
uncertainties, could cause our actual results to differ materially from those
contained in any forward-looking statement.
Limited Working Capital; Limited Operating History; Accumulated Deficit;
Anticipated Losses.
As of December 31, 1998, we had limited working capital of $923,000. We
also have not been in business for a long time. Most of our current sales are
related to the Precisionist 3000 Plus, our ultrasonic eye surgery machine. Our
accumulated deficit was $8,258,406 as of December 31, 1997 and $15,887,000 as of
December 31, 1998. Such losses have resulted principally from costs incurred in
connection with research and development, including clinical trials, of the
laser surgery system. Medical products were not sold by us until late 1992. Our
ability to become profitable largely depends on successfully developing clinical
applications and obtain regulatory approvals for its laser surgery products,
including the PhotonJ LaserPhacoJ, and to effectively market such products. The
problems and expenses frequently encountered in developing new products and the
competitive industry in which we operate will impact whether we are successful.
We may never achieve profitability. Furthermore, we may encounter substantial
delays and unexpected expenses related to research, development, production,
marketing, regulatory matters or other unforeseen difficulties.
Possible Future Delisting of Securities from The Nasdaq SmallCap Market and
Market Illiquidity.
We received a letter from the Nasdaq staff, dated January 7, 1998,
notifying us that our securities would be delisted from The Nasdaq SmallCap
Market at the close of business on January 15, 1998 because we failed to
demonstrate compliance with all the requirements for continued listing. We
requested a review of the staff's findings and conclusions. A hearing to review
the staff's findings and conclusions was held on February 19, 1998. We were
determined to be in compliance with the requirements for continued listing on
The Nasdaq SmallCap Market as a result of the proceeds we had received from sale
of 20,030 shares of Series C Preferred Stock and the exchange of 12%
Convertible, Redeemable Promissory Notes for 9,950 shares of Series C Preferred
Stock.
In order to remain eligible for quotation on Nasdaq, we must maintain
$2,000,000 in net tangible assets, a $500,000 market value of the public float
(excluding shares held directly or indirectly by officers, directors and
controlling stockholders), and at least 300 round lot holders of our Common
Stock. In addition, continued inclusion requires two market-makers and a minimum
bid price of $1.00 per share. If we are unable to comply with these new listing
requirements in the future, our securities would be delisted from the Nasdaq
SmallCap Market. We may be unable to satisfy all requirements to remain listed
on Nasdaq. If delisted from Nasdaq, our securities may then be traded on the OTC
Electronic Bulletin Board or in the over-the-counter market in the so-called
"pink sheets." As a result, it may be more difficult for an investor to dispose
of our securities, or to obtain accurate quotations on their market value.
Furthermore, the prices for our securities may be lower than might otherwise be
obtained.
Disclosures Relating to Low Priced Stocks; Possible Restrictions on Resales of
Low Priced Stocks and on Broker-Dealer Sales; Possible Adverse Effect of "Penny
Stock" Rules on Liquidity for the Company's Securities.
If our securities were to be delisted from Nasdaq as discussed above,
they may become subject to Rule 15g-9 promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), which imposes additional sales
practice requirements on broker-dealers that sell securities governed by Rule
15g-9 to persons other than established customers and "accredited investors"
(generally, individuals with a net worth in excess of $1,000,000 or annual
individual income exceeding $200,000 or $300,000 jointly with their spouses).
For transactions covered by Rule 15g-9, the broker-dealer must determine whether
the purchaser qualifies as a purchaser and must receive the purchaser's written
consent to the transaction prior to sale. Consequently, Rule 15g-9 may adversely
effect the ability purchasers and others to sell our securities and otherwise
affect the trading market in our securities.
The Commission has adopted regulations which generally define a "penny
stock" to be any non-Nasdaq equity security that has a market price (as therein
defined) less than $5.00 per share or with an exercise price of less than $5.00
per share, subject to certain exceptions. For any transactions by broker-dealers
involving a penny stock (unless exempt), rules promulgated under the Exchange
Act require delivery, prior to a transaction in a penny stock, of a risk
disclosure document relating to the penny stock market. Disclosure is also
required to be made about compensation payable to both the broker-dealer and the
registered representative and
5
<PAGE>
current quotations for the securities. Finally, monthly statements are required
to be sent disclosing recent price information for the penny stocks.
The foregoing penny stock restrictions will not apply to our securities
if such securities are listed on Nasdaq and have certain price and volume
information provided on a current and continuing basis or if we meet certain
minimum net tangible asset or average revenue criteria. There can be no
assurance that our securities will qualify for exemption from these
restrictions. In any event, even if our securities were exempt from such
restrictions, they would remain subject to Section 15(b)(6) of the Exchange Act,
which gives the Commission the authority to prohibit any person that is engaged
in unlawful conduct while participating in a distribution of a penny stock from
associating with a broker-dealer or participating in a distribution of a penny
stock, if the Commission finds that such a restriction would be in the public
interest. If our securities were subject to the rules on penny stocks, the
market liquidity for our securities could be materially adversely affected.
Future Capital Needs and Uncertainty of Additional Funding.
We may require substantial funds in addition to the net proceeds of this
Offering for various reasons, including continuing research and development,
expanding clinical trials, completing the FDA approval process for its products
(including the PhotonTM LaserPhacoTM), and manufacturing and marketing its
existing products. See "Risk Factors -- Government Regulation; Uncertainty of
FDA Approval" below. In the short term, based on past financial needs and on
currently planned programs, we anticipate that the net proceeds of this Offering
and the interest earned from it, together with funds generated from future
product sales, should be adequate, even if at the minimum level, to satisfy our
capital requirements for approximately 12 months. This estimate is based on
certain assumptions and there can be no assurance that the net proceeds of this
Offering will be sufficient to satisfy our capital requirements for 12 months.
Even if this Offering is successful, we will need to seek additional capital,
possibly through public or private sales of our securities, in order to fund our
activities on a long-term basis. Adequate funds may not be available when needed
or on terms acceptable to us. Insufficient funds may require us to delay, scale
back or eliminate certain or all of its research and development programs or to
license third parties to commercialize products or technologies that we would
otherwise seek to develop itself, which may materially adversely affect our
continued operations.
Technological Uncertainty and Early Stage of Product Development.
The science and technology of medical products, including lasers, is
rapidly evolving. Our medical systems may require significant further research,
development, testing and regulatory clearances. They are also subject to the
risks of failure inherent in the development of products based on innovative
technologies. These risks include the possibility that any or all of the
proposed products will prove to be ineffective or unsafe; that they fail to
receive necessary regulatory clearances; that the proposed products are
uneconomical; that others hold proprietary rights which preclude us from
marketing such products; or that others market better products. Accordingly, we
are unable to predict whether its research and development activities will
result in any commercially profitable products. Further, due to the extended
testing and regulatory review process required, we may be unable to sell our
current and proposed laser cataract system products. There is also no guarantee
that we will be able to develop and sell a glaucoma surgery system. See
"Business."
Government Regulation; Uncertainty of FDA Approval.
We are subject to substantial regulation by the FDA and other federal and
state regulatory agencies. FDA regulations require us to obtain either a 510(k)
clearance or pre-marketing approval prior to marketing a product in the United
States. We are also subject to foreign regulation and must receive various types
of approvals from foreign government agencies prior selling its products in some
countries. The clearance and approval processes for both the FDA and foreign
regulatory authorities are costly, time consuming and uncertain. In addition, we
are required to obtain FDA approval before exporting a device which has not
received FDA marketing clearance or approval. We may never be able to obtain
these required government approvals. See "Risk Factors--Future Capital Needs and
Uncertainty of Additional Funding." Delays or failure to obtain such approvals
would materially and adversely effect us, as would changes in existing
requirements. We have received a 510(k) clearance from the FDA for our
ultrasonic surgery systems allowing us to sell both devices in the United
States. We have also received 510(k) clearance to market an ocular blood flow
analyzer manufactured by O.B.F. Labs, Ltd. ("O.B.F. Labs"). In May 1995, we were
granted an investigational device exemption for our PhotonJ LaserPhacoJ System
allowing us to conduct clinical studies in support of our application with the
FDA to obtain approval to market our laser surgery system. We have completed the
authorized clinical studies and has requested authorization for expanded
clinical studies. We have also received FDA approval to manufacture and export
the PhotonJ LaserPhacoJ System internationally. However, we have not yet
obtained approval from some foreign countries to market the laser product where
approval is necessary. We anticipate that many contemplated applications of our
currently existing and planned products will be subject to the lengthy
regulatory approval process, including preclinical studies, clinical trials and
extensive regulatory review and could take many years and require the
expenditure of substantial resources. See "Business--Regulation."
6
<PAGE>
Lack of Operating Experience.
Our executives rely on their experience and skill from their professional
occupations. None of our executives has direct experience in managing a company
which utilizes research and product development activities and technology to
such a high degree.
See "Management."
Dependence on Laser Cataract System.
We are also developing a laser cataract system for inclusion in our
WorkstationJ. Phase I clinical trials have concluded for FDA approval for the
PhotonJ LaserPhacoJ system. During the clinical trial, we discovered that the
PhotonJ LaserPhacoJ system may not effectively remove viscerous cataracts. In
May, 1998, we received FDA clearance to conduct clinical tests on soft
cataracts. We are highly dependent on FDA approval of its PhotonJ LaserPhacoJ
system to generate future revenues. With the recently discovered possible
limitation of the PhotonJ LaserPhacoJ, the system may not be approved by the
FDA. See "Business -- Products."
Potential Obsolescence from Rapid Technological Change.
Our market is subject to rapid technological change. Development by
others of new or improved products, processes or technologies may make our
products obsolete or less competitive. Accordingly, we must continue investing
in research and development on our existing products and to develop new
products. Despite such investment, our current or proposed products may be
unsuccessful.
Product and Market Competition.
Our laser system will potentially receive competition from other laser
systems, such as excimer, holmium (Ho:YAG), Erbium (Er:YAG), Nd:YLF
(Neodymium:Yttium-Lithium-Fluoride) or lasers of other wave lengths. Competition
may also come from other medical devices and other surgical techniques. Further,
the cataract surgical device industry is dominated by a small number of large
competitors that are well established in the marketplace, have experienced
management, are well financed and have a well recognized trade name related to
their product lines. We may be unable to penetrate the existing market and
acquire a sufficient market share to be profitable. Significant competitive
factors which will affect future sales include regulatory approvals,
performance, pricing, timely product shipment, safety, customer support,
convenience of use and patient and general market acceptance. See "Business--
Competition."
Business Development Risks.
New ventures, particularly those involved in a highly technical industry
such as the medical industry, have substantial inherent risks. These risks are
in three general areas: technical, mechanical and human. Notwithstanding any
pre-production planning, new products can incur unexpected problems in full
scale production, which cannot always be foreseen or accurately predicted.
Designs can become unworkable, for unpredicted reasons. Quality control and
component sourcing failures can also be expected from time to time. Any
business, including ours, is substantially dependent upon the capabilities and
performance of both management and sales personnel. Mistakes in judgment or
performance can be costly and, in certain instances, disabling. Therefore,
management skill, experience, character and reliability are of significant
importance.
Dependence On Key Personnel.
Our success largely depends on a number of key employees. The loss of
services of one or more of these employees could have a material adverse effect
on us, including the development and sale of eye surgery systems. We are
especially dependent upon the efforts and abilities of certain of our senior
management, particularly Thomas F. Motter, Chairman of the Board, President and
Chief Executive Officer, and Robert W. Millar, Vice President of Engineering and
Manufacturing. Messrs. Motter and Millar are each employed by us under a
five-year employment agreement. The loss of any of our key executives could have
a material adverse effect on us and our operations and prospects, although the
loss of either Mr. Motter or Mr. Millar could have a more significant adverse
effect. We have no key man insurance on either Mr. Motter or Mr. Millar. We
believe that our future success will also depend, in part, upon our ability to
attract, retain and motivate qualified personnel. There is no assurance,
however, that we will be successful in attracting and retaining such personnel.
See "Management."
Production Risks.
The high-technology product line requires us to deal with suppliers and
subcontractors supplying highly specialized parts, operating highly
sophisticated and narrow tolerance equipment and performing highly technical
calculations. Components must be custom designed and manufactured, which is not
only complicated and expensive, but can also require a number of months to
7
<PAGE>
accomplish. Slight mistakes in either the design or manufacture can result in
unsatisfactory parts that may not be correctable. Because our business requires
the talents of various professions, mistakes from very slight oversights or
miscommunications can occur, resulting not only in costly delays and lost
orders, but also in disagreements regarding liability and, in any event,
extended delays in production. Moreover, we rely on suppliers that are related
to each other for parts and equipment. When dealing with related suppliers the
terms on which parts and equipment are purchased may not be as favorable as
could be obtained from unrelated third-party suppliers. See "Business."
Lack of Independent Market Testing.
We believe that there is substantial commercial demand for its laser
surgery system and blood flow analyzer for the eyes at a profitable price.
However, this belief is solely based on our management=s experience and
judgment. At this time, there have been no independent marketing studies by
independent professional marketing firms to reliably confirm the extent of this
demand, the price ranges within which it exists and the amount of promotion
necessary to exploit whatever demand does exist. See "Business."
No Assurance of Market Acceptance.
Our products may not be accepted in the marketplace. Such acceptance will
depend on a number of factors including receiving regulatory approvals,
demonstrating the safety, and advantages of our products over existing systems
and techniques. Our laser surgery system may never gain market acceptance since
the system may not effectively remove viscerous cataracts. Further, we be unable
to successfully market our products even if they perform successfully in
clinical applications. Our Precisionist ThirtyThousand TM Workstation TM may not
gain acceptance unless we can reduce or eliminate the vacuum surge and develop
additional, complementary surgical devices for installation in that host system.
Dependence on Patents and the Protection of Proprietary Technology.
We depend on our ability to license and obtain patents and on the
adherence to confidentiality agreements executed by employees, consultants and
third-parties to maintain the proprietary nature of our technology and to
operate without infringing on the proprietary rights of others. Our laser probe
is protected by a United States patent issued in 1987 to Daniel M. Eichenbaum,
M.D. We own the exclusive worldwide rights to this patent. Patents are reported
by O.B.F. Labs to be pending in the United States and Japan and with the
European Economic Community for the blood flow analyzer for the eyes we plan to
market. The pending patents may not be perfected. Also, our present or future
products may be found to infringe upon the patents of others. If our products
are found to infringe on the patents, or otherwise impermissibly utilize the
intellectual property of others, our development, manufacture and sale of such
products could be severely restricted or prohibited. We may be required to
obtain licenses to utilize such patents or proprietary rights of others and
acceptable terms may be unavailable. If we do not obtain such licenses, the
development, manufacture or sale of products requiring such licenses would be
materially adversely affected. In addition, we could incur substantial costs in
defending itself against challenges to our patents or infringement claims made
by third parties or in enforcing any patents we may obtain. See
"Business--Intellectual Property."
Limited Nature of Patent Protection.
Others may sell products similar to our Photon TM LaserPhaco TM system or
the Blood Flow Analyzer TM for the eyes before we can market either device. We
rely on the protections that we hope to realize under the United States and
foreign patent laws. See "Business--Intellectual Property Protection." However,
patents provide limited protections. We have a United States patent on the
hand-held probe design and applications for various foreign patents are either
pending or planned, and the patents for the blood flow analyzer for the eyes are
reported by O.B.F. Labs to be pending. Similar devices, however, could be
designed that do not infringe on our patent rights, but that are similar enough
to compete against our patented products. Moreover, it is possible that an
unpatented but prior existing device or design may exist that has never been
made public and therefore is not known to us or the industry in general. Such a
device could be introduced into the market without infringing on our current
patent. If any such competing non- infringing devices are produced and
distributed, our profit potential would be seriously limited, which would
seriously impair our viability. See "Business--Competition."
Limitations on Medical Reimbursement.
We anticipate that our medical devices will generally be purchased by
ophthalmologists and hospitals that will then bill various third-party payors,
such as government programs and private insurance plans, for the health care
services provided to their patients. Government agencies generally reimburse at
a fixed rate based on the procedure performed. Some of the potential procedures
for which our medical devices may be used, however, may be denied reimbursement
as elective. In addition, third-party payors may deny reimbursement if they
determine that the use of our products was unnecessary, inappropriate, not
cost-effective, experimental or used for a non-approved indication. Even if we
receive FDA clearances for our products, third-party payors may nevertheless
deny reimbursement. Furthermore, third-party payors increasingly challenge the
prices charged for medical products and services. Reimbursement from third-party
payors may be unavailable or if available, that reimbursement may be limited
when compared with
8
<PAGE>
reimbursement for competitive procedures, thereby materially adversely affecting
our ability to profitably sell products. The market for our products could also
be adversely affected by recent federal legislation that reduces reimbursements
under the capital cost pass-through system utilized in connection with the
Medicare program. Failure by hospitals and other users of our products to obtain
reimbursement from third-party payors or changes in government and private
third-party payors' policies toward reimbursement for procedures employing our
products would have a material adverse effect on us. See "Risk Factors--Proposed
Health Care Reform" and "Business--Marketing and Sales--Third-Party
Reimbursement."
Proposed Health Care Reform.
President Clinton's Administration is making proposals to change aspects
of the delivery and financing of health care services. Other legislation to
accomplish the same purpose has or will also be introduced by members of
Congress. Legislation derived from one or more of these proposals may be enacted
in the near future. Such legislation to control or reduce public (Medicare and
Medicaid) and private spending on health care, to reform the methods of payment
for health care goods and services by both the public and private sectors, and
to provide universal access to health care may be passed. We cannot predict what
form this legislation may take or the effect of such legislation on its
business. It is possible that the legislation ultimately enacted by Congress
will contain provisions resulting in price limits and utilization controls which
may reduce the rate of increase in the growth of the ophthalmic laser market or
otherwise adversely affect our business. It is also possible that future
legislation could result in modifications to the nation's public and private
health care insurance systems which will affect reimbursement policies in a
manner adverse to us. We also cannot predict what other legislation relating to
our business or the health care industry may be enacted, including legislation
relating to third-party reimbursement, or what effect legislation may have on
the results of its operations.
New Product Quality.
Our Precisionist ThirtyThousandJ WorkstationJ is a new computer-based
product unproven by day-to-day use in the marketplace. As is common with other
new computer-based products, we have discovered certain circuitry problems and
component failures with the first WorkstationJ that we manufactured. We believe
that we have corrected most if not all of these problems. However, there is no
assurance that all of these problems have been detected or corrected. If
customers were to experience significant problems with the WorkstationJ, if we
could not fix or correct the problems, or if our customers were dissatisfied
with the functionality or performance of the WorkstationJ, or product support
provided by us, we would be materially adversely effected.
Dependence on Outside Suppliers and Manufacturers.
We currently purchase all of its components, supplies and contract
manufacturing from third-party suppliers. Substantially all of our current
products are manufactured or assembled by three companies under long-term
manufacturing agreements. See "Business--Marketing and Sales--Manufacturing and
Raw Materials." However, if we were required to locate other manufacturers or
suppliers, we could experience increased costs and significant delays in both
locating and switching to new vendors. Further, it would be difficult for us to
develop the capacity to manufacture or assemble its products in-house since we
have no experience in large-scale manufacturing. In addition, we may be
unsuccessful in developing the necessary facilities or recruiting trained
personnel to achieve profitable manufacturing or assembling capacities.
Minimal Marketing Experience.
We have commenced a direct sales program to market its current and
proposed products. See "Business--Marketing and Sales." However, we have minimal
direct sales experience and may need to recruit additional qualified personnel
for this purpose. Our sales program may be unsuccessful or we may be unable to
attract and retain qualified distributors on favorable terms.
Product Liability and Possible Insufficiency of Insurance.
The nature of our business exposes it to risk from product liability
claims and there can be no assurance that the Company can avoid significant
product liability exposure. We maintain product liability insurance providing
coverage up to $1,000,000 per claim with an aggregate policy limit of
$1,000,000. There is substantial doubt that this amount of insurance would be
adequate to cover liabilities should we face significant claims. A successful
products liability claim brought against us could have a material adverse effect
on our business, operating results and financial condition. Further, product
liability insurance is becoming increasingly expensive, and there can be no
assurance that we will successfully maintain adequate product liability
insurance at acceptable rates, or at all. Should we be unable to maintain
adequate product liability insurance, our ability to market our products would
be significantly impaired. Any losses that we may suffer from future liability
claims or a voluntary or involuntary recall of our products and the damage that
any product liability litigation or voluntary or involuntary recall may do to
the reputation and marketability of our products would have a material adverse
effect on our business, operating results and financial condition.
9
<PAGE>
World Economic, Political and Currency Fluctuations.
We anticipate that a significant portion of its future product sales will
be in foreign countries. Because we quote prices for our products and accepts
payment on sales principally in U.S. dollars, any significant increase in the
value of the U.S. dollar against local currencies may make our products less
competitive with foreign products. The economic and political instability of
some foreign countries also may affect the ability of ophthalmologists and
others to purchase our products, or the ability of potential customers to pay
for the procedures for which our products are used. See "Business--Competition."
Potential Adverse Effects of Future Sales of Stock; Dilution.
As of March 31, 1999, approximately 58% or about 3,390,000 of the total
5,894,741 shares of Common Stock outstanding were "restricted securities" within
the meaning of Rule 144 under the 1933 Act. Ordinarily, under Rule 144, a person
holding restricted securities for a period of one year may, every three months,
sell in ordinary transactions, or in transactions directly with a market maker
an amount equal to the greater of one percent of our then outstanding Common
Stock or the average weekly trading volume during the four calendar weeks prior
to such sale. An additional 47,226 shares could immediately be sold in reliance
on Rule 144 upon the conversion of our Series A and Series B Preferred Stock
issued and outstanding as of March 31, 1999 for shares of Common Stock. An
additional 33,125 shares could also be immediately sold in reliance upon Rule
144 upon the exercise of the La Jolla Warrants and FAS Warrants and an
additional 660,280 shares could eventually be sold in reliance upon Rule 144
upon the exercise of Stock Options granted to our employees and directors.
Moreover, an additional 80,000 shares of Common Stock could be sold upon the
conversion of the Series C Preferred Stock and 1,140,000 shares of Common Stock
could be sold upon the conversion of the Series D Preferred Stock. Further,
1,000,000 shares could be sold upon the exercise of Class A Warrants issued in
connection with the July 1996 public offering and 512,500 shares could be sold
upon the exercise of warrants held by Bridge Note investors, and our attorneys
and underwriters of the July 1996 public offering. Finally, 739,400 shares could
be sold upon the exercise of warrants that we have issued to Win Capital , Cyn
Del and KSH Investment Group and 125,000 shares could be sold upon the exercise
of warrants that we have issued to John W. Hemmer. We have agreed to register
the shares of Common Stock issuable upon exercise of Class A Warrants,
Underwriter's Warrants, Win Capital Warrants, Note Holders' Warrants, Attorney's
Warrants, KSH Investment Group Warrants and Cyn Del Warrants on the same
registration statement as the shares of Common Stock issuable upon conversion of
the Series C and Series D Preferred Stock and Note and keep such registration
statement current until such time as all shares of Common Stock issuable upon
exercise of the warrants and conversion of the Series C and Series D Preferred
Stock are freely tradeable pursuant to Rule 144(k) promulgated under the
Securities Act, all at our cost and expense. Sales of such shares would increase
the number of shares in the public float and have an adverse effect on the
market price of the Common Stock.
Possible Volatility of Stock Price.
Our Common Stock and Class A Warrants are currently traded on The Nasdaq
SmallCap Market. Factors such as announcements by us of the regulatory status of
products, quarterly variations in its financial results, the gain or loss of
material contracts, changes in management, regulatory changes, trends in the
industry or stock market and announcements by competitors, among other things,
could cause the market price of such securities to fluctuate significantly.
Adverse Effects of Board of Director Control of Preferred Stock.
Our Certificate of Incorporation authorizes the issuance of shares of
"blank check" preferred stock, which will have such designations, rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval
(but subject to applicable government regulatory restrictions), to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
our Common Stock. Those terms and conditions may include preferences on an equal
or prior rank to existing series of Preferred Stock. Those shares may be issued
on such terms and for such consideration as the Board then deems reasonable and
such stock shall then rank equally in all aspects of the series and on the
preferences and conditions so provided, regardless of when issued. In the event
of such issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. As of March 31, 1999, 8,119 shares of Series A Preferred
Stock, 31,236 shares of Series B Preferred Stock, 1,400 shares of Series C
Preferred Stock and 1,140,000 shares of Series D Preferred Stock were issued and
outstanding, which are immediately convertible, in the aggregate, into 1,267,226
shares of our Common Stock. See "Description of Securities--Preferred Stock."
No Dividends on Common Stock.
We issued a stock dividend on its Series A Preferred Stock and Series B
Preferred Stock on January 8, 1996, to stockholders of record as of December 31,
1994. We have not paid any cash dividends on our Common Stock and do not expect
to declare or pay any cash or other dividends in the foreseeable future so that
we may reinvest earnings, if any, into the development of the business. The
holders of our Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock are entitled to non-cumulative cash
dividends paid out of surplus earnings. See "Dividend Policy" and "Description
of Securities--Preferred Stock."
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Board Discretion as to Use of Proceeds.
All of the net proceeds of the Offering, if any, have been allocated to
working capital (and not otherwise allocated for a specific purpose) and will be
used for such purposes as management may determine in its sole discretion
without the need for stockholder approval with respect to any such allocations.
See "Use of Proceeds."
Rescission Offer to Series B Shareholders.
We issued 493,000 shares of Series B Preferred Stock in 1994 and 1995.
The Series B Shares may not have been sold in compliance with certain aspects of
California corporate law and federal and state securities laws. Concurrently
with our July 1996 public offering, we provided the Series B Shareholders with a
rescission offer (the "Rescission Offer") to repurchase all Series B Preferred
shares (the "Rescission Shares") owned by the Series B Shareholders. The Series
B Shareholders were offered the right to rescind their purchases and receive a
refund of the price paid by them of $4.00 per share plus an amount equal to the
interest thereon at rates ranging from 6% to 12% per annum from the date the
Rescission Shares were purchased to July 25, 1996, the date our public offering
closed and each rescinding shareholder was paid by us. The original purchasers
of approximately 93% of the Series B Shares (460,250 shares) rejected the
Rescission Offer by responding as requested in the Rescission Offer or by
failing to return a response within thirty days of receiving the Rescission
Offer. Two shareholders owning a combined total of 32,750 shares accepted the
Rescission Offer. The Rescission Offer was designed to reduce any type of
contingent liability we may be subject to in connection with its private
placement of Series B Preferred Stock. However, the Rescission Offer may not
have fully relieved us from exposure to contingent liability under federal or
state securities laws. Not every state statutorily provides for voluntary
rescission offers. In addition, other states, although authorizing rescission
offers, do not completely limit the liability of the offeror. Thus, we may have
continuing liability in certain states following the Rescission Offer.
Limited Liability for Officers and Directors and Indemnification Matters.
Our Certificate of Incorporation eliminates in certain circumstances the
liability of directors for monetary damages for breach of their fiduciary duty
as directors. We have entered into indemnification agreements (the
"Indemnification Agreements") with certain directors and officers. Each such
Indemnification Agreement provides that we will indemnify the indemnitee against
expenses, including reasonable attorneys' fees, judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with any civil or criminal action or administrative proceeding arising out of
his performance of his duties as a director or officer, other than an action
instituted by the director or officer. The Indemnification Agreements will also
require that we indemnify the director or other party thereto in all cases to
the fullest extent permitted by applicable law. Each Indemnification Agreement
will permit the director or officer that is party thereto to bring suit to seek
recovery of amounts due under the Indemnification Agreement and to recover the
expenses of such a suit if he or she is successful. See "Management--Limitation
of Liability and Indemnification Matters."
Dilutionary Possibilities.
The Board of Directors has the inherent right under applicable Delaware
law, for whatever value the Board deems adequate, to issue additional shares of
Common Stock up to the limit of shares authorized by the Certificate of
Incorporation, and, upon such issuance, all holders of shares of Common Stock,
regardless of when it is issued, thereafter generally rank equally in all
aspects of that class of stock, regardless of when issued. The Board of
Directors likewise has the inherent right, limited only by applicable Delaware
law and provisions of the Certificate of Incorporation to increase the number of
shares of Preferred Stock in a series, to create a new series of Preferred Stock
and to establish preferences and all other terms and conditions in regard to
such newly-created series. Any of those actions will dilute the holders of
Common Stock and also affect the relative position of the holders of any series
of any class. Current stockholders have no rights to prohibit such issuances nor
inherent "preemptive" rights to purchase any such stock when offered. See "The
Offering."
USE OF PROCEEDS
Holders of Class A Warrants, Underwriter's Warrants, Win Capital
Warrants, Note Holders' Warrants, Attorney's Warrants, Cyn Del Warrants and KSH
Investment Group Warrants are not obligated to exercise any of their Warrants.
However, assuming exercise of all of the Warrants and assuming the issuance of
the 1,000,000 additional shares of Common Stock being registered for resale for
the purchase of assets from Humphrey Systems and for raising additional working
capital, the net proceeds from this Offering to be received by the Company from
the issuance of 2,376,900 shares of Common Stock covered by this Prospectus and
issuable upon the exercise of the Warrants and from the insurance of 1,000,000
additional shares of Common Stock are estimated to be $15,545,775. The closing
bid price of the Common Stock on The Nasdaq SmallCap Market was $3.50 on May 6,
1999. Approximately 55% of the Warrants are exercisable at prices above $3.50.
Accordingly, there is no assurance that any of the Warrants will be exercised
and the Company may not receive any proceeds from this Offering. The Company
will not receive any proceeds from the issuance of shares of Common Stock upon
conversion of the Series C Preferred Stock, the Note or Series D Preferred
Stock.
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The Company currently anticipates that it will use the net proceeds of
this Offering, if any, to fund working capital requirements. In the event
sufficient proceeds are not received, the Company's short term plan is to meet
cash needs through external financing sources such as bank financing and private
offerings of debt and/or equity. The Company also expects the cash flow from
operations will provide additional funds to the Company as operating revenues
increase.
The cost, timing and the amount of funds required for such uses by the
Company cannot be precisely determined at this time and will be based upon,
among other things, competitive developments, the rate of the Company's progress
in product development, and the availability of alternative methods of
financing. In addition, the Company's Board of Directors has broad discretion in
determining how the proceeds of this Offering received by the Company will be
applied.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1998.
<TABLE>
<CAPTION>
As of
December 31,
1998
- ----------------------------------------------------------------------------------------- ------------------------
<S> <C>
Long-term obligations(1) $ 33,000
-----------
Stockholders' equity:
Series A Preferred Stock, $.001 par value per share;
500,000 shares authorized, 34,619 issued and outstanding -
Series B Preferred Stock, $.001 par value per share;
500,000 shares authorized, 31,236 issued and outstanding -
Series C Preferred Stock, $.001 par value per share;
30,000 shares authorized; 6,900 issued and outstanding -
Series D Preferred Stock, $.001 par value per share;
1,140,000 shares authorized; -0- issued and outstanding -
Common Stock, $.001 par value per share; 20,000,000 shares
authorized, 5,500,306 issued and outstanding (2) 5,000
Additional paid-in-capital 17,704,000
Treasury Stock, 2,600 shares of common stock (4,000)
Unearned compensation (94,000)
Stock subscription receivable (8,000)
Accumulated deficit (15,887,000)
--------------
Total stockholders' equity 1,716,000
---------------
Total capitalization $ 1,749,000
===============
- -------------------
</TABLE>
(1) Excludes current portion of long-term debt.
(2) Does not include (i) 2,376,900 shares of Common Stock issuable
upon the exercise of the Class A Warrants, Underwriter's Warrants,
Win Capital Warrants, Note Holders' Warrants, Attorney's Warrants,
KSH Investment Group Warrants, Cyn Del Warrants and Hemmer Warrants;
(ii) 21,525 shares of Common Stock issuable upon exercise of the FAS
Warrants; (iii) 13,920 shares of Common Stock issuable upon
conversion of the 11,600 Series A Preferred Stock underlying the La
Jolla Warrants; (iv) 47,226 shares of Common Stock issuable upon the
conversion of the 8,119 shares of outstanding Series A Preferred
Stock and 31,236 shares of outstanding Series B Preferred Stock; (v)
2,853,143 shares of Common Stock issuable upon the conversion of the
Series C Preferred Stock and the Series D Preferred Stock; and (vi)
750,000 shares of Common Stock issuable upon the exercise of options
granted under the Company's 1995 Option Plan.
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Bridge Financing
During the period beginning on December 26, 1995 and ending on February
21, 1996, the Company sold a total of 23 Units to 14 investors (13 of which were
accredited investors) at a price of $25,000 per Unit primarily to finance its
public offering which was completed in July 1996 (excluding one Unit which was
issued for services). Each Unit consisted of a $25,000 Promissory Note with a
stated interest rate of 12% and Warrants to purchase 12,500 shares of Company's
Common Stock. Each Note bears interest at an imputed interest rate of 18% per
annum and is payable on the earlier of the closing of the Company raising at
least $4,000,000 through a public offering or December 31, 1996, at the $25,000
face amount of the Notes plus accrued interest at the rate of 12% per annum.
Each Warrant is exercisable, beginning on the date the Warrant is issued and
expiring on December 1, 2000, by the holder thereof to purchase one share of the
Company's Common Stock at an exercise price of $3.33 per share. The Company may
redeem the Warrants one year after completion of the offering at a price of $.05
per Warrant at such time as the Company's Common Stock has been trading in The
Nasdaq SmallCap Market or an established exchange at a price equal to or above
$10.00 for a period of 30 consecutive trading days ending within 15 days of the
date of redemption. See "Description of Securities."
Private Placement of 12% Convertible, Redeemable Promissory Notes
During the period from October 24, 1997 to December 8, 1997, the Company
sold a total of 21.4 Units of 12% Convertible, Redeemable Promissory Notes to 23
persons (all of whom were accredited investors) through a private placement at a
price of $50,000 per Unit, each Unit consisting of a $50,000 Unsecured 12%
Convertible, Redeemable Promissory Note. The Company received $1,070,000 in cash
as a result of the private placement transaction and paid $128,400 in
commissions and expenses. The Notes bear interest at 12% per annum, payable
semi-annually on each six month anniversary of the initial closing of the
private placement. The principal amount of the Notes, together with all accrued,
unpaid interest are due and payable on the three year anniversary of the closing
of the private placement. The Notes are redeemable prior to maturity at 112% of
the face value of each Note, plus accrued unpaid interest, upon 30 days written
notice to the holders of the Notes at any time after (i) the 30-day anniversary
of the effective date of the registration statement the Company will undertake
to file with the Securities and Exchange Commission to register the shares of
its Common Stock issuable to the noteholders upon conversion of the Notes, and
(ii) the average closing price of the Company's Common Stock for the 20-day
period immediately prior to the date on which notice of redemption is given to
the Company to the noteholders is at least $3.50 per share. Each Note is
convertible into 25,000 shares of the Company's Common Stock (one share for each
$2.00 principal amount of the Note) at the option of the noteholders until such
time as the Notes have been repaid in full. During the period from February 2,
1998 to March 26, 1998, 22 of the noteholders representing $995,000 of the Notes
elected to exchange their Notes for Series C Convertible Preferred Stock
pursuant to the terms of a Security Exchange Agreement. See "Capitalization --
Private Placement of Series C Convertible Preferred Stock" and "Description of
Securities."
