UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2000 Commission File Number: 0-28498
PARADIGM MEDICAL INDUSTRIES, INC.
---------------------------------
Exact Name of Registrant.
DELAWARE 87-0459536
---------------------------- ------------------
(State or other jurisdiction IRS Identification
of incorporation or organization) Number
2355 South 1070 West, Salt Lake City, Utah 84119
--------------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including Area Code (801) 977-8970
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
State the number of shares outstanding of each of the issuer's classes of common
equity as of the close of the period covered by this report.
Common Stock, $.001 par value 12,512,919
----------------------------- ----------
Title of Class Number of Shares
Outstanding as of
September 30, 2000
Series A Preferred, $.001 par value 5,957
----------------------------------- -----
Title of Class Number of Shares
Outstanding as of
September 30, 2000
Series B Preferred, $.001 par value 15,236
------------------------------------ ------
Title of Class Number of Shares
Outstanding as of
September 30, 2000
Series C Preferred, $.001 par value 0
------------------------------------ ---
Title of Class Number of Shares
Outstanding as of
September 30, 2000
Series D Preferred, $.001 par value 52,500
----------------------------------- ------
Number of Shares
Outstanding as of
September 30, 2000
Transitional Small Business Disclosure Format
YES NO X
---- ----
1
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
-------
Balance Sheet (unaudited) - September 30, 2000............... 3
Statements of Operations (unaudited) for the three
months and the nine months ended September 30, 2000
and September 30, 1999 ...................................... 5
Statements of Cash Flows (unaudited) for the nine months
ended September 30, 2000 and September 30, 1999 ............. 6
Notes to Financial Statements (unaudited).................... 7
Item 2.
-------
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................... 10
PART II - OTHER INFORMATION
Other Information............................................ 13
Signature Page............................................... 16
2
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30,
2000
-------------
(Unaudited)
<S> <C>
ASSETS
Current Assets
Cash & Cash Equivalents $ 3,257,000
Receivables, Net 755,000
Inventory 6,124,000
Prepaid Expenses 289,000
Notes Receivable 32,000
------------------
Total Current Assets 10,457,000
Inventory - Noncurrent 62,000
Intangibles, Net 1,577,000
Property and Equipment, Net 652,000
Deposits and Other Assets 97,000
------------------
Total Assets 12,845,000
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade Accounts Payable 405,000
Accrued Expenses 833,000
Current Portion of Long-term Debt 95,000
------------------
Total Current Liabilities 1,333,000
Long-term Debt 12,000
------------------
Total Liabilities 1,345,000
</TABLE>
3
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30,
2000
-------------
(Unaudited)
<S> <C>
Stockholders' Equity:
Preferred Stock, Authorized:
5,000,000 Shares, $.001 par value
Series A
Authorized: 500,000 shares; issued and
outstanding: 5,957 shares at September 30, 2000
Series B
Authorized: 500,000 shares; issued and
outstanding: 15,236 shares at September 30, 2000
Series C
Authorized: 30,000 shares; issued and
outstanding: zero shares at September 30, 2000
Series D
Authorized: 1,140,000 shares; issued and
outstanding: 52,500 shares at September 30, 2000
Common Stock, Authorized:
20,000,000 Shares, $.001 par value; issued and
outstanding: 12,512,919 shares at September 30, 2000 13,000
Additional paid-in-capital 40,149,000
Treasury Stock, 2,600 shares, at cost (4,000)
Stock Subscription Receivable (8,000)
Accumulated Deficit (28,650,000)
------------------
Total Stockholders' Equity 11,500,000
------------------
Total Liabilities and Stockholders' Equity $ 12,845,000
==================
</TABLE>
4
<PAGE>
PARADGIM MEDICAL INDUSTRES, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 1,603,000 $ 1,225,000 $ 5,318,000 $ 4,975,000
----------- ----------- ------------ ------------
Cost of Sales 1,305,000 813,000 3,479,000 2,580,000
Amortization of Capitialized Engineering,
Design, and Production Right Charges 43,000 41,000 130,000 85,000
