UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File No. 0-28498
PARADIGM MEDICAL INDUSTRIES, INC.
(Name of small business issuer in its charter)
DELAWARE 87-0459536
(State or other jurisdiction IRS Identification
of incorporation or organization) Number
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
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
(None) (None)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes [X] No [ ]
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Registrant's revenues for the fiscal year ended December 31, 1999 were
$1,701,373.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 23, 2000 was approximately $96,372,000 based on the
closing price on that date on the Nasdaq SmallCap Market.
As of March 23, 2000, Registrant had outstanding 9,884,330,shares of Common
Stock, 8,077 shares of Series A Preferred Stock, 19,236 shares of Series B
Preferred Stock, no shares of Series C Preferred Stock and 283,328 shares of
Series D Preferred Stock
DOCUMENTS INCORPORTED BY REFERENCE:
Additional documents set forth in Part IV hereof are incorporated by reference.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I
Item 1. Description of Business
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General
The Company develops, manufactures, sources, markets and sells ophthalmic
surgical and diagnostic equipment, instrumentation and related accessories,
including disposable products. The Company's surgical equipment is designed for
minimally invasive cataract treatment. The Company markets three ultrasound
cataract surgery systems with related instruments, accessories and disposable
products. The Company's flagship ultrasound system, the Precisionist(TM),is
manufactured as the base surgery system for the Company's Precisionist(TM)
Ophthalmic Surgical Workstation(TM). The Company is currently developing a laser
cataract surgery system as an adjunct to its ultrasound cataract surgery
equipment. This product is currently undergoing investigational trials in the
United States. If successfully developed and approved for medical uses, the
Company plans to market the laser system as a plug-in module for its
Workstation(TM). The Company's ultrasound diagnostic products include a
pachymeter, an A-Scan, an A/B Scan and the UBM biomicroscope, the technology for
which was acquired from Humphrey Systems in 1998. In addition, the Company
markets its Blood Flow Analyzer(TM). This product s a portable computerized
system for which the Company has secured a license granting it the right to
market the product in the United States. This product is designed for the
measurement of intraocular pressure and pulsatile ocular blood flow volume for
detection and treatment of glaucoma. The Company is currently developing
additional applications for all of its diagnostic products.
A cataract is a condition, which largely affects the elderly population,
in which the natural lens of the eye hardens and becomes cloudy, thereby
reducing visual acuity. Treatment consists of removal of the cloudy lens and
replacement with a synthetic lens implant which restores visual acuity. Cataract
surgery is the single largest volume and revenue producing outpatient surgical
procedure for ophthalmologists worldwide. The Health Care Finance Administration
reports that in the United States approximately 2 million cataract removal
procedures are performed annually, making this the largest outpatient procedure
reimbursed by Medicare. Most cataract procedures are performed using a method
called phacoemulsification or "phaco", which employs a high frequency (40 kHz to
60 kHz)ultrasonic probe needle device to fragment the cataract while still in
the eye and remove it in pieces by suction through a small incision.
The Company manufactures and sells three phaco systems with instruments,
accessories and disposable products. The Odyssey(TM) is a low-cost portable
system intended primarily for the international market.
The Paradigm SIStem(TM) is the Company's mid-range ultrasonic phaco and
competes in the market segment that wants an ultrasonic phaco only. Paradigm
acquired both technologies from Mentor in October, 1999.
The Precisionist(TM) Ocular Surgery Workstation(TM) is the Company's
newest generation system which is the base for its expandable surgical
"workstation" platform. The Company's Precisionist model includes a newly
developed proprietary fluidics panel which is completely non-invasive for
improved sterility and to provide a surgical environment in the eye that
virtually eliminates fluidic surge and chamber maintenance problems normally
associated with phaco cataract surgery. This new fluidics system provides
greater control for the surgeon and allows the safe operation at much higher
vacuum settings by sampling changes in 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.
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Current phaco systems can be difficult for many ophthalmic surgeons to
master and are limited in their ability to be the most minimally invasive method
possible. The Company is developing its proprietary patented laser system and
unique patented probe for laser cataract removal which the Company believes can
address the difficulties associated with phaco systems. The laser system is a
plug-in module for its Workstation(TM) which will be available as an up-grade if
and when cleared for market by the FDA. The development of the laser cataract
system is being done in cooperation with ophthalmic surgeons in the United
States. Additionally, research and development work is being conducted by the
Company's engineering group and with MEOS Photonics through the University of
Utah Laser Laboratory.
The Company believes that in certain surgical conditions, its laser system
will be easier to use and safer than present phaco systems. The probe will be
smaller than typical probes which employ an ultrasonic needle and will deliver
laser energy directly to the desired tissue area by means of a smooth blunt end.
The laser probe has been shown to eliminate high-frequency vibrations in the eye
and to significantly reduce heat build-up which is one of the complications
associated with ultrasound phaco. In 1996, the Company received FDA approval to
conduct clinical trials in the United States with the Photon(TM) laser system.
During these Phase I clinical trials the Company discovered that the
Photon(TM)laser system was effective in removing softer grade cataracts. The
Company also discovered that the Photon(TM)laser System may not effectively
remove harder grade cataract, although hard cataracts can be removed using the
already existing ultrasound capability of the Workstation(TM). The Company
completed its Phase I clinical trials in 1997, and received FDA approval to
proceed to an expanded Phase II clinical trial to refine the laser system and to
provide the statistical data required to approve the Photon(TM) laser system for
laser cataract removal. There is no assurance, however, that the Company will
successfully complete the Phase II clinical trials or be successful in improving
the laser system, or that additional disadvantages or problems unique to the
Photon(TM) laser system will not be discovered during the Phase II clinical
trials or following FDA approval of the system.
In addition to cataract surgery, the Company believes that its Photon(TM)
laser system is capable of being configured with specialty probes for use in
other ophthalmic surgical procedures. These potential applications could
represent substantial growth opportunities including additional sales of
equipment, instruments, accessories and disposables. However, there can be no
assurance that these applications will be developed or approved. Further there
is no guarantee that the laser will be accepted by the ophthalmic surgery market
in this capacity.
In June 1997, the Company received FDA clearance to market the Blood Flow
Analyzer(TM) for measurement of intraocular pressure and pulsatile ocular blood
flow for the detection of glaucoma and other retina related diseases. Ocular
blood flow is critical, the reduction of which may cause nerve fiber bundle
death through oxygen deprivation thus resulting in visual field loss associated
with glaucoma. The Company's Blood Flow Analyzer(TM)is a portable automated
in-office system that presents an affordable method for ocular blood flow
testing for the ophthalmic and optometric practitioner. The Company has secured
a license granting it the exclusive right to private label, package and market
the product in the United States, with full international marketing rights.
On June 26, 1998, the Company entered into a Co-Distribution Agreement
with Pharmacia & Upjohn Company and MAXXIM Corporation which provides for the
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marketing and sale of a range of ophthalmic products. Under the terms of the
Co-Distribution Agreement, the Company, Pharmacia & Upjohn MAXXIM 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(TM) for distribution and sale under the Co-Distribution Agreement.
The Pharmacia & Upjohn products to be distributed as part of the Co-Distribution
Agreement include the Healon(R) and Healon-GV(R), and Healon V, the new
visco-elastic solution, scheduled for introduction mid-year 2000. Pharmacia &
Upjohn also manufacture the CeeOn line of foldable, small intraocular lens
implants, designed to replace the natural lens removed during cataract surgery.
On July 23, 1998, the Company entered into an Agreement for Purchase and
Sale of Assets with the Humphrey Systems Division of Carl Zeiss, Inc. to acquire
the ownership and manufacturing rights to certain assets of Humphrey Systems
that are used in the manufacturing and marketing of an ultrasonic
microprocessor-based line of ophthalmic diagnostic instruments, including the
Ultrasonic Biometer Model 820, the A/B Scan System Model 837, the Ultrasound
Pachymeter Model 855, and the Ultrasound Biomicroscope Model 840, and all
accessories, packaging and end-user collateral materials for each of the product
lines for the sum of $500,000, payable in the form of 180,000 shares of Common
Stock which were issued to Humphrey Systems and 26,316 shares of Common Stock
which were issued to business broker Douglas Adams.
The rights to the ophthalmic diagnostic instruments which have been
purchased from Humphrey Systems under the Agreement complement both the
Company's cataract surgical equipment and its ocular Blood Flow Analyzer(TM).
The Ultrasonic Biometer calculates the prescription for the intraocular lens to
be implanted during cataract surgery. The Ultrasound Pachymeter measures corneal
thickness for the new refractive surgical applications that eliminate the need
for eyeglasses and for optometric applications including contact lense fitting.
The A/B Scan System combines the Ultrasonic Biometer and ultrasound imaging for
advanced diagnostic testing throughout the eye and is a viable tool for retinal
specialists. The Ultrasound Biomicroscope utilizes microscopic digital
ultrasound resolution for detection of tumors and improved glaucoma management.
On October 21, 1999, the Company purchased Mentor's surgical product line,
consisting of the Phaco SIStem(TM), the Odyssey(TM) and the Surg-E-Trol(TM).
This acquisition rounds out the Company's cataract surgery product line by
adding high-quality, moderately-priced cataract surgery products. The
transaction was paid for with $1.5 million worth of Paradigm common stock.
Background
Corporate History: The Company's business originated with Paradigm
Medical, Inc., a California corporation formed in October 1989 "PMI". PMI
developed the Company's present ophthalmic business and was operated by its
founders Thomas F. Motter and Robert W. Millar. In May 1993, PMI merged with and
into the Company. At the time of the merger, the Company was a dormant public
shell existing under the name French Bar Industries, Inc. ("French Bar"). French
Bar had operated a mining and tourist business in Montana. Prior to its merger
with PMI in 1993, French Bar had disposed of its mineral and mining assets in a
settlement of outstanding debt and had returned to the status of a dormant
entity. Pursuant to the merger, the Company caused a 1-for-7.96 reverse stock
split of its shares of Common Stock. The Company then acquired all of the issued
and outstanding shares of Common Stock of PMI using shares of its own Common
Stock as consideration. As part of the merger, the Company changed its name from
French Bar Industries, Inc. to Paradigm Medical Industries, Inc. and the
management of PMI assumed control of the Company. In April 1994, the Company
caused a 1-for-5 reverse stock split of its shares of Common Stock. In February
1996, the Company re-domesticated to Delaware pursuant to a reorganization.
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Overview
Disorders of the Eye: The human eye is a complex organ which functions
much like a camera, with a lens in front and a light-sensitive screen, the
retina, in the rear. The intervening space contains a transparent jelly-like
substance, the vitreous, which together with the outer layer, the sclera and
cornea, helps the eyeball to maintain its shape. Light enters through the
cornea, a transparent domed window at the front of the eye. The size of the
pupil, an aperture in the center of the iris, controls the amount of light that
is then focused by the lens onto the retina as an upside-down image. The lens is
the internal optical component of the eye and is responsible for adjusting
focus. The lens is enclosed in a capsule. The retina is believed to contain more
than 130 million light-receptor cells. These cells convert light into nerve
impulses that are transmitted right side up by the optic nerve to the brain,
where they are interpreted. Muscles attached to the eye control its movements.
Birth defects, trauma from accidents, disease and age related
deterioration of the components of the eye can all contribute to eye disorders.
The most common eye disorders are either pathological or refractive. Many
pathological disorders of the eye can be corrected by surgery. These include
cataracts (clouded lenses), glaucoma (elevated pressure in the eye), corneal
disorders such as scars, defects and irregular surfaces and vitro-retinal
disorders such as the attachment of membrane growths to the retina causing blood
leakage within the eye. All of these disorders can impair vision. Many
refractive disorders can be corrected through the use of eyeglasses and contact
lenses. Myopia (nearsightedness), hyperopia (farsightedness) and presbyopia
(inability to focus) are three of the most common refractive disorders.
Ultrasound Technology: Ultrasound devices have been used in ophthalmology
since the late 1960's for diagnostic and surgical applications when treating or
correcting eye disorders. In diagnostics, ultrasound instruments are used to
measure distances and shapes of various parts of the eye for prescription of
eyeglasses and contact lenses and for calculation of lens implant prescriptions
for cataract surgery treatment. These devices emit sound waves through a
hand-held probe that is placed onto or near the eye with the sound waves emitted
being reflected by the targeted tissue. The reflection "echo" is computed into a
distance value that is presented as a visual image, or cross-section of the eye,
with precise measurements displayed and printed for diagnostic use by the
surgeon.