Private Placement of Series C Convertible Preferred Stock
During the period from February 2, 1998 to April 11, 1998, the Company
sold a total of 20,300 shares of Series C Preferred Stock to 58 persons (all of
whom were accredited investors) through a private placement at a price of
$100.00 per share. The Company received $2,003,000 in cash as a result of the
private placement transaction and paid $235,360 in commissions and expenses. The
holders of the shares are entitled to 12% non-cumulative dividends. However, the
shares are entitled to dividends declared on the Company's Common Stock on an as
converted basis, i.e., as if the shares had been converted into Common Stock.
The holders of the shares of Series C Preferred Stock have the option at any
time to convert such shares into the Company's Common Stock at a conversion
price equal to $1.75 per share of the Common Stock, subject to adjustments for
stock splits, stock dividends and certain combinations or recapitalizations with
respect to the Common Stock. In addition, the shares will be automatically
converted into Common Stock upon 30 days' written notice by the Company to the
holders of the shares after (i) the 30-day anniversary of the effective date of
the filing of a registration statement on which shares of Common Stock issuable
upon conversion of the shares are registered and (ii) the average closing price
of the Common Stock for the 20-day period immediately prior to the date on which
notice of conversion is given by the Company to holders of the shares is at
least $3.50 per share. Any shares still outstanding after January 1, 2002 will
be automatically converted at such date at the conversion price then in effect.
See "Description of Securities."
Private Placement of Series D Convertible Preferred Stock
During the period from January 14, 1999 to March 1, 1999, the Company
sold a total of 1,140,000 shares of Series D Preferred Stock to 71 persons (all
of whom are accredited investors) through a private placement at a price of
$1.75 per share. The Company received $1,995,000 in cash as a result of the
private placement transaction and paid $199,500 in commissions. The holders of
the shares are entitled to 10% non-cumulative dividends. However, the shares are
entitled to dividends declared on the Company's
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<PAGE>
Common Stock on an as converted basis, i.e., as if the shares had been converted
into Common Stock. The holders of the shares of Series D Preferred Stock have
the option at any time to convert such shares into the Company's Common Stock at
a conversion price equal to $1.75 per share of the Common Stock, subject to
adjustments for stock splits, stock dividends and certain combinations or
recapitalizations with respect to the Common Stock. In addition, the shares will
be automatically converted into Common Stock upon 30 days' written notice by the
Company to the holders of the shares after (i) the 30-day anniversary of the
effective date of the filing of a registration statement on which shares of
Common Stock issuable upon conversion of the shares registered and (ii) average
closing price of the Common Stock over a 20-day period immediately prior to the
date on which notice of conversion is given by the Company to holders of the
shares is at least $3.50 per share. Any shares still left standing after January
1, 2002 will be automatically converted at such date at the conversion price
then in effect. See "Description of Securities."
SELECTED FINANCIAL DATA
The following table sets forth the Company's selected historical
financial data for the years ended September 30, 1996, December 31, 1997, and
December 31, 1998. The selected financial data as of and for the years ended
September 30, 1996, December 31, 1997 and December 31, 1998 are derived from the
financial statements of the Company which have been audited by Tanner & Co. The
Company changed its fiscal year end to December 31, effective December 31, 1996.
The following financial information should be read in conjunction with the
Financial Statements and related notes thereto.
<TABLE>
<CAPTION>
For the For the For the
year ended year ended year ended
September 30, December 31, December 31,
Statement of Operations Data 1996 1997 1998
- ---------------------------- ---- ---- ----
<S> <C> <C> <C>
Net sales................................................... $ 252,000 $ 464,000 $ 1,258,000
Net cost of sales........................................... 180,000 333,000 813,000
Operating Expenses.......................................... 1,328,000 2,933,000 3,160,000
Operating Loss.............................................. (1,256,000) (2,802,000 (2,715,000)
Other income (expenses)..................................... (193,000) (208,000) (44,000)
Net loss.................................................... (1,449,000) (3,010,000) (2,759,000)
Net loss attributable to common shareholders................ (1,448,000) (3,010,000) (2,759,000)
Net loss per common share................................... (0.66) (0.82) (.69)
Shares used in computing net loss per share ................ 2,193,000 3,663,000 4,022,000
Cash dividends per share.................................... None None None
</TABLE>
<TABLE>
<CAPTION>
As of As of
December 31, December 31,
Balance Sheet Data: 1997 1998
- ------------------- ---- ----
<S> <C> <C>
Current Assets............................................................. $ 1,857,000 $ 1,415,000
Current liabilities........................................................ 1,055,000 492,000
Working capital............................................................ 802,000 923,000
Total assets............................................................... 2,713,000 2,241,000
Long-term debt, less current portion....................................... 1,082,000 33,000
Accumulated deficit........................................................ (8,258,000) (15,887,000)
Stockholder's equity....................................................... 576,000 1,716,000
</TABLE>
14
<PAGE>
PRICE RANGE OF COMMON STOCK AND CLASS A WARRANTS
AND DIVIDEND POLICY
Our Common Stock and Class A Warrants trade on The Nasdaq SmallCap
Market under the symbols of "PMED" and "PMEDW." Prior to July 22, 1996, there
was no public market for the common stock. As of May 6, 1999, the closing bid
prices for our Common Stock and Class A Warrants were $3.50 per share and $.78
per warrant. The following are the high and low sales prices for the Common
Stock and Class A Warrants by quarter as reported by Nasdaq since July 22, 1996.
<TABLE>
<CAPTION>
Common Stock Class A Warrants
Price Range Price Range
-------------------------------------- ---------------------------
Period (Calendar Year) High Low High Low
----------------------
<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 2
Third Quarter 6 1-9/16 1-3/8 1/8
Fourth Quarter 4-5/8 2-7/16 7/8 1/4
1998
First Quarter 4-11/16 2-7/8 15/16 1/4
Second Quarter 6-1/2 3-13/16 1-5/16 1/4
Third Quarter 4-9/16 2-1/2 11/16 7/16
Fourth Quarter 3 1-9/16 1-3/16 7/16
1999
First Quarter 4 2-3/32 1-1/16 15/32
</TABLE>
Our Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, and Series D Convertible Preferred Stock are not publicly
traded. As of March 31, 1999, there were 646 record holders of Common Stock, 8
record holders of Series A Preferred Stock, 6 holders of Series B Preferred
Stock, 3 record holders of Series C Preferred Stock, and 72 record holders of
Series D Convertible Preferred Stock.
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We must pay cash dividends to holders of our Series A Preferred, Series
B Preferred, Series C Preferred, and Series D Convertible Preferred Stock before
we can pay any cash dividends to holders of our common stock. Dividends paid in
cash pursuant to outstanding shares of our Series A, Series B, Series C, and
Series D Preferred Stock are only payable from surplus earnings and are
non-cumulative and therefore, no deficiencies in dividend payments from one year
will be carried forward to the next. We currently intend to retain future
earnings, if any, to fund the development and growth of our proposed business
and operations. Any payment of cash dividends in the future on the Common Stock
will be dependent upon our financial condition, results of operations, current
and anticipated cash requirements, plans for expansion, restrictions, if any,
under any debt obligations, as well as other factors that the Board of Directors
deems relevant. We did issue 6,764 shares of Series A Preferred and 6,017 shares
of our Series B Preferred on January 8, 1996 as a stock dividend to Series A and
Series B shareholders of record as of December 31, 1994.
(See "Description of Securities - Preferred Stock.")
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
General
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations, contains forward looking statements which involve
risks and uncertainty. Our actual results could differ materially from those
anticipated in these forward looking statements as a result of certain factors
discussed in this section. We changed our fiscal year to the period from January
1 to and including December 31.
15
<PAGE>
We are engaged in the design, development, manufacture and sale of high
technology eye care products. Our surgical equipment is designed to perform
minimally invasive cataract surgery and is comprised of surgical devices and
related instruments and accessories, including disposable products. Our
ultrasound diagnostic products include a pachymeter, an A-Scan, an A/B Scan and
a biomicroscope, the technology for which we acquired from Humphrey Systems in
1998. In addition, we market our Blood Flow AnalyzerTM. Our activities for the
twelve months ended December 31, 1998 included domestic and international sales
of the Precisionist Thirty Thousand(TM) Ocular Surgery Workstation(TM) cataract
surgery systems, the Blood Flow Analyzer(TM), the Humphrey Systems ultrasound
diagnostic equipment, and research and development on the Photon(TM) laser
cataract removal system which received FDA approval for expansion to Phase II
Clinical Trials on May 19, 1998.
In July 1998, we announced the acquisition of the exclusive manufacturing
rights to four FDA-approved ophthalmic diagnostic instruments from Humphrey
Systems, a division of Carl Zeiss, Inc. which complement our cataract surgical
equipment and Blood Flow AnalyzerTM. We commenced delivery of the Pachymetric
Analyzer, which measures corneal thickness, in December 1998 and the Ultrasound
A-Scan, which measures the axial length of the eye, in March 1999. We expect to
begin shipments of the Ultrasound A/B Scan, which is used by retinal specialists
to identify foreign bodies in the posterior chamber of the eye and in evaluating
the structural integrity of the retina, in the second quarter of 1999. We should
commence shipments of the Ultrasonic Biomicroscope ("UBM"), which creates a
high-resolution computer image of the unseen parts of the eye providing a map
for the glaucoma surgeon, in the third quarter of 1999. In summary, we expect
all four instruments to be in production in the third quarter of 1999.
Results of Operations
Fiscal year Ended December 31, 1998 Compared to Fiscal year Ended
December 31, 1997.
Our sales increased by $794,000, or 171%, to $1,258,000 for the twelve
months ended December 31, 1998 from $464,000 for the comparable period in 1997.
The higher level of sales in fiscal 1998 was primarily due to the sale of 21
Precisionist Thirty ThousandTM and 17 Blood Flow Analyzers compared with 8
Precisionist Thirty ThousandTM and 3 Blood Flow Analyzers in fiscal 1997. Sales
of products in the surgery equipment market are contingent upon customer
evaluation and acceptance. In 1998, two Precisionist Thirty Thousands were
returned compared with five in 1997 when we identified and corrected certain
necessary software and hardware revisions. With the introduction of the new
fluidic system in March 1999 for the Precisionist Thirty Thousand WorkstationTM,
coupled with the shipment of the four new ophthalmic diagnostic instruments, we
anticipate a significant improvement in sales. The cost of sales increased
$480,000 or 144%, to $813,000 for the twelve months ended December 31, 1998,
from $333,000 for the comparable period in 1997. The gross margin for the twelve
months ended December 31, 1998 of 35.4%, was 7.2% higher than the gross margin
for the comparable period in 1997, of 28.2%, primarily as a result of the
amortization of capitalized engineering and design charges. If the amortization
of capitalized engineering and design charges, a non-cash expense, is excluded,
the gross margin for 1998 was 41.3% or slightly less than the gross margin of
41.4% for 1997.
Marketing and selling expenses increased by $430,000, or 72.8%, to
$1,021,000 for the twelve months ended December 31, 1998, from $591,000 for the
comparable period in 1997. The increase was a result of our adding a sales
manager and two additional sales representatives, an increase in advertising
promotional activities associated with trade shows and laser seminars for
ophthalmic surgeons in conjunction with launching the Photon Ocular Surgery
SystemTM, and service problems due to software and hardware revisions to the
Precisionist ThirtyThousand(TM) Ocular Surgery Workstation(TM).
General and administrative expenses increased $39,000 from $1,802,000 in
1997 or 2.2% to $1,841,000 for the twelve months ended December 31, 1998,
primarily due to higher costs associated with the implementation of a new
computer network and accounting, manufacturing and inventory control system.
Research and development expenses decreased by $242,000, or 44.8% for the
year ended December 31, 1998, to $298,000 from $540,000 for the comparable
period in 1997. The decrease was primarily the result of the completion of a
substantial part of the engineering and design changes on the Precisionist
ThirtyThousand(TM) Ocular Surgery Workstation(TM).
Other expenses decreased by $164,000 to $44,000 for the year ended
December 31,1998, compared to $208,000 for the same period in 1997. This is
primarily due to the conversion of promissory notes into convertible preferred
stock.
We had a net loss of $2,759,000 or $.69 per share for the year ended
December 31, 1998 as compared to a net loss of $3,010,000 or $.82 per share for
the year ended December 31, 1997, a decrease of $251,000. The decrease was a
result of increased sales and decreased research and development expenses offset
by increased costs of sales, marketing, and selling expenses.
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended
September 30, 1996.
Sales increased by $212,000, or 84%, to $464,000 for the twelve months
ended December 31, 1997 from $252,000 for the twelve months ended September 30,
1996. Sales of product in the surgical equipment market are contingent upon
customer
16
<PAGE>
evaluation. Based on the evaluation of the products shipped in our initial new
product launch in 1997, five units were returned and certain software and
hardware revisions were identified and corrected. The increase in sales in 1997
was a result of our launching the Photon Ocular Surgery System(TM) and the
Precisionist Thirty Thousand(TM), the latest generation of our products on March
31, 1997.
Cost of sales increased $153,000 or 85%, to $333,000 for the twelve
months ended December 31, 1997 from $180,000 for the twelve months ended
September 30, 1996, as a result of the increased sales. The gross margin for the
twelve months ended December 31, 1997 of 28% was slightly lower than the gross
margin for the twelve months ended September 30, 1996 of 29%, primarily as a
result of the amortization of capitalized engineering and design charges of
$61,000 in 1997 which reduced the gross margin from 41% to 28%.
Marketing and selling expenses increased by $375,000, or 174%, to
$591,000 for the twelve months ended December 31, 1997 from $216,000 for the
fiscal year ended September 30, 1996. The increase was a result of our adding
two additional sales representatives and increasing promotional activity in
anticipation of our launching the Photon Ocular Surgery System(TM) and the
Precisionist Thirty Thousand during the first quarter of 1997, and the resulting
service expenses associated with installing identified software and hardware
revisions.
General and administrative expenses increased by $979,000, or 119%, to
$1,802,000 for the twelve months ended December 31, 1997 from $823,000 for the
twelve months ended September 30, 1996. This was the result of an increase in
personnel and costs associated with pre-production and new product launch
activities. Upgrades
To garner sales, we offer the ultrasonic Precisionist(TM) system with an
unconditional arrangement under which the customer may trade in its
Precisionist(TM) system to upgrade to a Precisionist Thirty Thousand(TM) Ocular
Surgery System(TM). Under this arrangement, the customer receives full credit
for the trade in purchase price of the Precisionist(TM) system against the price
of the new Precisionist Thirty Thousand(TM) Ocular Surgery System(TM). As of
December 31, 1998, we had distributed approximately 51 Precisionist(TM) systems
under this provision. The gross margin on these original sales was approximately
$295,000 or 32%. If all of these customers were to exercise their upgrade
privilege, we would exchange the Precisionist(TM) system for our new
Precisionist Thirty Thousand(TM) Ocular Surgery System(TM) and refurbish the
ultrasonic Precisionist(TM) systems and sell them in the international market.
Any losses on the sale of the refurbished Precisionist(TM) systems, which are
not expected to be significant, would reduce the gross margin on the
Precisionist Thirty Thousand(TM) Ocular Surgery System(TM) sales. The total
gross margin on the upgrade sales is estimated to be $1,677,000 or 41%. During
the fiscal year ended December 31, 1998, there were two trade-in sales of units
totaling $76,000 compared to two trade in sales totaling $94,000 for the like
period in 1997. Liquidity and Capital Resources
We used cash in operating activities of $2,414,000 for the twelve months
ended December 31, 1998 compared to $2,624,000 for the twelve months ended
December 31, 1997. The decrease of cash used by operating activities in 1998 is
primarily attributable to a lower net loss. We used cash from investing
activities of $92,000 for the twelve months ended December 31, 1998 compared to
cash received from investing activities of $98,000 in fiscal 1997. The net cash
provided by financing activities for the twelve months ended December 31, 1998
was $1,733,000 compared with $944,000 for the similar period in 1997. In March
1998, we completed the private placement of 20,030 shares of Series C Preferred
Stock at $100 per share resulting in net proceeds of $1,739,000. In addition, we
exchanged $995,000 of promissory notes for 9,950 shares of Series C Preferred
Stock at $100 per share and the conversion of a $75,000 note into common stock.
In March 1999, we completed a private placement of 1,140,000 shares of
Series D Convertible Preferred Stock at $1.75 per share with the net proceeds
approximating $1.6 million. On a pro-forma basis to reflect the March 1999
equity financing as of December 31,1998, total stockholders equity would be
about $3.3 million with cash and cash equivalents of $1.7 million. Based on our
1999 budget and the net proceeds from the 1999 Preferred Stock offering, we
believe that funds are sufficient to continue operations through December 31,
1999. However, no assurances can be given that our plan will be successful in
achieving positive cash flow or profitability. The 1,140,000 common shares into
which the Series D Convertible Preferred Stock is convertible are some of the
shares being registered in this Offering.
We will seek funding to meet our working capital requirements through
collaborative arrangements and strategic alliances, additional public offerings
and/or private placements of our securities or bank borrowings. There can be no
assurance, however, that additional funds, if required, will be available from
any of these or other sources on favorable terms, if at all.
Our ratio of inventory to sales for the twelve month period ended
December 31, 1998 was .57 compared with 1.80 for a similar period in 1997. With
the launching of two new products within the past eighteen months, we have had
to build inventory in anticipation of sales. As a result, the ratio of inventory
to sales, particularly computed on the basis of inventory to quarterly sales,
tends to fluctuate widely depending on our purchase orders with the
manufacturers, the time lags between customer purchase orders, delivery and
sales, the number of demonstration units in the field, the accuracy of the sales
forecast and seasonal factors.
At December 31, 1998, we had net operating loss carryforwards (NOLs) of
approximately $9,600,000 and research and development tax credit carryforwards
of approximately $34,000. These carryforwards are available to offset future
taxable income, if any, and begin to expire in the year 2006. Our ability to use
NOLs to offset future income is dependant upon the tax laws in effect
17
<PAGE>
at the time the NOLs can be utilized. The Tax Reform Act of 1996 significantly
limits the annual amount that can be utilized for certain of these carryforwards
as a result of change of ownership.
Effect of Inflation and Foreign Currency Exchange
We have not realized a reduction in the selling price of the Precisionist
phaco system as a result of domestic inflation. Nor have we experienced
unfavorable profit reductions due to currency exchange fluctuations or inflation
with its foreign customers. Impact of New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. We believe that the adoption of SFAS
133 will not have any material effect on our financial statements.
We have reviewed all other recently issued accounting standards in order
to determine their effects, if any, on the results of operations or financial
position. Based on that review, we believe that none of these pronouncements
will have a significant effect on current or future earnings or operations. Year
2000
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. We do not
anticipate that any significant modification or replacement of our software will
be necessary for our computer systems to properly utilize dates beyond December
31, 1999 or that we will incur significant operating expenses to make any such
computer system improvements. We are not able to determine, however, whether any
of our suppliers, lenders, or service providers will need to make any such
software modifications or replacements or whether the failure to make such
software corrections will have an effect on our operations or financial
condition.
BUSINESS
General
We develop, manufacture, source, market and sell ophthalmic surgical
and diagnostic equipment, instrumentation and related accessories, including
disposable products. Our surgical equipment is designed for minimally invasive
cataract treatment. We market two ultrasonic cataract surgery systems with
related instruments, accessories and disposable products. One of the ultrasound
systems, the Precisionist Thirty Thousand(TM), is manufactured as the base
surgery system for our Precisionist Thirty Thousand(TM) Ophthalmic Surgical
Workstation(TM). We are currently developing a laser cataract surgery system as
an adjunct to our ultrasound cataract surgery equipment. This product is
currently undergoing investigational trials in the United States. If
successfully developed and approved for medical uses, we plan to market the
laser system as a plug-in module for our Workstation(TM). Our diagnostic product
is the Blood Flow Analyzer(TM). This product is a portable computerized system
for which we have secured a license granting us the right to market the product
in the United States. This product is designed for diagnosis of ocular blood
flow volume for detection and treatment of glaucoma. We are currently developing
additional test applications for this diagnostic product.
A cataract is a condition, which largely affects the elderly
population, in which the natural lens of the eye hardens and becomes cloudy,
thereby reducing visual acuity. Treatment consists of removal of the cloudy lens
and replacement with a synthetic lens implant which restores visual acuity.
Cataract surgery is the single largest volume, and revenue producing outpatient
surgical procedure, for ophthalmologists worldwide. The Health Care Finance
Administration reports that in the United States approximately 2 million
cataract removal procedures are performed annually, making this the largest
outpatient procedure reimbursed by Medicare. Most cataract procedures are
performed using a method called phacoemulsification or "phaco", which employs a
high frequency (40 kHz to 60 kHz) ultrasonic probe needle device to fragment the
cataract while still in the eye and remove it in pieces by suction through a
small incision.
We manufacturer and sell two phaco systems with instruments,
accessories and disposable products. The Precisionist 3000 Plus(TM) system was
introduced in 1992 and is a low-cost portable system intended primarily for the
international market. The Precisionist Thirty Thousand(TM) Ocular Surgery
Workstation(TM) is our newest generation system which is the base for our
expandable surgical "workstation" platform. We believe current phaco systems can
be difficult for many ophthalmic surgeons to master and are limited in their
ability to be the most minimally invasive method possible. We are developing a
proprietary patented laser system and unique patented probe for laser cataract
removal which we believe can address the difficulties associated with phaco
systems. We intend to make the patented laser system a plug-in module for its
Workstation(TM) if and when cleared for market by the FDA. The development of
the laser cataract system is being done in cooperation with ophthalmic surgeons
in the United States and through research and development work being conducted
by our engineering group, and under contract with the Dixon Medical Laser
Laboratory at the University of Utah in Salt Lake City.
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<PAGE>
We believe that in certain surgical conditions, our laser system will
be easier to use and safer than present phaco systems. The probe will be smaller
than typical probes employing ultrasonic needle technology and will deliver
laser energy directly to the desired tissue area by means of a smooth blunt end.
The laser probe has been shown to eliminate high-frequency vibrations in the eye
and to significantly reduce heat build-up which are complications associated
with the phaco method. In 1996, we received FDA approval to conduct clinical
trials in the United States with the Photon(TM) laser system. During these Phase
I clinical trials, we discovered that the Photon(TM) laser system was effective
in removing softer grade cataracts. We completed our Phase I clinical trials in
1997, and have received FDA approval to proceed to an expanded Phase II clinical
to provide the statistical data required to approve the Photon(TM) laser system
for laser cataract removal. There is no assurance however that we will
successfully complete the Phase II clinical trials or that additional
disadvantages or problems unique to the Photon(TM) laser system will not be
discovered during the Phase II clinical trials or following FDA approval of the
system.
In addition to cataract surgery, we believe that our Photon(TM) laser
system is capable of being configured with specialty probes for use in other
ophthalmic surgical procedures. These potential applications could represent
substantial growth opportunities including additional sales of equipment,
instruments, accessories and disposables. However, there can be no assurance
that these applications will be developed or approved. Further, there is no
guarantee that the laser will be accepted by the ophthalmic surgery market in
this capacity.
In June 1997, we received FDA clearance to market the Blood Flow
Analyzer(TM) for detection of glaucoma and other retina related diseases. The
device measures not only intraocular pressure but also pulsatile ocular blood
flow, the reduction of which may cause nerve fiber bundle death through oxygen
deprivation thus resulting in visual field loss associated with glaucoma. Our
Blood Flow Analyzer(TM) is a portable automated in-office system that presents
an affordable method for ocular blood flow testing for the ophthalmic and
optometric practitioner. We have secured a license granting us the exclusive
right to private label, package and market the product in the United States,
with full international marketing rights. The procedure done by the Blood Flow
Analyzer(TM) is not currently covered by an insurance procedure code for which
third-party payors will reimburse providers. As such, sales of this product may
be significantly less than would otherwise be expected.
On June 26, 1998, we entered into a Co-Distribution Agreement with
Pharmacia & Upjohn Company and National Healthcare Manufacturing Corporation
which provides for the marketing and sale of a range of ophthalmic products.
Under the terms of the Co- Distribution Agreement, we, Pharmacia & Upjohn and
National Healthcare will offer a comprehensive package of products to cataract
surgeons, including cataract surgical equipment, intraocular lens implants,
intraocular pharmaceuticals, surgical instruments and sterile procedural packs.
We will provide the Precisionist ThirtyThousand(TM) for distribution and sale
under the Co-Distribution Agreement. The Pharmacia & Upjohn products to be
distributed as part of the Co-Distribution Agreement include the Healon(R) and
Healong(R) viscoelastic solution and the CeeOn line of foldable, small
intraocular lens implants, designed to replace the natural lens removed during
cataract surgery.
On July 23, 1998, we entered into an Agreement for Purchase and Sale of
Assets with the Humphrey Systems Division of Carl Zeiss, Inc. to acquire the
ownership and manufacturing rights to certain assets of Humphrey Systems that
are used in the manufacturing and marketing of an ultrasonic microprocessor
based-line of ophthalmic diagnostic instruments, including the Ultrasonic
Biometer Model 820, the A/B Scan System Model 837, the Ultrasound Pachymeter
Model 855, and the Ultrasound Biomicroscope Model 840, and all accessories,
packaging and end-user collateral materials for each of the product lines for
the sum of $500,000, payable in the form of 78,947 shares of our common stock
which were issued to Humphrey Systems and 26,316 shares of common stock which
were issued to Douglas Adams. However, if the net proceeds received by Humphrey
Systems from the sale of the shares issued pursuant to the Agreement for
Purchase and Sale of Assets is less than $375,000 (after payment of commissions,
transfer taxes and other expenses relating to the sale of such shares), then we
are required to issue additional shares of common stock or pay additional funds
to Humphrey Systems as is necessary to increase Humphrey Systems' net proceeds
from the sale of the assets to $375,000. Since Humphrey Systems realized only
$162,818 from the sale of the 78,947 shares of common stock, we will probably
have to issue approximately 80,000 additional shares at current market prices to
enable Humphrey Systems to receive its guaranteed amount.
The rights to the ophthalmic diagnostic instruments that have been
purchased from Humphrey Systems under the Agreement compliment both our cataract
surgical equipment and our ocular Blood Flow Analyzer(TM). The Ultrasonic
Biometer calculates the prescription for the intraocular lens to be implanted
during cataract surgery. The Ultrasound Pachymeter measures corneal thickness
for the new refractive surgical applications that eliminate the need for
eyeglasses and for optometric applications including contact lense fitting. The
A/B Scan System combines the Ultrasonic Biometer and ultrasound imaging for
advanced diagnostic testing throughout the eye and is a viable tool for retinal
specialists. The Ultrasound Biomicroscope utilizes microscopic digital
ultrasound resolution for detection of tumors and improved glaucoma management.
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Background
History. Our business originated with Paradigm Medical, Inc., a
California corporation formed in October 1989. Paradigm Medical, Inc. developed
our present ophthalmic business and was operated by its founders, Thomas F.
Motter and Robert W. Millar. In May 1993, Paradigm Medical, Inc. merged with and
into Paradigm Medical Industries, Inc. At the time of the merger, Paradigm
Medical Industries, Inc. was a dormant public shell existing under the name
French Bar Industries, Inc. French Bar had operated a mining and tourist
business in Montana. Prior to its merger with Paradigm Medical, Inc. in 1993,
French Bar had disposed of its mineral and mining assets in a settlement of
outstanding debt and had returned to the status of a dormant entity. Pursuant to
the merger, we caused a 1-for 7.96 reverse stock split of our shares of common
stock. We then acquired all of the issued and outstanding shares of common stock
of Paradigm Medical, Inc. using shares of our own common stock as consideration.
As part of the merger, we changed our name from French Bar Industries, Inc. to
Paradigm Medical Industries, Inc. and the management of Paradigm Medical, Inc.
assumed control. In April 1994, we caused a 1-for-5 reverse stock split of our
shares of common stock. In February 1996, we redomesticated to Delaware pursuant
to a reorganization.
Overview
Disorders of the Eye. The human eye is a complex organ which functions
much like a camera, with a lens in front and a light-sensitive screen, the
retina, in the rear. The intervening space contains a transparent jelly-like
substance, the vitreous, which together with the outer layer, the sclera and
cornea, helps the eyeball to maintain its shape. Light enters through the
cornea, a transparent domed window at the front of the eye. The size of the
pupil, an aperture in the center of the iris, controls the amount of light that
is then focused by the lens onto the retina as an upside-down image. The lens is
the internal optical component of the eye and is responsible for adjusting
focus. The lens is enclosed in a capsule. The retina is believed to contain more
than 130 million light- receptor cells. These cells convert light into nerve
impulses that are transmitted right side up by the optic nerve to the brain,
where they are interpreted. Muscles attached to the eye control its movements.
Birth defects, trauma from accidents, disease and age related
deterioration of the components of the eye can all contribute to eye disorders.
The most common eye disorders are either pathological or refractive. Many
pathological disorders of the eye can be corrected by surgery. These include
cataracts (clouded lenses), glaucoma (elevated pressure in the eye), corneal
disorders such as scars, defects and irregular surfaces and vitro-retinal
disorders such as the attachment of membrane growths to the retina causing blood
leakage within the eye. All of these disorders can impair vision. Many
refractive disorders can be corrected through the use of eyeglasses and contact
lenses. Myopia (nearsightedness), hyperopia (farsightedness) and presbyopia
(inability to focus) are three of the most common refractive disorders.
Ultrasound Technology. Ultrasound devices have been used in
ophthalmology since the late 1960s for diagnostic and surgical applications when
treating or correcting eye disorders. In diagnostics, ultrasound instruments are
used to measure distances and shapes of various parts of the eye for
prescription of eyeglasses and contact lenses and for calculation of lens
implant prescriptions for cataract surgery treatment. These devices emit sound
waves through a hand-held probe that is placed onto or near the eye with the
sound waves emitted being reflected by the targeted tissue. The reflection
"echo" is computed into a distance value that is presented as a visual image, or
cross-section of the eye, with precise measurements displayed and printed for
diagnostic use by the surgeon.
Surgical use of ultrasound in ophthalmology is limited to treatment of
cataractous lenses in the eye through a procedure called phacoemulsification or
"phaco." A primary objective of cataract surgeries is the removal of the
opacified (cataractous) lens through an incision that is as small as possible.
The opacified lens is then replaced by a new synthetic lens intraocular implant.
Phaco technology involves a process by which a cataract is broken into small
pieces using ultrasonic shock waves delivered through a hollow, open-ended metal
needle attached to a hand-held probe. The fragments of cataractous tissue are
then removed through aspiration. Phaco systems were first designed in the late
1960s after various attempts by surgeons to use other techniques to remove
opacified lens, including crushing, cutting, freezing, drilling and applying
chemicals to the cataract. By the mid-1970s, ultrasound had proven to be the
most effective technology to fragment cataracts. Industry sources indicate that
phaco cataract treatment is the technology for cataract removal used in over 80%
of surgeries in the United States and over 20% of all foreign surgeries.
Laser Technology. The term "laser" is an acronym for Light
Amplification by Stimulated Emission of Radiation. Lasers have been commonly
used for a variety of medical and ophthalmic procedures since the 1960s. Lasers
emit photons of light into a highly intense beam of energy that typically
radiates at a single wavelength or color. Laser energy is generated and
intensified in a laser tube or solid-state cavity by charging and exciting
photons of energy contained within material called the lazing medium. This
stored light energy is then delivered to targeted tissue through focusing lenses
by means of optical mirrors or fiber optics. Most laser systems use solid state
crystals or gases as their lazing medium. Differing wavelengths of laser light
are produced by the selection of the lazing medium. The medium selected
determines the laser wavelength emitted, which in turn is absorbed by the
targeted tissue in the body. Different tissues absorb different wavelengths or
colors of laser light. The degree of absorption by the tissue also varies with
the choice of wavelength and is an important variable in treating various
tissue. In a surgical laser, light is emitted in either a
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continuous stream or in a series of short duration "pulses," thus interacting
with the tissue through heat and shock waves, respectively. Several factors,
including the wavelength of the laser and the frequency and duration of the
pulse or exposure, determine the amount of energy that interacts with the
targeted tissue and, thus, the amount of surgical effect on the tissue.
Lasers are widely accepted in the ophthalmic community for treatment of
certain eye disorders and are popular for surgical applications because of their
relatively non-invasive nature. In general, ophthalmic lasers, such as argon,
Nd:YAG and excimer (argon-fluoride) are used to coagulate, cut or ablate
targeted tissue. The argon laser is used to treat leaking blood vessels on the
retina (retinopathy) and retinal detachment. The excimer laser was recently
tested in clinical trials for limited use in corneal refractive surgery. The
Nd:YAG pulsed laser is used to perforate clouded posterior capsules (posterior
capsulotomy) and to relieve glaucoma- induced elevated pressure in the eye
(iridotomy, trabeulorplasty, transcleral cyclophotocoqulation). Argon, Nd:YAG
and excimer lasers are primarily used for one or two clinical applications each.
In contrast to these conventional laser systems, our Photon(TM) laser cataract
system is designed to be used for multiple ophthalmic applications, including
certain new applications that may be made possible with our proprietary
technology. Such new applications, however, must be tested in clinical trials
and be approved by the FDA.
Products
Our principal surgical product is an ultrasonic system used by
ophthalmologists to remove cataracts. In 1990, we received clearance from the
FDA pursuant to Section 510(k) of the Food, Drug and Cosmetics Act on our
Precisionist 3000(TM) phaco system for cataract surgery, which system was
upgraded to the Precisionist 3000 Plus(TM) in 1994. We also completed our
preclinical in vitro and in vivo (animal) testing of the Photon(TM) laser
cataract surgical system and submitted a Section 510(k) Premarket Notification
to the FDA for the Photon(TM) laser cataract system in September 1993, with a
follow-up Investigational Device Exemption application submitted in October 1994
to provide additional clinical data through human cases to support its earlier
filing. The Investigational Device Exemption was approved in May 1995. Phase I
clinical trials were begun in April 1996 with surgeries completed in December
1996. Patient follow-up examinations as mandated by the FDA study were completed
in July 1997, and we submitted our final report to the FDA thereafter. During
the Phase I clinical trials, we discovered that the Nd:YAG laser system is most
effective on soft cataracts. Hard cataracts can be removed using the already
existing ultrasound capability of the Workstation(TM). The FDA approved Phase II
trials on soft cataracts in May 1998. Seven laser systems are now installed in
the United States and surgeries are being performed with trial completion
expected in the first half of 1999.