----------- ----------- ------------ ------------
Net Cost of Sales 1,348,000 854,000 3,609,000 2,665,000
Gross Profit 255,000 371,000 1,709,000 2,310,000
----------- ----------- ------------ ------------
Operating Expenses:
Marketing and Selling 835,000 596,000 2,727,000 1,887,000
General and Administrative 651,000 518,000 3,323,000 1,613,000
Research and Development 556,000 649,000 1,373,000 1,147,000
----------- ----------- ------------ ------------
Total Operating Expenses 2,042,000 1,763,000 7,423,000 4,647,000
Operating Income (Loss) (1,787,000) (1,392,000) (5,714,000) (2,337,000)
Other Income and (Expense):
(Loss) Gain from Discontinued Product (2,000) (92,000) 11,000 (256,000)
Interest Income 34,000 (3,000) 110,000 (13,000)
Interest Expense (7,000) (10,000) (13,000) (23,000)
Other Income (Expense) (1,000) - 9,000 -
----------- ----------- ------------ ------------
Total Other Income and (Expense) 24,000 (105,000) 117,000 (292,000)
Loss Before Income Taxes (1,763,000) (1,497,000) (5,597,000) (2,629,000)
Income Taxes - - - -
----------- ----------- ------------ ------------
Net Loss $(1,763,000) $(1,497,000) $ (5,597,000) $ (2,629,000)
=========== =========== ============ ============
Net Loss Per Common Share - Basic
and Diluted $ (.15) $ (.19) $ (.50) $ (.37)
Weighted Average Outstanding Shares -
Basic and Diluted 11,877,885 8,103,274 11,191,806 7,174,175
</TABLE>
5
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
ended 9/30/00 ended 9/30/99
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (5,597,000) $ (2,629,000)
Adjustment to Reconcile Net Loss to Net
Cash Used In Operating Activities:
Depreciation and Amortization 352,000 241,000
Issuance of Common Stock for Compensation,
Services and Payables 1,047,000 278,000
Issuance of Stock Option/Warrant for Services 133,000 144,000
Provision for Losses on Receivables (64,000) -
(Increase) Decrease from Changes in:
Trade Accounts Receivable 1,039,000 195,000
Inventories (801,000) (911,000)
Prepaid Expenses (117,000) 177,000
Increase (Decrease) from Changes in:
Trade Accounts Payable (142,000) 82,000
Accrued Expenses and Deposits (150,000) (31,000)
-------------- -------------
Net Cash Used in Operating Activities (4,300,000) (2,454,000)
Cash Flow from Investing Activities:
Purchase of Property and Equipment (450,000) (210,000)
Patents and Intangibles (25,000) (33,000)
Net Cash Paid in Acquisition (95,000) -
Notes Receivable (32,000) -
-------------- -------------
Net Cash Used in Investing Activities (602,000) (243,000)
Cash Flows from Financing Activities:
Proceeds from Exercise of Warrants and Options 4,583,000 348,000
Proceeds from Capital Lease - 19,000
Principle Payments on Notes Payable (114,000) 177,000
Net Proceeds from Series D Stock Issue - 1,649,000
Proceeds Issued from Common Stock 2,572,000 510,000
-------------- -------------
Net Cash Provided by Financing Activities 7,041,000 2,703,000
Net Increase in Cash and Cash Equivalents 2,139,000 6,000
Cash and Cash Equivalents at Beginning of Period 1,118,000 161,000
-------------- -------------
Cash and Cash Equivalents at End of Period $ 3,257,000 $ 167,000
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest $ 12,000 $ 34,000
</TABLE>
6
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Significant Accounting Policies:
-----------------------------------
In the opinion of management, the accompanying financial statements
contain all adjustments (consisting only of normal recurring items)
necessary to present fairly the financial position of Paradigm Medical
Industries, Inc. ("the Company") as of September 30, 2000 and the
results of its operations for the three months and nine months ended
September 30, 1999 and 2000, and its cash flows for the nine months
ended September 30, 1999 and 2000. The results of operations for the
periods presented are not necessarily indicative of the results to be
expected for the full year period.
In June 2000, the Company acquired Vismed, Inc. dba Dicon in exchange
for 921,500 shares of common stock. The business combination has been
accounted for by the pooling-of-interest method in accordance with
APB16. Accordingly, the historical financial statements have been
restated to reflect the combination with Vismed as if it had occurred
as of the beginning of the period.