Surgical use of ultrasound in ophthalmology is limited to treatment of
cataractous lenses in the eye through a procedure called phacoemulsification or
"phaco." A primary objective of cataract surgeries is the removal of the
opacified (cataractous) lens through an incision that is as small as possible.
The opacified lens is then replaced by a new synthetic lens intraocular implant
("IOL"). Phaco technology involves a process by which a cataract is broken into
small pieces using ultrasonic shock waves delivered through a hollow, open-ended
metal needle attached to a hand-held probe. The fragments of cataractous tissue
are then removed through aspiration. Phaco systems were first designed in the
late 1960's after various attempts by surgeons to use other techniques to remove
opacified lens, including crushing, cutting, freezing, drilling and applying
chemicals to the cataract. By the mid-1970's, ultrasound had proven to be the
most effective technology to fragment cataracts. Industry sources indicate that
phaco cataract treatment is the technology for cataract removal used in over 80%
of surgeries in the United States and over 20% of all foreign surgeries.
Laser Technology: The term "laser" is an acronym for Light Amplification
by Stimulated Emission of Radiation. Lasers have been commonly used for a
variety of medical and ophthalmic 4
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procedures since the 1960's. Lasers emit photons into a highly intense beam of
energy that typically radiates at a single wavelength or color. Laser energy is
generated and intensified in a laser tube or solid-state cavity by charging and
exciting photons of energy contained within material called the lazing medium.
This stored light energy is then delivered to targeted tissue through focusing
lenses by means of optical mirrors or fiber optics. Most laser systems use solid
state crystals or gases as their lazing medium. Differing wavelengths of laser
light are produced by the selection of the lazing medium. The medium selected
determines the laser wavelength emitted, which in turn is absorbed by the
targeted tissue in the body. Different tissues absorb different wavelengths or
colors of laser light. The degree of absorption by the tissue also varies with
the choice of wavelength and is an important variable in treating various
tissue. In a surgical laser, light is emitted in either a continuous stream or
in a series of short duration "pulses," thus interacting with the tissue through
heat and shock waves, respectively. Several factors, including the wavelength of
the laser and the frequency and duration of the pulse or exposure, determine the
amount of energy that interacts with the targeted tissue and, thus, the amount
of surgical effect on the tissue.
Lasers are widely accepted in the ophthalmic community for treatment of
certain eye disorders and are popular for surgical applications because of their
relatively non-invasive nature. In general, ophthalmic lasers, such as argon,
Nd:YAG and excimer (argon-fluoride) are used to coagulate, cut or ablate
targeted tissue. The argon laser is used to treat leaking blood vessels on the
retina (retinopathy) and retinal detachment. The excimer laser was recently
tested in clinical trials for limited use in corneal refractive surgery. The
Nd:YAG pulsed laser is used to perforate clouded posterior capsules (posterior
capsulotomy) and to relieve glaucoma-induced elevated pressure in the eye
(iridotomy, trabeulorplasty, transcleral cyclophotocoqulation). Argon, Nd:YAG
and excimer lasers are primarily used for one or two clinical applications each.
In contrast to these conventional laser systems, the Company's Photon(TM) laser
cataract system is designed to be used for multiple ophthalmic applications,
including certain new applications that may be made possible with the Company's
proprietary technology. Such new applications, however, must be tested in
clinical trials and be approved by the FDA.
Products
The Company's principal surgical product is an ultrasonic system for use
by ophthalmologists to perform surgical treatment procedures to remove
cataracts. In 1990, the Company received clearance from the FDA pursuant to
Section 510(k) of the Food, Drug and Cosmetics Act (the "FDC Act") on its
Precisionist 3000(TM) phaco system for cataract surgery, which system was
upgraded to the Precisionist 3000 Plus(TM) in 1994. The Company also completed
its preclinical in vitro and in vivo (animal)testing of its Photon(TM) laser
cataract surgical system and submitted a Section 510(k)Premarket Notification to
the FDA for the Photon(TM) laser cataract system in September 1993, with a
follow-up Investigational Device Exemption ("IDE") application submitted in
October 1994 to provide additional clinical data through human cases to support
its earlier filing. The IDE was approved in May 1995. Phase I clinical trials
were begun in April 1996 with surgeries completed in December 1996. Patient
follow-up examinations as mandated by the FDA study were completed in July 1997,
and the Company submitted its final report to the FDA thereafter. During the
Phase I clinical trials the Company discovered that the Nd:YAG (Neodymium:
Yttrium-Aluminum-Garnet) laser system is most effective on soft cataracts. Hard
cataracts can be removed using the already existing ultrasound capability of the
Workstation(TM). The FDA approved Phase II trials on soft cataracts in May 1998.
Seven laser systems are now installed in the United States and surgeries are
being performed with trial completion expected in the first half of 2000.
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The Odyssey(TM): The Odyssey(TM) replaced the Precisionist 3000 and
Precisionist 3000 Plus. The Odyssey(TM) is a reliable, portable, low-cost phaco
system, with a very low operating cost. The primary market for the Odyssey(TM)
is in foreign countries where phaco technology is emerging and price-points are
relatively low. The Odyssey(TM) is also a reliable back-up system. The system
features a simple analog presentation of the ultrasound power, and aspiration.
The Odyssey(TM) provides the basic standard features for phaco surgery
including: continuous ultrasound tuning, ultrasound energy regulation and
anterior vitrectomy.
The SIStem(TM): The SIStem(TM) is the Company's state-of-the-art
phacoemulsification system, bridging the gap between the Odyssey(TM) and the
Precisionist(TM). The SIStem(TM) is designed to be a full-featured,
cost-effective, reliable phaco machine. The competitive feature package includes
automated priming and tuning, error detection, audible feedback, patented
fluidics system, pneumatic vitrectomy and bipolar electrosurgical coagulation.
With both reusable and single-use consumables, the SIStem(TM) is positioned for
the world's primary ultrasonic phaco markets, including the United States,
Europe and Asia.
Precisionist ThirtyThousand(TM): The Precisionist ThirtyThousand(TM) (the
"Precisionist(TM)") is the Company's core phaco surgical technology and the base
system for its Precisionist(TM) Ocular Surgery Workstation(TM). The
Precisionist(TM) was placed into production and sale in 1997. As a phaco
cataract surgery system, the Company believes the Precisionist(TM) with its new
fluidics panel is equal or superior to the present competitive systems in the
United States. The system features a graphic color display and unique
proprietary on-board computer and graphic user interface linked to soft-key
membrane panel for flexible programmable operation. The system provides
real-time "on-the-fly" adjustment capabilities for each surgical parameter
during the surgical procedure for high-volume applications. In addition, the
Precisionist(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 Precisionist(TM)
features the Company's newly developed proprietary fluidics panel which is
completely non-invasive for improved sterility and to provide a surgical
environment in the eye that virtually eliminates fluidic surge and chamber
maintenance problems normally associated with phaco cataract surgery. This new
fluidics system provides greater control for the surgeon and allows the safe
operation at much higher vacuum settings by sampling changes in 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 Workstation: The Precisionist(TM) Ocular Surgery Workstation(TM)
(the Workstation(TM)) which comprises the base system for the Precisionist(TM)
is the first system to the knowledge of the Company which uses the expansive
capabilities of today's advanced computer technology to offer seamless open
architecture expandability of the system hardware and software modules. The
Workstation utilizes an embedded computer developed for the Company and
controlled by a proprietary software system developed by the Company that
interfaces with all components of the system: ultrasound, fluidics (irrigation),
aspiration, venting, coagulation and anterior vitrectomy (pneumatic). Each
component is controlled as a peripheral module within this fully integrated
system. This approach allows for seamless expansion and refinement of the
Workstation(TM) with the ability to add other hardware and software features.
Expansion such as the Company's Photon(TM) laser system, when approved by the
FDA, and hardware for additional surgical applications are easily 6
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implemented by means of a pre-existing expansion rack which resides in the base
of the Workstation. These expanded capabilities could include, but would not be
limited to: laser systems, video surgical fiber optic imaging, cutting and
electrosurgery equipment. However, there is no guarantee that the
Workstation(TM) will be accepted in the market place.
Photon(TM) Laser System: The Photon(TM) laser cataract system, which is
still subject to FDA approval, is designed to be installed as a seamless plug-in
upgrade or add-on to the Company's Precisionist(TM) Ocular Surgery
Workstation(TM). The plug-in platform concept is unique in the ophthalmic
surgical market for systems of this magnitude and presents a unique market
opportunity for the Company. The main elements of the laser system are the
Nd:YAG laser module, Photon(TM) laser software package and interchangeable
disposable hand-held fiber optic laser Photofragmentation Probe(TM) (the
"LCP"(TM). The Photon(TM) laser utilizes the on-board microprocessor computer of
the Workstation(TM) to generate short pulse laser energy developed through the
patented LCP (TM) to targeted cataract tissue inside the eye, while
simultaneously irrigating the eye and aspirating the diseased cataract tissue
from the eye. The probe is smaller in diameter than conventional ultrasound
phaco needles and presents no damaging vibration or heat build-up in the eye.
The Company's Phase I clinical trials demonstrated that this probe can easily
reduce the size of the cataract incision from 3.0 mm to under 2.0 mm thereby
reducing surgical trauma and complementing current foldable intraocular implant
technology. The laser probe may also eliminate any possibility for burns around
the incision or at the cornea and may therefore be used with cataract surgery
techniques which utilize a more delicate clear cornea incision which can
eliminate sutures and be conducted with topical anesthesia. However, this system
may not effectively remove harder grade cataracts. Harder grade cataracts can be
removed using the already existing ultrasound capability of the Workstation(TM).
The Company intends to refine the laser delivery system and laser cataract
surgical technique used on soft cataracts through expanded research and clinical
studies. As far as the Company can determine, no integrated single laser
photofragmenting probe is presently available on the market that uses laser
energy directly, contained in an enclosed probe, to plasmatize cataract tissue
at a precise location inside the eye while simultaneously irrigating and
aspirating the site.
The Company's laser system is based upon the concept that pulsed laser
energy produced with the micro-processor controlled Nd:YAG laser system provides
ophthalmic surgeons with a more precise and less traumatic alternative in
cataract surgery. Although conventional ultrasonic surgical systems have proven
effective and reliable in clinical use for many years, their use of high
frequency shock waves and vibration to fragment the cataract can make the
procedure difficult and can present risk of complication both during and after
surgery. In contrast, the Company's laser system, which utilizes short
centralized energy bursts, should permit the delivery of the laser beam with
less trauma to adjacent tissue. Therefore, unlike ultrasonic systems, whose
vibrations and shock waves affect(and can damage) non-cataractous tissues within
the eye, the Company's Photon(TM) laser cataract system should only affect
tissues it comes into direct contact with.
Surgical Instruments, Accessories and Disposables: In addition to the
cataract surgery equipment, the Company is aggressively pursuing development and
product introductions for a range of cataract surgery instruments and
accessories that will be sold with its surgical systems and will complement
other competitive systems. In January 1998, the Company received FDA 510(k)
clearance for a line of proprietary titanium ultrasonic phaco needles it
produces at its Salt Lake City facility. The needles were released for sale in
May 1998 in a sterile Phaco PAK (TM). In May 1998, the Company received FDA
510(k) clearance for a line of irrigation/aspiration probes and tips. Product
release occurred in
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October 1998. These products and additional instruments were previously sourced
from third-party vendors. The Company believes that by developing its own
instruments and accessories it can improve product performance, introduce
innovative differentiation and improve sales margins. The Company's surgical
systems utilize or will utilize accessory instruments and disposables, some of
which are proprietary to the Company. These include replacement ultrasound tips,
sleeves, tubing sets and fluidics packs, instrument drapes and laser cataract
probes. The Company intends to expand its disposable accessories as it further
penetrates the cataract surgery market and expands the treatment applications
for its Workstation.
Diagnostic Eye Care Products: Glaucoma is a leading cause of blindness in
the world. Glaucoma is described as a partial or total loss of visual field
resulting from certain progressive disease or degeneration of the retina, macula
or nerve fiber bundle. The cause and mechanism of the glaucoma pathology is not
completely understood. Present detection methods focus on the measurement of
intraocular pressure in the eye to determine the possibility of pressure being
exerted upon the retina, and optic nerve fiber bundle, which can diminish visual
field. Recently, retinal blood circulation has been indicated as a key component
in the presence of glaucoma. Several companies produce color Doppler equipment
in the $150,000 price range intended to provide measurement of ocular blood flow
activity in order to diagnose and treat glaucoma at an earlier stage.