Precisionist 3000 Plus(TM) System. The Precisionist 3000 Plus(TM)
system is our first cataract surgery system, having been developed in 1992 and
enhanced in 1994. The system is compact, portable and simple to operate with a
very low operating cost. The primary market for the 3000 Plus(TM) is in foreign
countries where phaco technology is emerging and price-points are relatively
low. The 3000 Plus(TM) is also a good replacement or back-up system. The system
features a simple analog presentation of the ultrasound phaco equipment,
irrigation and aspiration fluidics. The 3000 Plus(TM) provides the basic
standard features for phaco surgery including: automated priming and tuning,
error detection of ultrasound handpiece and tip functions, audible vacuum
feedback tones, ultrasound energy metering, pneumatic high-speed anterior
vitrectomy and bipolar electrosurgery coagulation.
Precisionist Thirty Thousand(TM). The Precisionist Thirty Thousand(TM)
is our core phaco surgical technology and the base system for the Precisionist
Thirty Thousand(TM) Ocular Surgery Workstation(TM) platform. The Thirty
Thousand(TM) was placed into production and sale in 1997. As a phaco cataract
surgery system, we believe the Thirty Thousand(TM) is equal or superior to the
present competitive systems in the United States. The system features a graphic
color display and unique proprietary on-board computer and graphic user
interface linked to a soft-key membrane panel for flexible programmable
operation. The system provides real-time "on- the-fly" adjustment capabilities
for each surgical parameter during the surgical procedure for high-volume
applications. In addition, the Thirty Thousand(TM) provides one hundred
pre-programmable surgery set-ups, with a second level of sub-programmed custom
modes within each major surgical screen (i.e., ultrasound phaco and
irrigation/aspiration modes). The Thirty Thousand(TM) features our newly
developed proprietary fluidics panel which is completely non-invasive for
improved sterility and provides a surgical environment in the eye that virtually
eliminates fluidic surge and chamber maintenance problems normally associated
with phaco cataract surgery. This new fluidics system provides greater control
for the surgeon and allows safe operation at much higher vacuum setting by
sampling changes in aspiration 100 times per second. Greater vacuum in phaco
surgery means less use of ultrasound or laser energy to fragment the cataract
and less chance for surrounding tissue damage. In addition to the full
complement of surgical modalities (e.g., irrigation, aspiration, bipolar
coagulation and anterior vitrectomy), system automation includes "dimensional"
audio feedback of vacuum levels and voice confirmation for major system
functions, providing an intuitive environment in which the advanced phaco
surgeon can concentrate on the surgical technique rather than the equipment.
Photon(TM) Workstation(TM). The Precisionist Thirty Thousand(TM) Ocular
Surgery Workstation(TM) which comprises the base system for the Precisionist
Thirty Thousand(TM) is the first system known by us which uses the expansive
capabilities of today's advanced computer technology to offer seamless open
architecture expandability of the system hardware and software modules. The
Workstation(TM) utilizes an embedded computer developed for us. The computer is
controlled by a proprietary software system we developed that interfaces with
all components of the system: ultrasound, fluidics (irrigation), aspiration,
venting, coagulation and
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anterior vitrectomy (pneumatic). Each component is controlled as a peripheral
module within this fully integrated system. This approach allows for seamless
expansion and refinement of the Workstation(TM) with the ability to add other
hardware and software features. Expansion hardware such as our Photon(TM) laser
system, when approved by the FDA, and hardware for additional surgical
applications are easily implemented by means of a pre-existing expansion rack
which resides in the base of the Workstation(TM). These expanded capabilities
could include, but would not be limited to: laser systems, video surgical fiber
optic imaging, cutting and electrosurgery equipment. However, there is no
guarantee that the Workstation(TM) will be accepted in the market place.
Photon(TM) Laser System. The Photon(TM) laser cataract system, which is
still subject to FDA approval, is designed to be installed as a seamless plug-in
upgrade or add-on to our Precisionist Thirty Thousand(TM) Ocular Surgery
Workstation(TM). The plug-in platform concept is unique in the ophthalmic
surgical market for systems of this magnitude and presents a unique market
opportunity for us. The main elements of the laser system are the Nd:YAG laser
module, Photon(TM) laser software package and interchangeable disposable
hand-held fiber optic laser Photofragmentation Probe(TM) or LCP(TM). The
Photon(TM) laser utilizes the on-board microprocessor computer of the
Workstation(TM) to generate short pulse laser energy developed through the
patented LCP(TM) to targeted cataract tissue inside the eye, while
simultaneously irrigating the eye and aspirating the diseased cataract tissue
from the eye. The probe is smaller in diameter than conventional ultrasound
phaco needles and presents no damaging vibration or heat build-up in the eye.
Our Phase I clinical trials demonstrated that this probe can easily reduce the
size of the cataract incision from 3.0 mm to under 2.0 mm thereby reducing
surgical trauma and complementing current foldable intraocular implant
technology. The laser probe may also eliminate any possibility for burns around
the incision or at the cornea and may therefore be used with cataract surgery
techniques which utilize a more delicate clear cornea incision which can
eliminate sutures and be conducted with topical anesthesia. However, this system
may not effectively remove harder grade cataracts. Harder grade cataracts can be
removed using the already existing ultrasound capability of the Workstation(TM).
We intend to refine the laser delivery system and laser cataract surgical
technique through expanded research and clinical studies. As far as we can
determine, no integrated single laser photofragmenting probe is presently
available on the market that uses laser energy directly, contained in an
enclosed probe, to plasmatize cataract tissue at a precise location inside the
eye while simultaneously irrigating and aspirating the site.
Our laser system is based upon the concept that pulsed laser energy
produced with the micro-processor controlled Nd:YAG laser system provides
ophthalmic surgeons with a more precise and less traumatic alternative in
cataract surgery. Although conventional ultrasonic surgical systems have proven
effective and reliable in clinical use for many years, their use of high
frequency shock waves and vibration to fragment the cataract can make the
procedure difficult and present risk of complication both during and after
surgery. In contrast, our laser system, which utilizes short centralized energy
bursts, should permit the delivery of the laser beam with less trauma to
adjacent tissue. Therefore, unlike ultrasonic systems, whose vibrations and
shock waves affect (and can damage) non-cataractous tissues within the eye, our
Photon(TM) laser cataract system should only affect tissues it comes into direct
contact with.
Surgical Instruments, Accessories and Disposables. In addition to the
cataract surgery equipment, we are aggressively pursuing development and product
introductions for a range of cataract surgery instruments and accessories that
will be sold with our surgical systems and to fit other competitive systems. In
January 1998, we received FDA 510(k) clearance for a line of proprietary
titanium ultrasonic phaco needles we manufacture in our Salt Lake City facility.
The needles were released for sale in May 1998 in a sterile Phaco PAK(TM). In
May 1998, we received FDA 510(k) clearance for a line of irrigation/aspiration
probes and tips. Product release occurred in October 1998. These products and
additional instruments were previously sourced from third-party vendors. We
believe that by developing our own instruments and accessories we can improve
product performance, introduce innovative differentiation and improve sales
margins. Our surgical systems utilize or will utilize accessory instruments and
disposables, some of which are proprietary to us. These include replacement
ultrasound tips, sleeves, tubing sets and fluidics packs, instrument drapes and
laser cataract probes. We intend to expand our disposable accessories as we
further penetrate the cataract surgery market and expand the treatment
applications for our Workstation(TM).
Diagnostic Eyecare Products. Glaucoma is a leading cause of blindness
in the world. Glaucoma is a partial or total loss of visual field resulting from
certain progressive disease or degeneration of the retina, macula or nerve fiber
bundle. The cause and mechanism of the glaucoma pathology is not completely
understood. Present detection methods focus on the measurement of intraocular
pressure in the eye to determine the possibility of pressure being exerted upon
the retina, and optic nerve fiber bundle, which can diminish visual field.
Recently, retinal blood circulation has been indicated as a key component in the
presence of glaucoma. Several companies produce color Doppler equipment in the
$150,000 price range intended to provide measurement of ocular blood flow
activity in order to diagnose and treat glaucoma at an earlier stage.
Blood Flow Analyzer(TM) This is our first diagnostic eyecare device.
The device is manufactured for us and we market it pursuant to a license
agreement. The device is a portable desktop system that utilizes a proprietary
patented pneumatic Air Membrane Applanation Probe(TM) (the "AMAP(TM)") which is
attached to any model of standard examination slit lamp which is then placed on
the cornea of the patient's eye to measure the intraocular pressure within the
eye. The device is unique in that it reads a series of intraocular pressure
pulses over a short period of time (approximately five to ten seconds) and
generates a wave form profile which can be correlated to blood flow volume
within the eye. The blood flow volume is calculated by a proprietary software
algorithm developed by David M. Silver, Ph.D, one of our directors. The device
presents a numerical intraocular pressure reading and blood flow analysis rating
in a concise printout which is affixed to the patient history file. In addition,
the data generated by the device can
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be downloaded to a personal computer system for advanced database development
and management. The device measures not only intraocular pressure but also
pulsatile ocular blood flow, the reduction of which may cause nerve fiber bundle
death through oxygen deprivation thus resulting in visual field loss associated
with glaucoma. Our Blood Flow Analyzer(TM) is a portable automated in-office
system that presents an affordable method for ocular blood flow testing for the
ophthalmic and optometric practitioner. We have secured a license granting us
the exclusive right to private label, package and market the product in the
United States, with full international marketing rights. We market the Blood
Flow Analyzer(TM) as a stand-alone Model 100 SE unit, and packaged with a custom
built computer system as the Model 100 LE. The Blood Flow Analyzer(TM) utilizes
a single-use disposable cover for its AMAP(TM) corneal probe which is shipped in
sterile packages. The AMAP(TM) probe tip cover provides accurate readings and
acts as a prophylactic barrier for the patient. The device has been issued a
patent in the European Economic Community and is patent pending in the United
States and Japan. The FDA cleared the Blood Flow Analyzer(TM) for marketing in
June 1997 and we commenced selling the system in September 1997. In addition to
the Humphrey products, this diagnostic product will permit us to expand our
market to approximately 35,000 optometric practitioners in the United States in
addition to the approximately 18,000 ophthalmic practitioners who currently
perform eye surgeries and are candidates for our surgical systems. International
sales of the Blood Flow Analyzer(TM) will be further expanded in 1999.
Pachymetric Analyzer. We produce the Ultrasonic Pachymeter used for
measurement of corneal thickness. We anticipate steady monthly sales with the
positioning of this product for use in conjunction with the popular LASIK
(refractive laser surgery) procedure. Delivery of our backlog of the first eight
units began December 1998.
Ultrasonic A Scan. The Ultrasonic A Scan was and remains the industry
standard for axial length eye measurement, which is a prerequisite procedure
reimbursed by Medicare and is performed before every cataract surgery. Product
shipments began in January 1999. Over 5,000 Humphrey model A-Scan systems have
been installed in the worldwide market, representing a substantial market
opportunity for software upgrades and extended warranty contract sales.
Ultrasonic A/B Scan. The A/B Scan is used by retinal sub-specialists to
identify foreign bodies in the posterior chamber of the eye and to evaluate the
structural integrity of the retina. The A/B Scan is attractive to the general
ophthalmic community at large because of its lower price point.
Ultrasonic Biomicroscope ("UBM"). The UBM was developed by Humphrey
Systems in conjunction with the New York Eye and Ear Infirmary in Manhattan and
the University of Toronto. The UBM creates a high-resolution computer image of
the unseen parts of the eye that is a "map" for the glaucoma surgeon. The UBM is
an "enabling technology" for the ophthalmologist that we have repositioned for
broader market sales penetration. Formerly sold only to glaucoma sub-specialty
practitioners, we reintroduced the UBM at a price-point (Retail List $39,500)
targeted for the average practitioner seeking to add glaucoma filtering surgical
procedures and income to his/her cataract surgical practice. The UBM related
surgical filtering procedures are fully reimbursable by Medicare and insurance
providers. This untapped new market positions us as a leader in the rapidly
expanding glaucoma imaging and treatment segment. The UBM was introduced at the
American Academy of Ophthalmology meeting in November 1998 where we secured
eight system sales with cash deposits from domestic and foreign customers. At
the time these orders represented our total projected unit sales for fiscal
1999. As a result, and based on recently submitted foreign dealer sales
forecasts, we have revised our UBM unit sales projections upward and plan to
begin 1999 shipments earlier than projected to meet a potential steady-state
demand of five systems per month.
Marketing and Sales
Ophthalmologists are mainly office-based and perform their surgeries in
local hospitals or surgical centers that provide the necessary surgical
equipment and supplies. Ophthalmologists are generally involved in decisions
relating to the purchase of equipment and accessories for their independent
ambulatory surgical centers and for the hospitals with which they are
affiliated. This provides the opportunity for direct, targeted, personal
selling, responsive high quality customer service and short buying cycles to
achieve a product sale in the office or hospital. Hospitals also comprise a
significant market as recent demand for ultrasonic surgery technology has put
pressure on ophthalmologists, who in turn persuades the hospital to install the
latest technology system so that they can offer this procedure to their patients
and the community.
Industry analysts report that the United States ophthalmic surgical
device market has been characterized by slower growth in recent years. This has
apparently been caused by the uncertainty and potential reforms associated with
the health care industry. Further, hospitals have been inclined to keep their
older phaco machines longer than expected as they have been forced to mind
budgets more carefully and have become less willing to invest in capital
equipment until more information on health care reform becomes available.
However, analysts predict that the ophthalmic surgical device market will see
renewed growth in the coming years as the health care environment stabilizes and
as the growing elderly population produces an increased number of cataract
surgeries. As a consequence of these factors, the market should see a greater
rate of replacement of older machines that hospitals and surgeons have been
postponing for longer than usual.
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Current Market Acceptance and Potential. As of December 31, 1998, we
had distributed over 60 Precisionist 3000 and 3000 Plus(TM) phaco systems since
the introduction of the systems, 14 of the new Precisionist Thirty Thousand(TM)
Workstation(TM)s and 11 Photon(TM) Laser Phaco(TM) Workstation(TM). The
principal purchasers have been ophthalmologists and clinics in many countries
throughout the world. We believe that the market for our products is being
driven by:
* the aging of the population, which is evidenced by the
domestic and international cataract surgery volume growth
trend over the past ten years,
* the entry by emerging countries (including China, Russia, and
other countries in Asia, Eastern Europe and Africa) into
advanced technology medical care for their populations,
* increased awareness worldwide of the benefits of the minimally
invasive phaco cataract procedure, and
* the introduction of technology improvements such as our laser
system.
Marketing Organization. Paradigm markets its products internationally
through a network of dealers and domestically through direct sales
representatives and manufacturer's representatives. As of December 31, 1998, we
had six direct domestic sales representatives and one manufacturer's
representative in the United States and 21 foreign dealers. This is in addition
to 53 Paradigm Pharmacia & Upjohn Alliance representatives domestically. All of
these sales representatives are assigned exclusive territories and have entered
into contracts with Paradigm that contain performance quotas. Paradigm also
plans to continue to market its products by identifying customers through
internal market research, trade shows and direct marketing programs. We also
utilize a Clinical Advisory Board comprised of leading ophthalmic surgeons in
the United States and Europe who speak at conventions, train ophthalmologists
and visit foreign doctors and dealers to promote Paradigm's products.
We will emphasize the expandable features of the Workstation(TM) when
marketing it. Our marketing approach will be to focus on the upgradeability of
the Workstation(TM) and to develop the image of the Workstation(TM) as the most
versatile, upgradeable and cost effective surgical equipment available. Paradigm
will continue to focus its sales efforts towards ophthalmic hospital and
surgical center facilities specializing in cataract surgery. However, as systems
are installed, Paradigm will expand its focus to provide additional ophthalmic
and non-ophthalmic surgical applications as part of its Workstation(TM).
Additional surgical applications will expand the market for the Workstation(TM)
as well as associated sales of disposable surgical products.
We disseminated information about the innovative capabilities of our
products through advertisement and printed materials at our annual exhibition at
the annual meeting of the American Academy of Ophthalmology in New Orleans,
Louisiana in November 1998. The theme of our advertisement for the Ocular
Surgery Workstation(TM) was "The Future of Phaco is the Future of Ophthalmic
Surgery." We will expand upon the concept of the "Workstation(TM)" with
additional advanced laser and surgical capabilities. We have also launched a
campaign for the Blood Flow Analyzer. The product was introduced to the
ophthalmic marketplace at the American Academy of Ophthalmology meeting in
October 1997 and to the optometric marketplace at the California Optometric
Association and Vision Expo Easy New York meetings. The theme of Paradigm's
advertisement for its Blood Flow Analyzer was "Don't Miss Half of Your Glaucoma
Patients... A Fast, Clinically Proven Test For Ocular Blood Flow." (See,
"Business--Products.")
Product advertising is focused in the three industry trade newspapers,
Ocular Surgery News, Ophthalmology Times and the American Optometric Association
News. Most of the ophthalmologists or optometrists in the United States receive
one or more of these magazines through professional subscription programs. The
media has shown strong interest in our technology and products, as evidenced by
several recent front page articles in these publications.
Manufacturing and Raw Materials. Currently, Paradigm has a small
manufacturing and warehousing facility located in Salt Lake City. All components
and the finished surgical systems are manufactured under subcontracting
arrangements. None of these subcontractors manufactures products that compete
with our products. All component and systems manufacturing is performed under a
system of quality control and testing. As a condition to such contracting, each
subcontractor's manufacturing facilities and personnel must comply with the Good
Manufacturing Practices (GMP) guidelines established by the FDA, as well as
similar guidelines established by foreign governments, including CE Mark and
1S0-9001.
We currently subcontract the manufacture of our Precisionist Thirty
Thousand(TM) system to one of our stockholders, Zevex International, Inc., which
is located in Salt Lake City, Utah. The remaining operating elements of the
Photon(TM) laser cataract system are resident in the Precisionist Thirty
Thousand(TM) system supplied by Zevex. Although substantial reliance is
currently placed with Zevex, we believe we would be able to find alternative
manufacturers for our products currently manufactured by Zevex, including
in-house manufacturing. Paradigm also believes that there are multiple sources
of raw materials that are used or could be used in its products.
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The laser cavity, optical train and power source for the Photon(TM)
laser cataract system are supplied by Sunrise Technologies, Inc. in Fremont,
California. We have established an internal laser cataract probe manufacturing
facility and plan to have all probe production take place in Salt Lake City. The
remaining operating elements of the Photon(TM) laser cataract system, the
computer controller, fluidics and ancillary surgical modalities, are developed
through Zevex. Although substantial reliance is currently placed with Zevex and
Sunrise, we believe we would be able to find alternative manufacturers for the
components of the Photon(TM) lower cataract system. We also believe that there
are multiple sources of raw materials that are used or could be used in our
products.
Paradigm subcontracts the manufacturing of some of its ancillary
instruments, accessories and disposables through specified vendors in the United
States. These products are contracted in quantities and at costs consistent with
our financial purchasing capabilities and pricing needs. Paradigm manufactures
the LCP(TM) laser cataract probe and some of its surgical instruments,
accessories and fluidics surgical tubing sets at its facility in Salt Lake City.
The Blood Flow Analyzer(TM) is manufactured by OBF Labs. We may
repackage the analyzer using a module cover we designed and it may also be
marketed under our trade name and mark regardless of whether it is repackaged.
Our License and Manufacturing Agreement with OBF Labs continues through December
31, 2000 and is automatically renewable for successive one year additional
terms, unless either party gives written notice to the other at least 90 days
prior to the expiration of the term.
Product Service and Support. Service for Paradigm's products is
overseen from its Salt Lake City, Utah headquarters and is augmented by its
international dealer network who provide technical service and repair.
Installation, on-site training and a limited product warrant are included as the
standard terms of sale. We provide distributors with replacement parts at no
charge during the warranty period. To date, we have incurred minimal expenses
under this warranty program. International distributors are responsible for
installation, repair and other customer service to installed systems in their
territory. All systems parts are modular sub-components that are easily removed
and replaced. Paradigm maintains an adequate parts inventory and provides
overnight replacement parts shipment to its dealers. After the warranty period
expires, we offer one year and three year service contracts to domestic
customers and will continue to sell parts to international dealers who in turn
create their own service plans with their customers. As of December 31, 1998, we
have not sold any service contracts.
Third-Party Reimbursement. It is expected that our laser systems and
diagnostic system will generally be purchased by ophthalmologists and hospitals
as well as optometrists who will then bill various third-party payors for the
health care services provided to their patients. These payors include Medicare,
Medicaid and private insurers. Government agencies generally reimburse at a
fixed rate based on the procedure performed. Some of the potential procedures
for which the Photon(TM) laser cataract systems may be used, may be determined
to be elective in nature, and third-party reimbursement may not be available for
such procedures, even if approved by the FDA. In addition, third-party payors
may deny reimbursement if they determine that the procedure was unnecessary,
inappropriate, not cost-effective, experimental or used for a non-approved
indication. There can be no assurance that reimbursement from third-party payors
will be available, or if available, that reimbursement will not be limited,
thereby having a material adverse effect on our ability to develop new products
on a profitable basis, its operating results and financial condition.
Co-Distribution Agreement with Pharmacia & Upjohn Company and National
Healthcare Manufacturing Corporation. We entered into a Co-Distribution
Agreement as of June 26, 1998 with Pharmacia & Upjohn Company and National
Healthcare Manufacturing Corporation, which provides for the marketing and sale
of a range of ophthalmic products. Under the terms of the Co-Distribution
Agreement, Paradigm, Pharmacia & Upjohn and National Healthcare will offer a
comprehensive package of products to cataract surgeons, including cataract
surgical equipment, intraocular lens implants, intraocular pharmaceuticals,
surgical instruments and sterile procedural packs. We will provide the
Precisionist ThirtyThousand(TM) for distribution and sale under the Co-
Distribution Agreement. The Pharmacia & Upjohn products to be distributed as
part of the Co-Distribution Agreement include Healon(R) and Healongv(R)
viscoelastic solution and the CeeOn line of foldable, small intraocular lens
implants, designed to replace the natural lens removed during cataract surgery.
Research and Development
Paradigm's primary market for its surgical products is the cataract
surgery market. However, we believe that our laser systems may potentially have
broader ophthalmic applications. Consequently, we believe that a strong research
and development capability is important for our future. We have enlisted several
recognized and respected consultants and other technical personnel to act in
technical and medical advisory capacities. Several of these consultants serve on
Paradigm's Clinical Advisory Board to provide expert and technical support for
current and proposed products, programs and services. In addition, we are
conducting an extensive research program in conjunction with the Dixon Medical
Laser Lab at the University of Utah. The research is aimed at improving the
laser system performance for cataract surgery and exploring additional surgical
applications.
Paradigm believes its research and development capabilities provide it
with the ability to respond to regulatory developments, including new products,
new product features devised from its users and new applications for its
products on a timely and proprietary basis. Paradigm intends to continue
investing in research and development and to strengthen its ability to enhance
existing products
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and develop new products. We spent $540,000 in fiscal year ended December 31,
1997, and $298,000 in the year ended December 31, 1998.
Competition
General. Paradigm faces competition in the cataract and the glaucoma
surgery markets, and the glaucoma diagnostic market from two principal sources:
* manufacturers of competing ultrasound systems used when
performing cataract treatments and
* developers of technologies for ophthalmic diagnostic and
surgical used for treatment.
The surgical equipment industry is dominated by a few large companies that are
well established in the marketplace, have experienced management, are well
financed and have well recognized trade names and product lines. We believe that
the combined sales of five entities account for over 90% of the ophthalmic
surgery market. The remaining market is fragmented among emerging smaller
companies, some of which are foreign. The ophthalmic diagnostic market has a
similar composition.
Most major competitors either entered or expanded into the cataract or
glaucoma markets through the acquisition of smaller, entrepreneurial
high-technology manufacturing companies. Therefore, because existing competitors
or other entities desiring to enter the market could conceivably acquire current
entrepreneurial enterprises with small market activity, any and all competitors
must be considered to be formidable.
The Cataract Surgical System Industry. Presently, products offered by
the major manufacturers utilize ultrasonic technology. Those systems rely on
accessories including single-use cassette packs and other ancillary surgical
disposables such as saline solution, sutures and intraocular lenses for their
profits. The cassette packs are required for fluid and tissue collection during
the surgical procedure. The cassette packs are generally unique and proprietary
to their respective systems and represent a barrier to entry for third-party,
lower-cost after-market suppliers. While there is growing market resistance in
the United States and internationally to single-use cassettes, Paradigm
anticipates that manufacturers of ultrasound equipment will continue to develop
and enhance their present ultrasound products in order to protect their
investments in system and cassette technology and to protect their profits from
sales of these cassettes and accessories. Our Precisionist Thirty Thousand(TM)
ultrasonic phaco system has the ability to use either reusable or single-use
disposable components. The Photon(TM) laser cataract system will utilize probes
and cassette packs designed for single-use and semi-disposable instruments
priced at a level consistent with the demands of health care cost containment.
This will allow health care provider a substantial measure of cost containment,
while providing Paradigm with the quality control and income capability of
cassette sales.
The typical list price of a competitive advanced ultrasonic system
ranges from approximately $60,000 to $100,000. Lower cost models generally have
a list price ranging from approximately $30,000 to $60,000. The list price for
the Precisionist Thirty Thousand(TM) ocular surgery system is $89,900. The
Photon(TM) Laser Phaco(TM) will be sold at a price of approximately $129,000.
The international market, with significantly lower medical budgets, has not been
able to justify the expense of using disposable components. Budgetary
constraints have limited current manufacturers from gaining a significant share
of the international ultrasound equipment market, and provided a niche for the
emerging smaller companies discussed above.
Ultrasound Equipment Manufacturers. As a relatively recent entrant into
the cataract surgical equipment market with a newer equipment line, Paradigm is
establishing itself and, as yet, does not hold a significant share of the
market. We currently recognize Bausch & Lombe, Alcon Laboratories, and Allergan
Medical Optics as our primary competitors in the ultrasound phaco cataract
equipment market.
Laser Equipment Manufacturers. To our knowledge, there are several
other companies attempting to develop laser equipment for cataract surgery.
Based on currently available information, these competitive laser companies
appear to offer a less viable means of treating cataracts using laser
technology. We believe that there is presently no directly competing Nd:YAG
laser- assisted cataract surgical system available in the market. Paradigm also
believes that its product is sufficiently distinctive and, if properly marketed,
can capture a significant share of the cataract surgical device market. However,
there are substantial risks in undertaking a new venture in an established and
already highly competitive industry. In the short-term, we are seeking to
exploit these opportunities. Depending upon further developments, we may
ultimately exploit those opportunities through a merger with a stronger entity
already established or one that desires to enter the medical industry.
Paradigm believes that its ability to compete successfully will depend
on its capability to create and maintain advanced technology, develop
proprietary products, attract and retain scientific personnel, obtain patent or
other proprietary protection for its products and technologies, obtain required
regulatory approvals and manufacture, assemble and successfully market products
either alone or through third parties.
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The Retinal Diagnostic Market. The Glaucoma Research Foundation
suggests that with the aging of the so-called baby boom generation, there will
be an increase of macular degeneration and glaucoma in the United States, the
leading causes of adult blindness worldwide. The damage caused by these diseases
is irreversible. The preconditions for the onset of macular degeneration or
glaucoma are low ocular blood flow and high intraocular pressure. Diagnostic
screening is important for individuals susceptible to these diseases. People in
high risk categories include: African Americans over 40 years of age, all
persons over 60 years of age, persons with a family history of glaucoma or
diabetes, and the very near sighted. The Glaucoma Research Foundation recommends
that these high risk individuals be tested once every two years for glaucoma.
According to the U.S. Census Bureau, in 1995 there were over 30 million adults
65 years of age and older and 8 million African Americans 45 years of age and
older. The Glaucoma Research Foundation reports that glaucoma currently accounts
for more than 7 million visits to physicians annually.
We are subject to intense competition in the ophthalmic diagnostic
market from well-financed, established companies with recognizable trade names
and product lines and new and developing technologies. The industry is dominated
by several large entities which we believe account for the majority of
diagnostic equipment sales. Paradigm expects to derive revenues initially from
the sale of its blood flow analyzer and later through the sale of disposable
accessories for that device. The device is designed to detect glaucoma in an
earlier stage than is presently possible. In addition, the device performs
tonometry and blood flow analysis. The blood flow analyzer has a list price
ranging from approximately $13,500 and $20,000. Other ophthalmic diagnostic
devices which do not detect glaucoma in the early stages of the disease as does
Paradigm's analyzer yet retail at comparable prices. We believe that we can
compete in the diagnostic marketplace based upon the lower price and improved
diagnostic functions of the analyzer.
The Glaucoma Surgery Market. The glaucoma surgery market is similar in
composition to the retinal diagnostic market. The market is dominated by several
large companies. Because there are existing glaucoma and laser surgery products
in the market, Paradigm hopes to be able to enter the market relatively quickly
through FDA Section 510(k) clearance of its new systems and products. Paradigm
believes that it can compete in this established marketplace since it will be
offering its glaucoma surgery system as an add-on to its Workstation(TM). We
believe that our Workstation(TM) will give us a competitive advantage to gain a
position in the marketplace.
Intellectual Property Protection
Our cataract surgical products are proprietary in design, engineering
and performance. These ultrasonic products have not been patented to date
because the primary technology for ultrasonic tissue fragmentation, as available
to all competitors in the market, is mainly in the public domain.
The Photon(TM) laser cataract system is protected under a United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. and subsequently assigned by
Photomed International, Inc. and a Japanese patent issued in 1997 to Paradigm
for the utility and methods of laser ablation, aspiration and irrigation of
tissue through a hand-held probe of a unique design. We secured the exclusive
worldwide right to this patent shortly after its issue, and to the international
patents pending, from Photomed by means of a license agreement. The license
agreement was amended on December 5, 1997 to allow Photomed the right to conduct
research, development and marketing utilizing the patent in certain medical
sub-specialties other than ophthalmology for which Paradigm would receive
royalty payments equal to 1% of the proceeds from the net sales of products
utilizing the patent.
OBF Labs, the manufacturer of the Blood Flow Analyzer(TM) that Paradigm
markets in the United States under a non-exclusive license agreement, has been
granted a patent in the European Economic Community and has patents pending in
the United States and Japan.
Although our trademarks are important to our business, it is not our
policy to pursue trademark registrations for our trademarks associated with our
products. Consequently, we rely on common law trademark rights to protect
unregistered trademarks, although common law trademark rights do not provide
Paradigm with the same level of protection as would U.S. federal registered
trademarks. Common law trademark rights only extend to the geographical area in
which the trademark is actually used while U.S. federal registration prohibits
the use of the trademark by any party anywhere in the United States.
Paradigm also relies on trade secret law to protect some aspects of its
intellectual property. All key employees, consultants and advisors are required
to enter into a confidentiality agreement with Paradigm. Most of our third-party
manufacturers and formulators are also bound by confidentiality agreements.
Regulation
Our surgical and diagnostic systems are regulated as medical devices by
the FDA under the Food, Drug and Cosmetics Act or FDC Act. As such, these
devices require premarket clearance or approval by the FDA prior to their
marketing and sale. Such clearance or approval is premised on the production of
evidence sufficient for a company to show reasonable assurance of safety and
effectiveness regarding its products. Pursuant to the FDC Act, the FDA regulates
the manufacture, distribution and production of
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medical devices in the United States and the export of medical devices from the
United States. Noncompliance with applicable requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, denial of premarket clearance or approval for devices,
recommendations by the FDA that Paradigm not be allowed to enter into government
contracts, and criminal prosecution.
Following the enactment of the Medical Device Amendments to the FDC Act
in May 1976, the FDA began classifying medical devices in commercial
distribution into one of three classes: Class I, II or III. This classification
is based on the controls that are perceived to be necessary to reasonably ensure
the safety and effectiveness of medical devices. Class I devices are those
devices, the safety and effectiveness of which can reasonably be ensured through
general controls, such as adequate labeling, advertising, Premarket notification
and adherence to the FDA's Good Manufacturing Practice regulations. Some Class I
devices are exempt from some of the general controls. Class II devices are those
devices the safety and effectiveness of which can reasonably be assured through
the use of special controls, such as performance standards, postmarket
surveillance, patient registries and FDA guidelines. Class III devices are
devices that must receive premarket approval by the FDA to ensure their safety
and effectiveness. Generally, Class III devices are limited to life-sustaining,
life-supporting or implantable devices, or to new devices that have been found
not to be substantially equivalent to legally marketed devices.
There are two principal methods by which FDA approval may be obtained.
One method is to seek FDA approval through a premarket notification filing under
Section 510(k) of the FDC Act. If a manufacturer or distributor of a medical
device can establish that a proposed device is "substantially equivalent" to a
legally marketed Class I or Class II medical device or to a pre-1976 Class III
medical device for which the FDA has not called for a premarketing approval, the
manufacturer or distributor may seek FDA Section 510(k) premarket clearance for
the device by filing a Section 510(k) premarket notification. The Section 510(k)
notification and the claim of substantial equivalence will likely have to be
supported by various types of data and materials, possibly including clinical
testing results, obtained under an Investigational Device Exemption granted by
the FDA. The manufacturer or distributor may not place the device into
interstate commerce until an order is issued by the FDA granting premarket
clearance for the device. There can be no assurance that Paradigm will obtain
Section 510(k) premarket clearance for any of the future devices for it seeks
such clearance including the Photon(TM) Laser.
The FDA may determine that the device is "substantially equivalent" to
another legally marketed Class I, Class II or pre-1976 Class III device for
which the FDA has not called for a premarketing approval and allow the proposed
device to be marketed in the United States. The FDA may determine, however, that
the proposed device is not substantially equivalent, or may require further
information, such as additional test data, before the FDA is able to make a
determination regarding substantial equivalence. A "not substantially
equivalent" determination or a request for additional information could delay
Paradigm's market introduction of its products and could have a material adverse
effect on its business, operating results and financial condition.