Net Income (Loss) Per Share
---------------------------
Net income (loss) per common share is computed on the weighted average
number of common and common equivalent shares outstanding during each
period. Common stock equivalents consist of convertible preferred
stock, common stock options and warrants. Common equivalent shares are
excluded from the computation when their effect is anti-dilutive. Other
common stock equivalents have not been included in loss years because
they are anti-dilutive.
2. Legal Proceedings:
----------------------
The Company is not a party to any legal proceedings, which, if
adversely determined, would have a material adverse effect on the
Company or its business.
3. Preferred Stock Conversions:
--------------------------------
Under the Company's Articles of Incorporation, holders of the Company's
Class A and Class B Preferred Stock have the right to convert such
stock into shares of the Company's common stock at the rate of 1.2
shares of common stock for each share of preferred stock. During the
three month period ended September 30, 2000 no shares of Series A
Preferred Stock or Series B Preferred Stock were converted into common
stock.
7
<PAGE>
During the three months ended September 30, 2000, no shares Series D
Preferred stock were converted to the Company's Common stock.
4. Warrants:
------------
During the three month period ended September 30, 2000, warrants for a
total of 20,445 shares of the Company's Common Stock were exercised.
These warrants included KSH Warrants and Win Capital Corp. Warrants.
Net proceeds for the exercise of warrants and options during this
period were approximately $58,000.
5. Related Party Transactions:
------------------------------
On January 21, 2000 the Board of Directors granted Thomas F. Motter,
CEO and President, 100,000 shares of the Company's Common Stock. 61,111
shares of this total amount were considered repayment for the 61,111
shares Mr. Motter sold to Douglas A. MacLeod prior to the Company's
initial public offering in July 1996, under a settlement agreement to
terminate certain anti-dilution rights granted Mr. MacLeod by the
Company. The balance of 38,889 shares was deemed by the Board as a
bonus for work done by Mr. Motter since the initial public offering.
The market price on the date of grant was $12.50 per share, and
compensation expense in the amount of $486,000 was recognized.
On January 21, 2000 the Board of Directors granted Michael W. Stelzer,
an officer of the Company, 20,000 shares of the Company's Common Stock
as part of a severance agreement, and as part of settlement of Mr.
Stelzer's employment agreement. The market price on the date of grant
was $12.50 per share, and compensation expense in the amount of
$250,000 was recognized.
On June 5, 2000 the Company issued Mark Miehle 28,500 shares of the
Company's Common stock for a signing bonus as part of Mr. Miehle's
employment agreement. The market price on the date of the grant was
$6.8125 per share, and compensation expense in the amount of $194,000
was recognized.
6. Supplemental Cash Flow Information
-------------------------------------
During the nine months ended September 30, 2000 the Company acquired
the assets and liabilities of Ocular Blood Flow, Ltd. (OBF) in a
purchase transaction. The transactions required the payment of $100,000
and 100,000 shares of common stock. The Company recorded the following:
Acconts receivable $ 22,000
Prepaids 18,000
Inventory 28,000
Intangibles 799,000
Property, Plant and Equipments 25,000
Accounts payable (48,000)
Accrued liabilities (8,000)
Debt (66,000)
Common stock issued (675,000)
-------------
Net cash paid $ 95,000
-------------
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
General
The following Management's Discussion and Analysis of Financial
Condition and results of Operations contains forward-looking statements, which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors discussed in this section. The Company's fiscal year
runs from January 1 to and including December 31.
The Company is engaged in the design, development, manufacture and sale
of high technology surgical and diagnostic eye care products. Its surgical
equipment is designed to perform minimally invasive cataract surgery and is
comprised of surgical devices and related instruments and accessories, including
disposable products. Its diagnostic products include a pachymeter, an A-Scan, an
A/B Scan, a biomicroscope, a perimeter, a corneal topographer, and a blood flow
analyzer.