In June 1997, the Company received FDA clearance to market the Blood Flow
Analyzer(TM) for early detection and treatment management of glaucoma and other
retina related diseases. The device measures not only intraocular pressure but
also pulsatile ocular blood flow, the reduction of which may cause nerve fiber
bundle death through oxygen deprivation thus resulting in visual field loss
associated with glaucoma. The Company's Blood Flow Analyzer(TM) is a portable
automated in-office system that presents an affordable method for ocular blood
flow testing for the ophthalmic and optometric practitioner. The Company has
secured a license granting it the exclusive right to private label, package and
market the product in the United States, with full international marketing
rights.
Blood Flow Analyzer(TM): This was the Company's first diagnostic eye care
device. The device is manufactured for the Company and is being marketed by the
Company pursuant to a license agreement. The device is a portable desktop system
that utilizes a proprietary patented pneumatic Air Membrane Applanation
Probe(TM) (the "AMAP TM") which is attached to any model of standard examination
slitlamp which is then placed on the cornea of the patient's eye to measure the
intraocular pressure within the eye. The device is unique in that it reads a
series of intraocular pressure pulses over a short period of time (approximately
five to ten seconds) and generates a wave form profile which can be correlated
to blood flow volume within the eye. The blood flow volume is calculated by a
proprietary software algorithm developed by David M. Silver, Ph.D., at Johns
Hopkins. The device presents a numerical intraocular pressure reading and blood
flow analysis rating in a concise printout which is affixed to the patient
history file. In addition, the data generated by the device can be downloaded to
a personal computer system for advanced database development and management. The
Company markets the Blood Flow Analyzer(TM) as a stand-alone Model 100 SE unit,
and packaged with a custom built computer system as the Model 100 LE. The Blood
Flow Analyzer(TM) utilizes a single-use disposable cover for its AMAP (TM)
corneal probe which is shipped in sterile packages. The AMAP (TM) probe tip
cover provides accurate readings and acts as a prophylactic barrier for the
patient. The device has been issued a patent in the European Economic Community
and the United States and has a patent pending in Japan. The FDA cleared the
Blood Flow Analyzer(TM) for marketing in June 1997 and the Company commenced
selling the system in September 1997. In addition to the Humphrey 8
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products, this diagnostic product will permit the Company to expand its market
to approximately 35,000 optometry practitioners in the United States in addition
to the approximately 18,000 ophthalmic practitioners who currently perform eye
surgeries and are candidates for the Company's surgical systems. International
sales of the Blood Flow Analyzer(TM) will be further expanded in 1999.
Pachymetric Analyzer and LASIK Pachymeter: Paradigm produces two
Ultrasonic Pachymeters used for measurement of corneal thickness. The Model P55
is positioned as a standard office pachymeter. In November 1999, the Company
introduced the Model P55L LASIK Pachymeter, with its enhanced dynamic range to
measure thinner corneas. This device is targeted to the refractive surgery
market.
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. Over
5,000 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, one that the Company has
repositioned for broader market sales penetration. Formerly sold only to
glaucoma sub-specialty practitioners, the Company reintroduced the UBM at a
price-point targeted for the average practitioner seeking to add glaucoma
filtering surgical procedures and income to his/her cataract surgical practice.
The UBM related surgical filtering procedures are fully reimbursable by Medicare
and insurance providers. This untapped new market positions the Company as a
leader in the rapidly expanding glaucoma imaging and treatment segment.
Marketing and Sales
Ophthalmologists are mainly office-based and perform their surgeries in
local hospitals or surgical centers that provide the necessary surgical
equipment and supplies. Ophthalmologists are generally involved in decisions
relating to the purchase of equipment and accessories for their independent
ambulatory surgical centers and for the hospitals with which they are
affiliated. This provides the opportunity for direct, targeted, personal
selling, responsive high quality customer service and short buying cycles to
achieve a product sale in the office or hospital. Hospitals also comprise a
significant market as recent demand for ultrasonic surgery technology has put
pressure on the ophthalmologist, who in turn persuades the hospital to install
the latest technology system so that they
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can offer this procedure to their patients and the community.
Industry analysts report that the United States ophthalmic surgical device
market has been characterized by slower growth in recent years. This has
apparently been caused by the uncertainty and potential reforms associated with
the health care industry. Further, hospitals have been inclined to keep their
older phaco machines longer than expected as they have been forced to mind
budgets more carefully and have become less willing to invest in capital
equipment until more information on health care reform becomes available.
However, analysts predict that the ophthalmic surgical device market will see
renewed growth in the coming years as the health care environment stabilizes and
as the growing elderly population produces an increased number of cataract
surgeries. As a consequence of these factors, the market should see a greater
rate of replacement of older machines that hospitals and surgeons have been
postponing for longer than usual.
Current Market Acceptance and Potential: The Company's distribution base
includes over 200 of the Precisionist 3000, Precisionist 3000 Plus(TM),
Odyssey(TM), and SIStem(TM) phaco systems. Fourteen of the new Precisionist(TM)
Ocular Surgery Workstation(TM)s and eleven Photon(TM) Precisionist(TM) Ocular
Surgery Workstations(TM)s have also been placed. The principal purchasers have
been ophthalmologists and clinics in many countries throughout the world. The
Company believes that the market for its products is being driven by: (i) the
aging of the population, which is evidenced by the domestic and international
cataract surgery volume growth trend over the past ten years, (ii) the entry by
emerging countries (including China, Russia, and other countries in Asia,
Eastern Europe and Africa)into advanced technology medical care for their
populations, (iii)increased awareness worldwide of the benefits of the minimally
invasive phaco cataract procedure and (iv) the introduction of technology
improvements such as the Company's laser system.
Marketing Organization: The Company markets its products internationally
through a network of dealers and domestically through direct sales
representatives. As of December 31, 1999, the Company had seven direct domestic
sales representatives in the United States and twenty-one foreign dealers. This
is in addition to the fifty-three Paradigm Pharmacia & Upjohn Alliance
representatives and eighty MAXXIM representatives domestically. These sales
representatives are assigned exclusive territories and have entered into
contracts with the Company that contain performance quotas. The Company also
plans to continue to market its products by identifying customers through
internal market research, trade shows and direct marketing programs. The Company
also utilizes a Clinical Advisory Board comprised of leading ophthalmic surgeons
in the United States and Europe who speak at conventions, train ophthalmologists
and visit foreign doctors and dealers to promote the Company's products.
The Company, when marketing its surgical Workstation(TM), will emphasize
the expandable features of the Workstation(TM). The Company's marketing approach
will be to focus on the upgradeability of the Workstation(TM) and to develop the
image of the Workstation(TM) as the most versatile, upgradeable and cost
effective surgical equipment available. The Company will continue to focus its
sales efforts towards ophthalmic hospital and surgical center facilities
specializing in cataract surgery. However, as systems are installed, the Company
will expand its focus to provide additional ophthalmic and non-ophthalmic
surgical applications as part of its Workstation(TM). Additional surgical
applications will expand the market for the Workstation(TM) as well as
associated sales of disposable surgical products.
The Company disseminated the innovative capabilities of its products
through advertisement and
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printed materials at the Company's exhibition at the annual meeting of the
American Academy of Ophthalmology in Orlando, Florida in October 1999. The theme
of the Company's advertisement for its Ocular Surgery Workstation(TM) was "The
Future of Phaco is Laser Cataract Surgery." The Company will expand upon the
concept of the "Workstation(TM)" with additional advanced laser and surgical
capabilities. The Company has also continued its campaign for the Blood Flow
Analyzer(TM). The product was introduced to the ophthalmic marketplace at the
American Academy of Ophthalmology meeting in October 1997 and to the Optometric
marketplace at the California Optometric Association and Vision Expo Easy New
York meetings. The theme of the Company's advertisement for its Blood Flow
Analyzer is "Don't Miss Half of Your Glaucoma Patients... A Fast, Clinically
Proven Test For Ocular Blood Flow".
Product advertising is focused in the three industry trade newspapers,
Ocular Surgery News, Ophthalmology Times and the American Optometric Association
News. Most of the ophthalmologists or optometrists in the United States receive
one or more of these magazines through professional subscription programs. The
media has shown strong interest in the Company's technology and products, as
evidenced by several recent front page articles in these publications.
Manufacturing and Raw Materials: Currently, the Company is moving into a
29,000 square foot facility in Salt Lake City. This facility accommodates the
Company's expanded manufacturing, marketing and engineering capabilities. The
Company manufactures under system of quality control and testing, which complies
with the Quality System Requirements (QSR) guidelines established by the FDA, as
well as similar guidelines established by foreign governments, including CE Mark
and IS0-9001.
The laser cavity, optical train and power source for the Photon(TM) laser
cataract system are supplied by Sunrise Technologies, Inc. in Fremont,
California ("Sunrise"). The Company has established an internal laser cataract
probe manufacturing facility and performs all probe production in Salt Lake
City. The remaining operating elements of the Photon(TM) laser cataract system,
the computer controller, fluidics and ancillary surgical modalities,
manufactured at the Company's new facility. Although substantial reliance has
been placed with Sunrise, the Company believes it would be able to find
alternative laser sources, including eventual in-house manufacture.
The Company subcontracts the manufacturing of some of its ancillary
instruments, accessories and disposables through specified vendors in the United
States. These products are contracted in quantities
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and at costs consistent with the Company's financial purchasing capabilities and
pricing needs. The Company manufactures the LCP (TM) laser cataract probe and
some of its surgical instruments, accessories and fluidics surgical tubing sets
at its facility in Salt Lake City.
The Blood Flow Analyzer(TM) is manufactured by OBF Labs. The analyzer is
repackaged by the Company using a module cover designed by the Company and is
also being marketed under the Company's trade name and mark. The Company's
License and Manufacturing Agreement with OBF Labs continues through December 31,
2000 and is automatically renewable for successive one year additional terms,
unless either party gives written notice to the other party at least 90 days
prior to the expiration of the term. Service for the Company's products is
overseen from its Salt Lake City, Utah headquarters and is augmented by its
international dealer network, which dealers also provide technical service and
repair. Installation, on-site training and a 12 to 18 month warranty are
included as the standard terms of sale. The Company provides distributors with
replacement parts at no charge during the warranty period. To date, the Company
has incurred minimal expenses under this warranty program. International
distributors are responsible for installation, repair and other customer service
to installed systems in their territory. All system parts are modular
sub-components that are easily removed and replaced. The Company maintains an
adequate parts inventory and provides 24 hour replacement parts shipment to its
dealers. After the warranty period expires, the Company offers one year service
contracts to its domestic customers and will continue to sell parts to
international dealers who in turn create their own service plans with their
customers.
Product Service and Support: Service for the Company's products is
overseen from its Salt Lake City, Utah headquarters and is augmented by its
international dealer network who provide technical service and repair.
Installation, on-site training and a limited product warranty are included as
the standard terms of sale. The Company provides distributors with replacement
parts at no charge during the warranty period. To date, the Company has incurred
minimal expenses under this warranty program. International distributors are
responsible for installation, repair and other customer service to installed
systems in their territory. All systems parts are modular sub-components that
are easily removed and replaced. The Company maintains an adequate parts
inventory and provides overnight replacement parts shipment to its dealers.
After the warranty period expires, the Company offers one year and three year
service contracts to its domestic customers and will continue to sell parts to
international dealers who in turn create their own service plans with their
customers.
Third-Party Reimbursement: It is expected that the Company's laser systems
and diagnostic systems will generally be purchased by ophthalmologists and
hospitals as well as optometrists who will then bill various third-party payors
for the health care services provided to their patients. These payors include
Medicare, Medicaid and private insurers. Government agencies generally reimburse
at a fixed rate based on the procedure performed. Some of the potential
procedures for which the Photon(TM) laser cataract systems may be used, may be
determined to be elective in nature, and third-party reimbursement may not be
available for such procedures, even if approved by the FDA. In addition,
third-party payors may deny reimbursement if they determine that the procedure
was unnecessary, inappropriate, not cost-effective, experimental or used for a
non-approved indication. There can be no assurance that reimbursement from
third-party payors will be available, or if available, that reimbursement will
not be limited, thereby having a material adverse effect on the Company's
ability to develop new products on a profitable basis, its operating results and
financial condition.
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Co-Distribution Agreement with Pharmacia & Upjohn Company and MAXXIM: The
Company has entered into a Co-Distribution Agreement as of June 26, 1998 with
Pharmacia & Upjohn Company and MAXXIM, 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 MAXXIM 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(TM) for
distribution and sale under the Co-Distribution Agreement. The Pharmacia &
Upjohn products to be distributed as part of the Co- Distribution Agreement
include Healon(R) and HealonGV(R) viscoelastic solution and the CeeOn line of
foldable, small intraocular lens implants, designed to replace the natural lens
removed during cataract surgery. It is too soon to determine the full effect of
these agreements on the Company. However, some possible benefits may be lower
marketing costs for the Company's products and a greater appeal of the Company's
products to hospitals and other buyers who prefer a comprehensive and more
cost-effective package.