The alternate method to seek approval is to obtain premarket approval
from the FDA. If a manufacturer or distributor of a medical device cannot
establish that a proposed device is substantially equivalent to another legally
marketed device, whether or not the FDA has made a determination in response to
a Section 510(k) notification, the manufacturer or distributor will have to seek
premarket approval for the proposed device. A premarket approval or PMA
application would have to be submitted and be supported by extensive data,
including preclinical and clinical trial data to prove the safety and efficacy
of the device. If human clinical trials of a proposed device are required and
the device presents a "significant risk," the manufacturer or the distributor of
the device will have to file an Investigational Device Exemption application
with the FDA prior to commencing human clinical trials. The IDE application must
be supported by data, typically including the results of animal and mechanical
testing. If the IDE application is approved, human clinical trials may begin at
a specific number of investigational sites, and the approval letter could
include the number of patients approved by the FDA. An IDE clinical trial can be
divided into several parts or phases. Sometimes, a company will conduct a
feasibility study to confirm that a device functions according to its design and
operating parameters. This is usual clinical trial site. If the Phase I results
are promising, the applicant may, with the FDA's permission, expand the number
of clinical trial sites and the number of patients to be treated to assure
reasonable stability of clinical results. Phase II studies are performed to
confirm predictability of results and the absence of adverse reactions. The
applicant may, upon receipt of the FDA's authorization, subsequently expand the
study to a third phase with a larger number of clinical trial sites and a
greater number of patients. This involves longer patient follow-up times and the
collection of more patient data. Product claims, labeling and core data for the
premarketing approval are derived primarily from this portion of the clinical
trial. The applicant may also, upon receipt of the FDA's permission, consolidate
one or more of such portions of the study. Sponsors of clinical trials are
permitted to sell those devices distributed in the course of the study, provided
such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. Although both approval methods may require
clinical testing of the device in question under an approved Investigational
Device Exemption, the premarket approval procedure is more complex and time
consuming.
Upon receipt of the premarketing approval application, the FDA makes a
threshold determination whether the application is sufficiently complete to
permit a substantive review. If the FDA determines that the PMA is sufficiently
complete to permit a substantive review, the FDA will "file" the application.
Once the submission is filed, the FDA has by regulation 90 days to review it;
however, the review time is often extended significantly by the FDA asking for
more information or clarification of information already provided in the
submission. During the review period, an advisory committee may also evaluate
the application and provide
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recommendations to the FDA as to whether the device should be approved. In
addition, the FDA will inspect the manufacturing facility to ensure compliance
with the FDA's Good Manufacturing Practice requirements prior to approval of a
PMA. While the FDA has responded to PMA applications within the allotted time
period, PMA reviews generally take approximately 12 to 18 months or more from
the date of filing to approval. The PMA process is lengthy and expensive, and
there can be no assurance that approval will be obtained for any of Paradigm's
products determined to be subject to such requirements. A number of devices for
which PMA approval has been sought by other companies have never been approved
for marketing.
Any products manufactured or distributed by Paradigm pursuant to a
premarket clearance notification or PMA are or will be subject to pervasive and
continuing regulation by the FDA. The FDC Act also requires that our products be
manufactured in registered establishments and in accordance with GMP
regulations. Labeling, advertising and promotional activities are subject to
scrutiny by the FDA and, in certain instances, by the Federal Trade Commission.
The export of medical devices is also subject to regulation in certain
instances. In addition, the use of Paradigm's products may be regulated by
various state agencies.
All lasers manufactured for Paradigm are subject to the Radiation
Control for Health and Safety Act administered by the Center for Devices and
Radiological Health of the FDA. The law requires laser manufacturers to file new
product and annual reports and to maintain quality control, product testing and
sales records, to incorporate certain design and operating features in lasers
sold to end users pursuant to specific performance standards, and to comply with
labeling and certification requirements. Various warning labels must be affixed
to the laser, depending on the class of the product, as established by the
performance standards.
Although Paradigm believes that it and its manufacturers currently
comply and will continue to comply with all applicable regulations regarding the
manufacture and sale of medical devices, such regulations are always subject to
change and depend heavily on administrative interpretations. We cannot be sure
that future changes in review guidelines, regulations or administrative
interpretations by the FDA or other regulatory bodies, with possible retroactive
effect, will not materially adversely affect us. In addition to the foregoing,
we are subject to numerous federal, state and local laws relating to such
matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of potentially hazardous substance.
There can be no assurance that we will not be required to incur significant
costs to comply with such laws and regulations and that such compliance will not
have a material adverse effect upon our ability to conduct business.
Paradigm and the manufacturers of its products may be inspected on a
routine basis by both the FDA and individual states for compliance with current
GMP regulations and other requirements.
Congress has considered several comprehensive federal health care
programs designed to broaden coverage and reduce the costs of existing
government and private insurance programs. These programs have been the subject
of criticism within Congress and the health care industry, and many alternative
programs and features of programs have been proposed and discussed. Therefore,
Paradigm cannot predict the content of any federal health care program, if any
is passed by Congress, or its effect on it and its business. Some measures that
have been suggested as possible elements of a new program, such as government
price ceilings on nonreimbursable procedures and spending limitations on
hospitals and other healthcare providers for new equipment, could have an
adverse effect on our business, operating results or financial condition.
Uncertainty concerning the features of any health care program considered by the
Congress, its adoption by the Congress and the effect of the program on our
business could result in volatility of the market price of our common stock.
Furthermore, the introduction of Paradigm's products in foreign
countries may require it to obtain foreign regulatory clearances. We believe
that only a limited number of foreign countries have extensive regulatory
requirements, including France, Germany, Korea and Japan. A number of European
and other economically advanced countries, including Italy, Norway, Spain and
Sweden, have not developed regulatory agencies for intensive supervision of such
devices. Instead, they generally have been willing to accept the approval of the
FDA. Therefore, a premarket approval, Section 510(k) or approved Investigational
Device Exemption from the FDA is tantamount to approval in those countries.
These countries and most developing countries have simply deferred direct
discretion to licensed practicing surgeons to determine the nature of devices
that they will use in medical procedures. Paradigm's two ultrasound systems, the
Photon(TM) laser cataract system it is developing and the ocular blood flow
analyzer are all devices which require FDA approval. Therefore, a significant
aspect of the acceptance of the devices in the market is our effectiveness in
obtaining the necessary approvals. Having an approved IDE allows Paradigm to
export a product to qualified investigational sites.
Regulatory Status of Products
The Precisionist 3000 Plus(TM) and the Precisionist Thirty Thousand(TM)
Systems. Pursuant to Section 510(k) of the FDC Act, the FDA granted market
clearance for the commercialization of the Precisionist 3000 Plus(TM) system in
1990 and the Precisionist Thirty Thousand(TM) system in 1995, thereby allowing
Paradigm to sell these devices in the United States for their intended use as
cataract surgical systems. That clearance, in turn, has allowed for similar
approvals in several foreign countries, allowing sales to be undertaken in all
of those countries. Because no approvals are required in many developing
countries, including several countries in the Middle East and Latin America,
those areas are potentially viable markets.
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Applications for approval in other western countries, including Germany
and France, are currently pending. Under present circumstances, although there
is no assurance, approval of the German application is expected. Because France
places substantial credence in German approvals, it is expected that approval in
France will follow sometime thereafter. In Japan and Korea, we have provided the
Precisionist(TM) system to established dealers that have applied for approval in
those respective countries.
The Photon(TM) Laser Cataract System. We acquired permission from the
FDA to manufacture the device and approval to export it to qualified
investigator sites outside the United States under an open IDE granted by the
FDA in May 1995. Although the Photon(TM) laser cataract system is uniquely
configured in an original and proprietary manner, the laser system, a Nd:YAG
laser, is not proprietary to the device or to Paradigm and is widely used in the
medical industry and other industries as well. Of particular significance is the
fact that this particular component has received previous market clearance from
the FDA for other ophthalmic and medical applications. Also of significance is
our belief that the surgical treatment method used with the Photon(TM) laser
cataract is similar to the current ultrasound cataract treatment employed by
ophthalmologists. We thus believe that we can obtain Section 510(k) clearance
for the Photon(TM) laser cataract system sometime in 1999.
Paradigm submitted its Premarket Notification under Section 510(k) of
the FDC Act for the Photon(TM) laser cataract system in September 1993. The FDA
requested clinical support data for claims made in the Section 510(k) Premarket
Notification, and in October 1994 we submitted an IDE application to provide for
a "modest clinical study" in order to collect the data required by the FDA for
clearance of the Photon(TM) laser cataract system. The FDA granted this IDE in
May 1995. We began human clinical trials in April 1996 and completed the
clinical surgeries in December 1996. Through the clinical trials we discovered
that the Photon(TM) laser cataract system may not effectively remove harder
grade cataracts. We requested and received FDA approval to conduct Phase II
clinical studies at seven sites in hopes of refining the laser system and
surgical method to remove such cataracts and provide the statistical data
required to approve the Photon(TM) laser system for laser cataract removal.
There is no guarantee, however, that Paradigm will be successful in improving
the laser system to remove harder grade cataracts.
Blood Flow Analyzer(TM) (Paradigm BFA(TM)). The FDA granted market
clearance pursuant to Section 510(k) of the FDC Act, for the commercial sale of
our Blood Flow Analyzer in June 1997 for the intended use and claims of
applanation tonometry and blood flow analysis. The clearance allows immediate
marketing in the United States for this new product and allows Paradigm to
expand its product base into the ophthalmic office and optometric office with a
diagnostic system.
Employees
As of December 31, 1998, we had 20 full-time employees. This number
does not include manufacturer's representatives who are independent contractors
rather than our employees. We also utilize several consultants and advisors.
There can be no assurance that we will be successful in recruiting or retaining
key personnel. None of our employees is a member of a labor union and we have
never experienced any business interruption as a result of any labor disputes.
Facilities
Paradigm's executive offices are currently located at 1127 West 2320
South, Suite A, Salt Lake City, Utah. This facility consists of approximately
4,397 square feet of leased office space under a three year lease that will
expire on December 31, 2000 with an additional three year renewal option. We
leased an additional 3,700 square feet in October 1998 in a building adjacent to
our current facility, which is owned by the same landlord. The facility is
leased from Eden Roc, a California partnership, at a base monthly rate of $6,315
plus a monthly common maintenance area fee. The base monthly rent increases to
$6,415 and $6,518 for the second and third years of the lease. Pursuant to the
lease, we pay all real estate and personal property taxes and the insurance
costs on the premises. Paradigm believes that this facility is adequate and
satisfies its needs for the foreseeable future.
Legal Proceedings
Paradigm is not a party to any legal proceedings and is not aware of
any threatened legal proceedings which may be brought against it.
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MANAGEMENT
Directors and Executive Officers
The executive officers and directors of Paradigm, their ages and their
positions are set forth below:
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 Paradigm since
April 1993. Since December 12, 1997 and from May 1994 to August 1997, he has
served as President and Chief Executive Officer. From June 1989 to April 1993,
Mr. Motter served as Chief Executive Officer of Paradigm Medical, Inc. which
merged with Paradigm in May 1994. From September 1990 to April 1992, he was
employed by HGM Medical Laser Systems as general manager of their International
Division. From October 1978 to June 1989, Mr. Motter was employed by SmithKline
Beckman's Humphrey Instruments Division, which developed and manufactured
advanced ophthalmic diagnostic instruments, serving last as National Sales
Manager overseeing all domestic sales in its ophthalmic computer division. Mr.
Motter received a B.A. degree in English from Stephen's College in 1970 and an
M.B.A. degree from Pepperdine University in 1975.
Michael W. Stelzer has served as Vice President of Operations and Chief
Operating Officer since December 12, 1997 and its Secretary since July 30, 1998.
From August 8, 1997 to December 12, 1997, he served as President and Chief
Executive Officer. Mr. Stelzer joined our Board of Directors in April 1993. From
June 1989 to April 1993, he served as a General Counsel and a director of
Paradigm Medical, Inc. which merged with the Paradigm May 1994. From January
1995 to August 1997, Mr. Stelzer served as the Executive Vice President and
Chief Financial Officer of Rhino Marketing, Inc., a sports related holding
company, and was President of one of its subsidiaries. Prior to joining Rhino,
Mr. Stelzer was President and General Counsel for MarDec, Inc., a golf accessory
marketing company, from 1993 to 1995. Mr. Stelzer is a licensed attorney with
the state of California and has practiced law in California since 1980. From
March 1972 to January 1980, Mr. Stelzer was controller of Ponderosa Telephone
Company. Mr. Stelzer received a B.S. degree in business administration from the
University of California, Davis in 1970 and a Juris Doctorate from Humphreys
College of Law in 1979.
Robert W. Millar has served as Vice President of Engineering and
Manufacturing since December 12, 1997 and as a director since April 1993. From
April 1995 to December 12, 1997, Mr. Millar served as Executive Vice President.
From January 1991 to April 1993, he was employed as President by Paradigm
Medical, Inc., which merged with Paradigm in May 1994. From January 1990 to
January 1991, Mr. Millar was employed by HGM Medical Laser Systems, serving as
Director of Marketing and Product Management for all ophthalmic and surgical
markets. From October 1988 to December 1989, Mr. Millar was employed as Group
Products Manager for the Customer Products Division of Esselte Pendaflex
Corporation, a manufacturer and distributor of office supply products. From July
1986 to February 1988, Mr. Millar was employed by TechnaVision Inc., a company
engaged in the manufacture of ophthalmic diagnostic and other eyecare equipment.
From February 1980 to July 1986, he was employed by Pogue McJunkin & Associates,
a professional industrial design firm. Mr. Millar received a B.S. degree in
industrial design from the College of Design in Detroit, Michigan in 1979.
John W. Hemmer, C.F.A., has served as Vice President of Finance,
Treasurer and Chief Financial Officer and as a director since November 1995.
Since October 1989, Mr. Hemmer has served as a director and consultant for Sea
Pride Industries, Inc. and its subsidiaries in Gulf Breeze, Florida, which
developed the first offshore marine production system licensed and permitted for
use in the Gulf of Mexico. From March 1992 to July 1994, Mr. Hemmer was employed
as the Secretary and Vice President of Finance of Advance Electronics, Inc.,
which is engaged in the retail distribution of health and beauty products. From
November 1991 to December 1994, Mr. Hemmer was Secretary and Treasurer of Agro
Industrial Development, Ltd., which established a Free Trade Zone
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in Belize for the production and export of seafood. He was the President and
Chief Executive Officer of John W. Hemmer, Inc., a registered broker/dealer firm
from May 1987 to May 1989, which subsequently changed its name to Westfalia
Investments Inc., but retained his registered representative status until March
1995. Prior thereto, he was Vice President of Bankers Trust Company in charge of
venture capital and a member of the research and investment management
committees. Mr. Hemmer was Vice President of Corporate Finance at Dempsey,
Tegler & Company, Inc., a Senior Analyst at Lazard Freres & Company and an
Investment Officer of The Chase Manhattan Bank. Mr. Hemmer received a B. A.
degree in Economics from Queens College in 1951 and an M.S. degree in Banking
and Finance from Columbia University Graduate School of Business in 1952.
Patrick M. Kolenik has been a director since November 1997. Mr. Kolenik
has been Special Assistant to the President of International Heritage, Inc.
since 1996 and President and Co-Founder of Cyn Del & Co., Inc. since 1992. He
was a co-founder and director of Win Capital Corp., an investment banking firm,
but resigned as a director in 1996. As of July 1, 1998, Mr. Kolenik resumed an
affiliation with Win Capital Corp. From 1969 to 1989, Mr. Kolenik held various
positions at Sherwood Securities Corp., a securities firm, including President
and Chief Executive Officer, Executive Vice President of Trading, Executive Vice
President of Corporate Syndicate and Vice President of Corporate Finance. He
also served as a director of Sherwood Securities Corp. Mr. Kolenik attended
Baruch College where he majored in finance.
Robert L. Frome, Esq. has been a director since September 3, 1998. He
has been a Senior Partner at the Olshan Grundman Frome & Rosenzweig law firm in
New York City for over twenty years. He serves as a director of HealthCare
Services Group, Inc., the nation's largest provider of housekeeping, linen and
laundry services to long term care facilities, and of NUCO2, the nation's
largest provider of bulk carbon dioxide to restaurant, fast food outlets and
convenience stores. Mr. Frome is a trustee of Daytop Village Foundation and The
Hospital for Joint Diseases of New York University Medical Center. He received
an LL.B. from Harvard Law School in 1961 and LL.M. and B.S. degrees from New
York University in 1962 and 1958.
Technical and Medical Advisory Personnel
We utilize an informal Clinical Advisory Board of recognized practicing
ophthalmic surgeons in technical and medical advisory capacities. Outside
consultants are generally used on an ad hoc basis and such individuals do not
meet together as a group and are not compensated. The members of Paradigm's
Clinical Advisory Board are as follows:
Paul L. Archambeau, M.D. - Dr. Archambeau is an ophthalmologist in
Santa Rosa, California and a faculty member at the University of California at
San Francisco. He received his medical degree at the University of Buffalo
Medical School in 1959 and performed his residency at the Mayo Clinic in
Rochester, Minnesota.
Daniele S. Aron-Rosa, Ph.D, M.D. - Dr. Aron-Rosa is a faculty member at
the Rothschild Eye Institute in Paris, France. She received a doctorate degree
in physics from the University of Paris in 1957 and received her medical degree
there in 1962 and performed her residency at the University of Paris Hospital.
David C. Brown, III, M.D. - Dr. Brown is an ophthalmologist in Fort
Myers, Florida. He received his medical degree at the University of Florida in
1963 and also performed his residency at that facility.
Alan S. Crandall, M.D. - Dr. Crandall is an ophthalmologist in Salt
Lake City, Utah. He received his medical degree at the University of Utah in
1973 and performed his residency at the University of Pennsylvania
I. Howard Fine, M.D. - Dr. Fine is an ophthalmologist practicing in
Eugene, Oregon and a member of the Oregon Health Sciences University faculty.
Dr. Fine received his medical degree at Boston University in 1966 and also
performed his residency at that facility.
Stephane P. Ganem, M.D. - Dr. Ganem is chairman of the ophthalmology
department at the Rothschild Eye Institute in Paris, France.
Frederic B. Kremer, M.D. - Dr. Kremer is an ophthalmologist in Radnor,
Pennsylvania. He received his medical degree at the Jefferson Medical Center in
1976 and performed his residency at the Wills Eye Hospital in Philadelphia,
Pennsylvania.
Francis A. L'Esperance, M.D. - Dr. L'Esperance is President of the
American Board of Laser Surgery and a faculty member at the Columbia College of
Physicians and Surgeons. He received his medical degree from Harvard Medical
School in 1956 and performed his residency at the Massachusetts Eye and Ear
Infirmary.
Michael B. Limberg, M.D. - Dr. Limberg is an ophthalmologist practicing
in San Luis Obispo, California. He received his medical degree at the University
of Utah Medical School in 1982 and performed his residency at Louisiana State
University.
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<PAGE>
Marc A. Michelson M.D. - Dr. Michelson is an ophthalmologist in
Birmingham, Alabama. He received his medical degree at the University of Alabama
in 1975, and performed his residency at the Eye Foundation Hospital in
Birmingham, Alabama.
Lawrence E. Noble M.D. - Dr. Noble is an ophthalmologist in Provo,
Utah. He received his medical degree at the University of Oregon in 1964, and
performed his residency at the Good Samaritan Hospital.
Jaswant Singh Pannu, M.D. - Dr. Pannu is an ophthalmologist in
Lauderdale Lakes, Florida. He received his medical degree at the University of
Miami in 1967 and performed his residency at the Milwaukee, Wisconsin Veterans
Administration Hospital and at Evanston Hospital in Evanston, Illinois.
David M. Schneider, M.D. - Dr. Schneider is an ophthalmologist in
Cincinnati, Ohio. He received his medical degree at the University of Cincinnati
in 1975, and performed his residency at the University of Cincinnati.
Jeffrey G. Straus, M.D. - Dr. Straus is an ophthalmologist in Metairie,
Louisiana. He received his medical degree at State University of New York at
Buffalo in 1984 and performed his residency at Ochsner Foundation Hospital and
Clinic in New Orleans, Louisiana.
Gerald Zelman, M.D. - Dr. Zelman is a Ophthalmologist in Manhasset, New
York. He received his medical degree at the University of Lausanne in 1964, and
performed his residency at the Brooklyn Eye and Ear facility in Brooklyn, New
York.
Board Meetings and Committees
The Board of Directors held a total of five meetings during the fiscal
year ended December 31, 1998. The Audit Committee of the Board of Directors
consists of directors Michael W. Stelzer, Patrick M. Kolenik and Robert L.
Frome. The Audit Committee last met on September 14, 1998. The Audit Committee
is primarily responsible for reviewing the services performed by Paradigm's
independent public accountants and internal audit department and evaluating
accounting principles and its system of internal accounting controls. The
Compensation Committee of the Board of Directors consists of directors Robert M.
Millar, Michael W. Stelzer and Patrick M. Kolenik. The Compensation Committee
also last met on September 14, 1998. The Compensation Committee is primarily
responsible for reviewing compensation of executive officers and overseeing the
granting of stock options. No director attended fewer than 75% of all meetings
of the Board of Directors during the 1997 fiscal year.
Pursuant to Nasdaq corporate governance requirements recently made
applicable to Nasdaq SmallCap Market companies, the Company must have (i) a
minimum of two independent directors; (ii) an audit committee with a majority of
independent directors; and (iii) an annual stockholders meeting. We have and can
presently satisfy each of these requirements. Messrs. Kolenik and Frome qualify
as independent directors.
Compliance with Section 16(a) of the Securities and Exchange Act of 1934
Effective May 1, 1991, the Securities and Exchange Commission adopted
revised rules regarding reporting of beneficial ownership of securities by
officers, directors and owners of more than 10% of any class of a company's
equity securities. During fiscal 1997, George J. Barenholtz, then a director of
Paradigm, through an oversight, filed one late stock purchase transaction report
covering one transaction.
Executive Compensation
The following table sets forth, for each of the last three fiscal years
and for the three month period ended December 31, 1996, the compensation
received by Thomas F. Motter, Paradigm's Chairman of the Board, President and
Chief Executive Officer, and all other executive officers (collectively, the
"Named Executive Officers") at December 31, 1998 whose salary and bonus for all
services in all capacities exceed $100,000 for the fiscal year ended December
31, 1998.
33
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards Payouts
Other Securities
Annual Restricted Underlying Long-term All Other
Name and Compensation Stock Options/ Incentive Compensation
Principal Position Period Salary($) Bonus($) ($)(6) Awards($) SARs(#) Payout($) (#)(5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas F. Motter, 1998(1) $122,497 0 0 0 0 0 6,000
Chairman of the 1997(2) 129,584 0 5,250 0 0 0 0
Board, President 1996(3) 33,750 0 0 0 0 0 0
and Chief 1996(4) 111,042 1,000 3,600 0 0 0 6,000
Executive Officer
Robert W. Millar, 1998(1) 121,019 0 0 0 0 0 6,000
Vice President of 1997(2) 114,675 0 5,250 0 0 0 0
Engineering and 1996(3) 31,250 0 0 0 0 0 0
Manufacturing 1996(4) 99,792 1,000 3,600 0 0 0 6,000
John W. Hemmer, 1998(1) 117,884 0 0 0 0 0 6,000
Treasurer, Chief 1997(2) 112,670 0 5,250 0 0 0 0
Financial Officer 1996(3) 30,000 0 0 0 0 0 0
and Director 1996(4) 80,000 0 3,600(6) 0 20,000(6) 0 4,000
</TABLE>
(1) For the fiscal year ended December 31, 1998.
(2) For the fiscal year ended December 31, 1997.
(3) For the three month period ended December 31, 1996.
(4) For the fiscal year ended September 30, 1996.
(5) The amounts indicated under "Other Annual Compensation" for 1996 and 1998
consist of payments related to the operation of automobiles by the named
executive.
(6) On February 16, 1996, Paradigm granted Mr. Motter and Mr. Millar options
to purchase 106,000 and 84,000 shares of its common stock at an exercise
price of $5.00 per share. These options expire on February 15, 2001. On
January 31, 1996, Paradigm granted Mr. Hemmer options to purchase 20,000
shares of its common stock at an exercise price of $5.00 per share. These
options expire January 30, 2001
The following table sets forth information concerning the exercise of
options to acquire shares of Paradigm's common stock by the officers named above
during the fiscal year ended December 31, 1998, as well as the aggregate number
and value of unexercised options held by these officers on December 31, 1998.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
Number of Securiites Underlying Value of Unexercised
Unexercised Options/SARs In-the-Money Options/SARs at
At December 31, 1997(#) December 31, 1997($)
Shares
Acquired
On Exercise Value
Name (#) Reali;zed ($) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Thomas F. Motter -0- -0- 106,000 -0- -0- -0-
Robert W. Millar -0- -0- 84,000 -0- -0- -0-
John W. Hemmer -0- -0- 20,000 -0- -0- -0-
Michael W. Stelzer -0- -0- 20,000 -0- -0- -0-
</TABLE>
Director Compensation
The outside directors were each granted stock options to purchase
75,000 shares of Paradigm's common stock at an exercise price of $4.00 per
share. Outside directors are also reimbursed for their expenses in attending
Board and committee meetings. Directors are not precluded from serving Paradigm
in any other capacity and receiving compensation therefor.
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<PAGE>
Employee 401(k) Plan
In October 1996, Paradigm's Board of Directors adopted a 401(k)
Retirement Savings Plan. Under the terms of the 401(k) plan, effective as of
November 1, 1996, Paradigm may make discretionary employer matching
contributions to its employees who choose to participate in the plan. The plan
allows the Board to determine the amount of the contribution at the beginning of
each year. The Board adopted a contribution formula specifying that such
discretionary employer matching contributions would equal 100% of the
participating employee's contribution to the plan up to a maximum discretionary
employee contribution of 3% of a participating employee's compensation, as
defined by the plan. All persons who have completed at least six months' service
with the Company and satisfy other plan requirements are eligible to participate
in the 401(k) plan.
1995 Stock Option Plan
We adopted a 1995 Stock Option Plan for our officers, employees,
directors and consultants on November 7, 1995. This plan authorized the granting
of stock options to purchase an aggregate of not more than 300,000 shares of
Paradigm's common stock. On February 16, 1996, options for substantially all
300,000 shares were granted. On June 9, 1997, the shareholders approved an
amendment to the plan to increase the number of shares of common stock reserved
from issuance thereunder by an aggregate of 300,000 shares. That same day,
20,000 options each were granted to Michael W. Stelzer, Vice President of
Operations and Chief Operating Officer, and John W. Hemmer, Vice President of
Finance, Treasurer and Chief Financial Officer. On September 14, 1998, 37,450
options each were granted to Thomas F. Motter, President and Chief Executive
Officer, Robert W. Millar, Vice President of Engineering and Manufacturing, and
Messrs. Stelzer and Hemmer, and 75,000 options each to Patrick M. Kolenik and
Robert L. Frome, the two outside directors. There are presently outstanding
options to purchase 750,000 shares of common stock that have been granted under
the plan. None of these options has been exercised.
The plan is administered by the Compensation Committee. In general, the
Compensation Committee, will select the person to whom options will be granted
and will determine, subject to the terms of the plan, the number, exercise, and
other provisions of such options. Options granted under the plan will become
exercisable at such times as may be determined by the Compensation Committee.
Options under the plan may be either incentive stock options as such
term is defined in the Internal Revenue Code of 1986, as amended, or non-ISOs.
ISOs may only be granted to persons who are employees. Non-ISOs may be granted
to any person, including, but not limited to, employees, independent agents,
consultants, as the Compensation Committee believes has contributed, or will
contribute, to the Paradigm's succcess. The Compensation Committee shall
determine the exercise price of options granted under the plan, provided that,
in the case of ISOs, such price may not be less than 100% (110% in the case of
ISOs granted to holders of 10% of voting power of Paradigm's stock) of the fair
market value (as defined in the plan) of the common stock on the date of grant.
The aggregate fair market value (determined at the time of option grant) of
stock with respect to which ISOs become exercisable for the first time in any
year cannot exceed $100,000.
The term of each option shall not be more than 10 years (five years in
the case of ISOs granted to holders of 10% of the voting power of Paradigm's
stock) from the date of grant. The Board of Directors has a right to amend,
suspend or terminate the plan at any time; provided, however, that unless
ratified by Paradigm's stockholders, no amendment or change in the plan will be
effective which would increase the total number of shares which may be issued
under the plan, materially increase the benefits accruing to persons granted
under the plan or materially modify the requirements as to eligibility and
participation in the plan. No amendment, supervision or termination of the plan
shall, without the consent of an employee to whom an option shall previously
have been granted, affect the rights of such employee under such option.
Employment Agreements
Paradigm entered into employment agreements with each of Thomas F.
Motter, Michael W. Stelzer, Robert W. Millar and John W. Hemmer and which
commenced on January 1, 1998 and expire on January 1, 2003. The agreements
require each employee to devote substantially all of his working time to
Paradigm, provide that each of them may be terminated for "cause" (as provided
in the agreements) and prohibit each of them from competing with Paradigm for
two years following the termination of his employment agreement. The agreements
provide for the payment of an initial base salary of $135,000 to Mr. Motter,
$100,000 to Mr. Stelzer, $125,000 to Mr. Millar and $120,000 to Mr. Hemmer, and
became effective as of January 1, 1998. In January 1998, Mr. Hemmer also
received a bonus of 50,000 shares of common stock in recognition of the services
previously rendered by him. The agreements provide for salary increases and
bonuses as shall be determined at the discretion of the Board of Directors.
Change of Control Termination Agreements
On September 14, 1998, Paradigm entered into a Change of Control
Termination Agreement with each of Thomas F. Motter, Michael W. Stelzer, Robert
W. Millar and John W. Hemmer. The agreements are effective as of January 1, 1998
and continue in
35
<PAGE>
effect through December 31, 2002. However, beginning on December 31, 2002 and
each December 31 thereafter, the term of each of the agreements shall
automatically be extended for one additional year unless, no later than the
preceding November 1, Paradigm shall have given notice that it does not wish to
extend such agreement. If a change of control occurs during the original or any
extended term of the agreement, the agreement shall continue in effect for a
period of 12 months beyond the month in which the change of control occurred.
The agreements provide that if there is a change of control of
Paradigm, and provided there has been no termination of employment on account of
death, disability, retirement or for cause, each of Messrs. Motter, Stelzer,
Millar and Hemmer shall be entitled to receive the following benefits in the
event their employment is terminated subsequent to the change of control:
- payment of full base salary through the date of termination of
employment at the rate in effect at the time of the change of
control, plus all other amounts and benefits to which each is
entitled under any compensation plan of Paradigm;
- in lieu of any further salary payments for periods subsequent to
the Termination Date, Paradigm shall pay a lump sum severance
payment equal to 2.99 times the sum of the annual base salary in
effect at the time of the change of control;
- payments of any deferred compensation, including deferred bonuses;
- in lieu of shares of common stock issuable upon the exercise of
outstanding options, an amount in cash shall be distributed equal
to the product of the excess of the closing price of the shares as
reported on the Nasdaq SmallCap Market on or nearest the
Termination Date over the per share exercise price of each option
times the number of shares covered by each such option; and
- all legal fees and expenses incurred as a result of such
termination including all fees and expenses incurred in contesting
or disputing any termination of employment or seeking to obtain or
enforce any right or benefit provided by the agreement.
For the purposes of the agreement, a change of control shall have
occurred if:
- any person becomes a beneficial owner of 30% or more of the
combined voting power of the then outstanding securities,
- during any period of two consecutive years (not including any
period prior to the execution of the agreement), individuals who
at the beginning of the period constitute Paradigm Board of
Directors and any new director whose election by the Board or
nomination for election by the shareholders was approved by a vote
of at least two-thirds of the directors then still in office who
either were directors at the beginning of the period or whose
election or nomination for election were previously so approved,
cease for any reason to constitute a majority,
- Paradigm enters an agreement resulting in the occurrence of a
change of control of Paradigm,
- the Board of Directors eliminates or otherwise reduces the
authority, duties and/or responsibilities of the Executive
Committee, or
- the shareholders approve a merger or consolidation of Paradigm
with any other corporation, other than a merger or consolidation
that would result in the voting securities of Paradigm outstanding
immediately prior to it continuing to represent (either by
remaining outstanding or by being converted into voting securities
of the surviving entity) at least 30% of the combined voting power
of the voting securities of Paradigm or such surviving entity
outstanding immediately after the merger or consolidation, or the
shareholders approve a plan of complete liquidation of Paradigm or
as agreement for the sale or disposition by Paradigm of all or
substantially all of its assets.
If any of the events constituting a change of control of Paradigm shall
occur, each of Messrs. Motter, Stelzer, Millar and Hemmer shall be entitled to
the benefits set forth above on the subsequent termination of their employment
during the term of the Agreements unless the termination is on account of death,
disability, or retirement, by Paradigm for cause, or by such individuals other
than for good reason. Termination for cause is defined in the agreement to
include termination on the willful and continued failure to substantially
perform their duties after a written demand for substantial performance is
delivered to the Board of Directors, which demand specifically identifies the
manner in which the board believes that they have not substantially performed
their duties, or the willful engaging by such individuals in conduct that is
demonstrably and materially injurious to Paradigm. No act, or failure to act, on
their part shall be deemed "willful" pursuant to the agreement unless done, or
omitted to be done, by such individuals not in good faith and without a
reasonable belief that their action or omission was in the best interest of
Paradigm. In addition, they shall not be deemed to have been terminated for
cause unless or until they shall have been delivered a copy of a resolution duly
adopted by the affirmative vote of not less than 75% of the entire membership of
the Board of Directors at a meeting called for such purpose.
36
<PAGE>
Under the terms of the agreements, each of Messrs. Motter, Stelzer,
Millar and Hemmer are entitled to terminate their respective agreement for good
reason. Good reason is defined in the Agreements to include:
- the assignment of any duties inconsistent with their status and
position immediately prior to a change in control, or substantial
adverse alteration in the nature or status of their
responsibilities and those in effect immediately prior to a change
in control;
- a reduction in their annual base salary as in effect on the date
of this Agreement or as such salary may be increased from time to
time except for across-the-board salary reductions similarly
effecting all key employees of Paradigm and all key employees of
any person in control of Paradigm;
- their relocation to a location not within 25 miles of Paradigm's
present executive offices;
- the failure by Paradigm, without their consent, to pay to them any
part of their current compensation, or to pay any part of an
installment of deferred compensation under any deferred
compensation program, within seven days of the date the
compensation is due;
- the failure by Paradigm to continue to effect any bonus which they
were entitled or any compensation plan which they participated
immediately prior to a change of control that is material to their
total compensation, including the 1995 Stock Option Plan, 401(k)
pretax retirement savings plan, and flexible benefit plan;
- the failure of Paradigm to continue to provide them with benefits
substantially similar to those enjoyed by them under Paradigm's
life insurance, medical, health and accident, or disability plans
which they are participating at the time of a change of control,
and for the failure to continue to provide them with an automobile
or allowance in lieu of it, if they were provided with such
automobile or allowance in lieu of it at the time of a change of
control; and
- the failure of Paradigm to obtain a satisfactory agreement with
any successor to assume and agree to perform the agreements.