Its ultrasound diagnostic products technology were acquired from
Humphrey Systems in 1998. In October 1999, the Company purchased the inventory
and design and production rights another line of surgical equipment, also
designed to perform minimally invasive cataract surgery. The line includes the
Mentor SIStem (TM), the Odyssey (TM), and the Surgitrol (TM). In November 1999,
the Company entered into a Mutual Release and Settlement Agreement with the
manufacturer of the Precisionist Thirty Thousand (TM) in which the Company
purchased the raw material and finished goods inventory to bring manufacture of
this product in-house. The Dicon (TM) perimeter and the Dicon (TM) topographer
were acquired when it acquired Vismed in June 2000. The blood flow analyzer was
acquired when Ocular Blood Flow LTD (OBF) was purchased in June 2000. The
Company has received approval for ISO 9000 and CE Mark certifications in June
2000.
Activities for the three months ended September 30, 2000, included
sales of the Photon Laser Cataract Removal Workstation into the international
market, the Mentor SIStem(TM), associated accessories, and sales of the Dicon
(TM) diagnostic products: the ultrasound, topography, perimetry and blood flow
analyzer. Other activities include continued expenses in connections with the
FDA approval of the Photon Laser Cataract Removal Workstation and on-going
expenses in the development of a direct sales force.
Results of Operations
Three Months Ended September 30, 2000, Compared to Three Months Ended
September 30, 1999
Net sales increased by $378,000, or 30.9%, to $1,603,000 for the three
months ended September 30, 2000, from $1,225,000 for the comparable period in
1999. This increase was due to increased sales of the Photon Laser Cataract
Removal Workstation in the international market and the Mentor SIStem(TM) and
associated accessories, and the sales of the Dicon(TM) diagnostic products,
including the ultrasound, topography, perimetry and blood flow analyzer.
The gross margin for the three months ended September 30, 2000, of
15.9%, was lower than the gross margin of 30.3% for the three months ended
September 30, 1999. This decrease was attributable to an inventory adjustment
taken in the third quarter of 2000 and the capture of manufacturing costs
associated with the Photon Laser Cataract Removal Workstation and the Mentor
Phaco system. The inventory adjustment was the result of the Company
establishing a valuation allowance for obsolescence and implementing a more
sophisticated accounting system that is capable of identifying inventory
shortages.
Marketing and selling expenses increased by $239,000, or 40.1%, to
$835,000 for the three months ended September 30, 2000, from $596,000 for the
comparable period in 1999. This increase was the result of the cost of
additional sales and marketing personnel as the Company established a direct
sales force in the third quarter of 2000 for the sales of its products in the
United States.
General and administrative expenses increased $133,000, or 25.7%, to
$651,000 for the three months ended September 30, 2000, from $518,000 for the
comparable period in 1999. This increase was primarily due to increased expenses
related to financing activities and on-going financial consulting for the third
quarter of 2000 as compared to the same period in 1999.
9
<PAGE>
Research and development expenses decreased $93,000, or 14%, to
$556,000 for the three months ended September 30, 2000, from $649,000 for the
same period in 1999. This decrease was due to the transfer of pre-production
costs of the Photon Laser Cataract Removal Workstation and the Mentor Phaco
SIStem(TM) into manufacturing.
Other income increased by $130,000, or 123.8%, to $24,000 for the three
months ended September 30, 2000, from an expense of $105,000 for the same period
in 1999. This increase was due to the sales of discontinued products and the
interest earned on the Company's cash account in the third quarter of 2000 over
the same period in 1999.
Nine Months Ended September 30, 2000, Compared to Nine Months Ended
September 30, 1999
Net sales increased by $343,000, or 6.9%, to $5,318,000 for the nine
months ended September 30, 2000, from $4,975,000 for the comparable period in
1999. This was due to increased sales of the Photon Laser Cataract Removal
Workstation in the international market and the Mentor SIStem(TM) and associated
accessories, and the sales of the Dicon(TM) diagnostic products, including the
ultrasound, topography, perimetry and blood flow analyzer for the nine months
ended September 30, 2000.