Research and Development
The Company's primary market for its surgical products is the cataract
surgery market. However, the Company believes that its laser systems may
potentially have broader ophthalmic applications. Consequently, the Company
believes that a strong research and development capability is important for the
Company's future. In addition to the Company's expanded in-house R&D
capabilities, it has enlisted several recognized and respected consultants and
other technical personnel to act in technical and medical advisory capacities.
Several of these consultants serve on the Company's clinical Advisory Board to
provide expert and technical support for current and proposed products, programs
and services of the Company. In addition, the Company is conducting research in
conjunction with MEOS Photonics through the University of Utah Medical Laser
Laboratory. The research is aimed at improving the laser system's performance
for cataract surgery and exploring additional surgical applications.
The Company believes its research and development capabilities provide it
with the ability to respond to regulatory developments, including new products,
new product features devised from its users and new applications for its
products on a timely and proprietary basis. The Company intends to continue
investing in research and development and to strengthen its ability to enhance
existing products and develop new products. The Company spent $540,148 in fiscal
year ended December 31, 1997, $298,187 in the year ended December 31, 1998, and
$677,225 in the fiscal year ended December 31, 1999.
Competition
General. The Company is subject to competition in the cataract and the
glaucoma surgery markets, and the glaucoma diagnostic market from two principal
sources: (i) manufacturers of competing ultrasound systems used when performing
cataract treatments and (ii) developers of technologies for ophthalmic
diagnostic and surgical instruments used for treatment. The surgical equipment
industry is dominated by a few large companies that are well established in the
marketplace, have experienced management, are well financed and have well
recognized trade names and product
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lines. The Company believes that the combined sales of five entities account for
over 90% of the ophthalmic surgery market. The remaining market is fragmented
among emerging smaller companies, some of which are foreign. The ophthalmic
diagnostic market has a similar composition.
Most major competitors either entered or expanded into the cataract or
glaucoma markets through the acquisition of smaller, entrepreneurial
high-technology manufacturing companies. Therefore, because existing competitors
or other entities desiring to enter the market could conceivably acquire current
entrepreneurial enterprises with small market activity, any and all competitors
must be considered to be formidable.
The Cataract Surgical System Industry. Presently, products currently in
use are offered by the major manufacturers utilizing ultrasonic technology.
Those systems rely on accessories including single-use cassette packs and other
ancillary surgical disposables such as saline solution, sutures and intraocular
lenses for their profits. The cassette packs are required for fluid and tissue
collection during the surgical procedure. The cassette packs are generally
unique and proprietary to their respective systems and represent a barrier to
entry for third-party, lower-cost after-market suppliers. While there is growing
market resistance in the United States and internationally to single-use
cassettes, the Company anticipates that manufacturers of ultrasound equipment
will continue to develop and enhance their present ultrasound products in order
to protect their investments in system and cassette technology and to protect
their profits from sales of these cassettes and accessories. The Company's
Precisionist Thirty Thousand(TM) ultrasonic phaco system has the ability to use
either reusable or single-use disposable components. The Photon(TM) laser
cataract system will utilize probes and cassette packs designed for single-use
and semi-disposable instruments priced at a level consistent with the demands of
health care cost containment. This will allow the health care providers a
substantial measure of cost containment, while providing the Company with the
quality control and income capability of cassette sales.
The typical list price of a competitive advanced ultrasonic system ranges
from approximately $60,000 to $100,000. Lower cost models generally have a list
price ranging from approximately $30,000 to $60,000. The list price for the
Precisionist Thirty Thousand(TM) ocular surgery system is $89,900. The Company's
Photon(TM) Laser Phaco(TM) will be sold at a price of approximately $129,000.
The international market, with significantly lower medical budgets, has not been
able to justify the expense of using disposable components. Budgetary
constraints have limited current manufacturers from gaining a significant share
of the international ultrasound equipment market, and has provided a niche for
the emerging smaller companies discussed above.
Ultrasound Equipment Manufacturers. As a relatively recent entrant into
the cataract surgical equipment market with a newer equipment line, the Company
is establishing itself and, as yet, does not hold a significant share of the
market. The Company currently recognizes Bausch & Lombe, Alcon Laboratories, and
Allergan Medical Optics as its primary competitors in the ultrasound phaco
cataract equipment market.
Laser Equipment Manufacturers. To the Company's knowledge, there are
several other companies attempting to develop laser equipment for cataract
surgery. Based on the information currently available to the Company, these
competitive laser companies appear to offer a less viable
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means of treating cataracts using laser technology. The Company believes that
there is presently no directly competing Nd:YAG laser-assisted cataract surgical
system available in the market. The Company also believes that its product is
sufficiently distinctive and, if properly marketed, can capture a significant
share of the cataract surgical device market. However, there are substantial
risks in undertaking a new venture in an established and already highly
competitive industry. In the short-term, the Company is seeking to exploit these
opportunities. Depending upon further developments, the Company may ultimately
exploit those opportunities through a merger with a stronger entity already
established or one that desires to enter the medical industry.
The Company believes that its ability to compete successfully will depend
on its capability to create and maintain advanced technology, develop
proprietary products, attract and retain scientific personnel, obtain patent or
other proprietary protection for its products and technologies, obtain required
regulatory approvals and manufacture, assemble and successfully market products
either alone or through third parties.
The Retinal Diagnostic Market. The Glaucoma Research Foundation suggests
that with the aging of the so-called baby boom generation, there will be an
increase of macular degeneration and glaucoma in the United States, the leading
causes of adult blindness worldwide. The damage caused by these diseases is
irreversible. The preconditions for the onset of macular degeneration or
glaucoma are low ocular blood flow and/or high intraocular pressure. Diagnostic
screening is important for individuals susceptible to these diseases. People in
high risk categories include: African Americans over 40 years of age, all
persons over 60 years of age, persons with a family history of glaucoma or
diabetes, and the very near sighted. The Glaucoma Research Foundation recommends
that these high risk individuals be tested once every two years for glaucoma.
According to the U.S. Census Bureau, in 1995 there were over 30 million adults
65 years of age and older and 8 million African Americans 45 years of age and
older. The Glaucoma Research Foundation reports that glaucoma currently accounts
for more than 7 million visits to physicians annually.
The Company is subject to intense competition in the ophthalmic diagnostic
market from well-financed, established companies with recognizable trade names
and product lines and new and developing technologies. The industry is dominated
by several large entities which the Company believes account for the majority of
diagnostic equipment sales. The Company expects to derive revenues from the sale
of its newly acquired ultrasound diagnostic equipment and blood flow analyzer.
The blood flow analyzer is designed to detect glaucoma in an earlier stage than
is presently possible. In addition, the device performs tonometry and blood flow
analysis. The blood flow analyzer has a list price ranging from approximately
$13,500 and $20,000. Other ophthalmic diagnostic devices which do not detect
glaucoma in the early stages of the disease as does the Company's analyzer
retail at comparable prices. The Company thus believes that it can compete in
the diagnostic market place based upon the lower price and improved diagnostic
functions of the analyzer.
The Glaucoma Surgery Market. The glaucoma surgery market is similar in
composition to the retinal diagnostic market. The market is dominated by several
large companies. Because there are existing glaucoma and laser surgery products
in the market, the Company hopes to be able to enter the market relatively
quickly through FDA Section 510(k) clearance of its new systems and products.
The Company believes that it can compete in this established marketplace since
it will be offering its glaucoma surgery system as an add-on to its
Workstation(TM). The Company believes that its Workstation(TM) will give the
Company a competitive advantage to gain a position in the marketplace.
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Intellectual Property Protection
The Company's cataract surgical products are proprietary in design,
engineering and performance. The Company's ultrasonic products have not been
patented to date because the primary technology for ultrasonic tissue
fragmentation, as available to all competitors in the market, is mainly in the
public domain.
The Photon(TM) laser cataract probe is protected under a United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. and subsequently assigned by
Photomed International, Inc. ("Photomed") and a Japanese patent issued in 1997
to the Company for the utility and methods of laser ablation, aspiration and
irrigation of tissue through a hand-held probe of a unique design. The Company
secured the exclusive worldwide right to this patent shortly after its issue,
and to the international patents pending, from Photomed by means of a license
agreement (the "License Agreement"). The License Agreement was amended on
December 5, 1997 to allow Photomed the right to conduct research, development
and marketing utilizing the patent in certain medical sub-specialties other than
ophthalmology for which the Company would receive royalty payments equal to 1%
of the proceeds from the net sales of products utilizing the patent. See
"Management" and "Certain Relationships and Related Transactions."
OBF Labs, the manufacturer of the Blood Flow Analyzer(TM) that the Company
markets in the United States under a non-exclusive license agreement, has been
granted a patent in the European Economic Community and the United States and
has a patent pending in Japan.
Although the Company's trademarks are important to its business, it is not
the Company's policy to pursue trademark registrations for its trademarks
associated with its products. Consequently, the Company relies on common law
trademark rights to protect its unregistered trademarks, although common law
trademark rights do not provide the Company with the same level of protection as
would U.S. federal registered trademarks. Common law trademark rights only
extend to the geographical area in which the trademark is actually used while
U.S. federal registration prohibits the use of the trademark by any party
anywhere in the United States.
The Company also relies on trade secret law to protect some aspects of its
intellectual property. All of the Company's key employees, consultants and
advisors are required to enter into a confidentiality agreement with the
Company. Most of the Company's third-party manufacturers and formulators are
also bound by confidentiality agreements with the Company.
Regulation
The Company's surgical and diagnostic systems are regulated as medical
devices by the FDA under the FDC Act. As such, these devices require Premarket
clearance or approval by the FDA prior to their marketing and sale. Such
clearance or approval is premised on the production of evidence sufficient for
the Company to show reasonable assurance of safety and effectiveness regarding
its products. Pursuant to the FDC Act, the FDA regulates the manufacture,
distribution and production of medical devices in the United States and the
export of medical devices from the United States. Noncompliance with applicable
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, denial of
Premarket clearance or
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approval for devices, recommendations by the FDA that the Company not be allowed
to enter into government contracts, and criminal prosecution.
Following the enactment of the Medical Device Amendments to the FDC Act in
May 1976, the FDA began classifying medical devices in commercial distribution
into one of three classes: Class I, II or III. This classification is based on
the controls that are perceived to be necessary to reasonably ensure the safety
and effectiveness of medical devices. Class I devices are those devices, the
safety and effectiveness of which can reasonably be ensured through general
controls, such as adequate labeling, advertising, Premarket notification and
adherence to the FDA's Quality System Requirements (QSR) regulations. Some Class
I devices are exempt from some of the general controls. Class II devices are
those devices the safety and effectiveness of which can reasonably be assured
through the use of special controls, such as performance standards, postmarket
surveillance, patient registries and FDA guidelines. Class III devices are
devices that must receive Premarket approval by the FDA to ensure their safety
and effectiveness. Generally, Class III devices are limited to life-sustaining,
life- supporting or implantable devices, or to new devices that have been found
not to be substantially equivalent to legally marketed devices.
There are two principal methods by which FDA approval may be obtained. One
method is to seek FDA approval through a Premarket notification filing under
Section 510(k) of the FDC Act. If a manufacturer or distributor of a medical
device can establish that a proposed device is "substantially equivalent" to a
legally marketed Class I or Class II medical device or to a pre-1976 Class III
medical device for which the FDA has not called for a PMA, the manufacturer or
distributor may seek FDA Section 510(k) Premarket clearance for the device by
filing a Section 510(k) Premarket notification. The Section 510(k) notification
and the claim of substantial equivalence will likely have to be supported by
various types of data and materials, possibly including clinical testing
results, obtained under an IDE granted by the FDA. The manufacturer or
distributor may not place the device into interstate commerce until an order is
issued by the FDA granting Premarket clearance for the device. There can be no
assurance that the Company will obtain Section 510(k) Premarket clearance for
any of the future devices for which the Company seeks such clearance including
the Photon(TM) Laser.