Profit Sharing Plan
On February 16, 1996, Paradigm adopted a Profit Sharing Plan, under
which an amount equal to 10% of the pretax profits will be set aside for the
benefit of officers and key employees. This funding will be paid to the officers
and key employees as follows: Thomas W. Motter, Chairman of the Board, President
and Chief Executive Officer--30%; Robert W. Millar, Vice President of
Engineering and Manufacturing--25%; John W. Hemmer, Chief Financial Officer and
Treasurer--20%; and a pool of 25% to be allocated among the other officers and
key employees as determined by the Compensation Committee and approved by the
Board of Directors. This funding will only be paid if the qualified pretax
profits exceed $10,000,000 for any fiscal year beginning October 1, 1996 and
ending December 31, 2001. If the pretax profits reach $10,000,000 for any fiscal
year, the entire pretax profits for that year will qualify for the funding. The
plan expires at the end of its fifth fiscal year on December 31, 2001, when all
funds held will be disbursed.
Limitation of Liability and Indemnification
Paradigm reincorporated in Delaware in February 1996, in part, to take
advantage of certain provisions in Delaware's corporate law relating to
limitations on liability of corporate officers and directors. Paradigm believes
that the reincorporation into Delaware, the provisions of its Certificate of
Incorporation and Bylaws and the separate indemnification agreements outlined
below are necessary to attract and retain qualified persons as directors and
officers. Paradigm's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. This provision is
intended to allow the directors the benefit of Delaware General Corporation Law
which provides that directors of Delaware corporations may be relieved of
monetary liabilities for breach of their fiduciary duties as directors, except
under certain circumstances, including breach of their duty of loyalty, acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, unlawful payments of dividends or unlawful stock repurchases
or redemptions or any transaction from which the director derived an improper
personal benefit. Paradigm's Bylaws provide that it shall indemnify its officers
and directors to the fullest extent provided by Delaware law. The Bylaws
authorize the use of indemnification agreements and Paradigm has entered into
such agreements with each of its directors and executive officers. Retirement of
Chief Financial Officer
On May 6, 1999, the Company's Board of Directors authorized an
agreement to be entered into with John W. Hemmer, Vice President of Finance,
Treasurer and Chief Financial Officer of the Company, regarding the remaining
term of his Employment
37
<PAGE>
Agreement and the Change of Control Agreement. Under the terms of the proposed
agreement, Mr. Hemmer's salary will continue until June 1, 1999, at which time
his employment with the Company will terminate. Thereafter, Mr. Hemmer will
become an independent consultant to the Company and receive an initial payment
of $12,500 with annual payments of $25,000 being paid on January 2000 and each
subsequent year for two additional years and the final payment in 2004 in the
amount of $12,500, for a total consulting contract payment of $100,000. In
addition, the Company is to issue Warrants to Mr. Hemmer to purchase 125,000
shares of Common Stock at an exercise price of $2.63 per share, with the
underlying Common Stock to be registered in the Company's current registration
statement. Finally, the Company is to issue Warrants to Mr. Hemmer to purchase
75,000 shares of Common Stock at the same exercise price as the Class A
Warrants, or $7.50 per share. In consideration for the payments under the
consulting contract and the Warrants to be issued to Mr. Hemmer, the Employment
Agreement and the Change of Control Agreement with Mr. Hemmer will be cancelled
as of June 1, 1999.
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of Paradigm as to which indemnification is being sought,
nor is Paradigm aware of any threatened litigation that may result in claims for
indemnification by any director, officer, employee or other agent.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of Paradigm pursuant
to the foregoing provisions, or otherwise, Paradigm has been advised that in the
opinion of the SEC, such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to
beneficial ownership of Paradigm's common stock as of March 31, 1999 for (i)
each executive officer of Paradigm, (ii) each director, (iii) each person known
to Paradigm to be the beneficial owner of more than 5% of the outstanding
shares, and (iv) all directors and officers as a group.
Percent of
Name and Address(1) Number of Shares Ownership(2)
- ------------------------------------ ----------------------- ------------------
Thomas F. Motter (3)(6) 520,000 8.8%
Douglas MacLeod 418,451 7.1%
Robert W. Millar(4)(6) 336,105 5.7%
Michael W. Stelzer(5)(6) 62,935 1.1%
John W. Hemmer(5)(6) 70,513 1.2%
Robert L. Frome(7) 14,000 *
Patrick M. Kolenski(8) 1,007 *
Executive officers and directors
as a group (6 persons) 1,004,560 17.0%
- -----------------------------
* 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 warrants described in this Prospects or any
other warrants that Paradigm may have issued and no conversion of
outstanding shares of Paradigm's Series A, Series B, Series C, and
Series D Preferred Stock into Common Stock.
(3) Does not include options to purchase 143,450 shares of Common Stock
granted to Mr. Motter under the 1995 Option Plan.
(4) Includes 2,000 shares held by William E. Millar, Mr. Millar's father,
10,000 shares held by Michael S. Millar, Mr. Millar's brother, and 100
shares to Nathan Glynn, Mr. Millar's nephew. Mr. Millar disclaims
beneficial ownership of these 3,100 shares. Does not include options to
purchase 121,450 shares of Common Stock granted to Mr. Millar under the
1995 Option Plan.
(5) Does not include option to purchase 57,450 shares of Common Stock
granted to each of the two directors under the 1995 Option Plan.
(6) Does not include 250 shares of Series C Convertible Preferred Stock
held by each of the four management directors.
(7) Does not include 750 shares of Series C Convertible Preferred Stock
held by Mr. Frome or options to purchase 75,000 shares of Common Stock
granted to him.
(8) Does not include 2,000 shares of Series C Convertible Preferred Stock
held by Mr. Kolenik or options to purchase 75,000 shares of Common
Stock granted to him.
38
<PAGE>
Item 12. Certain Relationships and Related Transactions
The information set forth herein describes certain transactions between
Paradigm and certain affiliated parties. Future transactions, if any, will be
approved by a majority of the disinterested members of the Board of Directors
and will be on terms no less favorable to Paradigm than those that could be
obtained from unaffiliated parties.
Paradigm subcontracts the manufacture of its Precisionist 3000 Plus(TM)
and Precisionist Thirty Thousand(TM) Workstation(TM) to one of its shareholders,
Zevex, Inc. which is located in Salt Lake City, Utah. On September 23, 1996, we
entered into a Design, Engineering and Manufacturing Agreement with Zevex for
the engineering and manufacture of the Workstation(TM) and Precisionist Thirty
Thousand(TM). As of December 31, 1998, Zevex has manufactured and delivered 39
systems. However, the agreement can be terminated at any time by Paradigm if
Zevex fails for two consecutive quarters to timely fulfill our purchase orders,
or by Zevex if Paradigm fails to timely make the payments required by the
agreement after having received a 20 day notice from Zevex demanding payment.
Zevex is also under an exclusive contract with Paradigm, which expires September
23, 1999, that prohibits Zevex from manufacturing complete ultrasound or laser
surgical systems for any other company, without permission. For the fiscal years
ended December 31, 1997 and December 31, 1998, Paradigm purchased design and
manufacturing services in the amounts of $1,070,000 and $48,663, respectively,
from Zevex.
On January 8, 1997, Paradigm subcontracted the subassembly of the laser
module piece of the Photon(TM) Laser Phaco(TM) from Sunrise Technologies, Inc.
During the 12 month period ending December 31, 1997, we purchased 10 laser
module subassemblies for a total purchase price of $160,000, from Sunrise whose
president was a member of Paradigm's Board of Directors at the time the
manufacturing agreement was signed.
The Photon(TM) LaserPhaco(TM) system is protected under a United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. (U.S. Patent Number
4,694,828) for the utility and methods of laser ablation, aspiration and
irrigation of tissue through a hand-held probe of a unique design and assigned
to Photomed, a corporation owned in part by Dr. Eichenbaum. Paradigm secured the
exclusive worldwide right to this patent shortly after its issue, and to the
international patents pending, from Photomed by means of a License Agreement
that entitled Dr. Eichenbaum to royalty payments equal to 1% of the proceeds
from the net commercial sales of the Photon(TM) LaserPhaco(TM) system and
accessories in all medical specialties. The License Agreement terminates July 7,
2003. The License Agreement was amended on December 5, 1997 to allow Photomed
the right to conduct research, development and marketing utilizing the patent in
certain medical sub-specialties other than ophthalmology for which we would
receive royalty payments equal to 1% of the proceeds from the net sales of
products utilizing the patent.
Randall Mackey, a director of Paradigm from September 1995 to September
3, 1998, is President and a shareholder of the law firm of Mackey Price &
Williams, which rendered legal services to Paradigm in connection with
Paradigm's public offering and other corporate matters. Legal fees and expenses
paid to Mackey Price & Williams for the fiscal year ended December 31, 1997
totaled $118,765. For the fiscal year ended December 31, 1998, Paradigm paid
legal fees and expenses in the amount of $97,414 and at year end owed $16,371.
Paradigm also granted Mackey Price & Williams warrants to purchase 25,000 shares
of Common Stock at an exercise price of $3.33 per share in partial payment for
legal services relating to our July 1996 public offering.
Mr. Kolenik, a director of Paradigm since November 1997, is a former
director of Win, the placement agent for the Series C Convertible Preferred
Stock offering. Under the terms of an agency agreement with Win, Paradigm agreed
to pay to Win a commission equal to 9% of the aggregate purchase price of the
shares sold, or $269,820. Win was also paid a non-accountable expense allowance
equal to 3% of the aggregate purchase price of the shares sold. Paradigm has
also entered into an agreement with Win dated August 20, 1997, wherein Win
agreed to perform unspecified investment banking services for it for a two year
period, for which Paradigm agreed to pay Win a monthly retainer of $2,000 for
the first six months of the agreement, $4,000 per month for the second six
months, and $6,000 per month for the remainder of the agreement. In an agreement
entered into in February 1999, Win agreed to accept $7,500 in cash plus $60,500
in Common Stock valued at the close of business the day prior to the initial
close of the Series D Convertible Preferred stock offering in addition to a
$50,000 finders fee as it related to that offering. In addition, Paradigm issued
Win warrants to purchase 191,000 shares of Common Stock at an exercise price of
$3.00 per share in connection with the investment banking agreement and
additional warrants to purchase 100,000 shares of common stock at $3.00 per
share for services rendered in the private placement of Series C Convertible
Preferred Stock.
Prior to the initial closing of the Series D preferred stock offering,
Paradigm borrowed $75,000 from Cyn Del, of which Mr. Kolenik is President, a
director and a shareholder, and $25,000 from Win Capital. The combined $100,000
loan bears interest at a rate of 10% per annum, is payable pro rata monthly, and
is due on the 6-month anniversary of the loan. Paradigm issued to Cyn Del
five-year warrants to purchase 105,000 shares of Common Stock and Win Capital
warrants to purchase 35,000 share of Common Stock both at an initial exercise
price equal to the closing price of the Common Stock on the business day
immediately prior to the issuance date of the warrants, or $2.30 per share,
subject to adjustment according to the terms contained therein. Paradigm also
entered into a one-year consulting agreement dated January 19, 1999, for Win
Capital to provide financial consulting services to Paradigm in consideration
for a fee of $5,000 per month for the term of the agreement.
39
<PAGE>
SECURITYHOLDERS REGISTERING SHARES
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1999 by each of the
holders of Series C Preferred Stock (the "Selling Series C Preferred
Stockholder"), assuming each of the Selling Series C Preferred Stockholders
elects to exercise his conversion rights to convert the Series C Preferred
shares (the "Series C Shares") into shares of Common Stock, at a conversion
price equal to $1.75 per share of Common Stock, the number of shares of Common
Stock to be sold by each Selling Series C Preferred Shareholder, and the
percentage of each Selling Series C Preferred Stockholder after the sale of
Common Stock included in this Prospectus.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Number of Owned After
Offering Shares Being Offering
Offered
------------
Stockholders Number Percent Number Percent
------------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Robert M. Ball 7,143 * 7,143 0 *
Robert J. Braig 5,714 * 5,714 0 *
Thomas W. Brake 8,572 * 8,572 0 *
Craig S. Brewer 14,286 * 14,286 0 *
Consolidated Management Services, Inc. 11,429 * 11,429 0 *
Michael Demayo 11,429 * 11,429 0 *
C. Richard Dobson 7,143 * 7,143 0 *
Robert L. Frome 42,857 * 42,857 0 *
Steven F. Gallop and Karen M. Gallop, 5,714 * 5,714 0 *
JTWROS
William A. Gantz and Carol A. Gantz, 5,714 * 5,714 0 *
JTWROS
John A. Grue 5,714 * 5,714 0 *
Edward G. Hammond 14,286 * 14,286 0 *
Hi-Tel Group, Inc. 42,857 * 42,857 0 *
Rommie L. Honeycutt 5,714 * 5,714 0 *
Roy Lee Hounshell 5,714 * 5,714 0 *
Samuel C. Houser 5,714 * 5,714 0 *
Randy N. Humphrey 5,714 * 5,714 0 *
Jerry R. King 11,429 * 11,429 0 *
Terry F. King 11,429 * 11,429 0 *
Shannon E. Miller and Shannon S. 5,714 * 5,714 0 *
Miller, JTWROS
Joseph R. Nemeth 57,143 * 57,143 0 *
Dr. Joseph Nemeth, IRA 57,143 * 57,143 0 *
Christopher C. Northey 5,714 * 5,714 0 *
Eileen M. O'Dea 42,857 * 42,857 0 *
Laurence Leon Olive 5,714 * 5,714 0 *
John D. Phillips, Jr. 11,429 * 11,429 0 *
Richard D. Poling 5,714 * 5,714 0 *
Feliciano Sergio Sabates, III 8,572 * 8,572 0 *
Claude W. Savage and Jean G. Savage 5,714 * 5,714 0 *
JTWROS
Gregg Stokes 5,714 * 5,714 0 *
TSP Associates, Inc. 57,143 * 57,143 0 *
William E. Webb, III 7,428 * 7,428 0 *
Artas Corporation 28,571 * 28,571 0 *
United Growth Fund, Inc. Profit Sharing 28,571 * 28,571 0 *
Plan
Sterling Capital LLC 14,286 * 14,286 0 *
John W. Hemmer and Barbara Bean 84,799(2) 1.4% 14,286 70,513 1.2%
Hemmer, JTWROS (1)
Gregory J. Lavin 14,286 * 14,286 0 *
Robert W. Millar(3) 350,391 5.8% 14,286 336,105 *
Thomas F. Motter(4) 534,285 8.9% 14,285 520,000 *
Marc N. Rubin 28,571 * 28,571 0 *
Thomas R. Wolf and Erica P. Wolf, 17,143 * 17,143 0 *
JTWROS
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Dr. Thomas R. Wolf, SEP IRA 14,286 * 14,286 0 *
Canadian Advantage Limited Partnership 142,857 * 142,857 0 *
Paul N. Davis 17,143 * 17,143 0 *
RF Lafferty & Co. Profit Sharing Plan 114,286 * 114,286 0 *
FBO Henry Hackel
Roger Newman 28,571 * 28,571 0 *
Samuel Richman 14,286 * 14,286 0 *
Jeffrey Zarry Schwartz 14,286 * 14,286 0 *
Richard C. Siskey 28,571 * 28,571 0 *
Jeffrey G. Straus 25,690 * 14,286 11,404 *
Wight Investment 28,571 * 28,571 0 *
Michael W. Stelzer and Paula J. Stelzer, 77,221(6) 1.3% 14,286 62,935(6) *
JTWROS(5)
Patrick Kolenik - IRA 28,571 * 28,571 0 *
Patrick Kolenik and Delores Kolenik, 29,578(8) * 28,571 1,007(8) *
JTWROS(7)
Roger C. Husted 14,286 * 14,286 0 *
Lincoln Trust Company FBO Michael B. 57,143 * 57,143 0 *
Limberg, M.D.
Charles F. Trapp 20,000 * 20,000 0 *
BCN Associates 28,571 * 28,571 0 *
Charles Thompson 20,646 * 14,286 6,360 *
Continental Stock Transfer & Trust Co. 28,571 * 28,571 0 *
Ronald A. and Karen A. Ballsin, 57,143 * 57,143 0 *
JTWROS
Michael Associates 57,143 * 57,143 0 *
Mark S. Richardson 14,286 * 14,286 0 *
Mark and Lori Cozens 8,572 * 8,572 0 *
Michael L. Salamone 14,286 * 14,286 0 *
Premier Alliance Group, Inc. 20,000 * 20,000 0 *
Gary Hammond 14,286 * 14,286 0 *
Jeffrey A. and Penny Strack 14,286 * 14,286 0 *
J. Michael Smith 14,286 * 14,286 0 *
Irwin Messer and Alexandra S. Urdang, 11,429 * 11,429 0 *
JTWROS
Sheila Sandman 14,286 * 14,286 0 *
Joseph Aufrino 28,571 * 28,571 0 *
Ted Levine 28,571 * 28,571 0 *
B. Michael Pisani 14,286 * 14,286 0 *
Alfred J. Ricciardi and Joseph Ricciardi, 28,571 * 28,571 0 *
JTWROS
Rose W. Zee 28,571 * 28,571 0 *
Patrick and Linda Vetere, JTWROS 14,286 * 14,286 0 *
------------ ---------------- --------------
TOTAL 2,671,467 1,713,143 958,324
</TABLE>
- ----------------------------------------
* Less than 1%
(1) Mr. Hemmer is Vice President of Finance, Treasurer, Chief Financial
Officer and a director of the Company.
(2) Includes 20,513 shares of Common Stock held by Mr. Hemmer.
(3) The Registering Securityholder is Vice President of Engineering and
Manufacturing and a director of the Company.
(4) The Registering Securityholder is Chairman of the Board, President and
Chief Executive Officer of the Company.
(5) Mr. Stelzer is Vice President of Operations, Chief Operating Officer
and a director of the Company.
(6) Includes 62,935 shares of Common Stock held by Mr. Stelzer.
(7) Mr. Kolenick is a director of the Company.
(8) Includes 1,007 shares of Common Stock held by Mr. Kolenick.
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1999, by each of the
holders of Series D Preferred Stock (the "Selling Series D Preferred
Stockholders"), assuming each of the Selling Series D Preferred Stockholders
elects to exercise his conversion rights to convert the Series D Preferred
shares (the "Series D Shares") into shares of Common Stock, at a conversion
price equal to $1.75 per share of Common Stock, the number of shares of Common
Stock to be sold by each Selling Series D Preferred Stockholder, and the
percentage of each Selling Series D Preferred Stockholder after the sale of
Common Stock included in this Prospectus.
41
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially
Owned After
Offering
Number of
Shares Being
Stockholders Number Percent Offered Number Percent
------------ ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
A.J. Baccala 15,000 * 15,000 0 *
Jerry and Linda Bassin 25,000 * 25,000 0 *
Dr. Robert Bedrossian 5,000 * 5,000 0 *
Dr. Valery Berger 15,000 * 15,000 0 *
Bill D. and Claudia J. Berkley 10,000 * 10,000 0 *
Berkley Investments, Inc. 10,000 * 10,000 0 *
Paul and Judith Berkman 15,000 * 15,000 0 *
Edwin Bindseil 15,000 * 15,000 0 *
Dr. Kostaki Bis 5,000 * 5,000 0 *
Benjamin Bollag 70,000 * 70,000 0 *
Dr. Richard Bowe IRA 25,316 * 25,316 0 *
CarCap Co., LLC 10,000 * 10,000 0 *
James & Caren Cobb 40,000 * 40,000 0 *
Thomas C. Coleman 30,000 * 30,000 0 *
William & Marion Conley 5,000 * 5,000 0 *
Corman Foundation, Inc. 30,000 * 30,000 0 *
Brian & Irene Cotter 10,000 * 10,000 0 *
Jonathan Cress 5,000 * 5,000 0 *
Scott Crowther 10,000 * 10,000 0 *
George & JoAnn Dick 10,000 * 10,000 0 *
John Donohue, IRA 20,000 * 20,000 0 *
James A. Erb 10,000 * 10,000 0 *
Clifford A. Falkenau Trust 5,000 * 5,000 0 *
Helen Falkenau 5,000 * 5,000 0 *
Aaron I. Feder 10,000 * 10,000 0 *
Dale S. and Jack Feinblatt 9,000 * 9,000 0 *
Dr. Ronald Friedman, IRA 10,000 * 10,000 0 *
Dr. Leon Gallin 5,000 * 5,000 0 *
Anthony Gardocki 17,000 * 17,000 0 *
Shadow Capital, LLC, 40,000 * 40,000 0 *
Bonnie and Mort Goldberg 10,000 * 10,000 0 *
R. Steven Graves 10,000 * 10,000 0 *
Sean Greene 10,000 * 10,000 0 *
Halpert Enterprises Inc. 10,000 * 10,000 0 *
John Harte 15,000 * 15,000 0 *
Douglas and Alexis Hogue 10,000 * 10,000 0 *
Dr. Roger Husted 11,500 * 11,500 0 *
Irwin Kabat 6,000 * 6,000 0 *
A. William Kapler 10,000 * 10,000 0 *
Elaine Khalaf 10,000 * 10,000 0 *
Aaron Kirzner 5,000 * 5,000 0 *
Steven Kohn, IRA 9,356 * 9,356 0 *
Lyudmila Korets 5,000 * 5,000 0 *
Walter and Carol Koschak 28,000 * 28,000 0 *
Dr. Michael Limberg, IRA 100,000 * 100,000 0 *
Morris Macy 5,000 * 5,000 0 *
Robert Margolin, IRA 5,000 * 5,000 0 *
Michelle McDonough 15,000 * 15,000 0 *
Mid-Lakes P/S Trust 50,000 * 50,000 0 *
Dr. Joseph Nemeth 100,000 * 100,000 0 *
Jules M. Ness 10,000 * 10,000 0 *
James Pickett 5,000 * 5,000 0 *
Dr. Soleiman Rabanipour 10,000 * 10,000 0 *
Dr. Sheldon Rabin, IRA 20,000 * 20,000 0 *
Reinhard & Reinhard M/P Plan 8,000 * 8,000 0 *
Marsha and Barry Reiss 10,000 * 10,000 0 *
Alan Rothstein 15,000 * 15,000 0 *
Dr. Steven Rubel 5,000 * 5,000 0 *
Melvyn and Lea Ruskin 10,000 * 10,000 0 *
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Scott W. Sakin 10,000 * 10,000 0 *
Judy Shapiro 25,000 * 25,000 0 *
Larry and Katina Snyder 5,000 * 5,000 0 *
Jerold Stern 5,000 * 5,000 0 *
Steve Shook Construction P/S Plan
Dtd. 12/10/82 10,828 * 10,828 0 *
Joseph and Sandra Stewart 10,000 * 10,000 0 *
David Tadych 5,000 * 5,000 0 *
Miles and Rochelle Weinberg 10,000 * 10,000 0 *
Xanadu Associates, LLC 10,000 * 10,000 0 *
Dr. Alkis Zingas Trust 15,000 * 15,000 0 *
Dr. Igor Zlotin 5,000 * 5,000 0 *
Simon Zunamon Revocable Trust 20,000 * 20,000 0 *
----------- -----------
TOTAL 1,140,000 1,140,000
</TABLE>
DESCRIPTION OF SECURITIES
Paradigm's authorized capital stock consists of 20,000,000 shares of
Common Stock, $.001 par value per share, and 5,000,000 shares of Preferred
Stock, $.001 par value per share. Paradigm has created four classes of Preferred
Stock, designated as Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, and Series D Convertible Preferred Stock.
Common Stock. The holders of Common Stock are entitled to one vote for
each share held of record on all matters to be voted on by stockholders. The
holders of Common Stock are entitled to receive such dividends, if any, as may
be declared from time to time by the Board of Directors in its discretion from
legally available funds. Upon liquidation or dissolution of Paradigm, the
holders of Common Stock are entitled to receive, pro rata, assets remaining
available for distribution to stockholders. The Common Stock has no cumulative
voting, preemptive or subscription rights and is not subject to any future
calls. There are no conversion or redemption rights applicable to the shares of
Common Stock. All the outstanding shares of Common Stock are fully paid and
nonassessable.
Preferred Stock. The Board of Directors is authorized, without further
action by the stockholders, to issue, from time to time, up to 5,000,000 shares
of Preferred Stock in one or more classes or series, and to fix or alter the
designations, power and preferences, and relative participation, option or other
rights, if any, and qualifications, limitations or restrictions thereof,
including, without limitation, dividend rights (and whether dividends are
cumulative), conversion rights, if any, voting rights (including the number of
votes, if any, per share), redemption rights (including sinking fund provisions,
if any), and liquidation preferences of any unissued shares or wholly unissued
series of preferred stock, and the number of shares constituting any such class
or series and its designation and to increase or decrease the number of such
class or series subsequent to the issuance of shares of such class or series,
but not below the number of shares of such class or series then outstanding. The
issuance of any series of preferred stock under certain circumstances could have
the effect of delaying, deferring or preventing a change in control and could
adversely affect the rights of the holders of the Common Stock. As of the date
of this Memorandum, Paradigm has created and issued shares of four classes of
preferred stock more fully discussed below.
Series A Preferred Stock. The Board of Directors has authorized the
issuance of a total of 500,000 shares of Series A Preferred Stock. Each share of
Series A Preferred Stock is convertible into shares of Common Stock at a rate of
1.2 shares of Common Stock for each share of Series A Preferred Stock. Paradigm
may, at its sole option, at any time, redeem all of the then-outstanding shares
of Series A Preferred Stock at a price of $4.50 per share, plus accrued and
unpaid dividends, if any. The holders of shares of Series A Preferred Stock are
entitled to non-cumulative preferred dividends at the rate of $0.24 per share of
Series A Preferred Stock per annum, payable in cash on or before December 31 of
each year, commencing December 31, 1995. Such dividends, however, can only be
paid from surplus earnings of Paradigm and further, because these dividends are
non-cumulative, no deficiencies in dividend payments from any calendar year can
be carried forward to the next calendar year. The Series A Preferred Stock has
priority rights to dividends over the Common Stock, but will not participate in
any dividends payable to the holders of shares of Common Stock. No dividends
will be paid to holders of shares of Common Stock unless and until all dividends
on shares of Preferred Stock have been paid in full for the same period. Except
upon the redemption of the Series A Preferred Stock or before the payment of
dividends on any shares of capital stock that are on par with or junior or
subordinate to the Series A Preferred Stock as to dividends, or upon the
liquidation, dissolution or winding-up of Paradigm, the payment of dividend from
surplus earnings was not mandatory prior to December 31, 1995. In the event of
any liquidation, dissolution or winding-up of Paradigm, the holders of shares of
Series A Preferred Stock are entitled to receive, prior and in preference to,
any distribution of any of the assets or surplus funds of Paradigm to the
holders of shares of Common Stock or any other stock of Paradigm ranking on
liquidation junior or subordinate to the Series A Preferred Stock, an amount
equal to $1.00 per share, plus accrued and unpaid dividends, if any. Holders of
shares of Series A Preferred Stock have no voting rights, except in those
instances required by Delaware law.
As of March 31, 1999, there were a total of 8,119 shares of Series A
Preferred Stock issued and outstanding. A total of 9,743 shares of Common Stock
has been set aside and reserved in the event that the holders of shares of
Series A Preferred Stock elect to convert those shares into shares of Common
Stock. As of March 31, 1999, 114,645 shares of Series A Preferred Stock have
been converted into 137,574 shares of Common Stock.
43
<PAGE>
Series B Preferred Stock. The Board of Directors has authorized the
issuance of a total of 500,000 shares of Series B Preferred Stock. Each share of
the Series B Preferred Stock is convertible into shares of Common Stock at a
rate of 1.2 shares of Common Stock for each share of Series B Preferred Stock.
Paradigm may, at its sole option, at any time, redeem all of the
then-outstanding shares of Series B Preferred Stock at a price of $4.50 per
share, plus accrued and unpaid dividends, if any. Except upon the redemption of
the Series B Preferred Stock or before the payment of dividends on any shares of
capital stock that are on par with or junior or subordinate to the Series B
Preferred Stock as to dividends, or upon the liquidation, dissolution or
winding-up of Paradigm, the payment of dividends from surplus earnings was not
mandatory prior to December 31, 1995. In the event of any liquidation,
dissolution or winding-up of Paradigm, the holders of shares of Series B
Preferred Stock are entitled to receive, prior and in preference to, any
distribution of any of the assets or surplus funds of Paradigm to the holders of
shares of Common Stock or any other stock of Paradigm ranking on liquidation
junior or subordinate to the Series B Preferred Stock, an amount equal to $4.00
per share, plus accrued and unpaid dividends, if any. Holders of shares of
Series B Preferred Stock have no voting rights, except in those instances
required by Delaware law.
As of March 31, 1999, there were a total of 31,236 shares of Series B
Preferred Stock issued and outstanding. A total of 37,483 shares of Common Stock
have been set aside and reserved in the event that the holders of shares of
Series B Preferred Stock elect to convert those shares into shares of Common
Stock. As of March 31, 1999, 461,764 shares of Series B Preferred Stock have
been converted into 554,116 shares of Common Stock.
Series C Preferred Stock. The Board of Directors has authorized the
issuance of a total of 30,000 shares of Series C Preferred Stock. Each share of
Series C Preferred Stock is convertible into shares of Common Stock at an
initial conversion price equal to $1.75 per share of Common Stock, subject to
adjustments for stock splits, stock dividends and certain combinations or
recapitalizations in respect of the Common Stock. The shares are also
automatically converted into Common Stock upon 30 days' written notice by
Paradigm to the holders of the shares after (i) the 30-day anniversary of the
effective date of the filing of a registration statement in which shares of
Common Stock issuable upon conversion of the shares were registered and (ii) the
average closing price of the Common Stock for the 20-day period immediately
prior to the date in which notice of conversion is given to the holders of the
shares is at least $3.50 per shares. Any shares still outstanding after January
1, 2002 shall be mandatorily converted at such date at the conversion price then
in effect. Holders of the shares have no redemption rights. The holders of
shares of Series C Preferred Stock are entitled to 12% non-cumulative preferred
dividends. However, the shares shall be entitled to dividends declared on the
Common Stock on an as-converted basis. Such dividends shall accrue from the date
of issuance or the last preferred dividend record date and be payable in cash or
shares of Common Stock. Such dividends, however, can only be paid at Paradigm's
sole option from surplus earnings and further, because these dividends are
non-cumulative, no deficiencies in dividend payments from any calendar year can
be carried forward to the next calendar year. In the event of any liquidation,
dissolution, sale of all or substantially all of the assets or merger or
consolidation of Paradigm (and, in case of a merger or consolidation, Paradigm
is not the surviving entity), the holders of Series C Preferred Stock shall be
entitled to receive, in preference to the holders of all other classes of
capital stock, whether now existing or hereinafter created (other than Series A
Preferred Stock and Series B Preferred Stock with which Series C Preferred Stock
shall, for purposes of a liquidation, rank junior), an amount per share equal to
the greater of (A) the amount such shares would have received had such holders
converted the Series C Preferred Stock into Common Stock immediately prior to
such liquidation, plus declared or unpaid dividends or (B) or the stated value,
$100 per share, subject to such liquidation plus declared but unpaid dividends.
Holders of shares of Series C Preferred Stock shall have no voting rights,
except in those instances required by Delaware law.
As of March 31, 1999, there were a total of 1,400 shares of Series C
Preferred Stock issued and outstanding. A total of 80,000 shares of Common Stock
has been set aside and reserved in the event that the holders of the Series C
Preferred Stock elect to convert those shares into shares of Common Stock. As of
March 31, 1999, 28,580 shares of Series C Preferred Stock have been converted
into 1,633,143 shares of Common Stock.
Series D Convertible Preferred Stock. The Board of Directors authorized
the issuance of a total of 1,140,000 shares of Series D Convertible Preferred
Stock. Each share of Series D Preferred Stock is convertible into one share of
Common Stock, subject to adjustments for stock splits, stock dividends and
certain combinations or recapitalizations in respect of the Common Stock. The
shares are also automatically converted into Common Stock upon 30 days' written
notice by Paradigm to the holders of the shares after (i) the 30-day anniversary
of the effective date of a registration statement in which shares of Common
Stock issuable upon conversion of the shares are registered and (ii) the average
closing price of the Common Stock for the 20-day period immediately prior to the
date in which notice of conversion is given to the holders of the shares is at
least $3.50 per share. Any shares still outstanding after January 1, 2002 shall
be mandatorily converted at such date at the conversion price then in effect.
Holders of the shares have no redemption rights. The holders of shares of Series
D Preferred Stock are entitled to 10% non-cumulative preferred dividends.
Additionally, holders of the shares will receive any dividends declared on the
Common Stock on an as-converted basis. Such dividends accrue from the date of
issuance or the last preferred dividend record date and are payable in cash or
shares of Common Stock. Such dividends, however, can only be paid at Paradigm's
sole option from surplus earnings and further because these dividends are
non-cumulative, no deficiencies in dividend payments from any calendar year can
be carried forward to the next calendar year. In the event of any liquidation,
dissolution, sale of all or substantially all of the assets or merger or
consolidation of Paradigm (and, in case of a merger or consolidation, Paradigm
is not the surviving entity), the holders of Series D Preferred Stock are
entitled to receive, in preference to the holders of all other classes of
capital stock, whether now existing or hereinafter created, other than Series A
Preferred Stock Series B Preferred Stock and Series C Preferred Stock with which
Series D Preferred Stock shall, for purposes of a liquidation, rank junior, an
amount per share equal to the greater of (A) the amount such shares would have
received had such holders converted the Series D Preferred Stock into Common
Stock immediately prior to such liquidation, plus declared or unpaid dividends
or (B) or the stated value, $1.75 per share, subject to such liquidation plus
declared but unpaid dividends. Holders of shares of Series D Preferred Stock
have no voting rights, except in those instances required by Delaware law.
44
<PAGE>
As of March 31, 1999, there were a total of 1,140,000 shares of Series
d Preferred Stock issued and outstanding. A total of 1,140,000 shares of Common
Stock has been set aside and reserved in the event that the holders of the
Series D Preferred Stock elect to convert those shares into shares of Common
Stock. As of March 31, 1999, no shares of Series D Preferred Stock have been
converted into shares of Common Stock.
Rescission Offer to Series B Preferred Stockholders. The 493,000 shares
of Series B Preferred Stock issued to the Company's Series B Stockholders (the
"Series B Stockholders") may not have been sold in compliance with certain
aspects of California corporate law and federal and state securities laws.