The gross margin for the nine months ended September 30, 2000, of
32.1%, was lower than the gross margin of 46.4% for the nine months ended
September 30, 1999. This increase was attributable to an inventory adjustment
taken in the third quarter of 2000 and the capture of manufacturing costs
associated with the Photon Laser Cataract Removal Workstation and the Mentor
Phaco SIStem(TM). The inventory adjustment was the result of the Company
establishing a valuation allowance for obsolescence and implementing a more
sophisticated accounting system that is capable of identifying inventory
shortages.
Marketing and selling expenses increased by $840,000, or 44.5%, to
$2,727,000 for the nine months ended September 30, 2000, from $ 1,887,000 for
the comparable period in 1999. This increase was the result of additional cost
of sales and marketing personnel as the Company established a direct sales
during the nine months ending September 30, 2000 for the sales of its products
in the United States.
General and administrative expenses increased by $1,710,000, or 106%,
to $3,323,000 for the nine months ended September 30, 2000, from $1,613,000 for
the comparable period in 1999. This increase was primarily due to expenses
related to financing activities, on-going financial consulting, the recording of
the fair market value of common stock granted to two officers of the Company in
the first quarter of 2000, transaction costs associated with the acquisitions of
Dicon and OBF, Ltd., and the recording of the warrant-related expenses for the
nine months ended September 30,2000 over the same period in 1999.
Research and development expenses increased $226,000, or 19.7%, to
$1,373,000 for the nine months ended September 30, 2000, from $1,147,000 for the
same period in 1999. This increase was due to the additional personnel costs and
consulting fees relating to ISO 9000, CE Mark certification, and FDA submission
during the nine months ended September 30, 2000 as compared to the same period
in 1999.
Other income increased by $409,000, or 140.1%, to $117,000 for the
quarter ended September 30, 2000 from an expense of $292,000 for the same period
in 1999. This increase was due to the sales of discontinued products and the
interest earned on the Company's cash account for nine months ended September
30, 2000 over the same period in 1999.
Liquidity and Capital Resources
The Company used cash in operating activities of $4,300,000 for the
nine months ended September 30, 2000, compared to $2,454,000 for the nine months
ended September 30, 1999. The increase in cash used by operating activities for
the first nine months of 2000 was primarily attributable to the Net Operating
Loss. The Company used cash in investing activities of $602,000 for the nine
months ended September 2000, compared to the $243,000 in the same period in
1999. The increase in cash used in investing activities in the first nine months
of 2000 was primarily for the purchase of computer equipment and software to
upgrade the Company's information system and furniture and equipment added with
the move to a larger facility. Net cash provided by financing activities was
$7,041,000 for the nine months ended September 30, 2000, compared to $2,703,000
for the same period in 1999. The Company received approximately $2,572,000 in
the third quarter of 2000 from private placement transactions.
10
<PAGE>
In March 1999, the Company completed a private placement of 1,140,000
shares of Series D Convertible Preferred Stock at $1.75 per share with the net
proceeds approximating $1.6 million. Also, in first quarter 1999, proceeds of
$100,000 were received from a six-month promissory note.
In August and September 2000, the Company completed private placements
of a aggregate of 800,000 shares of common stock at $3.625 per share with net
proceeds of $2,309,125.
Based on our 2000 budget and the net proceeds from the fund raising
activities, the Company believes that funds are sufficient to continue
operations through December 31, 2000. However, no assurances can be given that
the Company's plan will be successful in achieving positive cash flow or
profitability.
The Company will continue to seek funding to meet its working capital
requirements through collaborative arrangements and strategic alliances,
additional public offerings and/or private placements of its securities or bank
borrowings. There can be no assurance, however, that additional funds, if
required, will be available from any of these or other sources on favorable
terms, if at all.
The Company's ability to use Net Operating Loss Carryforwards (NOLs) to
offset future income is dependant upon certain limitations as a result of the
pooling transaction with Vismed and the tax laws in effect at the time of 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
The Company has not realized a reduction in the selling price of the
Precisionist phaco system as a result of domestic inflation. Nor has it
experienced unfavorable profit reductions due to currency exchange fluctuations
or inflation with its foreign customers.
Impact of New Accounting Pronouncements
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective date of FASB
Statement No. 133." SFAS 133 establishes accounting and reporting standards for
derivative instruments and recognition of all derivatives as assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. SFAS 133 is now effective for fiscal years beginning
after June 15, 2000. The Company believes that the adoption of SFAS 133 will not
have any material effect on the financial statements of the Company.