The FDA may determine that the device is "substantially equivalent" to
another legally marketed Class I, Class II or pre-1976 Class III device for
which the FDA has not called for a PMA, and allow the proposed device to be
marketed in the United States. The FDA may determine, however, that the proposed
device is not substantially equivalent, or may require further information, such
as additional test data, before the FDA is able to make a determination
regarding substantial equivalence. A "not substantially equivalent"
determination or a request for additional information could delay the Company's
market introduction of its products and could have a material adverse effect on
the Company's business, operating results and financial condition.
The alternate method to seek approval is to obtain Premarket approval from
the FDA. If a manufacturer or distributor of a medical device cannot establish
that a proposed device is substantially equivalent to another legally marketed
device, whether or not the FDA has made a determination in response to a Section
510(k) notification, the manufacturer or distributor will have to seek Premarket
approval for the proposed device. A PMA application would have to be submitted
and be supported by extensive data, including preclinical and clinical trial
data to prove the safety and efficacy of the device. If human clinical trials of
a proposed device are required and the device presents a "significant risk," the
manufacturer or the distributor of the device will have to file an IDE
application with the
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FDA prior to commencing human clinical trials. The IDE application must be
supported by data, typically including the results of animal and mechanical
testing. If the IDE application is approved, human clinical trials may begin at
a specific number of investigational sites, and the approval letter could
include the number of patients approved by the FDA. An IDE clinical trial can be
divided into several parts or Phases. Sometimes, a company will conduct a
feasibility study to confirm that a device functions according to its design and
operating parameters. This is usual clinical trial site. If the Phase I results
are promising, the applicant may, with the FDA's permission, expand the number
of clinical trial sites and the number of patients to be treated to assure
reasonable stability of clinical results. Phase II studies are performed to
confirm predictability of results and the absence of adverse reactions. The
applicant may, upon receipt of the FDA's authorization, subsequently expand the
study to a third phase with a larger number of clinical trial sites and a
greater number of patients. This involves longer patient follow-up times and the
collection of more patient data. Product claims, labeling and core data for the
PMA are derived primarily from this portion of the clinical trial. The applicant
may also, upon receipt of the FDA's permission, consolidate one or more of such
portions of the study. Sponsors of clinical trials are permitted to sell those
devices distributed in the course of the study, provided such compensation does
not exceed recovery of the costs of manufacture, research, development and
handling. Although both approval methods may require clinical testing of the
device in question under an approved IDE, the Premarket approval procedure is
more complex and time consuming.
Upon receipt of the PMA application, the FDA makes a threshold
determination whether the application is sufficiently complete to permit a
substantive review. If the FDA determines that the PMA is sufficiently complete
to permit a substantive review, the FDA will "file" the application. Once the
submission is filed, the FDA has by regulation 90 days to review it; however,
the review time is often extended significantly by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee may also evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's QSR requirements prior to approval of a PMA.
While the FDA has responded to PMA applications within the allotted time period,
PMA reviews generally take approximately 12 to 18 months or more from the date
of filing to approval. The PMA process is lengthy and expensive, and there can
be no assurance that such approval will be obtained for any of the Company's
products determined to be subject to such requirements. A number of devices for
which PMA approval has been sought by other companies have never been approved
for marketing.
Any products manufactured or distributed by the Company pursuant to a
premarket clearance notification or PMA are or will be subject to pervasive and
continuing regulation by the FDA. The FDC Act also requires that the Company's
products be manufactured in registered establishments and in accordance with QSR
regulations. Labeling, advertising and promotional activities are subject to
scrutiny by the FDA and, in certain instances, by the Federal Trade Commission.
The export of medical devices is also subject to regulation in certain
instances. In addition, the use of the Company's products may be regulated by
various state agencies.
All lasers manufactured for the Company are subject to the Radiation
Control for Health and Safety Act administered by the Center for Devices and
Radiological Health of the FDA. The law requires laser manufacturers to file new
product and annual reports and to maintain quality control, product testing and
sales records, to incorporate certain design and operating features in lasers
sold to
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end users pursuant to specific performance standards, and to comply with
labeling and certification requirements. Various warning labels must be affixed
to the laser, depending on the class of the product, as established by the
performance standards.
Although the Company believes that it currently complies and will continue
to comply with all applicable regulations regarding the manufacture and sale of
medical devices, such regulations are always subject to change and depend
heavily on administrative interpretations. There can be no assurance that future
changes in review guidelines, regulations or administrative interpretations by
the FDA or other regulatory bodies, with possible retroactive effect, will not
materially adversely affect the Company. In addition to the foregoing, the
Company is subject to numerous federal, state and local laws relating to such
matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of potentially hazardous substance.
There can be no assurance that the Company will not be required to incur
significant costs to comply with such laws and regulations and that such
compliance will not have a material adverse effect upon the Company's ability to
conduct business.
The Company and the manufacturers of the Company's products may be
inspected on a routine basis by both the FDA and individual states for
compliance with current QSR regulations and other requirements.
Congress has considered several comprehensive federal health care programs
designed to broaden coverage and reduce the costs of existing government and
private insurance programs. These programs have been the subject of criticism
within Congress and the health care industry, and many alternative programs and
features of programs have been proposed and discussed. Therefore, the Company
cannot predict the content of any federal health care program, if any is passed
by Congress, or its effect on Company and its business. Some measures that have
been suggested as possible elements of a new program, such as government price
ceilings on nonreimbursable procedures and spending limitations on hospitals and
other healthcare providers for new equipment, could have an adverse effect on
the Company's business, operating results or financial condition. Uncertainty
concerning the features of any health care program considered by the Congress,
its adoption by the Congress and the effect of the program on the Company's
business could result in volatility of the market price of the Company's Common
Stock.
Furthermore, the introduction of the Company's products in foreign
countries may require the Company to obtain foreign regulatory clearances. The
Company believes that only a limited number of foreign countries have extensive
regulatory requirements, including France, Germany, Korea and Japan. The time
involved for regulatory approval in foreign countries varies and can take a
number of years. A number of European and other economically advanced countries,
including Italy, Norway, Spain and Sweden, have not developed regulatory
agencies for intensive supervision of such devices. Instead, they generally have
been willing to accept the approval of the FDA. Therefore, a PMA, Section 510(k)
or approved IDE from the FDA is tantamount to approval in those countries. These
countries and most developing countries have simply deferred direct discretion
to licensed practicing surgeons to determine the nature of devices that they
will use in medical procedures. The Company's two ultrasound systems, the
Photon(TM) laser cataract system the Company is developing and the ocular blood
flow analyzer are all devices which require FDA approval. Therefore, a
significant aspect of the acceptance of the devices in the market is the
effectiveness of the Company in obtaining the necessary approvals. Having an
approved IDE allows the Company to export a product to qualified
19
<PAGE>
investigational sites.
Regulatory Status of Products
The SIStem(TM), Odyssey(TM) and Surg-E-Trol(TM) are approved for sale in
the U. S. by the FDA under 510(k)s. The products have also been accepted for
import into various non-EC countries. The SIStem(TM) has been certified to bear
the CE mark, allowing sales in European Community countries.
The Photon(TM) Laser Cataract System. The Company acquired permission from
the FDA to manufacture the device and approval to export it to qualified
investigator sites outside the United States under an open IDE granted by the
FDA in May 1995. Although the Photon(TM) laser cataract system is uniquely
configured in an original and proprietary manner, the laser system, a Nd:YAG
laser, is not proprietary to the device or the Company and is widely used in the
medical industry and other industries as well. Of particular significance is the
fact that this particular component has received previous market clearance from
the FDA for other ophthalmic and medical applications. Also of significance is
the Company's belief that the surgical treatment method used with the Photon(TM)
laser cataract is similar to the current ultrasound cataract treatment employed
by ophthalmologists. The Company thus believes that it can obtain Section 510(k)
clearance for the Photon(TM) laser cataract system sometime in 2000.
The Company submitted its Premarket Notification under Section 510(k) of
the FDC Act for the Photon(TM) laser cataract system in September 1993. The FDA
requested clinical support data for claims made in the Section 510(k) Premarket
Notification, and in October 1994 the Company submitted an IDE application to
provide for a "modest clinical study" in order to collect the data required by
the FDA for clearance of the Photon(TM) laser cataract system. The FDA granted
this IDE in May 1995. The Company began human clinical trials in April 1996 and
completed the clinical surgeries in December 1996. Through the clinical trials
the Company discovered that the Photon(TM) laser cataract system may not
effectively remove harder grade cataracts. Hard cataracts can be removed using
the already existing ultrasound capability of the Workstation(TM). The Company
has requested and received FDA approval to conduct Phase II clinical studies at
seven sites in hopes of refining the laser system and surgical method to remove
cataracts and provide the statistical data required to approve the Photon(TM)
laser system for laser cataract removal. There is no guarantee, however, that
the Company will be successful in improving the laser system to remove harder
grade cataracts.
Blood Flow Analyzer(TM)(Paradigm BFA). The FDA granted market clearance
pursuant to Section
20
<PAGE>
510(k) of the FDC Act, for the commercial sale of the Paradigm Blood Flow
Analyzer(TM) in June 1997 for the intended use and claims of applanation
tonometry and blood flow analysis. The clearance allows immediate marketing in
the United States for this new product and allows the Company to expand its
product base into the ophthalmic office and optometric office with a diagnostic
system.
Employees
As of December 31, 1999, the Company had 26 full-time employees. This
number does not include the Company's manufacturer's representatives who are
independent contractors rather than employees of the Company. The Company also
utilizes several consultants and advisors. There can be no assurance that the
Company will be successful in recruiting or retaining key personnel. None of the
Company's employees is a member of a labor union and the Company has never
experienced any business interruption as a result of any labor disputes.
Item 2. Description of Property
- -------------------------------
The Company's executive offices are currently located at 2355 South 1070
West, Salt Lake City, Utah. This facility consists of approximately 29,088
square feet of leased office space under a three year lease that will expire on
March 1, 2003 with an additional three year renewal option. These facilities are
leased from Eden Roc, a California partnership, at a base monthly rate of
$15,999 plus a $2,356 monthly common area maintenance fee. The base monthly rent
increases to $16,479 and $16,973 for the second and third years of the lease,
respectively. Pursuant to the lease, the Company pays all real estate and
personal property taxes and the insurance costs on the premises. The Company
believes that these facilities are adequate and satisfy its needs for the
foreseeable future.
Item 3. Legal Proceedings
- -------------------------
The Company is not a party to any material legal proceedings outside the
ordinary course of its business or to any other legal proceedings which, if
adversely determined, would have a material adverse effect on the Company's
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None.
PART II
-------
Item 5. Market for Common Equity and related Stockholder Matters
- ----------------------------------------------------------------
The Authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, $.001 par value per share, and 5,000,000 shares of Preferred
Stock, $.001 par value per share. The Company has created four classes of
Preferred Stock, designated as Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock.
The Company's Common Stock and Class A Warrants trade on The Nasdaq
SmallCap Market under the respective symbols of "PMED" and "PMEDW." Prior to
July 22, 1996, there was no public market for the Common Stock. As of March 23,
2000 the closing sale prices of the Common 21
<PAGE>
Stock and Class A Warrants were $9.750 per share and $3.313 per warrant,
respectively. The following are the high and low sales prices for the Common
Stock and Class A Warrants by quarter as reported by Nasdaq since July 22, 1996.
<TABLE>
<CAPTION>
Common Stock Class A Warrants
Price Range Price Range
Period (Calendar Year) High Low High Low
<S> <C> <C> <C> <C>
1996
Third Quarter (since July 22, 1996)..... 6.000 2.000 1.188 0.125
Fourth Quarter.......................... 5.625 2.875 1.438 0.438
1997
First Quarter........................... 6.375 3.000 1.563 0.750
Second Quarter.......................... 5.750 3.000 1.000 1.500
Third Quarter........................... 6.000 1.563 1.375 0.125
Fourth Quarter.......................... 4.625 2.438 0.875 0.250
1998
First Quarter........................... 4.688 2.875 0.938 0.250
Second Quarter.......................... 6.500 3.813 1.313 0.250
Third Quarter........................... 4.563 2.500 0.688 0.438
Fourth Quarter.......................... 3.000 1.563 1.188 0.438
1999
First Quarter 4.000 2.094 1.063 0.047
Second Quarter 3.938 2.688 0.875 0.594
Third Quarter 4.594 2.688 1.000 0.438
Fourth Quarter 7.938 2.875 2.313 0.438
</TABLE>
The Company's Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock are not publicly traded. As of
March 23,2000, there were 659 record holders of Common Stock, 6 record holders
of Series A Preferred Stock, 4 record holders of Series B Preferred Stock, no
record holders of Series C Preferred Stock and 28 record holders of Series D
Preferred Stock.