Concurrently with its public offering, the Company provided the Series B
Stockholders with a rescission offer (the "Rescission Offer") to repurchase all
Series B Preferred shares (the "Rescission Shares") owned by the Series B
Stockholders. The Series B Stockholders were offered the right to rescind their
purchases and receive a refund of the price paid by them of $4.00 per share plus
an amount equal to the interest thereon at rates ranging from 6% to 10% per
annum from the date the Rescission Shares were purchased to July 25, 1996, the
date the Company's public offering closed and each rescinding shareholder was
paid by the Company. The original purchasers of approximately 93% of the Series
B Shares (460,250 shares) rejected the Rescission Offer. Two shareholders owning
a combined total of 32,750 shares have accepted the Rescission Offer.
Although the Company was not instructed by any regulatory body to
actually conduct the Rescission Offer, the Company decided to go forward with
the Rescission Offer to reduce any type of potential contingent liability it may
be exposed to in connection with its private placement of Series B Preferred
Stock. The Rescission Offer is designed to reduce such contingent liability by
placing the Series B Stockholders on notice of possible defects and presenting
them with an opportunity to avoid or mitigate damages. The Rescission Offer,
however, may not fully relieve the Company from exposure to contingent liability
under federal or state securities laws. See "Risk Factors -- Rescission Offer to
Series B Stockholders."
Class A Warrants. Each Class A Warrant entitles the holder to purchase
one share of Common Stock at an exercise price of $7.50 per share. Class A
Warrants are exercisable through July 10, 2001 provided that at the time of
exercise a current prospectus relating to the Common Stock is then in effect and
the Common Stock is qualified for sale or exempt from qualification under
applicable state securities laws. The Class A Warrants are subject to redemption
by the Company commencing July 10, 1997, upon 30 days' written notice, at a
price of $.05 per Class A Warrant if the average closing bid price of the Common
Stock for any 30 consecutive business days ending within 15 days of the date of
which the notice of redemption is given shall have exceeded $8.50 per share.
Holders of Class A Warrants automatically forfeit their rights to purchase the
shares of Common Stock issuable upon exercise of such Warrants unless the
Warrants are exercised before the close of business on the business day
immediately prior to the date set for redemption. All outstanding Class A
Warrants must be redeemed if any Class A Warrants are redeemed. A notice of
redemption shall be mailed to each of the registered holders of the Class A
Warrants by First Class mail, postage prepaid, 30 days before the date fixed for
redemption. The notice of redemption shall specify the redemption price, the
date fixed for redemption, the place where the Class A Warrant certificates
shall be delivered and the redemption price to be paid, and that the right to
exercise a Class A Warrant shall terminate at 5:00 p.m. (Salt Lake City time) on
the business day immediately preceding the date fixed for redemption.
The Class A Warrants may be exercised upon surrender of the
certificate(s) therefore on or prior to the expiration or the redemption date at
the offices of Continental Stock Transfer & Trust Company, the Company's warrant
agent (the "Warrant Agent") with the subscription form on the reverse side of
the certificate(s) completed and executed as indicated, accomplished by payment
(in the form of a certified or cashier's check payable to the order of the
Company) of the full exercise price for the number of warrants being exercised.
The Class A Warrants contain provisions that protect the holders
thereof against dissolution by adjustment of the exercise price per share and
the number of shares issuable upon exercise thereof upon the occurrence of
certain events including issuances of Common Stock (or securities convertible,
exchangeable or exercisable into Common Stock) at less than market value, stock
dividends, stock splits, mergers, sale of substantially all of the Company's
assets, and for other extraordinary events; provided, however, that no such
adjustment shall be made upon, among other things (i) the issuance or exercise
of options or other securities under employee benefit plans (ii) the sale or
exercise of outstanding options or warrants or the Class A Warrants, or (iii)
the conversion of shares of the Company's Preferred Stock to Common Stock.
The Company is not required to issue fractional shares of Common Stock,
and in lieu thereof will make a cash payment based upon the current market value
of such fractional shares. The holder of Class A Warrants will not possess any
right as a shareholder of the Company unless or until he or she exercises the
Class A Warrants. As of March 31, 1999, no Class A Warrants have been exercised.
Underwriter's Warrants. In connection with its public offering, the
Company issued and sold to the underwriters of that offering, warrants to
purchase 100,000 shares of Common Stock at $8.125 per share commencing July 10,
1998 and continuing to be exercisable until July 10, 2001, and an additional
100,000 shares of Common Stock at a price of $7.50 per share exercisable for the
same period of time. During the exercise period, holders of the Underwriter's
Warrants are entitled to certain demand and incidental registration rights with
respect to the securities issuable upon exercise of the Underwriter's Warrants.
The number of shares covered by the Underwriter's Warrants are subject to
adjustment in certain events to prevent dissolution. The Company may redeem the
Underwriter's Warrants beginning July 10, 1998 at a price of $.05 per warrant at
such time as the Company's Common Stock has been trading on The Nasdaq SmallCap
Market or an established exchange at a price equal to or above $10.00 per share
for a period of 30 consecutive business days ending within 15 days of the date
of redemption. Prior to July 10, 1998, the Underwriter's Warrants are not
transferrable except to officers and directors of the representative,
co-underwriters, selling group members and their officers or partners. As of
March 31, 1999, no Underwriter's Warrants have been exercised.
45
<PAGE>
Win Capital Warrants. In connection with a letter agreement dated
August 20, 1997, wherein Win Capital agreed to perform unspecified investment
banking services, the Company issued Win Capital Warrants to purchase 191,000
shares of Common Stock at any time not later than August 19, 2000. The Company
issued additional Warrants to Win Capital to purchase 100,000 shares of Common
Stock at anytime no later than February 24, 2001 for services rendered in the
private placement of Series C Preferred Stock. Each of the Win Capital Warrants
entitles the holder to purchase one share of Common Stock at an exercise price
of $3.00 per share. The Win Capital Warrants may be exercised upon surrender of
the certificate(s) therefor on or prior to the expiration or the redemption date
(as explained above) at the offices of the Company's Warrant agent with the
subscription form on the reverse side of the certificate(s) completed and
executed as indicated, accomplished by payment (in the form of a certified or
cashier's check payable to the order of the Company) of the full exercise price
for the number of Warrants being exercised. The Company may redeem the Win
Capital Warrants at a price of $.05 per Warrant at such time as the Company's
Common Stock has been trading in the over-the-counter market as reported on The
Nasdaq SmallCap Market at a price equal to or above $5.00 for a period of 20
consecutive trading days ending within 20 days of the date of redemption. The
Win Capital Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price per share and the number of shares
issuable upon exercise thereof upon the occurrence of certain events, including
stock dividends, stock splits, mergers and the sale of substantially all of the
Company's assets. The Company is not required to issue fractional shares of
Common Stock, and in lieu thereof will make a cash payment based upon the
current market value of such fractional shares. The holder of the Win Capital
Warrants will not possess any rights as a shareholder of the Company unless and
until the holder exercises the Warrants. As of March 31, 1999, no Win Capital
Warrants have been exercised.
Note Holders' and Attorney's Warrants. In connection with certain
Bridge Financing, the Company issued Warrants to purchase 300,000 shares of
Common Stock to investors. Pursuant to a warrant agreement between the Company
and Mackey Price & Williams ("MP&W"), the Company issued Warrants to purchase
25,000 shares of Common Stock to MP&W. Each Warrant entitles the holder to
purchase one share of Common Stock at an exercise price of $3.33 per share. The
Note Holders' and Attorney's Warrants are exercisable through December 1, 2000.
The Note Holders' and Attorney's Warrants may be exercised upon surrender of the
certificate(s) therefor on or prior to the expiration or the redemption date at
the offices of the Company's warrant agent with the subscription form on the
reverse side of the certificate(s) completed and executed as indicated,
accomplished by payment (in the form of a certified or cashier's check payable
to the order of the Company) of the full exercise price for the number of
Warrants being exercised. The Company may redeem the Note Holders' and
Attorney's Warrants at a price of $.05 per Warrant at such time as the Company's
Common Stock has been trading in the over-the-counter market as reported on The
Nasdaq SmallCap Market at a price equal to or above $10.00 for a period of 30
consecutive trading days ending within 15 days of the date of redemption. The
Note Holders' and Attorney's Warrants contain provisions that protect the
holders thereof against dilution by adjustment of the exercise price per share
and the number of shares issuable upon exercise thereof upon the occurrence of
certain events, including stock dividends, stock splits, mergers and the sale of
substantially all of the Company's assets. The Company is not required to issue
fractional shares of Common Stock, and in lieu thereof will make a cash payment
based upon the current market value of such fractional shares. The holder of the
Note Holders' and Attorney's Warrants will not possess any rights as a
shareholder of the Company unless and until the holder exercises the Warrants.
As of March 31, 1999, 12,500 Note Holders' Warrants have been exercised to
purchase 12,500 shares of Common Stock. No Attorney's Warrants have been
exercised as of that date.
KSH Investment Group Warrants. In connection with its Series D
Preferred private placement, the Company has issued KSH Investment Group, Inc.
Warrants to purchase 208,400 shares of Common Stock. These Warrants consist of
Placement Agent Warrants to purchase 68,400 shares of Common Stock at any time
not later than February 12, 2004 at exercise price of $2.50 per share for
Warrants to purchase 55,539 shares of Common Stock, $2.69 per share for Warrants
to purchase 10,461 shares, and $2.38 per share for Warrants to purchase 2,400
shares of Common Stock. The Investment Banking Fee Warrants consist of Warrants
to purchase 140,000 shares of Common Stock at any time no later than March 1,
2004 at an exercise price of $2.38 per share. The KSH Investment Group Warrants
contain provisions that protect holders thereof against dilution by adjustment
of the exercise price per share and the number of shares issuable upon exercise
thereof upon the occurrence of certain events, including stock dividends, stock
splits, mergers and the sale of substantially all of the Company's assets. The
Company is not required to issue fractional shares of Common Stock, and in lieu
thereof will make a cash payment based upon the current market value of such
fractional shares. The registered holders of the KSH Investment Group Warrants
also may elect to exercise their Warrants by way of cashless exercise of the
Warrants. The number of shares of Common Stock issuable on the cashless exercise
of the KSH Investment Group Warrants is equal to the total number of Warrants
issued to the holder times the difference between the then current market price
and the exercise price of the Warrants divided by the market price of the
Warrants. The holder of the KSH Investment Group Warrants will not possess any
rights as a shareholder of the Company unless and until the holder exercises the
Warrants. As of March 31, 1999, no KSH Investment Group Warrants have been
exercised.
Cyn Del and Win Capital Warrants. In connection with certain financing
that Cyn Del and Win Capital provided to the Company, the Company issued Cyn Del
Warrants to purchase 105,000 shares of Common Stock and Win Capital Warrants to
purchase 35,000 shares of Common Stock. These Warrants are exercisable at any
time not later than January 15, 2004 at $2.30 per share. The Warrants contain
provisions that protect the holders thereof against dilution by adjustment of
the exercise price per share and the number of shares issuable upon exercise
thereof upon the occurrence of certain events, including stock dividends, stock
splits, mergers and the sale of substantially of the Company's assets. The
Company is not required to issue fractional shares of Common Stock, and in lieu
thereof will make a cash payment based upon the current market value of such
fractional shares. The holders of the Warrants will not possess any rights as
shareholders of the Company unless and until the holders exercise the Warrants.
As of March 31, 1999, no Warrants have been exercised. On March 7, 1999, the
Company's Board of Directors authorized the issuance of additional Warrants to
Cyn Del to purchase 75,000 shares of Common Stock at an exercise price of $4.00
per share, on condition that Cyn Del exercises its Warrants to purchase 105,000
shares of Common Stock at $2.30 per share within 72 hours after receiving notice
from the Company that this Registration Statement is effective. Similarly, on
April 7, 1999, the Company's Board of Directors authorized the issuance of
additional Warrants to Win Capital to purchase 25,000 shares of Common Stock at
an exercise price of
46
<PAGE>
$4.00 per share, on condition that Win Capital exercises its Warrants to
purchase 35,000 shares of Common Stock at $2.30 per share within 72 hours after
receiving notice from the Company that this Registration Statement is effective.
Hemmer Warrants. In connection with the retirement of John W. Hemmer,
Vice President of Finance, Treasurer, Chief Financial Officer and a director of
the Company, the Company's Board of Directors has authorized the issuance of
Warrants to Mr. Hemmer to purchase 125,000 shares of Common Stock. Each warrant
entitles the holder to purchase one share of Common Stock at an exercise price
of $2.63 per share. The Warrants are exercisable through March 10, 2004. The
Warrants contain provisions that protect the holder thereof against dilution by
adjustment of the exercise price per share and the number of shares issuable
upon exercise thereof upon the occurrence of certain events, including stock
dividends, stock splits, mergers and the sale of substantially all of the
Company's assets. The Company is not required to issue fractional shares of
Common Stock, and in lieu thereof will make a cash payment based on the current
market value of such fractional shares. The holder of the Warrants will not
possess any rights as a shareholder of the Company unless and until the holder
exercises the Warrants. On May 6, 1999, the Board of Directors also authorized
the issuance of additional Warrants to Mr. Hemmer to purchase 75,000 shares of
Common Stock at the same exercise price as the Class A Warrants, or $7.50 per
share. However, these Warrants may not be exercised until the Warrants issued to
Mr. Hemmer to purchase 125,000 shares of Common Stock have been exercised.
La Jolla Warrants. In connection with its Series A Preferred private
placement, the Company has issued La Jolla Securities Corporation ("La Jolla")
Warrants to purchase 11,600 shares of the Company's Series A Preferred. Each
warrant entitles La Jolla to purchase one share of Series A Preferred at a price
of $4.00 per share at any time prior to May 8, 1999. These warrants are subject
to redemption by the Company beginning on July 10, 1998 at a price of $0.05 per
warrant, if the Company's Common Stock has been trading at a price equal to or
above $7.50 per share for 20 consecutive business days ending within 15 days of
the date of redemption.
FAS Warrants. In connection with its Series B Preferred private
placement, the Company issued First Associated Securities Group, Inc. ("FAS")
Warrants to purchase 21,525 shares of the Company's Common Stock. Each warrant
entitles FAS to purchase one share of Common Stock at a price of $3.00 per
share. These warrants are currently exercisable and expire on December 31, 1999.
Certain Provisions of Certificate of Incorporation. Paradigm's
Certificate of Incorporation provides that to the fullest extent permitted by
Delaware law, its directors shall not be liable to it and its stockholders. The
Certificate of Incorporation also contains provisions entitling the officers and
directors to indemnification by Paradigm to the fullest extent permitted by the
Delaware General Corporation Law.
Indemnification Agreements. Paradigm has entered into Indemnification
Agreements with its officers and directors. Such Indemnification Agreements
provide that Paradigm will indemnify its officers and directors against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
arising out of threatened, pending or completed legal action against any officer
or director to the fullest extent permitted by the Delaware General Corporate
Law.
Transfer and Warrant Agent. Paradigm's transfer agent and registrar for
its Common Stock and the Warrant Agent for the Class A Warrants is Continental
Stock Transfer & Trust Company, New York, New York.
PLAN OF DISTRIBUTION
The Company may solicit the exercise of Class A Warrants and Note
Holders' Warrants through a registered or licensed broker-dealer. Upon exercise
of Class A Warrants or Note Holders' Warrants, the Company will pay such
soliciting broker-dealer a fee of 5% of the aggregate exercise price of Class A
Warrants and Note Holders' Warrants exercised, if: (i) the market price of the
Common Stock on the date the Class A Warrant or the Note Holders' Warrant is
exercised is greater than the then exercise price of the Class A Warrant or the
Note Holders' Warrant, respectively; (ii) the exercise of the Class A Warrant or
the Note Holders' Warrant was solicited by a member of the National Association
of Securities Dealers, Inc.; (iii) the Class A Warrant or the Note Holders'
Warrant is not held in a discretionary account; (iv) disclosure of the
compensation arrangements was made by delivery of this Prospectus or otherwise)
both at the time of the offering and at the time of exercise of the Class A
Warrant or the Note Holders' Warrant; and (v) the solicitation of exercise of
the Class A Warrant or the Note Holders' Warrant is not in violation of
Regulation M.
In connection with the solicitation of the Class A Warrant or the Note
Holders' Warrant exercises, the soliciting broker-dealer will be prohibited from
engaging in any market-making activities with respect to the Company's
securities for the period commencing either two or nine business days (depending
on the market price of the Common Stock) prior to any solicitation activity for
the exercise of Class A Warrants or Note Holders' Warrants until the later of
(i) the termination of such solicitation activity, or (ii) the termination (by
waiver or otherwise) of any right which the soliciting broker-dealer may have to
receive a fee for the exercise of Class A Warrants or Note Holders' Warrants
following such solicitation. As a result, the soliciting broker-dealer may be
unable to provide a market for the Company's securities, should it desire to do
so, during certain periods while the respective Class A Warrants or Note
Holders' Warrants are exercisable.
The Company does not plan to solicit Series C or Series D Preferred
Stockholders regarding the conversion of their Series C or Series D Preferred
Shares into shares of Common Stock which have been registered for resale upon
conversion.
The resale of the Common Stock by the Series C and Series D Preferred
stockholders that elect to convert their shares of Series C and Series D
Preferred Stock to shares of Common Stock and the holders of Class A Warrants,
Underwriter's Warrants, Win
47
<PAGE>
Capital Warrants, Note Holder's Warrants, Attorney's Warrants, KSH Investment
Group Warrants and Cyn Del Warrants, that elect to exercise their respective
warrants and purchase Company Stock (collectively, the "Selling
Securityholders"), may be effected from time to time in transactions (which may
include block transactions by or for the account of the Selling Securityholders)
in The Nasdaq SmallCap Market or in negotiated transactions, a combination of
such methods of sale or otherwise. Sales may be made at fixed prices which may
be changed, at market prices prevailing at the time of sale, or at negotiated
prices.
Selling Securityholders may effect such transactions by selling their
shares of Common Stock directly to purchasers, through broker-dealers acting as
agents for the Selling Securityholders or to broker-dealers who may purchase
securities as principals and thereafter sell the Common Stock from time to time
in the over-the-counter market, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers for whom such broker-dealers act as agents or to whom they may sell
as principals or otherwise (which compensation as to a particular broker-dealer
may exceed customary commissions). The Selling Securityholders will pay all
commissions, transfer taxes, and other expenses associated with the sale of
Common Stock by them.
The Selling Securityholders and broker-dealers, if any, acting in
connection with such sales may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act and any commission received by them and
any profit on the resale of the securities by them might be deemed to be
underwriting discounts and commissions under the Securities Act. The Company has
agreed to indemnify the Selling Securityholders against certain liabilities
under the Securities Act.
From time to time this Prospectus will be supplemented and amended as
required by the Securities Act. During any time when a supplement or amendment
is so required, the Selling Securityholders are to cease sales until the
Prospectus has been supplemented or amended. Pursuant to the registration rights
granted to certain of the Selling Securityholders, the Company has agreed to
update and maintain the effectiveness of this Prospectus. Certain of the Selling
Securityholders also may be entitled to sell their Shares without the use of
this Prospectus, provided that they comply with the requirements of Rule 144
promulgated under the Securities Act.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered
hereby and certain other legal matters in connection have been passed upon for
the Company by Mackey Price & Williams, Salt Lake City, Utah. The Company
granted Mackey Price & Williams, the Company's counsel, Warrants to purchase
25,000 shares of Common Stock at $3.33 per share in partial payment for legal
services in connection with the Company's public offering which was completed in
July 1996. See "Description of Securities -- Bridge and Attorneys' Warrants."
INDEPENDENT AUDITORS
The financial statements included in this prospectus, to the extent and
for the periods indicated in their reports, have been audited by Tanner & Co.,
independent auditors, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
auditing and accounting.
DEFINITIONS
Unless the context indicates otherwise, the following words and terms,
as used in this Prospectus, shall have the following meanings:
Ablation. To surgically remove with laser energy breaking down the
tissue.
Acuity. The ability to se objects in focus. Perfect visual acuity is
referred to as 20/20 vision or emmetropia.
Anterior Chamber. The front section of the eye containing the cornea,
lens and Iris, which refract and focuses light images onto the retina.
Aspiration. Removal of tissue and fluids from the eye through suction.
Cataract. Hardened opaque lens of the eye. Generally an age elated
pathology. Cataracts become harder and more opaque over time, which reduces
visual ability to the point of complete blindness. Cataracts can also be caused
by genetic disorders and accidental trauma.
Common Stock. The shares of voting Common Stock of the Company. See
"Terms of the Offering - Common Stock."
The Company. Paradigm Medical Industries, Inc., a Delaware corporation,
and its predecessors.
48
Cornea. The clear front exterior surface of the eye. Its domed
curvature refracts images through the and to the retina. Its posterior surface
inside the eye is the endothelium that is sensitive to shock or vibration.
<PAGE>
ECCE. Acronym for extracapsular cataract extraction. A cataract removal
method using steel surgical instruments requiring a larger incision that is more
invasive than phaco surgery.
Emmetropia. Normal visual acuity, 20/20 vision.
Exchange Act. The Securities Exchange Act of 1934, as amended.
Fiber Optic. A small, flexible quartz strand that transmits
concentrated laser light energy for precise delivery to tissue in surgery.
FDA. The United States Food and Drug Administration.
IOL. Acronym for intra-ocular lens. A clear plastic prosthetic implant
that replaces the natural human lens after cataract removal surgery to restore
sight.
Internal Revenue Service. The United States Internal Revenue Service,
the governmental agency that is responsible for administering the federal tax
laws of the United States government.
Intraocular Pressure. The pressure within the orbit of the eye usually
expressed in millimeters mercury ("MM/Hg") abnormally high and low pressures of
which are used as indicators of ocular pathologies.
Investor Questionnaire and Subscription Agreement. The Investor
Questionnaire and Subscription Agreement attached hereto as Exhibit "B".
Investors. Those persons or entities acquiring the Notes in the
Offering.
In Vitro. Refers to studies and/or phenomena that take place outside
the body (for example, in test tubes).
In Vivo. Refers to studies and/or phenomena that take place in animals
or humans.
Laser. An acronym for "Light Amplification by Stimulated Emission of
Radiation." Lasers emit light in a highly intense beam of energy that radiates
at a single wave length. Laser light energy can be selectively directed for a
specific effect on body tissue and pin-pointed to a specific location through a
small fiber optic for a wide variety of surgical purposes.
Lens. The clear crystalline substance in the anterior chamber of the
eye that accommodates focusing of images on the retina for visual acuity.
Nasdaq. Abbreviation and registered service mark of The Nasdaq Stock
Market, Inc.
Note. The Company's 12% Convertible, Redeemable Promissory Note.
Phaco. Contraction of phacoemulsification. Ophthalmic medical term for
the microsurgical cataract removal procedure and related surgical devises (i.e.,
to perform a phaco surgery, or to use a phaco instrument).
Phacoemulsification. Minimally invasive surgical procedure for removing
a hardened cataract from the eye. The process involves using an ultrasonic probe
with a hollow vibrating needle that fragments the hardened cataract, while in
the eye, and aspirates the unwanted cataract tissue from the eye. Generally
considered a superior, less invasive alternative to ECCE.
Posterior Chamber. The rear section of the eye containing the retina,
vitreous and optic nerve, responsible for receiving light images from the
anterior chamber and processing these into visual information to the brain.
Pulsatile Intraocular Blood Flow. A measurement of blood reaching the
retina derived from readings of intraocular pressure over a fixed period of time
which is one determinate of the condition of the retina.
Retina. Rear surface of the posterior chamber responsible for receiving
and processing visual images.
Round lot holder. A holder of 100 shares or more of a normal unit of
trading.
Section 510(k). Section 510(k) of the FDA Act providing medical device
manufacturers premarket notification to facilitate sales of a device that is new
to the manufacturer, but "substantially equivalent" to a device already legally
marketed.
Series A Preferred. The Company's Series A 6% Convertible Redeemable
Preferred Stock, $.001 par value per share.
49
<PAGE>
Series B Preferred. The Company's Series B 12% Convertible Redeemable
Preferred Stock, $.001 par value per share.
Series C Preferred. The Company's Series C Convertible Preferred Stock,
$.001 par value per share, $100 stated value.
Securities Act. The Securities Act of 1933, as amended.
Vitreous. Optically clear, fibrous gel-like fluid medium located in the
posterior chamber that comprises the majority of the volume in the eye, and
serves to give the eye its shape.
50
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Paradigm Medical Industries, Inc.
We have audited the balance sheet of Paradigm Medical Industries, Inc. (the
Company) as of December 31, 1998, and the related statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Paradigm Medical Industries,
Inc. as of December 31, 1998, and the results of its operations and its cash
flows for the years ended December 31, 1998 and 1997, in conformity with
generally accepted accounting principles.
TANNER + Co.
Salt Lake City, Utah
March 5, 1999
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Balance Sheets
December 31, 1998
- ----------------------------------------------------------------------------------------------------------
Assets
Current assets:
<S> <C>
Cash $ 114,000
Receivables, net 566,000
Inventories 720,000
Prepaid expenses 15,000
------------------
Total current assets 1,415,000
Capitalized engineering and design charges, net 235,000
Property and equipment, net 547,000
Other 44,000
------------------
Total assets $ 2,241,000
------------------
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Payables $ 316,000
Accrued liabilities 163,000
Current portion of long-term debt 13,000
------------------
Total current liabilities 492,000
------------------
Long-term debt 33,000
------------------
Commitments -
Stockholders' equity:
Preferred stock, $.001 par value:
Series A, 500,000 shares authorized, 34,619 shares
issued and outstanding (aggregate liquidation
preference of $34,619) -
Series B, 500,000 shares authorized; 31,236 shares
issued and outstanding (aggregate liquidation
preference of $124,944) -
Series C, 30,000 shares authorized, 6,900 shares
issued and outstanding -
Common stock, $.001 par value, 20,000,000 shares
5,500,306 shares issued and outstanding 5,000
Additional paid-in capital 17,704,000
Treasury stock, at cost (4,000)
Unearned compensation (94,000)
Stock subscription receivable (8,000)
Accumulated deficit (15,887,000)
------------------
Total stockholders' equity 1,716,000
------------------
Total liabilities and stockholders' equity $ 2,241,000
------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Operations
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------
<S> <C> <C>
Sales $ 1,258,000 $ 464,000
-----------------------------------
Cost of sales 739,000 272,000
Amortization of capitalized engineering and design changes 74,000 61,000
-----------------------------------
813,000 333,000
-----------------------------------
Gross profit 445,000 131,000
-----------------------------------
Operating expenses:
Marketing and selling 1,021,000 591,000
General and administrative 1,841,000 1,802,000
Research and development 298,000 540,000
-----------------------------------
Total operating expenses 3,160,000 2,933,000
-----------------------------------
Operating loss (2,715,000) (2,802,000)
-----------------------------------
Other income (expense):
Interest income 49,000 57,000
Interest expense (33,000) (265,000)
Other (60,000) -
-----------------------------------
(44,000) (208,000)
-----------------------------------
Loss before provision for income taxes (2,759,000) (3,010,000)
Provision for income taxes - -
-----------------------------------
Net loss $ (2,759,000) $ (3,010,000)
-----------------------------------
Loss per common share - basic and diluted $ (.69) $ (.82)
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Stockholders' Equity
Years Ended December 31, 1998 and 1997
- -------------------------------------------------------------------------------------------------
Preferred Stock
-------------------------------------------------------
Series A Series B Series C Common Stock
----------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997 121,704 $ - 448,398 $ - - $ - 3,194,061 $ 3,000
Conversion of
preferred stock
to common stock (71,582) - (403,015) - - - 569,518 1,000
Issuance of common
stock for compensation - - - - - - 22,852 -
Warrants exercised for
common stock - - - - - - 12,500 -
Issuance of warrants
in connection with
the issuance of debt - - - - - - - -
Amortization of
unearned compensation
- - - - - - - -
Difference between the
convertible notes
payable conversion
price and common
stock fair value - - - - - - - -
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Stock Gain
Additional Unearned Sub- Accum- on
Paid-In Treasury Stock Compen- scription ulated Marketable
-----------------
Capital Shares Amount sation Receivable Deficit Securities
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997 $ 8,162,000 2,600 $ (4,000) $ (63,000) $ - $ (5,248,000) $ 10,000
Conversion of
preferred stock to
common stock - - - - - - -
Issuance of common
stock for compensation 78,000 - - - - - -
Warrants exercised for
common stock 42,000 - - - - - -
Issuance of warrants
in connection with
the issuance of debt 317,000 - - - - - -
Amortization of
unearned compensation
- - - 63,000 - - -
Difference between the
convertible notes
payable conversion
price and common
stock fair value 235,000 - - - - - -
- --------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Stockholders' Equity
Years Ended December 31, 1998 and 1997
- ---------------------------------------------------------------------------------------------------
Preferred Stock
-------------------------------------------------------
Series A Series B Series C Common Stock
------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net change in
unrealized gain on
marketable securities - - - - - - - -
Net loss - - - - - - - -
-----------------------------------------------------------------------------
Balance at
December 31, 1997 50,122 - 45,383 - - - 3,798,931 4,000
Issuance of Series C
preferred stock for:
Cash - - - - 19,937 - - -
Debt - - - - 9,950 - - -
Subscription
receivable - - - - 93 - - -
Conversion of
preferred stock to
common stock (15,503) - (14,147) - (23,080) - 1,354,424 1,000
Issuance of common
stock for:
Services - - - - - - 93,135 -
Payables - - - - - - 90,000 -
Debt - - - - - - 37,500 -
Assets - - - - - - 126,316 -
Issuance of stock
options for services - - - - - - - -
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Stock Gain
Additional Unearned Sub- Accum- on
Paid-In Treasury Stock Compen- scription ulated Marketable
-----------------
Capital Shares Amount sation Receivable Deficit Securities
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net change in
unrealized gain on
marketable securities - - - - - - (10,000)
Net loss - - - - - (3,010,000) -
-----------------------------------------------------------------------
Balance at
December 31, 1997 8,834,000 2,600 (4,000) - - (8,258,000) -
Issuance of Series C
preferred stock for:
Cash 1,739,000 - - - - - -
Debt 829,000 - - - - - -
Subscription
receivable 8,000 - - - (8,000) - -
Conversion of preferred
stock to common stock (1,000) - - - - - -
Issuance of common
stock for:
Services 290,000 - - (94,000) - - -
Payables 399,000 - - - - - -
Debt 75,000 - - - - - -
Assets 500,000 - - - - - -
Issuance of stock
options for services 161,000 - - - - - -
- ---------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Stockholders' Equity
Years Ended December 31, 1998 and 1997
- ------------------------------------------------------------------------------------------------
Preferred Stock
-------------------------------------------------------
Series A Series B Series C Common Stock
----------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Difference between
the series C preferred
stock conversion
price and common stock
fair value - - - - - - - -
Net loss - - - - - - - -
---------------------------------------------------------------------------
Balance at
December 31, 1998 34,619 $ - 31,236 $ - 6,900 $ - 5,500,306 $ 5,000
---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Stock Gain
Additional Unearned Sub- Accum- on
Paid-In Treasury Stock Compen- scription ulated Marketable
------------------
Capital Shares Amount sation Receivable Deficit Securities
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Difference between
the series C preferred
stock conversion
price and common stock
fair value 4,870,000 - - - - (4,870,000) -
Net loss - - - - - (2,759,000) -
--------------------------------------------------------------------------------
Balance at
December 31, 1998 $ 17,704,000 2,600 $ (4,000) $ (94,000) $ (8,000) $ (15,887,000) $ -
--------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Cash Flows
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (2,759,000) $ (3,010,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 106,000 209,000
Loss on disposal of equipment - 12,000
Issuance of common stock for services 196,000 78,000
Interest and stock compensation expenses related
to common stock options/warrants 161,000 235,000
Provision for losses on receivables 30,000 -
(Increase) decrease in:
Receivables (475,000) (102,000)
Inventories 240,000 (592,000)
Debt offering cost 259,000 -
Prepaid expenses 1,000 8,000
Increase (decrease) in:
Payables 14,000 466,000
Accrued liabilities (187,000) 72,000
-----------------------------------
Net cash used in
operating activities (2,414,000) (2,624,000)
-----------------------------------
Cash flows from investing activities:
Purchase of property and equipment (48,000) (32,000)
Notes receivable (44,000) -
Capitalized engineering and design charges - (370,000)
Proceeds from the sale of marketable securities - 500,000
-----------------------------------
Net cash (used in) provided by
investing activities (92,000) 98,000
-----------------------------------
Cash flows from financing activities:
Proceeds from issuance of Series C preferred stock 1,739,000 -
Principal payments on long-term debt (6,000) (3,000)
Proceeds from issuance of notes payable - 1,070,000
Proceeds from lines of credit - 980,000
Payment on lines of credit - (980,000)
Payment of debt offering costs - (165,000)
Proceeds from exercise of warrants - 42,000
-----------------------------------
Net cash provided by
financing activities 1,733,000 944,000
-----------------------------------
Net decrease in cash (773,000) (1,582,000)
Cash, beginning of year 887,000 2,469,000
-----------------------------------
Cash, end of year $ 114,000 $ 887,000
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-8
</TABLE>
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Organization
Paradigm Medical Industries, Inc. (the Company) is a Delaware 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 100,000 shares of the Company's
common stock at a price of $4.00 per share to an individual, as
consideration for consulting legal services. The warrants are exercisable
beginning in January 1999 and expire on December 18, 2008.
- --------------------------------------------------------------------------------
F-21
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Stock Option Plan and Warrants
Continued
o In connection with an investment banking agreement (see Note 7), the
Company issued a warrant to Win Capital to purchase up to 191,000 shares of
common stock at a purchase price of $3.00 per share. The warrant is
currently exercisable and expires on August 19, 2000. The fair value of the
warrant of $317,060 was recorded as debt offering costs and was amortized
over the term of the debt.
A schedule of the options and warrants is as follows:
Exercise
Number of Price Per
----------------------------
Options Warrants Share
------------------------------------------
Outstanding at January 1, 1997 378,940 1,558,125 $ 3.00 - 8.13
Granted 135,000 191,000 3.00 - 5.00
Exercised - (12,500) 3.33
Expired (63,740) - 5.00
------------------------------------------
Outstanding at December 31,
1997 450,200 1,736,625 3.00 - 8.13
Granted 319,960 200,000 2.31 - 5.00
Forfeited (50,000) - 5.00
------------------------------------------
Outstanding at December 31,
1998 720,160 1,936,625 $ 3.00 - 8.13
------------------------------------------
- --------------------------------------------------------------------------------
F-22
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Earnings Per Share
Financial accounting standards requires companies to present basic earnings per
share (EPS) and diluted earnings per share along with additional informational
disclosures. Information related to earnings per share is as follows:
Years Ended
December 31,
------------------------------------
1998 1997
------------------------------------
Basic and Diluted EPS:
Net loss available to common
stockholders $ (2,759,000) $ (3,010,000)
------------------------------------
Weighted average common shares 4,022,000 3,663,000
------------------------------------
Net loss per share $ (.69) $ (.82)
------------------------------------
10. Stock-Based Compensation
The Company adopted the disclosure only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation expense has been recognized for stock options
granted to employees. Had compensation expense for the Company's stock options
been determined based on the fair value at the grant date for awards in 1998 and
1997 consistent with the provisions of SFAS No. 123, the Company's results of
operations would have been reduced to the pro forma amounts indicated below:
Years Ended
December 31,
------------------------------------
1998 1997
------------------------------------
Net loss - as reported $ (2,759,000) $ (3,010,000)
Net loss - pro forma $ (3,044,000) $ (3,168,000)
Loss per share - as reported $ (.69) $ (.82)
Loss per share - pro forma $ (.76) $ (.86)
------------------------------------
- --------------------------------------------------------------------------------
F-23
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Stock-Based Compensation
Continued
The fair value of each option grant is estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions:
December 31,
-----------------------------------
1998 1997
-----------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 82% 102%
Risk-free interest rate 5.0% 5.5%
Expected life of options 6 years 5 years
-----------------------------------
The weighted average fair value of options granted during the years ended
December 31, 1998 and 1997 are $1.85 and $3.31, respectively.