The Company has reviewed all other recently issued accounting standards
in order to determine their effects, if any, on the results of operations or
financial position. Based on that review, the Company believes that none of
these pronouncements will have a significant effect on current or future
earnings or operations.
Part II: Other Information
On June 26, 1998, the Company entered into a Co-Distribution Agreement
(the "Co-Distribution Agreement") with Pharmacia & Upjohn Company ("Pharmacia &
Upjohn") and National Healthcare Manufacturing Corporation ("National
Healthcare") which provides for the marketing and sale of a range of ophthalmic
products. Under the terms of the Co-Distribution Agreement, the Company,
Pharmacia & Upjohn, and National Healthcare, will offer a comprehensive package
of products to cataract surgeons, including cataract surgical equipment,
intraocular lens implants, intraocular pharmaceuticals, surgical instruments and
sterile procedural packs. The Company will provide the Precisionist Thirty
Thousand(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 and Healongv viscoelastic solution and the CeeOn
line of foldable, small intraocular lens implants, designed to replace the
natural lens removed during cataract surgery. This agreement was renewed in
April of 2000.
On July 23, 1998, the Company entered into an Agreement for Purchase
and Sale of Assets (the "Agreement") with the Humphrey Systems Division of Carl
Zeiss, Inc. ("Humphrey Systems") to acquire the ownership and manufacturing
rights to certain assets of Humphrey Systems that are diagnostic instruments.
These include the Ultrasonic Biometer Model 820, the A Scan System, 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. The sum of the agreement was $500,000,
payable in the form of 78,947 shares of Common Stock which were issued to
Humphrey Systems, and 26,316 shares of Common Stock which were issued to Douglas
Adams. If the net proceeds received by Humphrey Systems from the sale of the
shares issued pursuant to the Agreement is less than $375,000, after payment of
commissions, transfer taxes and other expenses relating to the sale of such
shares, the Company is required to issue additional shares of Common Stock, or
pay additional funds to Humphrey Systems as is necessary to increase Humphrey
11
<PAGE>
System's net proceeds from the sale of the assets to $375,000. Since Humphrey
Systems realized only $162,818 from the sale of 78,947 shares of Paradigm's
common stock, Paradigm issued 80,000 additional shares in January 1999, to
enable Humphrey Systems to receive its guaranteed amount. The amount of $21,431
was paid to the Company as excess proceeds from the sale of this additional
stock.
The rights to the ophthalmic diagnostic instruments that have been
purchased from Humphrey Systems under the Agreement complement both the
Company's cataract surgical equipment and its ocular Blood Flow Analyzer. 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 the 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.
In October 1999, the Company entered into an agreement with Mentor
Corp. to purchase the rights to develop, manufacture, market and distribute
their Phaco product line. The phaco line includes the Mentor SIStem(TM) , the
Odyssey(TM), and the Surg-E-Trol(TM). The sum of the agreement was $1,500,000,
payable in the form of 485,751 shares of Common Stock which were issued to
Mentor Corp. Shipments of the Mentor SIStem(TM) commenced immediately upon
purchase and have continued in the second quarter of 2000.
In November 1999, the Company entered into a Mutual Release and
Settlement Agreement with the manufacturer of its Precisionist
ThirtyThousand(TM) Ocular Surgery Workstation(TM) and Photon(TM) laser cataract
systems, in which the Company terminated its Manufacturing Agreement and
completed the purchase from them of outstanding finished goods and raw material
inventory. The sum of the agreement was $1,386,750, payable in the form of
300,000 shares of Common Stock. The payment included the outstanding payables to
this firm.
In June 2000, the Company entered into a reorganization with Vismed.
Vismed, a privately held company located in California, was founded in 1989 and
manufactures and distributes Dicon branded diagnostic products. These products
include a perimeter used in the detection and monitoring of glaucoma and a
corneal topographer used to measure the curvature of the cornea which is useful
the fitting of contact lenses and refractive surgery. The transaction was
completed in exchange for 921,500 shares of Common Stock. All Vismed employee
stock options were converted into the Company's stock option plan.