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future. The Company must pay cash dividends to holders of its Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred Stock
before it can pay any cash dividend to holders of its Common Stock. Dividends
paid in cash pursuant to outstanding shares of the Company's Series A, Series B,
Series C and Series D Preferred Stock are only payable from surplus earnings of
the Company and are non-cumulative and therefore, no deficiencies in dividend
payments from one year will be carried forward to the next. The Company
currently intends to retain future earnings, if any, to fund the development and
growth of the Company's proposed business and operations. Any payment of cash
dividends in the future on the Common Stock will be dependent upon the Company's
financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, restrictions, if any, under any debt
obligations, as well as other factors that the Company's Board of Directors
deems relevant. The Company issued 6,764 shares of its Series A Preferred and
6,017 shares of its Series B Preferred on January 8, 1996 as a stock dividend to
Series A and Series B shareholders of record as of December 31, 1994.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -----------------------------------------------------------------
General
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations, contains forward looking statements which involve
risks and uncertainty. The Company's actual results could differ materially from
those anticipated in these forward looking statements as a
22
<PAGE>
result of certain factors discussed in this section. The Company has changed its
fiscal year to the period from January 1 to and including December 31.
The Company is engaged in the design, development, manufacture and sale of
high technology eye care products. The Company's surgical equipment is designed
to perform minimally invasive cataract surgery and is comprised of surgical
devices and related instruments and accessories, including disposable products.
The Company's ultrasound diagnostic products include a pachymeter, an A-Scan, an
A/B Scan and a biomicroscope, the technology for which was acquired from
Humphrey Systms in 1998. In addition, the Company markets its Blood Flow
Analyzer(TM). Paradigm's activities for the twelve months ended December 31,
1999 include domestic sales of the Precisionist ThirtyThousand(TM) and Humphrey
Systems ultrasound diagnostic equipment, acquisition of new product lines, and
research and development on the Photon(TM) laser cataract removal system which
received FDA approval for expansion to Phase II Clinical Trials on May 19, 1998.
In July 1998, the Company announced the acquisition of the exclusive
manufacturing rights to four FDA-approved ophthalmic diagnostic instruments from
Humphrey Sysems, a division of Carl Zeiss, Inc. which complement the Company's
cataract surgical equipment and its Blood Flow Anylyzer(TM). The Company
commenced delivery of the Pachymetric Analyzer, which measures corneal
thickness, in December, 1998 and the Ultrasound A-Scan, which measures the axial
length of the eye, in March,1999. The Company began shipments of the Ultrasound
A/B Scan, which is used by retinal specialists to identify foreign bodies in the
posterior chamber of the eye and in evaluating the structural integrity of the
retina, in the second quarter of 1999. The Ultrasonic Biomicroscope ("UBM"),
which creates a high-resolution computer image of the unseen parts of the eye
providing a map for the glaucoma surgeon, also commenced shipments in the second
quarter of 1999.
In October 1999 the Company entered into an agreement with Mentor to
purchase the rights to develop, manufacture, market and sell their Phaco product
line. The phaco line includes the Mentor SIStem(TM), the Odyssey(TM), and the
Surg- E-Trol(TM). Shipments of the Mentor SIStem(TM) commenced immediately upon
purchase, and have continued in first quarter of 2000.
In November, 1999, the Company entered into a Mutual Release and
Settlement agreement with the manufacturer of the Precisionist
ThirtyThousand(TM) Ocular Surgery Workstation(TM) in which the Company
terminated its Manufacturing Agreement and completed the purchase from them of
outstanding finished goods and raw material inventory. The company took over the
development and manufacture of the ThirtyThousand(TM) Ocular Surgery
Workstation(TM).
On January 27, 2000, the Company entered into a letter of intent to
acquire Vismed, dba Dicon, a California corporation, a manufacturer and
distributor of proprietary medical diagnostic instrumentation for chronic eye
diseases.
Results of Operations
Fiscal year Ended December 31, 1999, Compared to Fiscal year Ended
December 31, 1998:
Sales increased by $443,000, or 35%, to $1,701,000 for the twelve months
ended December 31, 1999, from $1,258,000 for the comparable period in 1998.
Production and shipment of the Humphrey ophthalmic diagnostic instruments
commenced in the first and second quarters of 1999. The Company shipped a total
of 105 A-Scans, 22 A/B Scans, 21 Ultrasonic Biomicroscopes, and 31 Pachymeters.
Also, upon the purchase of the Mentor phaco product line in the fourth quarter
of 1999, the Company shipped two Mentor SIStem(TM) surgery workstations, as well
as associated accessories. The new fluidic panel for the Precisionist(TM) was
completed late in the year, rather than in March 1999, as was anticipated at the
end of 1998. As a result, the Company shipped only one Precisionist(TM) in 1999.
Due to the restructuring of Phase II clinical study sites in the third quarter
of 1999, which was done to expedite completion of the clinical studies, sales
returns were posted of approximately $500,000.
Cost of sales increased by $218,000, or 27%, to $1,031,000 for the twelve
months ended December 31, 1999, from $813,000 for the comparable period in 1998.
The 39% gross margin on sales for the twelve months ended December 31, 1999, was
4% higher than the 35% gross margin on sales for the comparable period in 1998.
If the amortization of capitalized engineering and design charges, a non-cash
expense, 23
<PAGE>
is excluded, gross margins for 1999 and 1998 were 44% and 41%, respectively.
Marketing and selling expenses decreased by $106,000, or 10%, to $915,000
for the twelve months ended December 31, 1999, from $1,021,000 for the
comparable period in 1998. Sales and marketing activities pertaining to the
Humphrey ophthalmic diagnostic instruments were launched during the 1999 year,
although there were no changes in the size of the sales force.
General and administrative expenses increased by $870,000, or 47%, to
$2,711,000 in 1999, from $1,841,000 for the twelve months ended December 31,
1998. The majority of the increase was attributable to the Black-Scholes
valuation of common stock warrants and common stock granted as compensation for
consulting services during the year and an increase in bad debt expense relating
to receivables. In addition, approximately $85,000 in design expense was
recognized as a result of the Mutual Release and Settlement Agreement with the
manufacturer of the Precisionist(TM), which was entered into in preparation for
taking the development and manufacture of the Precisionist(TM) in-house.
Research and development expenses increased by $379,000, or 127%, to
$677,000 for the year ended December 31, 1999, from $298,000 for comparable
period in 1998. The increase between 1998 and 1999 was ascribed to an increase
in personnel pursuant to bringing the Humphrey line into full production and
taking over the manufacture of the Precisionist(TM).
Other income(expense)increased by $55,000,to $11,000 for the year ended
December 31, 1999, from ($44,000) for the same period in 1998. This was the
result of a reduction in interest expense recognized in 1999 and a billing
adjustment posted in 1998.
The Company had a net loss of $3,622,000, or $.54 per share, for the year
ended December 31, 1999, compared to a net loss of $2,759,000, or $.69 per
share, for the year ended December 31, 1998, an increase of $863,000. The
increase in net loss was attributable to a reduction in sales of the
Precisionist(TM) as a result of delays in the release of the new fluidic panel,
sales returns pursuant to restructuring the Phase II clinical study sites, the
valuation of the warrants granted to outside consultants, expenses recognized in
connection with the Mutual Release and Settlement Agreement with the
manufacturer of the Precisionist(TM), and an increase in bad debt allowance for
receivables.
Fiscal Year Ended December 31, 1998, Compared to Fiscal Year Ended
December 31, 1997:
Sales increased by $794,000,or 171%, to $1,258,000 for the twelve months
ended December 31, 1998 from $464,000 for the comparable period in 1997. The
higher level of sales in fiscal 1998 was primarily due to the sale of 21
Precisionist(TM) and 17 Blood Flow Analyzer(TM)s compared with 8
Precisionist(TM)s and 3 Blood Flow Analyzer(TM)s in fiscal 1997. Sales of
products in the surgery equipment market are contingent upon customer evaluation
and acceptance. In 1998, two Precisionist(TM)s were returned compared with five
in 1997 when certain software and hardware revisions were identified and
corrected. With the introduction of teh new fluidic system in March 1999 for the
Precisionist Thirty Thousand Workstation(TM), coupled with the shipment of the
four new ophthalmic diagnostic instruments, management anticipates a significant
improvement in sales.
The cost of sales increased $480,000, or 144%, to $813,000 for the twelve
months ended December 31, 1998, from $333,000 for the comparable period in 1997.
The gross margin for the twelve months ended December 31, 1998 of 35%, was 7%
higher than the gross margin for the comparable period in 1997, of 28%,
primarily as a result of the amortization of capitalized engineering and design
charges. If the amortization of capitalized engineering and design charges, a
non-cash expense,
23
<PAGE>
is excluded, the gross margin for 1998 and 1999 is 41% or slightly less than the
gross margin of 41% for 1997.
Marketing and selling expenses increased by $430,000, or 73%, to
$1,021,000 for the twelve months ended December 31, 1998, from $591,000 for the
comparable period in 1997. The increase was a result of the Company adding a
sales manager and two additional sales representatives, an increase in
advertising promotional activities associated with trade shows and laser
seminars for ophthalmic surgeons in conjunction with launching the Photon Ocular
Surgery Workstation(TM), and service problems due to software and hardware
revisions to the Precisionist(TM)Ocular Surgery Workstation(TM).
General and administrative expenses increased $39,000 from $1,802,000 in
1997 or 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 45%, for the
year ended December 31, 1998, to $298,000 from $540,000 for the comparable
period in 1997. The decrease was primarily the result of the completion of a
substantial part of the engineering and design changes on the Precisionist
ThirtyThousand(TM) Ocular Surgery Workstation(TM).
Other expenses decreased by $164,000 to $44,000 for the year ended
December 31,1998, compared to $208,000 for the same period in 1997. This is
primarily due to the conversion of promissory notes into convertible preferred
stock.
The Company had a net loss of $2,759,000, or $.69 per share, for the year
ended December 31, 1998 as compared to a net loss of $3,010,000, or $.82 per
share, for the year ended December 31, 1997, a decrease of $251,000. The
decrease was a result of increased sales and decreased research and development
expenses offset by increased costs of sales, marketing, and selling expenses.
Upgrades
To garner sales, the Company offers the ultrasonic Precisionist(TM) system
with an unconditional arrangement under which the customer may trade in their
Precisionist(TM) system to upgrade to a Precisionist ThirtyThousand(TM) Ocular
Surgery Workstation(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 ThirtyThousand(TM) Ocular Surgery
Workstation(TM). As of December 31, 1999, the Company has distributed
approximately 51 Precisionist(TM) systems under this provision. The gross margin
on these original sales was approximately $295,000, or 32%. If all of these
customers were to exercise their upgrade privilege, the Company would exchange
the Precisionist(TM) system for the Company's new Precisionist Thirty
Thousand(TM) Ocular Surgery Workstation(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
ThirtyThousand(TM) Ocular Surgery Workstation(TM) sales. The total gross margin
on the upgrade sales is estimated to be $1,677,000, or 41%. During the year
ended December 31, 1999, there were no trade-in sales, compared with two
trade-in sales totaling $76,000 for the year ended December 31, 1998.
Liquidity and Capital Resources
The Company used cash in operating activities of $3,623,000 for the twelve
months ended December 31, 1999, compared to $2,414,000 for the twelve months
ended December 31, 1998. The increase in cash used for operating activities in
1999 was attributed to the purchase of inventory associated with the production
of the Humphrey diagnostic line and a decrease in collections on receivables.
The Company used cash from investing activities of $4,000 for the twelve months
ended December 31, 1999, compared to $92,000 in fiscal 1998. The difference was
attributable to a note receivable recognized in 1998 but reversed in 1999.
Investment in property and equipment in both years was about the same. Net cash
provided by financing activities for the twelve months ended December 31, 1999,
was $4,515,000, compared with $1,733,000 for 1998. In March 1999, the Company
completed a private placement of 1,140,000 shares of Series D Convertible
Preferred Stock at $1.75 per share with the net proceeds to the Company
approximating $1,649,000. In several sale transactions, 920,900 shares of Common
Stock were sold for net proceeds of $2,485,000. In addition, First Associated
Securities warrants, Noteholders' warrants, the Win and Cyndel working capital
loan warrants, and Hemmer warrants were exercised for total proceeds of
$398,000.
The Company will seek funding to meet its working capital requirements
through collaborative arrangements and strategic alliances, additional public
offerings and/or private placements of its securities or bank borrowings. There
can be no assurance, however, that additional funds, if required, will be
available from any of the foregoing or other sources on favorable terms, if at
all.