The following table summarizes information about stock options and warrants
outstanding at December 31, 1998:
Outstanding Exercisable
------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 12/31/98 (Years) Price 12/31/98 Price
- --------------------------------------------------------------------------------
$2.30 - 2.75 20,160 9.86 2.47 - $ -
3.00 - 4.00 736,625 2.91 3.29 644,958 3.19
5.00 - 8.13 1,900,000 2.87 6.53 1,814,400 6.61
- --------------------------------------------------------------------------------
$2.30 - 8.13 2,656,785 2.94 5.60 2,459,358 $ 5.57
- --------------------------------------------------------------------------------
11. Related Party Transactions
The Company has entered into an exclusive three year design, engineering and
manufacturing agreement (the Agreement) for its Photon laser cataract system
with a company that is a shareholder (the Manufacturer). Under the provisions of
the Agreement, the Company paid a total of $1,000,000 to the Manufacturer at
various milestone dates for engineering and design services. $630,000 of this
amount was charged to expense as research and development; the balance was
recorded as capitalized engineering and design charges.
- --------------------------------------------------------------------------------
F-24
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Related Party Transactions
Continued
In addition, the Company will pay the actual cost of tooling, plus a two percent
mark-up, which is not expected to be significant. All items for tooling purposes
will belong to the Company. The Agreement establishes the purchase price of the
systems at the lesser of a fixed purchase price or the actual cost of
manufacturing plus a markup.
The Company purchased research and development services, design and
manufacturing services and systems from the Manufacturer in the amount of
approximately $49,000 and $1,070,000 during the year ended December 31, 1998 and
1997, respectively.
The Agreement prohibits the manufacturer from participating in any activities,
including manufacturing, related to laser surgical systems for any other company
for a period of two years beyond the term of any renewed term of the Agreement.
The Agreement includes certain termination provisions, which include the event
that the Company is unable to obtain governmental or regulatory approvals. The
Agreement is renewable for successive one year additional terms.
In 1997, the Company signed an amended exclusive patent license agreement with a
company which owns the patent for the laser-probe used on the Photon machine.
This company is owned by a shareholder of the Company. The agreement provides
for the payment of a 1% royalty on all sales proceeds related directly or
indirectly, to the Photon machine. The agreement terminates on July 7, 2003.
Through December 31, 1998, no significant royalties have been paid under this
agreement.
A law firm, of which a director of the Company is a shareholder, has rendered
legal services to the Company. The Company paid this firm $97,000, and $119,000
for the year ended December 31, 1998 and 1997, respectively. As of December 31,
1998, the Company owed this firm $16,000, which is included in accounts payable.
- --------------------------------------------------------------------------------
F-25
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Supplemental Cash Flow Information
During the year ended December 31, 1998:
o The Company issued Series C Preferred Stock in exchange for long-term debt
of $995,000 and debt-offering costs of $166,000.
o The Company issued common stock for future services in the amount of
$94,000.
o The Company issued common stock in exchange for long-term debt of $75,000.
o The Company issued common stock in exchange for a related-party payable of
$399,000.
o The Company issued common stock in exchange for production rights of
$374,000 and inventory of $126,000.
o The Company increased the accumulated deficit and additional paid-in
capital by $4,870,000 due to the difference between the Series C preferred
stock conversion price and the common stock fair value.
o The Company acquired computer equipment in exchange for long-term debt of
$36,000.
During the year ended December 31, 1997, the Company issued warrants valued at
$317,060 in exchange for services.
Actual amounts paid for interest and income taxes are as follows:
Years Ended
December 31,
-----------------------------------
1998 1997
-----------------------------------
Interest $ 33,000 $ 22,000
-----------------------------------
Income taxes $ - $ -
-----------------------------------
- --------------------------------------------------------------------------------
F-26
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Export Sales
Total sales include export sales by major geographic area as follows:
Years Ended
December 31,
-----------------------------------
Geographic Area 1998 1997
- ---------------
-----------------------------------
Middle East $ 150,000 $ 2,000
South America 140,000 -
Europe 11,000 38,000
Far East 3,000 18,000
-----------------------------------
$ 304,000 $ 58,000
-----------------------------------
14. Employment Agreements
Effective January 1, 1998, the Company entered into employment agreements with
four officers which expire on January 1, 2003. The agreements provide for
aggregate annual compensation of $480,000. In addition, the Company has entered
into agreements which provide for additional payments to be made to these
officers in the event the Company has a change of control.
15. Profit Sharing Plan
The Company has adopted a profit sharing plan pursuant to which an amount equal
to 10% of the pretax profits of the Company will be set aside for the benefit of
the Company's officers and key employees. This amount will only be paid if the
Company's qualified pretax profits exceed $10,000,000 for any fiscal year prior
to December 31, 2001.
16. Savings Plan
In November 1996, the Company established a 401(k) Retirement Savings Plan for
the Company's officers and employees. The Plan provisions include eligibility
after six months of service, a three year vesting provision and 100% matching
contribution by the Company up to 3% of a participant's compensation. During the
years ended December 31, 1998 and 1997, the Company contributed $10,646 and
$36,136 to the Plan, respectively.
- --------------------------------------------------------------------------------
F-27
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
17. Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. The Company believes that the
adoption of SFAS 133 will not have any material effect on the financial
statements of the Company.
18. Restatement of the 1997 Financial Statements
The Company had previously issued financial statements for the year ended
December 31, 1997. The accompanying revised 1997 financial statements reflect an
adjustment due to correction of an error. The adjustment to the financial
statements arises from the expense recognition for the difference between the
conversion price and the fair value of the common stock into which the security
is convertible.
The following schedule summarizes the adjustment leading to the restatement of
the 1997 financial statements:
As Originally
Category Reported Restated
- ---------------------------------------------------------------------------
Net loss $ (2,775,000) $ (3,010,000)
Interest expense $ 30,000 $ 265,000
The revised net loss reflects a change involving the recognition of a non-cash
expense for the difference between the convertible notes payable conversion
price and the fair value of the common stock, on the debt issuance date and has
been recorded in interest expense for the year ended December 31, 1997. This
adjustment resulted in an increase to the net loss and interest expense of
$235,000.
- --------------------------------------------------------------------------------
F-28
<PAGE>
No dealer, salesman or any other person has been authorized to give
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of any offer
to buy any of the securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof.
---------------------
TABLE OF CONTENTS
Page
Prospectus Summary...........................................................1
Risk Factors ...............................................................5
Use of Proceeds.............................................................11
Capitalization..............................................................12
Selected Financial Data.....................................................14
Price of Common Stock and Class A
Warrants and Dividend Policy..............................................15
Management's Discussion and Analysis .......................................15
Business ...................................................................18
Management..................................................................31
Principal Shareholders......................................................38
Certain Transactions........................................................38
Securityholders Registering Shares..........................................40
Description of Securities ..................................................43
Plan of Distribution........................................................47
Legal Matters...............................................................48
Independent Auditors........................................................48
Definitions.................................................................48
Index of Financial Statements..............................................F-1
6,496,359 Shares of Common Stock Issuable
Upon Exercise of Warrants and
Conversion of Series C and
Series D Preferred Stock and Note
PARADIGM MEDICAL INDUSTRIES, INC.
-----------------
PROSPECTUS
-----------------
May ___, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any person who is,
or is threatened to be made, a party to any threatened, pending or completed
legal action, suit or proceedings, whether civil, criminal, administrative or
investigative (other than action by or in the right of such corporation), by
reason of the fact that such person was an officer or director of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the corporation's best interests, and, for criminal
proceedings, had no reasonable cause to believe his or her conduct was illegal.
A Delaware corporation may indemnify officers and directors in an action by or
in the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation in the performance of his
or her duty. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses which such officer or director
actually and reasonably incurred.
In accordance with the Delaware Law, the Certificate of Incorporation of
the Company contains a provision to limit the personal liability of the
directors of the Company for violations of their fiduciary duty. This provision
eliminates each director's liability to the Registrant or its stockholders for
monetary damages except (i) for any breach of the director's duty of loyalty to
the Registrant or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit. The effect of this provision is to eliminate the personal liability of
directors for monetary damages for actions involving a breach of their fiduciary
duty of care, including any such actions involving gross negligence.
The Company may not indemnify an individual unless authorized and a
determination is made in the specific case that indemnification of the
individual is permissible in the circumstances because his or her conduct was in
good faith, he or she reasonably believed that his or her conduct was in, or not
opposed to, the Company's best interests and, in the case of any criminal
proceeding, he or she had no reasonable cause to believe his or her conduct was
unlawful. The Company may not advance expenses to an individual to whom the
Company may ultimately be responsible for indemnification unless authorized in
the specific case after the individual furnishes the following to the Company: a
written affirmation of his or her good faith belief that his or her conduct was
in good faith, that he or she reasonably believed that his or her conduct was
in, or not opposed to, the Company's best interests and, in the case of any
criminal proceeding, he or she had no reasonable cause to believe his or her
conduct was unlawful and (2) the individual furnishes to the Company a written
undertaking, executed personally or on his or her behalf, to repay the advance
if it is ultimately determined that he or she did not meet the standard of
conduct referenced in part (1) of this sentence. In addition to the individual
furnishing the aforementioned written affirmation and undertaking, in order for
the Company to advance expenses, a determination must also be made that the
facts then- known to those making the determination would not preclude
indemnification.
All determinations relative to indemnification must be made as follows:
(1) by the Board of Directors of the Company by a majority vote of those present
at a meeting at which a quorum is present, and only those directors not parties
to the proceeding shall be counted in satisfying the quorum requirement; or (2)
if a quorum cannot be obtained as contemplated in part (1) of this sentence, by
a majority vote of a committee of the Board of Directors designated by the Board
of Directors of the Company, which committee shall consist of two or more
directors not parties to the proceeding, except that directors who are parties
to the proceeding may participate in the designation of directors for the
committee; or (3) by special legal counsel selected by the Board of Directors or
its committee in the manner prescribed in part (1) or part (2) of this sentence
(however, if a quorum of the Board of Directors cannot be obtained under part
(1) of this sentence and a committee cannot be designated under part (2) of this
sentence, then a special legal counsel shall be selected by a majority vote of
the full board of directors, in which selection directors who are parties to the
proceeding may participate); or (4) by the shareholders, by a majority of the
votes entitled to be cast by holders of qualified shares present in person or by
proxy at a meeting.
The Company has also entered into Indemnification Agreements with its
executive officers and directors. These Indemnification Agreements are
substantially similar in effect to the Bylaws and the provisions of the
Company's Certificate of Incorporation relative to providing indemnification to
the maximum extent and in the manner permitted by the Delaware General
Corporation Law. Additionally, such Indemnification Agreements contractually
bind the Company with respect to indemnification and contain certain
II-2
<PAGE>
exceptions to indemnification, but do not limit the indemnification available
pursuant to the Company's Bylaws, the Company's Certificate of Incorporation or
the Delaware General Corporation Law.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the expenses payable by the Company in
connection with the issuance and distribution of the securities being
registered, other than underwriting discount (all amounts except the Securities
and Exchange Commission filing fee and the NASD fee are estimated):
Filing fee - Securities and Exchange Commission............. $ 921
NASD fee.................................................... 2,000
Printing and engraving expenses............................. 200
Legal fees and disbursements................................ 3,500
Accounting fees and disbursements........................... 1,500
Blue Sky fees and expenses (including legal fees)........... 500
Miscellaneous............................................... 379
--------
Total expenses.............................................. $ 9,000
Item 26. Recent Sales of Unregistered Securities
The following information is furnished with regard to all issuances of
unregistered shares of the Company's securities during the past three years.
Each of the following transactions was exempt from registration under the
Securities Act by virtue of the provisions of Section 4(2) of the Securities Act
and, where indicated, by either Rule 504 or 505 of Regulation D promulgated
under the Securities Act.
None of the following transactions involved a distribution or public
offering. All share and per share information presented below have been adjusted
to give retroactive effect to a 1-for-7.96 reverse stock split, which was
approved in April 1993 and a 1-for-5 reverse stock split, which was approved in
April 1994.
I. 12% Convertible, Redeemable Promissory Notes
During the period from October 24, 1997 to December 8, 1998, the
Company sold a total of 21.4 Units of 12% Convertible, Redeemable Promissory
Notes to the 23 persons identified below in this Part III of Item 26, "Recent
Sales of Unregistered Securities" (all of whom were accredited investors),
through a private placement under Rule 505 of Regulation D promulgated under the
Securities Act at a price of $50,000 per Unit, each Unit consisting of a $50,000
Unsecured 12% Convertible, Redeemable Promissory Note. The Company received
$1,070,000 in cash as a result of the private placement transaction and paid
$128,400 in commissions and expenses to Win Capital Corp., the exclusive
placement agent of the offering.
A. On December 8, 1997, the Company issued one Unit to
Continental Stock Transfer Corp. for a cash investment of
$50,000.
B. On December 8, 1997, the Company issued one Unit to Robert L.
Frome for a cash investment of $50,000.
C. On December 8, 1997, the Company issued two Units to Ronald A.
Balkin, M.D. and Karen A. Balkin, JTWROS for a cash investment
of $100,000.
D. On December 8, 1997, the Company issued two Units to Michael
Associates for a cash investment of $100,000.
E. On December 8, 1997, the Company issued .50 Unit to Mark S.
Richardson for a cash investment of $25,000.
F. On December 8, 1997, the Company issued .30 Unit to Mark E.
Cozens for a cash investment of $15,000.
G. On December 8, 1997, the Company issued .50 Unit to Michael L.
Salamone for a cash investment of $25,000.
H. On December 8, 1997, the Company issued .70 Unit to Premier
Alliance Group, Inc. for a cash investment of $35,000.
I. On December 8, 1997, the Company issued .50 Unit to Gary W.
Hammond for a cash investment of $25,000.
J. On December 8, 1997, the Company issued .50 Unit to Jeffrey A.
Strack and Penny Strack, JTROS for a cash investment of
$25,000.
II-3
<PAGE>
K. On December 8, 1997, the Company issued .50 Unit to J. Michael
Smith for a cash investment of $25,000.
L. On December 8, 1997, the Company issued .50 Unit to Eileen M.
O'Dea for a cash investment of $25,000.
M. On December 8, 1997, the Company issued .40 Unit to Irwin W.
Messer and Alexandra S. Urdang, JTWROS for a cash investment
of $20,000.
N. On December 8, 1997, the Company issued .50 Unit to Sheila
Sandman for a cash investment of $25,000.
O. On December 8, 1997, the Company issued one Unit to Joseph
Aufiero for a cash investment of $50,000.
P. On December 8, 1997, the Company issued one Unit to Ted Levine
for a cash investment of $50,000.
Q. On December 8, 1997, the Company issued .50 Unit to B. Michael
Pisani for a cash investment of $25,000.
R. On December 8, 1997, the Company issued one Unit to Alfred J.
Riccairdi and Joseph Riccairdi, JTWROS and for a cash
investment of $50,000.
S. On December 8, 1997, the Company issued two Units to R.F.
Lafferty Profit Sharing Plan FBO Henry Hackel for a cash
investment of $100,000.
T. On December 8, 1997, the Company issued one Unit to Rose W.
Zee for a cash investment of $50,000.
U. On December 8, 1997, the Company issued .50 Unit to Patrick F.
Vetere, M.D. and Linda A. Vetere JTWROS for a cash investment
of $25,000.
V. On December 8, 1997, the Company issued two Units to MLPF&S
Tax ID 13-3180817 FBO Dr. Joseph Nemeth IRA for a cash
investment of $100,000.
W. On December 8, 1997, the Company issued 1.5 Units to Bill L.
Trahan for a cash investment of $75,000.
II. Series C Preferred Stock
During the period from February 2, 1998 to April 11, 1998, the Company
sold a total of 20,300 shares of Series C Preferred Stock to the 58 persons
identified below in this part IV. of Item 26, "Recent Sales of Unregistered
Securities" (all of whom were accredited investors) through a private placement
under Rule 505 of Regulation D promulgated under the Securities Act at a price
of $100.00 per share. The Company received $2,003,000 in cash as a result of the
private placement transaction and paid $235,360 in commissions and expenses to
Win Capital Corp., the exclusive placement agent of the offering.
A. On March 4, 1998, the Company issued 125 shares of Series C
Preferred Stock to Robert M. Ball for a cash investment of
$12,500.
B. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Robert J. Braig for a cash investment of
$10,000.
C. On March 4, 1998, the Company issued 150 shares of Series C
Preferred Stock to Thomas W. Brake for a cash investment of
$15,000.
D. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Craig S. Brewer for a cash investment of
$25,000.
E. On March 4, 1998, the Company issued 200 shares of Series C
Preferred Stock to Consolidated Management Services, Inc. for
a cash investment of $20,000.
F. On March 4, 1998, the Company issued 200 shares of Series C
Preferred Stock to Michael Demayo for a cash investment of
$20,000.
G. On March 4, 1998, the Company issued 125 shares of Series C
Preferred Stock to C. Richard Dobson for a cash investment of
$12,500.
II-4
<PAGE>
H. On March 4, 1998, the Company issued 750 shares of Series C
Preferred Stock to Robert L. Frome for a cash investment of
$75,000.
I. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Steven F. Gallop and Karen M. Gallop,
JTWROS for a cash investment of $10,000.
J. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to William A. Gantz and Carol A. Gantz, JTWROS
for a cash investment of $10,000.
K. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to John A. Grue for a cash investment of
$10,000.
J. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Edward G. Hammond for a cash investment of
$25,000.
L. On March 4, 1998, the Company issued 750 shares of Series C
Preferred Stock to Hi-Tel Group, Inc. for a cash investment of
$75,000.
M. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Rommie L. Honeycutt for a cash investment
of $10,000.
N. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Roy Lee Hounshell for a cash investment of
$10,000.
O. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Samuel C. Houser and Robin B. Houser,
JTWROS for a cash investment of $10,000.
P. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Randy N. Humphrey for a cash investment of
$10,000.
Q. On March 4, 1998, the Company issued 200 shares of Series C
Preferred Stock to Jerry R. King for a cash investment of
$20,000.
R. On March 4, 1998, the Company issued 200 shares of Series C
Preferred Stock to Terry F. King for a cash investment of
$20,000.
S. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Shannon E. Miller and Shannon S. Miller,
JTWROS for a cash investment of $10,000.
T. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to Joseph R. Nemeth for a cash investment of
$100,000.
U. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to Dr. Joseph Nemeth, IRA for a cash
investment of $100,000.
V. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Christopher C. Northey for a cash
investment of $10,000.
W. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Eileen M. O'Dea for a cash investment of
$75,000.
X. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Laurence Leon Olive for a cash investment
of $10,000.
Y. On March 4, 1998, the Company issued 200 shares of Series C
Preferred Stock to John D. Phillips, Jr. for a cash investment
of $20,000.
Z. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Richard D. Poling for a cash investment of
$10,000.
AA. On March 4, 1998, the Company issued 150 shares of Series C
Preferred Stock to Feliciano Sergio Sabates, III for a cash
investment of $15,000.
II-5
<PAGE>
BB. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Claude W. Savage and Jean G. Savage, JTWROS
for a cash investment of $10,000.
CC. On March 4, 1998, the Company issued 100 shares of Series C
Preferred Stock to Gregg Stokes for a cash investment of
$10,000.
DD. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to TSP Associates, Inc. for a cash investment
of $100,000.
EE. On March 4, 1998, the Company issued 130 shares of Series C
Preferred Stock to William E. Webb, III for a cash investment
of $13,000.
FF. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Artas Corporation for a cash investment of
$50,000.
GG. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to United Growth Fund, Inc. Profit Sharing
Plan for a cash investment of $50,000.
HH. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Sterling Capital LLC for a cash investment
of $25,000.
II. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to John W. Hemmer and Barbara Bean Hemmer,
JTWROS for a cash investment of $25,000.
JJ. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Gregory J. Lavin for a cash investment of
$25,000.
KK. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Robert W. Millar for a cash investment of
$25,000.
LL. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Thomas F. Motter for a cash investment of
$25,000.
MM. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Marc N. Rubin for a cash investment of
$50,000.
NN. On March 4, 1998, the Company issued 300 shares of Series C
Preferred Stock to Thomas R. Wolf and Erica P. Wolf, JTWROS
for a cash investment of $30,000.
OO. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Dr. Thomas R. Wolf, SEP IRA for a cash
investment of $25,000.
PP. On March 4, 1998, the Company issued 2,500 shares of Series C
Preferred Stock to Canadian Advantage Limited Partnership for
a cash investment of $250,000.
QQ. On March 4, 1998, the Company issued 300 shares of Series C
Preferred Stock to Paul N. Davis for a cash investment of
$30,000.
RR. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to RF Lafferty & Co. Profit Sharing Plan FBO
Henry Hackel for a cash investment of $100,000.
SS. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Roger Newman for a cash investment of
$50,000.
TT. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Samuel Richman for a cash investment of
$25,000.
UU. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Jeffrey Zarry Schwartz for a cash
investment of $25,000.
VV. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Richard C. Siskey for a cash investment of
$50,000.
II-6
<PAGE>
WW. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Jeffrey G. Straus for a cash investment of
$25,000.
XX. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Wight Investment for a cash investment of
$50,000.
YY. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Michael W. Stelzer and Paula J. Stelzer,
JTWROS for a cash investment of $25,000.
ZZ. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Patrick Kolenik - IRA for a cash investment
of $50,000.
AAA. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Patrick Kolenik and Dolores Kolenik, JTWROS
for a cash investment of $50,000.
BBB. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Roger C. Husted for a cash investment of
$25,000.
CCC. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to Lincoln Trust Company FBO Michael B.
Limberg, M.D. for a cash investment of $100,000.
DDD. On April 6, 1998, the Company issued 300 shares of Series C
Preferred Stock to Charles F. Trapp for a cash investment of
$35,000.
EEE. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to BCN Associates for a cash investment of
$50,000.
FFF. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Charles R Thompson, Jr., M.D. for a cash
investment of $25,000.
GGG. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Continental Stock Transfer & Trust for a
cash investment of $50,000.
HHH. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to Ronald A. and Karen A. Ballsin, JTWROS for
a cash investment of $100,000.
III. On March 4, 1998, the Company issued 1,000 shares of Series C
Preferred Stock to Michael Associates for a cash investment of
$100,000.
JJJ. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Mark S. Richardson for a cash investment of
$25,000.
KKK. On March 4, 1998, the Company issued 150 shares of Series C
Preferred Stock to Mark and Lori Cozins for a cash investment
of $15,000.
LLL. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Michael L. Salamone for a cash investment
of $25,000.
MMM. On March 4, 1998, the Company issued 350 shares of Series C
Preferred Stock to Premier Alliance Group, Inc. for a cash
investment of $35,000.
NNN. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Gary Hammond for a cash investment of
$25,000.
OOO. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Jeffrey A. and Penny Strack for a cash
investment of $25,000.
PPP. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to J. Michael Smith for a cash investment of
$25,000.
QQQ. On March 4, 1998, the Company issued 200 shares of Series C
Preferred Stock to Irwin Messer and Alexandra S. Urdang for a
cash investment of $20,000.
II-7
<PAGE>
RRR. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Sheila Sandman for a cash investment of
$25,000.
SSS. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Joseph Aufrino for a cash investment of
$50,000.
TTT. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Ted Levine for a cash investment of
$50,000.
UUU. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to B. Michael Pisani for a cash investment of
$25,000.
VVV. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Alfred J. Ricciardi and Joseph Ricciardi
for a cash investment of $50,000.
WWW. On March 4, 1998, the Company issued 500 shares of Series C
Preferred Stock to Rose W. Zee for a cash investment of
$50,000.
XXX. On March 4, 1998, the Company issued 250 shares of Series C
Preferred Stock to Patrick and Linda Vetere, JTWROS, for a
cash investment of $50,000.
III. Common Stock
A. On August 4, 1998, the Company issued 90,000 shares of Common
Stock to Zevex International, Inc. ("Zevex") pursuant to the
Stock Exchange for Satisfaction of Debt Agreement in which the
Company agreed to issue such shares in exchange for the
satisfaction of $400,000 in debt which the Company then owed
to Zevex.
B. On August 4, 1998, the Company issued 79,929 shares of Common
Stock to Humphrey Systems Division of Carl Zeiss, Inc.
("Humphrey Systems") and 26,315 shares of Common Stock to
Douglas Adams as consideration under an Agreement for Purchase
and Sale of Assets in which the Company acquired the ownership
and manufacturing rights to certain diagnostic instruments of
Humphrey Systems.
C. On November 19, 1998, the Company issued 21,053 shares of
Common Stock to Humphrey Systems as consideration under an
Agreement for Purchase and Sale of Assets in which the Company
acquired the ownership and manufacturing rights to certain
diagnostic instruments of Humphrey Systems.
IV. Series D Convertible Preferred Stock
During the period from January 14, 1999 to March 1, 1999, the Company
sold a total of 1,140,000 shares of Series D Preferred Stock to the 71 persons
identified below in this Part V of Item 26, "Recent Sales of Unregistered
Securities" (all of whom were accredited investors) through a private placement
under Rule 506 of Regulation D promulgated under the Securities Act at a price
of $1.75 per share. The Company received $1,995,000 in cash as a result of the
private placement transaction and paid $199,500 in commissions and expenses to
KSH Investment Group, Inc., the placement agent of the offering. It also issued
warrants to purchase shares to
A. On February 12, 1999, the Company issued 15,000 shares of
Series D Preferred Stock to A.J. Baccala for a cash investment
of $26,250.
B. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Dr. Robert Bedrossian for a cash
investment of $8,750.
C. On February 12, 1999, the Company issued 15,000 shares of
Series D Preferred Stock to Dr. Valery Berger for a cash
investment of $26,250.
D On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Berkeley Investments, Inc. for a
cash investment of $17,500.
E. On February 12, 1999, the Company issued 15,000 shares of
Series D Preferred Stock to Paul and Judith Berkman for a cash
investment of $26,250.
F. On February 12, 1999, the Company issued 15,000 shares of
Series D Preferred Stock to Edwin Bindseil for a cash
investment of $26,750.
II-8
<PAGE>
G On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Dr. Kostaki Bis for a cash
investment of $8,750.
H. On February 12, 1999, the Company issued 70,000 shares of
Series D Preferred Stock to Benjamin Bollag for a cash
investment of $122,500.
I. On February 12, 1999, the Company issued 23,316 shares of
Series D Preferred Stock to Dr. Richard Bowe, IRA for a cash
investment of $44,303.
J. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to CarCap Co., LLC for a cash
investment of $8,750.
K. On February 12, 1999, the Company issued 40,000 shares of
Series D Preferred Stock to James and Caren Cobb for a cash
investment of $70,000.
L On February 12, 1999, the Company issued 30,000 shares of
Series D Preferred Stock to the Corman Foundation, Inc. for a
cash investment of $52,500.
M. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Brian and Irene Cotter for a cash
investment of $17,500.
N. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Jonathan Cress for a cash
investment of $8,750
O. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Scott Crowther for a cash
investment of $17,500.
P. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to George and JoAnn Dick for a cash
investment of $17,500.
Q. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to James A. Erb for a cash investment
of $17,500.
R. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Clifford A. Falkenau for a cash
investment of $8,750.
S. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Helen Falkenau for a cash
investment of $8,750.
T. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Aaron I. Feder for a cash
investment of $17,500.
U. On February 12, 1999, the Company issued 9,000 shares of
Series D Preferred Stock to Dale S. and Jack Feinblatt for a
cash investment of $15,750.
V. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Dr. Ronald Friedman, IRA for a
cash investment of $17,500.
W. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Dr. Leon Gallin for a cash
investment of $8,750.
X. On February 12, 1999, the Company issued 17,000 shares of
Series D Preferred Stock to Anthony Gardocki for a cash
investment of $29,750.
Y. On February 12, 1999, the Company issued 40,000 shares of
Series D Preferred Stock to Shadow Capital, LLC for a cash
investment of $70,000.
Z. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Bonnie and Mort Goldberg for a
cash investment of $17,500.
AA. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to R. Steven Graves for a cash
investment of $17,500.
II-9
<PAGE>
BB. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Sean Greene for a cash investment
of $17,500.
CC On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Halpert Enterprises, Inc. for a
cash investment of $17,500.
DD On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Douglas and Alexis Hogue for a
cash investment of $17,500
EE. On February 12, 1999, the Company issued 11,500 shares of
Series D Preferred Stock to Dr. Roger Husted for a cash
investment of $20,125.
FF. On February 12, 1999, the Company issued 6,000 shares of
Series D Preferred Stock to Irwin Kabat for a cash investment
of $10,500.
GG. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to A. William Kapler for a cash
investment of $17,500.
HH. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Elaine Khalaf for a cash
investment of $17,500.
II. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Aaron Kirzner for a cash
investment of $8,750.
JJ. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Lyudmila Korets for a cash
investment of $8,750.
KK. On February 12, 1999, the Company issued 28,000 shares of
Series D Preferred Stock to Walter and Carol Koschak for a
cash investment of $49,000.
LL. On February 12, 1999, the Company issued 100,000 shares of
Series D Preferred Stock to Dr. Michael Limberg, IRA a cash
investment of $175,000.
MM. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Morris Macy for a cash investment
of $8,750.
NN. On February 12, 1999, the Company issued 15,000 shares of
Series D Preferred Stock to Michelle McDonough for a cash
investment of $26,250.
OO. On February 12, 1999, the Company issued 100,000 shares of
Series D Preferred Stock to Dr. Joseph Nemeth for a cash
investment of $175,000.
PP. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Jules M. Ness for a cash
investment of $17,500.
QQ. On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to James Pickett for a cash
investment of $8,750.
RR On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Dr. Soleiman Rabanipour for a cash
investment of $17,500.
SS On February 12, 1999, the Company issued 20,000 shares of
Series D Preferred Stock to Dr. Sheldon Rabin, IRA for a cash
investment of $35,000.
TT On February 12, 1999, the Company issued 8,000 shares of
Series D Preferred Stock to the Reinhard & Reinhard M/P Plan
for a cash investment of $14,000.
UU On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Marsha and Barry Reiss for a cash
investment of $17,250.
VV On February 12, 1999, the Company issued 15,000 shares of
Series D Preferred Stock to Alan Rothstein for a cash
investment of $26,250.
II-10
<PAGE>
WW On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Scott W. Sakin for a cash
investment of $17,500.
XX On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Larry and Katina Snyder for a cash
investment of $8,750.
YY On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Jerold Stern for a cash investment
of $8.750.
ZZ On February 12, 1999, the Company issued 10,828 shares of
Series D Preferred Stock to Steve Shook Construction P/S Plan
for a cash investment of $18,949.
AAA. On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Joseph and Sandra Stewart for a
cash investment of $17,500.
BBB On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to David Tadych for a cash investment
of $8.750.
CCC On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Miles and Rochelle Weinberg for a
cash investment of $17,500.
DDD On February 12, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Xanadu Associates, LLC for a cash
investment of $17,500
EEE On February 12, 1999, the Company issued 15,000 shares of
Series D Preferred Stock to Dr. Alkis Zingas Trust for a cash
investment of $26,250.
FFF On February 12, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Dr. Igor Zlotin for a cash
investment of $8,750.
GGG On February 12, 1999, the Company issued 20,000 shares of
Series D Preferred Stock to Simon Zunamon Revocable Trust for
a cash investment of $35,000.
HHH. On February 23, 1999, the Company issued 25,000 shares of
Series D Preferred Stock to Jerry and Linda Bassin for a cash
investment of $43,750.
III. On February 23, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Bill D. and Claudia J. Berkeley
for a cash investment of $17,500
JJJ. On February 23, 1999, the Company issued 30,000 shares of
Series D Preferred Stock to Thomas C. Coleman for a cash
investment of $52,500.
KKK. On February 23, 1999, the Company issued 9,356 shares of
Series D Preferred Stock to Steven Kohn, IRA for a cash
investment of $16,373.
LLL. On February 23, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Robert Margolin, IRA for a cash
investment of $8,750.
MMM. On February 23, 1999, the Company issued 50,000 shares of
Series D Preferred Stock to Mid-Lakes P/S Trust for a cash
investment of $87,500.
NNN. On February 23, 1999, the Company issued 5,000 shares of
Series D Preferred Stock to Dr. Steven Rubel for a cash
investment of $8.750.
OOO. On February 23, 1999, the Company issued 10,000 shares of
Series D Preferred Stock to Melvyn and Lea Ruskin for a cash
investment of $17,500.
PPP. On February 23, 1999, the Company issued 25,000 shares of
Series D Preferred Stock to Judy Shapiro for a cash investment
of $43,750.
QQQ. On March 1, 1999, the Company issued 5,000 shares of Series D
Preferred Stock to William and Marion Conley for a cash
investment of $8,750.
II-11
<PAGE>
RRR. On March 1, 1999, the Company issued 20,000 shares of Series D
Preferred Stock to John Donahue, IRA for a cash investment of
$35,000.
SSS. On March 1, 1999, the Company issued 15,000 shares of Series D
Preferred Stock to John Harte for a cash investment of
$26,250.
V. Common Stock
A. On January 18, 1999, the Company issued 50,000 shares of
Common Stock to John W. Hemmer, Vice President of Finance,
Treasurer, Chief Financial Officer and a director of the
Company, for services provided to the Company.
Item 27. Exhibits
Exhibit
Number Document Dexcription
(a) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-B or are incorporated by reference to previous filings.