In June 2000, the Company completed the purchase of Ocular Blood Flow
Ltd. (OBF). OBF manufactures a blood flow analyzer representing proprietary
technology for measuring blood flow to the eye. Many clinicals have been
performed demonstrating the clinical efficacy of the product in glaucoma.
Strategically the company feels the Vismed and OBF acquisitions add to
the diagnostic product line-up and provide experienced management to assist the
Company in its transition from a development stage into the growth phase.
Overall, the Company has invested heavily into all departments in
anticipation of FDA Approval for it's Photon Laser Surgical System and the new
product lines obtained through the acquisitions.
Item 1. Legal Proceedings
The Company has received demand letters dated September 14, 2000 and
October 17, 2000 from Mentor Corporation ("Mentor") claiming that the Company
failed to register 485,751 shares of common stock issued to Mentor under the
Asset Purchase Agreement dated October 15, 1999, among the Company. Mentor,
Mentor Ophthalmics, Inc. and Mentor Medical, Inc. The Asset Purchase Agreement
related to the Company's purchase of Mentor's phacoemulsification product line
in consideration for the issuance by the Company to Mentor of 485,751 shares of
its common stock, valued at the sum of $1,500,000 at the time of closing.
The Asset Purchase Agreement required the Company to register the
485,751 shares of common stock issued to Mentor whenever the Company determined
to register any of its shares of common stock. Mentor alleges that because the
Company did not register the 485,751 shares in a Registration Statement which
became effective on January 6, 2000 (the "January 6, 2000 Registration
Statement"), that it was unable to sell the shares at the time and, as a result,
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lost approximately $5,000,000 due to Company's alleged breach of the Asset
Purchase Agreement.
The Company maintains that an authorized officer of Mentor agreed to
waive the registration rights of Mentor in having the 485,751 shares registered
in the January 6, 2000 Registration Statement. As a consequence, the Company
believes that is has not breached the Asset Purchase Agreement and that Mentor
is not owed any moneys for not having registered the shares of the Company's
common stock held by Mentor in the January 6, 2000 Registration Statement. The
Company and Mentor are currently engaged in discussions in an attempt to resolve
the matter.
The Company is not a party to any legal proceedings or threatened to be
party to any other legal proceedings outside the ordinary course of the
Company's business or to any other legal proceedings which, if adversely
determined, would have a material adverse effect on the Company or its business.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The Company received a warning letter dated August 30, 2000, from the
Office of Compliance, Center for Devices and Radiological Health of the Food and
Drug Administration ("FDA") relating to the human clinical trials of its
Photon(TM) Laser Cataract System. The warning letter concerns the conditions
found by the FDA during several audits that it performed during the period from
June 5, 2000 to June 26, 2000 at the Company's clinical sites. The Company
responded to the warning letter in a submission dated September 27, 2000. In the
submission the Company took corrective action that included submitting a revised
clinical protocol and case report forms and procedures for the collection and
control of data. In a subsequent letter dated November 2, 2000 to the Company,
the FDA requested clarification of two issues. The Company anticipates that
these issues will be resolved by year end. While the results of the audit are
still under review, the Company expects to receive a report soon from the FDA
detailing any requirements for continuing clinical trials.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-B or are incorporated by reference to previous filings.