The Company's ratio of inventory to sales for the twelve month period
ended December 31, 1999, was 2.44, compared with .57, for the same period in
1998. With the launching of new products within the past eighteen months,
management has had to build inventory in anticipation of sales. As a result, the
ratio of inventory to sales, particularly computed on the basis of inventory to
quarterly sales, tends to fluctuate widely depending on the Company's purchase
orders with the manufacturers, the time lags between customer's purchase orders,
delivery and sales, the number of demonstration units in the field, the accuracy
of the sales forecast and seasonal factors.
At December 31, 1999, the Company had net operating loss carryforwards
(NOLs)of approximately $12,000,000 and research and development tax credit
carryforwards of approximately $34,000. These carryforwards are available to
offset future taxable income, if any, and begin to expire in the year 2006. The
Company's ability to use its NOLs to offset future income is dependant upon the
tax laws in effect at the time the NOL's can be utilized. The Tax Reform Act of
1996 significantly limits the annual amount that can be utilized for certain of
these carry forwards as a result of change of ownership.
Effect of Inflation and Foreign Currency Exchange
The Company has not realized a reduction in the selling price of the
Precisionist phaco system as a result of domestic inflation. Nor has the Company
experienced unfavorable profit reductions due to currency exchange fluctuations
or inflation with its foreign customers.
25
<PAGE>
Impact of New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. The Company believes that the
adoption of SFAS 133 will not have any material effect on the financial
statements of the Company.
The Company has reviewed all other recently issued accounting standards in
order to determine their effects, if any, on the results of operations or
financial position of the Company. Based on that review, the Company believes
that none of these pronouncements will have a significant effect on current or
future earnings or operations.
Item 7. Financial Statements
- ----------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
Index to Financial Statements
- --------------------------------------------------------------------------------
Page
----
Independent Auditors' Report F-2
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity F-5
Statement of Cash Flows F-7
Notes to Financial Statements F-8
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-1
<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, 1999, and the related statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1999 and
1998. 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, 1999, and the results of its operations and its cash
flows for the years ended December 31, 1999 and 1998, in conformity with
generally accepted accounting principles.
TANNER + Co.
Salt Lake City, Utah
March 16, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Balance Sheet
December 31, 1999
- ----------------------------------------------------------------------------------------------------------
Assets
------
<S> <C>
Current assets:
Cash $ 1,002,000
Receivables, net 561,000
Inventories 4,153,000
Prepaid expenses 91,000
------------------
Total current assets 5,807,000
Intangibles, net 611,000
Property and equipment, net 204,000
------------------
Total assets $ 6,622,000
------------------
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Payables $ 252,000
Accrued liabilities 142,000
Current portion of long-term debt 23,000
------------------
Total current liabilities 417,000
------------------
Long-term debt 25,000
------------------
Commitments and contingencies -
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized, 341,457 shares
issued and outstanding (aggregate
liquidation preference of $684,000) -
Common stock, $.001 par value, 20,000,000
shares authorized, 8,785,548 shares
issued and outstanding 9,000
Additional paid-in capital 26,564,000
Treasury stock, at cost (4,000)
Stock subscription receivable (8,000)
Accumulated deficit (20,381,000)
------------------
Total stockholders' equity 6,180,000
------------------
Total liabilities and stockholders' equity $ 6,622,000
------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Operations
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1999 1998
-----------------------------------
<S> <C> <C>
Sales $ 1,701,000 $ 1,258,000
Cost of sales 1,031,000 813,000
-----------------------------------
Gross profit 670,000 445,000
-----------------------------------
Operating expenses:
General and administrative 2,711,000 1,841,000
Marketing and selling 915,000 1,021,000
Research and development 677,000 298,000
-----------------------------------
Total operating expenses 4,303,000 3,160,000
-----------------------------------
Operating loss (3,633,000) (2,715,000)
-----------------------------------
Other income (expense):
Interest income 30,000 49,000
Interest expense (15,000) (33,000)
Other (4,000) (60,000)
-----------------------------------
Total other income 11,000 (44,000)
-----------------------------------
Loss before provision for income taxes (3,622,000) (2,759,000)
Provision for income taxes - -
-----------------------------------
Net loss $ (3,622,000) $ (2,759,000)
-----------------------------------
Loss per common share - basic and diluted $ (.54) $ (.69)
-----------------------------------
Weighted average common shares - basic and diluted 6,733,000 4,022,000
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Stockholders' Equity
Years Ended December 31, 1999 and 1998
- ------------------------------------------------------------------------------------------------------------------------
Preferred Stock
-----------------------------------------------------------------------------
Series A Series B Series C Series D Common Stock
-----------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1998 50,122 $ - 45,383 $ - - $ - - $ - 3,798,931 $4,000
Issuance of Series C
preferred stock for: - -
Cash - - - - 19,937 - - - - -
Debt - - - - 9,950 - - - - -
Subscription - - - - 93 - - - - -
receivable
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 - - - - - - - - - -
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>
Additional Unearned Stock sub- Accum-
Paid-In Treasury Stock Compen- scription ulated
------------------
Capital Shares Amount sation Receivable Deficit
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1998 $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 8,000 - - - (8,000) -
receivable
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 - - - - -
Difference between the
series C preferred
stock conversion price
and common stock fair 4,870,000 - - - - (4,870,000)
value
Net loss - - - - - (2,759,000)
-----------------------------------------------------------------
Balance at December 31,
1998 17,704,000 2,600 (4,000) (94,000) (8,000) (15,887,000)
- -----------------------------------------------------------------------------------------
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Stockholders' Equity
Years Ended December 31, 1999 and 1998
- ------------------------------------------------------------------------------------------------------------------------
Preferred Stock
-----------------------------------------------------------------------------
Series A Series B Series C Series D Common Stock
-----------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series D
preferred stock for cash - - - - - - 1,140,000 1,000 - -
Conversion of preferred
stock (26,542) - (12,000) - (6,400) - (826,356) (1,000) 1,238,199 1,000
Issuance of common
stock for:
Cash - - - - - - - - 920,900 1,000
Exercise of warrants
and options - - - - - - - - 166,980 -
Assets - - - - - - - - 819,257 1,000
Satisfaction of
payables - - - - - - - - 23,426 -
Services - - - - - - - - 116,510 1,000
Offering costs for:
Preferred stock - - - - - - - - - -
Common stock - - - - - - - - - -
Amortization of unearned
compensation - - - - - - - - - -
Issuance of stock
options
and warrants for - - - - - - - - - -
services
Difference between the
Series D preferred
stock conversion price
and common stock fair - - - - - - - - - -
value
Net loss
--------------------------------------------------------------------------------------------------
Balance at
December 31, 1999 8,077 $ - 19,236 $ - 500 $ - 313,644 $ - 8,785,578 $9,000
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Additional Unearned Stock sub- Accum-
Paid-In Treasury Stock Compen- scription ulated
------------------
Capital Shares Amount sation Receivable Deficit
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Series D
preferred stock for cash 1,995,000 - - - - -
Conversion of preferred
stock - - - - - -
Issuance of common
stock for:
Cash 2,620,000 - - - - -
Exercise of warrants
and options 398,000 - - - - -
Assets 2,656,000 - - - - -
Satisfaction of
payables 107,000 - - - - -
Services 366,000 - - - - -
Offering costs for:
Preferred stock (347,000) - - - - -
Common stock (136,000) - - - - -
Amortization of unearned
compensation - - - 94,000 - -
Issuance of stock
options
and warrants for 329,000 - - - - -
services
Difference between the
Series D preferred
stock conversion price
and common stock fair 872,000 - - - - (872,000)
value
Net loss (3,622,000)
-----------------------------------------------------------------
Balance at
December 31, 1999 $26,564,000 2,600 $(4,000) $ - $(8,000) $(20,381,000)
=================================================================
- -----------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Cash Flows
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1999 1998
-----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,622,000) $ (2,759,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 163,000 106,000
Amortization of unearned compensation 94,000 -
Issuance of common stock for services 367,000 196,000
Issuance of stock option/warrant for services 329,000 161,000
Provision for losses on receivables 345,000 30,000
(Increase) decrease in:
Receivables (340,000) (475,000)
Inventories (905,000) 240,000
Debt offering cost - 259,000
Prepaid expenses (76,000) 1,000
Increase (decrease) in:
Payables 43,000 14,000
Accrued liabilities (21,000) (187,000)
-----------------------------------
Net cash used in
operating activities (3,623,000) (2,414,000)
-----------------------------------
Cash flows from investing activities:
Purchase of property and equipment (48,000) (48,000)
Notes receivable 44,000 (44,000)
-----------------------------------
Net cash used in
investing activities (4,000) (92,000)
-----------------------------------
Cash flows from financing activities:
Proceeds from issuance of Series C preferred stock - 1,739,000
Proceeds from issuance of Series D preferred stock 1,649,000 -
Proceeds from issuance of common stock 2,485,000 -
Principal payments on long-term debt (17,000) (6,000)
Proceeds from exercise of common stock warrants and
options 398,000 -
-----------------------------------
Net cash provided by
financing activities 4,515,000 1,733,000
-----------------------------------
Net increase (decrease) in cash 888,000 (773,000)
Cash, beginning of year 114,000 887,000
-----------------------------------
Cash, end of year $ 1,002,000 $ 114,000
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-7
</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 business of developing and selling laser-based and other
surgical eye care equipment and products.
Liquidity
The Company incurred a net loss and negative cash flows from operating
activities for the year ended December 31, 1999 and has an accumulated deficit.
Subsequent to year-end the Company has continued to have individuals exercise
their options or warrants. As a result, 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, 2000. However, no assurances can be given that management's plans
will be successful in achieving profitability to positive cash flows.
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.
- --------------------------------------------------------------------------------
F-8
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies Continued
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.
Intangible Assets
The Company capitalized a portion of payments to manufacturers for engineering
and design services. These costs are being amortized using the straight line
method over a three to five year period. At December 31, 1999 and 1998, the
accumulated amortization was $253,000 and $135,000, respectively. Amortization
expense for the years ended December 31, 1999 and 1998 was $118,000 and $74,000,
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.
- --------------------------------------------------------------------------------
F-9
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies Continued
Revenue Recognition
Revenues for sales of the Photon product, are recognized upon installation and
acceptance by the customer. Revenues for sales of other surgical systems,
ultrasound diagnostic devices, and disposable products are recognized when the
product is shipped.
The Company offers certain products with an unconditional arrangement under
which the customer may trade in the product to upgrade to other systems, such as
the Photon. Under this agreement, the customer will receive full credit for the
purchase price of the product traded 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.
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. 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.
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.
- --------------------------------------------------------------------------------
F-10
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies Continued
Concentration of Risk - Continued
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.
During the year ended December 31, 1999, the Company had sales to a major
customer which represented approximately 14% of total net sales. During the year
ended December 31, 1998, no single customer represented more than 10% of total
net sales.
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.
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 amounts in the 1998 financial statements have been reclassified to
conform with the presentation of the current year financial statements.
- --------------------------------------------------------------------------------
F-11
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Detail of Certain Balance Sheet Accounts
Receivables:
Trade receivables $ 916,000
Employee receivables 10,000
Other 10,000
Allowance for doubtful accounts (375,000)
-----------------
$ 561,000
-----------------
Inventories:
Finished goods $ 2,081,000
Raw materials 2,072,000
-----------------
$ 4,153,000
-----------------
Preferred stock:
Series A 500,000 shares authorized, 8,077
shares issued and outstanding (aggregate
liquidation preference of $8,000) $ -
Series B, 500,000 shares authorized, 19,236
shares issued and outstanding (aggregate
liquidation preference of $77,000) -
Series C, 30,000 shares authorized, 500
shares issued and outstanding (aggregate
liquidation preference of $50,000) -
Series D 1,140,000 shares authorized,
313,644 shares issued and outstanding
(aggregate liquidation preference of $549,000) -
-----------------
$ -
-----------------
- --------------------------------------------------------------------------------
F-12
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Property and Equipment
Property and equipment consists of the following:
Office equipment $ 187,000
Computer equipment 108,000
Automobile 26,000
Furniture and fixtures 21,000
-----------------
342,000
Accumulated depreciation and
amortization (138,000)
-----------------
$ 204,000
-----------------
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 $ 8,000
Capital lease obligations (see note 5) 40,000
-----------------
48,000
Less current portion (23,000)
-----------------
$ 25,000
-----------------
Future maturities are as follows:
Year Ending December 31, Amount
- ------------------------ ------
2000 $ 23,000
2001 24,000
2002 1,000
-----------------
$ 48,000
-----------------
- --------------------------------------------------------------------------------
F-13
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Lease Obligations
During the year ended December 31, 1999 the Company leased certain 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 and other equipment $ 54,000
Less accumulated amortization (10,000)
-----------------
$ 44,000
-----------------
Amortization expense on assets under capital leases during the year ended
December 31, 1999 was $10,000.