Table No. Document
2.1 Amended Agreement and Plan of Merger between Paradigm Medical
Industries, Inc., a California corporation and Paradigm Medical
Industries, Inc., a Delaware corporation(1)
3.1 Certificate of Incorporation(1)
3.2 Bylaws(1)
4.1 Warrant Agency Agreement with Continental Stock Transfer &
Trust Company(3)
4.2 Specimen Common Stock Certificate (2)
4.3 Specimen Class A Warrant Certificate(2)
4.4 Form of Class A Warrant Agreement(2)
4.5 Underwriter's Warrant with Kenneth Jerome & Co., Inc.(3)
4.6 Warrant to Purchase Common Stock with Note Holders re bridge
financing(1)
4.7 Warrant to Purchase Common Stock with Mackey Price &
Williams(1)
4.8 Warrant to Purchase Common Stock with Win Capital Corp.(6)
4.9 Specimen Series C Convertible Preferred Stock Certificate(6)
4.10 Certificate of the Designations, Powers, Preferences and Rights
of the Series C Convertible Preferred Stock(6)
4.11 Specimen Series D Convertible Preferred Stock Certificate (10)
4.12 Certificate of the Designations, Powers, Preferences and Rights
of the Series D Convertible Preferred Stock (10)
4.13 Warrant to Purchase Common Stock with Win Capital Corp. (10)
4.14 Warrant to Purchase Common Stock with Cyn Del & Co. (10)
4.15 Warrant Agreement with KSH Investment Group, Inc. (10)
4.16 Warrant to Purchase Common Stock with John R. Hemmer
5. Opinion of Mackey Price & Williams (10)
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)
II-12
<PAGE>
10.8 Royalty Agreement (for Ultrasonic Phaco Handpiece) with Dennis
L. Oberkamp Design Services(1)
10.9 Lease Agreement with Eden Roc (6)
10.10 Settlement and Release Agreement with Douglas A. MacLeod(1)
10.11 Form of Indemnification Agreement(1)
10.12 1995 Stock Option Plan and forms of Stock Option Grant
Agreements(1)
10.13 Form of Promissory Note with Note Holders re bridge
financing(1)
10.14 Employee's Lock-Up Agreement(1)
10.15 Registering Shareholders Lock-Up Agreement(3)
10.16 Amendment of Settlement and Release Agreement with Douglas A.
MacLeod(3)
10.17 Design, Engineering and Manufacturing Agreement with Zevex,
Inc.(5)
10.18 License and Manufacturing Agreement with O.B.F. Labs, Ltd.(6)
10.19 Settlement Agreement with Estate of H.L. Federman(6)
10.20 Agreement with Win Capital Corp.(6)
10.21 12% Convertible, Redeemable Promissory Note(6)
10.22 Securities Exchange Agreement(6)
10.23 Stock Exchange for Satisfaction of Debt Agreement with Zevex
International, Inc. (7)
10.24 Co-Distribution Agreement with Pharmacia & Upjohn Company and
National Healthcare Manufacturing Corporation (7)
10.25 Agreement for Purchase and Sale of Assets with Humphrey Systems
Division of Carl Zeiss, Inc. (7)
10.26 Employment Agreement with Thomas F. Motter(9)
10.27 Employment Agreement with Robert W. Millar(9)
10.28 Employment Agreement with Jack W. Hemmer(9)
10.29 Employment Agreement with Michael W. Stelzer (9)
10.30 Change of Control Termination with Thomas F. Motter (9)
10.31 Change of Control Termination with Robert W. Millar (9)
10.32 Change of Control Termination with John W. Hemmer (9)
10.33 Change of Control Termination with Michael W. Stelzer (9)
10.34 Promissory Note with Win Capital Corp. (10)
10.35 Promissory Note with Cyn Del & Co. (10)
10.36 Consulting Agreement with Win Capital Corp. (10)
10.37 Agreement with Win Capital Corp.
10.38 Agreement with Cyn Del & Co.
23.1 Consent of Medical Laser Insight(3)
23.2 Consent of Frost & Sullivan(3)
23.3 Consent of Ophthalmologists Times(3)
23.4 Consent of Mackey Price & Williams (10)
23.5 Consent of Tanner & Co.
27. Financial Data Schedule
----------------------------
(1) Incorporated by reference from Registration Statement on Form
SB-2, as filed on March 19, 1996.
(2) Incorporated by reference from Amendment No. 1 to Registration
Statement on Form SB-2, as filed on May 14, 1996.
(3) Incorporated by reference from Amendment No. 2 to Registration
Statement on Form SB-2, as filed on June 13, 1996.
(4) Incorporated by reference from Amendment No. 3 to Registration
Statement on Form SB-2, as filed on June 28, 1996.
(5) Incorporated by reference from Annual Report on Form 10-KSB, as
filed on December 30, 1996
(6) Incorporated by reference from Annual Report on Form 10-KSB, as
filed on April 16, 1998
(7) Incorporated by reference from Quarterly Report on Form 10-QSB,
as filed on August 19, 1998.
II-13
<PAGE>
(8) Incorporated by reference from Registration Statement on Form SB-2, as
filed on June 15, 1998. (9) Incorporated by reference from Quarterly Report
on Form 10-QSB, as filed on November 12, 1998. (10) Incorporated by
reference from Registration Statement on Form SB-2, as filed on April 29,
1999.
(b) Reports on Form 8-K
None
Undertakings
The undersigned Registrant hereby undertakes (a) subject to the terms and
conditions of Section 15(d) of the Securities Exchange Act of 1934, to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section; (b) to provide the Underwriter at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in the names as required by the Underwriters to
permit prompt delivery to each purchaser; (c) if any public offering by the
Underwriters is to be made on terms differing from those set forth on the cover
page of the Prospectus, to file a post-effective amendment setting forth the
terms of such offering; and (d) to deregister, by means of a post-effective
amendment, any securities covered by this Registration Statement that remain
unsold at the termination of this offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or preceding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant also undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering of those securities.
The undersigned Registrant further undertakes that it will file, during
any period in which it offers or sells securities, a post-effective amendment to
this Registration Statement to (i) include any prospectus required by Section
10(a)(3) of the Securities Act, (ii) reflect in the prospectus any facts or
events which, individually or together, represent a fundamental change in the
information in the Registration Statement, and (iii) include any additional or
changed material information on the plan of distribution.
II-14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in Salt Lake City,
State of Utah, on May 6, 1999.
PARADIGM MEDICAL INDUSTRIES, INC.
By: /s/ Thomas F. Motter
----------------------------------------
Thomas F. Motter, Chairman of the Board,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Thomas F. Motter as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Registration Statement, and to file the same, with
all Exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Thomas F. Motter Chairman of the Board, May 6, 1999
- -------------------------
Thomas F. Motter President and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael W. Stelzer Vice President of Operations, Chief May 6, 1999
- -------------------------
Michael W. Stelzer Operating Officer, Secretary and Director
/s/ Robert W. Millar Vice President of Engineering and May 6, 1999
- -------------------------
Robert W. Millar Manufacturing and Director
/s/ John W. Hemmer Treasurer, Chief Financial Officer and May 6, 1999
- ------------------------
John W. Hemmer Director (Principal financial and
Accounting Officer)
Director May __, 1999
- ------------------------
Patrick M. Kolenik
Director May __, 1999
- ------------------------
Robert L. Frome
</TABLE>
SBA-506M.PMI
II-15
<PAGE>
As filed with the Securities and Exchange Commission on April 27, 1999
Registration Statement No. 33-77267
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
AMENDMENT NO. 1
TO
EXHIBITS
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
PARADIGM MEDICAL INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 3841 87-0459536
(State of jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number)Identification Number)
1127 West 2320 South, Suite A
Salt Lake City, Utah 84119
(801) 977-8970
(Address and telephone number of registrant's principal
executive offices and principal place of business)
Thomas F. Motter, President
1127 West 2320 South. Suite A
Salt Lake City, Utah 84119
(801) 977-8970
(Name, address and telephone number of agent for service)
----------------------
Copies to:
Randall A. Mackey, Esq.
Mackey Price & Williams
170 South Main Street, Suite 900
Salt Lake City, Utah 84101-1655
Telephone: (801) 575-5000
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Table No. Document
--------- --------
<S> <C>
2.1 Amended Agreement and Plan of Merger between Paradigm Medical Industries, Inc., a California
corporation and Paradigm Medical Industries, Inc., a Delaware corporation(1)
3.1 Certificate of Incorporation(1)
3.2 Bylaws(1)
4.1 Warrant Agency Agreement with Continental Stock Transfer & Trust Company(3)
4.2 Specimen Common Stock Certificate (2)
4.3 Specimen Class A Warrant Certificate(2)
4.4 Form of Class A Warrant Agreement(2)
4.5 Underwriter's Warrant with Kenneth Jerome & Co., Inc.(3)
4.6 Warrant to Purchase Common Stock with Note Holders re bridge financing(1)
4.7 Warrant to Purchase Common Stock with Mackey Price & Williams(1)
4.8 Warrant to Purchase Common Stock with Win Capital Corp.(6)
4.9 Specimen Series C Convertible Preferred Stock Certificate(6)
4.10 Certificate of the Designations, Powers, Preferences and Rights of the Series C Convertible Preferred Stock(6)
4.11 Specimen Series D Convertible Preferred Stock Certificate (10)
4.12 Certificate of the Designations, Powers, Preferences and Rights of the Series D Convertible Preferred Stock(10)
4.13 Warrant to Purchase Common Stock with Win Capital Corp. (10)
4.14 Warrant to Purchase Common Stock with Cyn Del & Co. (10)
4.15 Warrant Agreement with KSH Investment Group, Inc. (10)
4.16 Warrant to Purchase Common Stock with John R. Hemmer
5. Opinion of Mackey Price & Williams (10)
10.1 Exclusive Patent License Agreement with Photomed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 Confidential Disclosure Agreement with Zevex, Inc.(1)
10.4 Indemnity Agreement with Zevex International, Inc.(1)
10.5 Manufacturing Agreement with Sunrise Technologies, Inc.(1)
10.6 Royalty Agreement dated January 30, 1992, with Dennis L. Oberkamp Design Services(1)
10.7 Indemnity Agreement dated January 30, 1992, with Dennis L. Oberkamp Design Services(1)
10.8 Royalty Agreement (for Ultrasonic Phaco Handpiece) with Dennis L. Oberkamp Design Services(1)
10.9 Lease Agreement with Eden Roc (6)
10.10 Settlement and Release Agreement with Douglas A. MacLeod(1)
10.11 Form of Indemnification Agreement(1)
10.12 1995 Stock Option Plan and forms of Stock Option Grant Agreements(1)
10.13 Form of Promissory Note with Note Holders re bridge financing(1)
10.14 Employee's Lock-Up Agreement(1)
10.15 Registering Shareholders Lock-Up Agreement(3)
10.16 Amendment of Settlement and Release Agreement with Douglas A. MacLeod(3)
10.17 Design, Engineering and Manufacturing Agreement with Zevex, Inc.(5)
10.18 License and Manufacturing Agreement with O.B.F. Labs, Ltd.(6)
10.19 Settlement Agreement with Estate of H.L. Federman(6)
10.20 Agreement with Win Capital Corp.(6)
10.21 12% Convertible, Redeemable Promissory Note(6)
10.22 Securities Exchange Agreement(6)
10.23 Stock Exchange for Satisfaction of Debt Agreement with Zevex International, Inc. (7)
10.24 Co-Distribution Agreement with Pharmacia & Upjohn Company and National
Healthcare Manufacturing Corporation (7)
<PAGE>
10.25 Agreement for Purchase and Sale of Assets with Humphrey Systems Division of
Carl Zeiss, Inc. (7)
10.26 Employment Agreement with Thomas F. Motter(9)
10.27 Employment Agreement with Robert W. Millar(9)
10.28 Employment Agreement with Jack W. Hemmer(9)
10.29 Employment Agreement with Michael W. Stelzer (9)
10.30 Change of Control Termination with Thomas F. Motter (9)
10.31 Change of Control Termination with Robert W. Millar (9)
10.32 Change of Control Termination with John W. Hemmer (9)
10.33 Change of Control Termination with Michael W. Stelzer (9)
10.34 Promissory Note with Win Capital Corp. (10)
10.35 Promissory Note with Cyn Del & Co. (10)
10.36 Consulting Agreement with Win Capital Corp. (10)
10.37 Agreement with Win Capital Corp.
10.38 Agreement with Cyn Del & Co.
23.1 Consent of Medical Laser Insight(3)
23.2 Consent of Frost & Sullivan(3)
23.3 Consent of Ophthalmologists Times(3)
23.4 Consent of Mackey Price & Williams (10)
23.5 Consent of Tanner & Co.
27. Financial Data Schedule
----------------------------
(1) Incorporated by reference from Registration Statement on Form SB-2, as filed on March 19, 1996.
(2) Incorporated by reference from Amendment No. 1 to Registration Statement on Form SB-2, as filed on May 14, 1996.
(3) Incorporated by reference from Amendment No. 2 to Registration Statement on Form SB-2, as filed on June 13, 1996.
(4) Incorporated by reference from Amendment No. 3 to Registration Statement on Form SB-2, as filed on June 28, 1996.
(5) Incorporated by reference from Annual Report on Form 10-KSB, as filed on December 30, 1996
(6) Incorporated by reference from Annual Report on Form 10-KSB, as filed on April 16, 1998
(7) Incorporated by reference from Quarterly Report on Form 10-QSB, as filed on August 19, 1998.
(8) Incorporated by reference from Registration Statement on Form SB-2, as filed on June 15, 1998.
(9) Incorporated by reference from Quarterly Report on Form 10-QSB, as filed on November 12, 1998.
(10) Incorporated by reference from Registration Statement on Form SB-2, as filed on April 29, 1999.
</TABLE>
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR
SALE, SOLD, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT.
Void after 5:00 p.m., Mountain Standard Time, March 10, 2004.
Warrant to Purchase 125,000
Shares of Common Stock
WARRANT TO PURCHASE COMMON STOCK
PARADIGM MEDICAL INDUSTRIES, INC.
This is to certify that, FOR VALUE RECEIVED,
JOHN W. HEMMER
or registered assigns (the "Holder"), is entitled to purchase, subject to the
provisions of this Warrant, from Paradigm Medical Industries, Inc., a Delaware
Corporation (the "Company"), at any time on or after March 11, 1999, and not
later than 5:00 p.m., Mountain Standard Time, on March 10, 2004, 125,000 shares
of common stock, $.001 par value of the Company (the "Common Stock") at a
purchase price of $2.63 per share. The number of shares of Common Stock to be
received upon the exercise of this Warrant and the price to be paid for a share
of Common Stock may be adjusted from time to time as hereinafter set forth. The
shares of the Common Stock deliverable upon such exercise, and as adjusted from
time to time, are referred to as "Warrant Stock" and the exercise price of a
share of Common Stock in effect at any time and as adjusted from time to time is
referred to as the "Exercise Price."
1. Exercise of Warrant. Subject to the provisions of hereof, this
Warrant may be exercised in whole or in part at any time or from time to time on
or after March 11, 1999 by tender to the Company the Purchase Form annexed
hereto, duly executed and accompanied by payment of the Exercise Price for the
number of shares specified in such form, together with all federal and state
taxes applicable upon such exercise. If this Warrant should be exercised in part
only, the Company shall, upon surrender of this Warrant for cancellation,
execute and deliver a new Warrant evidencing the right of the holder to purchase
the balance of the shares purchasable hereunder. Upon receipt by the Company of
this Warrant at the office or agency of the Company, in proper form for
exercise, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of the Company shall then be closed or
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WAR-506M.PMI
<PAGE>
that certificates representing such shares of Common Stock shall not then be
actually delivered to the Holder.
2. Reservation of Shares. The Company shall reserve for issuance and/or
delivery upon exercise of this Warrant such number of shares of its Common Stock
as shall be required for issuance or delivery upon exercise of this Warrant.
3. Fractional Shares. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of such fractional share.
4. Exchange, Assignment or Loss of Warrant. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company for other Warrants of different
denominations entitling the holder thereof to purchase in the aggregate the same
number of shares of Common Stock purchasable hereunder. The term "Warrant" as
used herein includes any Warrants issued in substitution for or replacement of
this Warrant, or into which this Warrant may be divided or exchanged. Upon
receipt by the Company of evidence satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of reasonably satisfactory indemnification including a surety bond,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will execute and deliver a new Warrant of like tenor and date. Any such new
Warrant executed and delivered shall constitute an additional contractual
obligation on the part of the Company, whether or not this Warrant so lost,
stolen, destroyed, or mutilated shall be at any time enforceable by anyone.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
6. Adjustment of Exercise Price. The Exercise Price of Each Warrant
shall be subject to adjustment from time to time as follows:
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WAR-506M.PMI
<PAGE>
(a) If the number of shares of Common Stock outstanding at any
time after the date hereof is increased by a stock dividend payable in shares of
Common Stock or by a subdivision or split-up of shares of Common Stock, then, on
the date such payment is made or such change is effective, the Exercise Price of
a Warrant shall be appropriately decreased so that the number of shares of
Common Stock issuable on exercise of such Warrant shall be increased in
proportion to such increase of outstanding shares.
(b) If the number of shares of Common Stock outstanding at any
time after the date hereof is decreased by a combination of the outstanding
shares of Common Stock, then, on the
effective date of such combination, the Exercise Price of a Warrant shall be
appropriately increased so that the number of shares of Common Stock issuable on
exercise of a Warrant shall be decreased in proportion to such decrease in
outstanding shares.
(c) In case, at any time after the date hereof, of any capital
reorganization, or any reclassification of the stock of the Company (other than
as a result of a stock dividend or subdivision, split-up or combination of
shares), or the consolidation or merger of the Company with or into another
person (other than a consolidation or merger in which the Company is the
continuing entity and which does not result in any change in the Common Stock),
or of the sale or other disposition of all or substantially all the properties
and assets of the Company, the Warrants shall, after such reorganization,
reclassification, consolidation, merger, sale or other disposition, be
convertible into the kind and number of shares of stock or other securities or
property of the Company or otherwise to which such holder would have been
entitled if immediately prior to such reorganization, reclassification,
consolidation, merger, sale or other disposition he had converted his Warrants
into Common Stock. The provisions of this clause (c) shall similarly apply to
successive reorganizations, reclassifications, consolidations, mergers, sales or
other dispositions.
(d) All calculations under this paragraph 6 shall be made to
the nearest cent or to the nearest one hundredth (1/100) of a share, as the case
may be.
(e) Minimal Adjustments. No adjustment in the Exercise Price
need be made if such adjustment would result in a change in the Exercise Price
of less than $0.01. Any adjustment of less than $0.01 which is not made shall be
carried forward and shall be made at the time of and together with any
subsequent adjustment which, on a cumulative basis, amounts to an adjustment of
$0.01 or more in the Exercise Price.
(f) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Exercise Price pursuant to this paragraph (f),
the Company at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Warrants a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based. The Company shall, upon written request at any time of any holder of
Warrants, furnish or cause to be furnished to such holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the Exercise Price of
such series at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the exercise of the Warrants.
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WAR-506M.PMI
<PAGE>
(g) Reservation of Stock Issuable Upon Exercise. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the exercise of the
Warrants such number of its shares of Common Stock as shall from time to time be
sufficient to effect the exercise of all outstanding Warrants; and if at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the exercise of all then outstanding Warrants, the Company
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose.
(h) Reclassification, Reorganization or Merger. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of an
issuance of Common Stock by way of dividend or other distribution or of a
subdivision or combination), or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety, the
Company shall cause effective provision to be made so that the holder shall have
the right thereafter, by exercising this Warrant to purchase the kind and amount
of shares of stock and other securities and property receivable upon such
reclassification, capital reorganization or other change, consolidation, merger,
sale or conveyance. Any such provision shall include provision for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Warrant and shall expressly provide that the issuer of
securities to be thereafter received on exercise of this Warrant assumes
obligations for registration of the Warrant and Warrant Stock issuable on
exercise of the Warrant substantially in accordance with the provisions of
Section 1 of this Warrant. The foregoing provisions of this Section shall
similarly apply to successive reclassifications, capital reorganizations and
changes of shares of Common Stock and to successive consolidations, mergers,
sales or conveyances.
(i) Dissolution. In case of a dissolution, liquidation, or
winding up of the Company, all purchase rights under this Warrant shall
terminate at the close of business on the date as of which holders of record of
the Common Stock shall be entitled to participate in a distribution of the
assets of the Company in connection with such dissolution, liquidation or
winding up. Any Warrant not exercised prior to such time shall be void and no
rights shall exist thereunder. In any such case of termination of purchase
rights, a statement thereof shall be included in the notice required by this
Warrant.
7.01 Definitions. As used in this Paragraph 7:
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WAR-506M.PMI
<PAGE>
(a) The terms "register", "registered", and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Act and the declaration or ordering of the effectiveness of
such registration statement.
(b) The term "Registrable Securities" means (i) the Common Stock issued
or issuable pursuant to the exercise of the Warrants and (ii) any Common Stock
of the Company issued or issuable in respect of such Common Stock or other
securities issued or issuable pursuant to the exercise of the Warrants upon any
stock split, stock dividend, recapitalization, or similar event, or any Common
Stock otherwise issued or issuable with respect to the Warrants. Notwithstanding
anything set forth above, the above-described securities shall not be treated as
Registrable Securities if and so long as they (A) have been sold to or through a
broker or dealer or underwriter in a public distribution or a public securities
transaction, or (B) have been sold (or are available for sale in the opinion of
counsel to the Company and market conditions would permit the sale of such
shares within a 90 day period) pursuant to Rule 144(k) in a transaction exempt
from the registration and prospectus delivery requirements of the Act so that
all transfer restrictions and restrictive legends with respect thereto are
removed upon the consummation of such sale.
(c) The term "Holder" means any holder holding Registrable Securities
or the Shares (and any person holding Shares or Registrable Securities to whom
the registration rights have been transferred pursuant to paragraph 9 hereof).
(d) The term "SEC" means the Securities and Exchange Commission or any
successor agency thereto.
7.02 Registration Rights. The Company shall file a registration
statement with the SEC to register the shares of Common Stock issuable to the
Holder upon conversion of this Warrant within forty-five (45) days of the
initial closing of the Company's offering (the "Offering") of shares of Series D
Convertible Preferred Stock (the "Series D Preferred Stock"), and will keep such
registration statement current until such time as the shares of Common Stock
issuable upon conversion of the shares of Series D Preferred Stock offered in
the Offering are freely tradeable pursuant to Rule 144(k) promulgated under the
Securities Act of 1933, as amended, all at the Company's cost and expense
(except commissions or discounts and attorney's fees and costs of the Holder).
Additionally, the Holder will have the right to demand the registration of the
shares issuable upon exercise of this Warrant beginning six months after the
closing of a public offering of the Company's securities if such Warrant is not
exercised during the period in which the registration statement for the shares
of Common Stock issuable upon conversion of the notes in the Offering is kept
current and such shares are not otherwise registered.
7.03 Company Registration.
(a) If at any time, or from time to time, the Company shall determine
to register any of its securities, either for its own account or for the account
of a security holder or holders, other than a registration relating solely to
employee benefit plans, or a registration on Form S-4 relating solely to an SEC
Rule 145 transaction, or a registration on any other form (other than Form S-1,
S-3, SB-1 or SB-2) which does not include substantially the same information as
would be required to be included in a registration statement covering the sale
of Registrable Securities, the Company will:
(i) promptly give to each Holder written notice thereof; and
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WAR-506M.PMI
<PAGE>
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein (if the Holder so desires), all the Registrable Securities
specified in any written request or requests by any Holder or Holders received
by the Company within twenty (20) days after such written notice is received on
the same terms and conditions as the Common Stock, if any, otherwise being sold
through the underwriter in such registration.
(b) If the registration that the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise the Holders as a part of the written notice given pursuant to paragraph
7.3(a). All Holders desiring to distribute their securities through such
underwriting, if any, (together with the Company and the other holders
distributing their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company.
(c) Notwithstanding any other provision of this paragraph 7.03, if the
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the underwriter may limit the Registrable
Securities or other securities to be included in the registration; provided,
however, that if such registration is other than the first registered offering
of the Company's securities to the public, the underwriter may not limit the
Registrable Securities to be included in such registration to less than 30% of
the securities included therein (based on aggregate market values). Any
reduction by the underwriter of the number of Registrable Securities or other
securities to be included in such registration shall be made in the following
manner: initially, shares of Common Stock held by the founders or other members
of the Company's management shall be excluded from such underwritten public
offering to the extent required by the underwriter, and if a further reduction
in the number of shares is required, the Company shall so advise all Holders and
other holders distributing their securities through such underwriting and the
number of shares of Registrable Securities and other securities that may be
included in the registration and underwriting shall be allocated among the
holders thereof in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities and other securities contractually entitled to
registration with the offering held by such Holders and other holders at the
time of filing of the Registration Statement. To facilitate the allocation of
shares in accordance with the above provisions, the Company may round the number
of shares allocated to any Holder or holder to the nearest 100 shares. The
Company shall advise all Holders of Registrable Securities which would otherwise
be registered and underwritten pursuant hereto of any such limitations, and the
number of shares of Registrable Securities that may be included in the
registration. If any Holder or holder disapproves of the terms of any such
underwriting, such Holder or holder may elect to withdraw therefrom by written
notice to the Company and the underwriter. Any securities excluded or withdrawn
from such underwriting shall not be transferred in a public distribution prior
to ninety (90) days after the effective date of the registration statement
relating thereto, or such shorter period of time as the underwriters may
require.
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WAR-506M.PMI
<PAGE>
(d) The Company shall have the right to terminate or withdraw any
registration initiated by it under this paragraph 7.03 prior to the
effectiveness of such registration whether or not any Holder has elected to
register securities in such registration.
7.04 Registration on Form S-3. If any Holder or Holders request that
the Company file a registration statement on Form S-3 (or any successor form to
Form S-3) for a public offering of shares of the Registrable Securities the
reasonably anticipated aggregate price to the public of which, net of
underwriting discounts and commissions, would exceed $500,000, and the Company
is a registrant entitled to use Form S-3 to register the Registrable Securities
for such an offering, the Company shall use its best efforts to cause such
Registrable Securities to be registered for the offering on such form and to
cause such Registrable Securities to be qualified in such jurisdictions as the
Holder or Holders may reasonably request; provided, however, that the Company
shall not be required to effect more than one registration pursuant to this
paragraph 7.04 in any twelve (12) month period. The substantive provisions of
paragraph 7.03 shall be applicable to each registration initiated under this
paragraph 7.04.
7.05 Expenses of Registration. All expenses incurred in connection with
any registration, qualification or compliance pursuant to this Paragraph 7,
including, without limitation, all registration, filing and qualification fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Company, accounting fees and expenses, and expenses of any special audits
incidental to or required by such registration, shall be borne by the Company;
provided, however, that the Company shall not be required to pay stock transfer
taxes or underwriters' fees, discounts or commissions relating to Registrable
Securities, or fees of counsel for the selling shareholders.
7.06 Information by Holder. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, and the distribution proposed by
such Holder or Holders, as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to in this Paragraph 7.
7.07 Sale Without Registration. If at the time of any transfer of any
Registrable Securities, such Registrable Securities shall not be registered
under the Act, the Company may require, as a condition of allowing such
transfer, that the Holder or transferee furnish to the Company (a) such
information as is necessary in order to establish that such transfer may be made
without registration under the Act, and (b) (if the transfer is not made in
compliance with Rule 144 other than a transfer not involving a change in
beneficial ownership or a pro rata distribution by a partnership to its
partners) at the expense of the Holder or transferee, an opinion of counsel
satisfactory to the Company in form and substance to the effect that such
transfer may be made without registration under the Act; provided that nothing
contained in this paragraph 7.09 shall relieve the Company from complying with
any request for registration, qualification, or compliance made pursuant to the
other provisions of this Paragraph 7.
-7-
WAR-506M.PMI
<PAGE>
7.08 Market Stand-off Agreement. The Holders, if requested by the
Company and an underwriter of Common Stock (or other securities) of the Company,
shall agree not to sell or otherwise transfer or dispose of any Securities held
by the Holders during the ninety (90) day period following the effective date of
a registration statement covering an initial public offering of the Company's
securities filed under the Act provided that:
(a) such agreement shall only apply to the first such
registration statement of the Company filed after the date of this Warrant
including shares of Common Stock (or other securities) to be sold on its behalf
to the public in an underwritten offering; and
(b) all Holders holding more than one percent of the
outstanding Common Stock, all officers and directors of the Company and all
other holders of registration rights of the Company (whether or not pursuant to
this agreement) enter into similar agreements. Such agreement shall be in
writing in the form satisfactory to the Company and such underwriter. The
Company may impose stop-transfer instructions with respect to the Securities
subject to the foregoing restriction until the end of the foregoing period.
7.09 Amendment of Registration Rights. With the written consent of the
Holders of a majority of the then outstanding Registrable Securities (including
securities exercisable for or convertible into Registrable Securities), the
Company may amend this Paragraph 7, or enter into an agreement with any holder
or prospective holder of any securities of the Company which would allow such
holder or prospective holder to include such securities as Registrable
Securities under this Paragraph 7.
7.10 Termination of Registration Rights. The demand rights provided for
in this Paragraph 7 shall be exercisable only between March 11, 1999 and March
10, 2004.
8. Transfer to Comply with the Securities Act 1933.
(a) This Warrant or the Warrant Stock or any other security
issued or issuable upon exercise of this Warrant may not be offered or sold
except in compliance with the Securities Act of 1933, as amended, and then only
against receipt of an agreement of such person to whom such offer of sale is
made to comply with the provisions of this Section 9 with respect to any resale
or other disposition of such securities.
(b) The Company may cause the following legend to be set forth
on each certificate representing Warrant Stock or any other security issued or
issuable upon exercise of this Warrant not theretofore distributed to the public
or sold to underwriters for distribution to the public pursuant to Section 1
hereof, unless counsel for the Company is of the opinion as to any such
certificate that such legend is unnecessary:
-8-
WAR-506M.PMI
<PAGE>
The securities represented by this certificate may not be offered for
sale, sold or otherwise transferred except pursuant to an effective
registration statement made under the Securities Act of 1933 (the
"Act"), or pursuant to an exemption from registration under the Act,
the availability of which is to be established to the satisfaction of
the Company.
9. Applicable Law. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Utah.
Paradigm Medical Industries, Inc.
By _________________________________________
Thomas F. Motter, President and Chief
Executive Officer
ATTEST:
By:-------------------------------------
Michael W. Stelzer, Vice President of
Operations, Secretary and Chief
Operating Officer
Date: Effective as of March 11, 1999
[SEAL]
-9-
WAR-506M.PMI
<PAGE>
PURCHASE FORM
Date __________________
The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing __________ shares of Common Stock and hereby
makes payment of $__________ in payment of the actual exercise price thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name____________________________________________________________________________
(please typewrite or print in block letters)
Address_________________________________________________________________________
Signature______________________________
-10-
WAR-506M.PMI
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED ____________________________________________________
hereby sells, assigns and transfers unto
Name ___________________________________________________________________________
(please typewrite or print in block letters)
Address _______________________________________________________________________
the right to purchase Common Stock represented by this Warrant to the extent of
______ shares as to which such right is exercisable and does hereby irrevocably
constitute and appoint _________________________________________ attorney, to
transfer the same on the books of the Company with full power of substitution in
the premises.
Signature _____________________________
Date: _____________________
-11-
WAR-506M.PMI
<PAGE>
April 23, 1999
WIN Capital
2 Rector Street
New York, New York
Re: 35,000 warrants issued in conjunction with $100,000 loan
Gentlemen:
On April 7, 1999, the Board of Directors of Paradigm Medical
Industries, Inc., authorized the issuance of 25,000 warrants exercisable for
Five (5) years at $4.00 per share of Paradigm Common Stock to WIN Capital.
The Common Stock underlying these warrants will be registered with
Paradigm's current Registration Statement upon the condition that WIN Capital
agrees to exercise their 35,000 warrants to purchase Paradigm Common Stock at
$2.30 per share (exercise price) within seventy-two (72) hours after receiving
notice from Paradigm Medical that the aforementioned Registration has gone
effective.
Please be advised that the Registration Statement is close to being
finished and that you promptly execute and return this agreement by facsimile to
me at (801) 977-8973. Thank you.
Very truly yours,
/s/ Michael W. Stelzer
Michael W. Stelzer
Corporate Secretary
HAVING READ AND UNDERSTOOD THE FOREGOING; IT IS SO AGREED.
/s/ Steve Bayern as Chairman
WIN Capital
LT1-507M.PMI
<PAGE>
April 23, 1999
Cyndel & Co.
26 Ludlam
Bayville, New York
Re: 105,000 warrants issued in conjunction with $100,000 loan
Gentlemen:
On April 7, 1999, the Board of Directors of Paradigm Medical
Industries, Inc., authorized the issuance of 75,000 warrants exercisable for
Five (5) years at $4.00 per share of Paradigm Common Stock to Cyndel.
The Common Stock underlying these warrants will be registered with
Paradigm's current Registration Statement upon the condition that Cyndel agrees
to exercise their 75,000 warrants to purchase Paradigm Common Stock at $2.30 per
share (exercise price) within seventy-two (72) hours after receiving notice from
Paradigm Medical that the aforementioned Registration has gone effective.
Please be advised that the Registration Statement is close to being
finished and that you promptly execute and return this agreement by facsimile to
me at (801) 977-8973. Thank you.
Very truly yours,
/s/ Michael W. Stelzer
Michael W. Stelzer
Corporate Secretary
HAVING READ AND UNDERSTOOD THE FOREGOING; IT IS SO AGREED.
/s/ Patrick Kolenik
Cyndel & Co.
LTR-507M.PMI
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANT
We consent to the incorporation by reference in this Registration
Statement on Form SB-2 of our report dated March 5, 1999, which appears on page
F-2 of the annual report on Form 10-KSB of Paradigm Medical Industries, Inc. for
the years ended December 31, 1998 and 1997, and to the reference to our Firm in
the Prospectus.
TANNER + CO.
Salt Lake City, Utah
May 7, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
PARADIGM MEDICAL INDUSTRIES, INC., FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 114,000
<SECURITIES> 0
<RECEIVABLES> 596,000
<ALLOWANCES> 30,000
<INVENTORY> 720,000
<CURRENT-ASSETS> 1,415,000
<PP&E> 640,000
<DEPRECIATION> 93,000
<TOTAL-ASSETS> 2,241,000
<CURRENT-LIABILITIES> 492,000
<BONDS> 33,000
0
0
<COMMON> 5,000
<OTHER-SE> 1,711,000
<TOTAL-LIABILITY-AND-EQUITY> 2,241,000
<SALES> 1,258,000
<TOTAL-REVENUES> 1,258,000
<CGS> 813,000
<TOTAL-COSTS> 3,973,000
<OTHER-EXPENSES> 11,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,000
<INCOME-PRETAX> (2,759,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,759,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,759,000)
<EPS-PRIMARY> (0.69)
<EPS-DILUTED> (0.69)
</TABLE>