Table No. Document
--------- ---------
2.1 Amended Agreement and Plan of Merger between Paradigm Medical
Industries, Inc., a California corporation and Paradigm Medical
Industries, Inc., a Delaware corporation (1)
3.1 Certificate of Incorporation (1)
3.2 Bylaws (1)
4.1 Warrant Agency Agreement with Continental Stock Transer & 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 Specimen Series C Convertible Preferred Stock Certificate (4)
4.9 Certificate of the Designations, Powers, Preferences and Rights of the
Series C Convertible Preferred Stock (4)
4.10 Specimen Series D Convertible Preferred Stock Certificate (7)
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4.11 Certificate of the Designations, Powers, Preferences and Rights of the
Series D Convertible Preferred Stock (10)
4.12 Warrant to Purchase Common Stock with Cyndel & Co.(7)
4.13 Warrant Agreement with KSH Investment Group, Inc. (7)
4.14 Warrant to Purchase Common Stock with R.F. Lafferty & Co., Inc. (7)
4.15 Warrant to Purchase Common Stock with Dr. David B. Limberg (10)
4.16 Warrant to Purchase Common Stock with John W. Hemmer (10)
5. Opinion of Mackey Price & Williams
10.1 Exclusive Patent License Agreement with Photomed (1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum (1)
10.3 Lease with Eden Roc (4)
10.4 1995 Stock Option Plan and forms of Stock Option Grant Agreement (1)
10.5 Form of Promissory Note with Note Holders re bridge financing (1)
10.6 Co-Distribution Agreement with Pharmacia & Upjohn Company and National
Healthcare Manufacturing Corporation (5)
10.7 Agreement for Purchase and Sale of Assets with Humphrey Systems
Division of Carl Zeiss, Inc. (5)
10.8 Employment Agreement with Thomas F. Motter (6)
10.9 Asset Purchase Agreement with Mentor Corp., Mentor Opthalmics, Inc.,
and Mentor Medical, Inc. (8)
10.10 Transition Services Agreement with Mentor Corp., Mentor Opthalmics,
Inc., and Mentor Medical, Inc. (8)
10.11 Severance Agreement and General Release with Michael W. Stelzer (8)
10.12 Consulting Agreement with Dr. Michael B. Limberg (8)
10.13 Renewed Consulting Agreement with Dr. Michael Limberg (10)
10.14 Mutual Release and Settlement Agreement with Zevex International, Inc.
(8)
10.15 Consulting Agreement with Douglas Adams (8)
10.16 Agreement and Plan of Reorganization with Paradigm Subsidiary, Inc. and
Vismed, Inc. d/b/a Dicon (9)
10.17 Agreement and Plan of Merger with Paradigm Subsidiary, Inc. and Vismed,
Inc. d/b/a Dicon (9)
10.18 Registration Rights Agreement with Paradigm Subsidiary, Inc. and
certain shareholders of Vismed, Inc., d/b/a Dicon (9)
10.19 Indemnification Agreement with Paradigm Subsidiary, Inc. and certain
shareholders of Vismed, Inc., d/b/a Dicon (9)
10.20 Consulting Agreement with Cyndel & Co., Inc. (10)
10.21 Stock Purchase Agreement with Ocular Blood Flow, Ltd. and Malcolm
Redman (10)
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10.22 Consulting Agreement with Malcolm Redman (10)
10.23 Royalty Agreement with Malcolm Redman (10)
10.24 Registration Rights with Malcolm Redman (10)
10.25 General Financial Advisory Services Agreement with McDonald
Investments, Inc.
10.26 Agreements with Steven J. Bayern and Patrick M. Kolenik
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 Annual Report on Form 10-KSB, as filed
on April 16, 1998.
(5) Incorporated by reference from Quarterly Report on Form 10-QSB, as
filed on August 19, 1998.
(6) Incorporated by reference from Quarterly Report on Form 10-QSB, as
filed on November 12, 1998.
(7) Incorporated by reference from Registration Statement on Form SB-2, as
filed on April 29, 1999.
(8) Incorporated by reference from Annual Report on Form 10-KSB, as filed
on March 30, 2000.
(9) Incorporated by reference from Form 8-K, as filed on June 5, 2000.
(10) Incorporated by reference from Report on Form 10-QSB, as filed on
August 16, 2000.
(b) Reports on form 8-K
-------------------
On August 7, 2000, the Company filed an Amended Report on Form 8-K
regarding completion of the transaction to acquire Vismed, Inc.
d/b/a/ Dicon.
15
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
REGISTRANT
PARADIGM MEDICAL INDUSTRIES, INC.
---------------------------------
Registrant
DATED: November 14, 2000 By:/s/ Thomas F. Motter
----------------
Thomas F. Motter
Chairman of the Board and Chief
Executive Officer (Principal Executive
Officer)
DATED: November 14, 2000 By:/s/ John W. Hemmer
----------------
Vice President of Finance, Treasurer, and
Chief Financial Officer (Principal Financial
and Accounting Officer)
16