Capital lease obligations have imputed interest rates of approximately 15% to
22% and are payable in aggregate monthly installments of approximately $2,000
through 2001 and $1,000 through April 2002. The leases are secured by equipment.
Future minimum payments on the capital lease obligations are as follows:
2000 $ 23,000
2001 23,000
2002 3,000
-----------------
49,000
Less amount representing interest (9,000)
-----------------
Present value of future minimum lease payments $ 40,000
-----------------
- --------------------------------------------------------------------------------
F-14
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Lease Obligations Continued
The Company leases office and warehouse space under an operating lease
agreement. Future minimum rental payments under the noncancelable operating
lease as of December 31, 1999 is approximately as follows:
Year Ending December 31, Amount
- ------------------------ ------
2000 $ 176,000
2001 197,000
2002 203,000
2003 17,000
-----------------
Total future minimum rental payments $ 593,000
-----------------
Rent expense related to noncancelable operating leases was approximately
$102,000 and $41,000 for the years ended December 31, 1999 and 1998,
respectively.
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,
---------------------------------
1999 1998
---------------------------------
Federal income tax benefit at
statutory rate $ 1,200,000 $ 938,000
Other - 45,000
Change in valuation allowance (1,200,000) (983,000)
---------------------------------
$ - $ -
---------------------------------
- --------------------------------------------------------------------------------
F-15
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Income Taxes Continued
Deferred tax assets (liabilities) are comprised of the following:
Net operating loss carryforward $ 4,080,000
Depreciation and amortization (23,000)
Allowance and reserves 146,000
Research and development tax credit
carryforwards 34,000
-----------------
4,237,000
Valuation allowance (4,237,000)
-----------------
$ -
-----------------
A valuation allowance has been established for the net deferred tax asset due to
the uncertainty of the Company's ability to realize such asset.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $12,000,000 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-16
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Capital Stock
The Company has established a series of preferred stock with a total of
5,000,000 authorized shares and a par value of $.001, 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 shares
of the Series A Preferred Stock at a price of $4.50 per share, plus accrued
and unpaid dividends related to the fiscal year in which such redemption
occurs.
- --------------------------------------------------------------------------------
F-17
<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 rights 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-18
<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 Series D Preferred Stock $.001 par value, $1.75
stated value. The Series D Preferred Stock has the following rights and
privileges:
1. The holders of the shares are entitled to dividends at the rate of 10% 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.
- --------------------------------------------------------------------------------
F-19
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Capital Stock Continued
Series D Preferred Stock - continued
2. Upon the liquidation of the Company, the holders of the Series D Preferred
Stock are entitled to receive an amount per share equal to the greater of
(a) the amount they would have received had they converted the shares into
Common Stock immediately prior to such liquidation plus all 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 one share of Common Stock at an initial conversion
price, subject to adjustment. The Series D Preferred Stock shall be
converted into one share of the Common Stock subject to adjustment (a) on
January 1, 2002 or (b) upon 30 days written notice by the Company to the
holders of the Shares, at any time after (i) the 30-day anniversary of the
registration statement on which the shares of Common Stock issuable upon
conversion of the Series D Preferred Stock were 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 redemption is given by the Company to
the holders of the Series D Preferred Stock is at least $3.50 per share.
4. The holders of the shares have no voting rights.
8. Stock Option Plan and Warrants
The Company has a Stock Option Plan (the Option Plan) which reserves 300,000
shares of the Company's authorized but unissued common stock for the granting of
stock options. An amendment to the Plan increases 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.
- --------------------------------------------------------------------------------
F-20
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Stock Option Plan and Warrants Continued
In addition, the Company has granted warrants to purchase the Company's common
stock to various entities. During the years ended December 31, 1999 and 1998,
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.
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 and legal services. The warrants are currently
exercisable and expire on December 18, 2008.
o In connection with the Company issuing Series D Preferred Stock, the
Company issued warrants to purchase up to 211,400 shares of common stock at
a purchase price of between $2.38 and $2.69 per share. The warrants are
currently exercisable and expire on February 12, 2004.
- --------------------------------------------------------------------------------
F-21
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Stock Option Plan and Warrants Continued
A schedule of the options and warrants is as follows:
Number of Exercise
---------------------------- Price Per
Options Warrants Share
------------------------------------------
Outstanding at January 1,
1998 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
Granted 310,040 801,400 2.30 - 7.50
Exercised - (166,980) 2.30 - 3.00
Expired - (17,945) 3.00 - 4.00
Forfeited (121,450) - 5.00
------------------------------------------
Outstanding at December 31,
1999 908,750 2,553,100 $2.30 - 8.13
------------------------------------------
9. 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 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,
------------------------------------
1999 1998
------------------------------------
Net loss - as reported $ (3,622,000) $ (2,759,000)
Net loss - pro forma $ (4,433,000) $ (3,044,000)
Loss per share - as reported $ (.54) $ (.69)
Loss per share - pro forma $ (.66) $ (.76)
------------------------------------
- --------------------------------------------------------------------------------
F-22
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
9. 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,
-----------------------------------
1999 1998
-----------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 81% 82%
Risk-free interest rate 6.0% 5.0%
Expected life of options 2 - 5 years 6 years
-----------------------------------
The weighted average fair value of options granted during the years ended
December 31, 1999 and 1998 are $1.24 and $1.85, respectively.
The following table summarizes information about stock options and warrants
outstanding at December 31, 1999:
Outstanding Exercisable
------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
- --------------------------------------------------------------------------------
$2.30 - 5.00 2,186,850 3.35 $ 3.75 2,114,630 $ 3.73
7.50 - 8.13 1,275,000 1.53 7.55 1,200,000 7.55
- --------------------------------------------------------------------------------
$2.30 - 8.13 3,461,850 2.61 $ 5.15 3,314,630 $ 5.12
- --------------------------------------------------------------------------------
10. Related Party Transactions
The Company has 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, 1999, no significant royalties have been paid under this agreement.
- --------------------------------------------------------------------------------
F-23
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Related Party Transactions Continued
A law firm, of which a former director of the Company is a shareholder, has
rendered legal services to the Company. The Company paid this firm $53,000 and
$97,000, for the year ended December 31, 1999 and 1998, respectively. As of
December 31, 1999, the Company owed this firm $9,000 which is included in
accounts payable.
The Company had an investment banking agreement with Win Capital Corp. (Win) for
a two year period which may be extended an additional year. A former director of
the Company is also a former director of Win. 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 to purchase up to 191,000 shares of
common stock at a purchase price of $3.00 per share. In March 1998, the Company
issued to Win Capital a warrant to purchase 100,000 shares of the Company's
common stock at a price of $3.00 per share. The Company satisfied the cash
portion of this agreement in 1999 through the payment of $7,500 and the issuance
of 24,200 shares of common stock.
Prior to the initial closing of the Series D Preferred Offering, the Company
borrowed $75,000 from Cyn Del, of which a former director of the Company is
President, a director and shareholder and $25, 000 from Win Capital. The
combined $100,000 loan bore interest at a rate of 10% per annum, and was paid
back at the end of six months. The Company issued to Cyn Del warrants to
purchase 105,000 shares of Common Stock and Win Capital warrants to purchase
35,000 shares. The Company also entered into a one-year consulting agreement,
wherein Cyn Del would provide consulting services to the Company in
consideration for a fee of $5,000 per month for the term of the agreement. In
April, 1999 the Board of Directors agreed to grant 25,000 warrants to Win and
75,000 warrants to Cyn Del, both at an exercise price of $4.00 per share, if
they exercised their outstanding warrants, which they did.
- --------------------------------------------------------------------------------
F-24
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Supplemental Cash Flow Information
During the year ended December 31, 1999:
o The Company issued common stock in exchange for inventory of $2,528,000,
intangible assets of $120,000, equipment of $9,000 and accounts payable of
$107,000.
o The Company increased the accumulated deficit and additional paid-in
capital by $872,000 due to the difference between the Series D preferred
stock conversion price and the common stock fair value.
o The Company acquired property and equipment in exchange for long-term debt
of $19,000.
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.
- --------------------------------------------------------------------------------
F-25
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Supplemental Cash Flow Information Continued
Actual amounts paid for interest and income taxes are as follows:
Years Ended
December 31,
-----------------------------------
1999 1998
-----------------------------------
Interest $ 15,000 $ 33,000
-----------------------------------
Income taxes $ - $ -
-----------------------------------
12. Export Sales
Total sales include export sales by major geographic area as follows:
Years Ended
December 31,
-----------------------------------
Geographic Area 1999 1998
- ---------------
-----------------------------------
Far East $ 556,000 $ 3,000
South America 266,000 140,000
Middle East 151,000 150,000
Europe 30,000 11,000
-----------------------------------
$ 1,003,000 $ 304,000
-----------------------------------
13. 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.
- --------------------------------------------------------------------------------
F-26
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
14. 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, 1999 and 1998, the Company contributed approximately
$19,000 and $11,000 to the Plan, respectively.
15. Commitments and Contingencies
Consulting Agreements
During the year ended December 31, 1999 the Company entered a consulting
agreement with a former officer of the Company, which expires in 2004 and
requires annual payments of $25,000 through 2003 and a payment of $12,500 in
2004.
During the year ended December 31, 1999 the Company entered into a business
development agreement with an individual. The terms of this agreement are for
one year and provide for a commission of 10% up to a maximum of $1,000,000 in
the event the individual is able to find a party to acquire the Company.
Employment Agreements
The Company has employment agreements with an officer and key employees which
expire between December 2001 and December 2002. The agreements provide for
aggregate annual compensation of $195,000 through 2001, and $135,000 through
2002. In addition, the Company has entered into agreements which provide for
additional payments to be made to the officer in the event the Company has a
change of control.
Litigation
The Company may become or is subject to investigations, claims or lawsuits
ensuing out of conduct of its business, including those related to environmental
safety and health, product liability, commercial transactions etc. The Company
is currently not aware of any such items which it believes could have a material
adverse effect on its financial position.
- --------------------------------------------------------------------------------
F-27
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Fair Value of Financial Instruments
The Company's financial instruments consist of cash, receivables, payables, and
notes payable. The carrying amount of cash, receivables and payables
approximates fair value because of the short-term nature of these items. The
carrying amount of the notes payable approximates fair value as the individual
borrowings bear interest at market interest rates.
17. Recent 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 requires 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.
18. Subsequent Event
On January 28, 2000, the Company entered into a letter of intent with a company
to purchase all the outstanding shares of common stock of that company. As
consideration for the purchase the Company will issue 750,000 common shares to
the company.
- --------------------------------------------------------------------------------
F-28
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosures
- --------------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
- --------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act.
- ---------------------------------------
26
<PAGE>
The executive officers and directors of the Company, their ages and their
positions are set forth below:
Name Age Position
Thomas F. Motter 51 Chairman of the Board, President and
Chief Executive Officer and acting
Chief Financial Officer
Robert L. Frome 60 Director
David M. Silver, Ph.D. 58 Director
Randall Mackey 54 Director
The directors are elected for one year terms which expire at the next
annual meeting of shareholders. Executive officers are elected annually by the
Board of Directors to hold office until the first meeting of the Board following
the next annual meeting of shareholders and until their successors have been
elected and qualified.
Thomas F. Motter has served as Chairman of the Board of the Company since
April 1993. Since December 12,1997 and from May 1994 to August 1997, he has
served as President and Chief Executive Officer of the Company. From June 1989
to April 1993, Mr. Motter served as Chief Executive Officer of Paradigm Medical,
Inc. which merged with the Company in May 1994. From September 1990 to April
1992, he was employed by HGM Medical Laser Systems as general manager of their
International Division. From October 1978 to June 1989, Mr. Motter was employed
by SmithKline Beckman's Humphrey Instruments Division, which developed and
manufactured advanced ophthalmic diagnostic instruments, serving last as
National Sales Manager overseeing all domestic sales in its ophthalmic computer
division. Mr. Motter received a B.A. degree in English from Stephen's College in
1970 and an M.B.A. degree from Pepperdine University in 1975.
Robert L. Frome, has been a director of the Company since September 3,
1998. He has been a Senior Partner at the Olshan Grundman Frome Rosenzweig &
Wolosky LLP law firm in New York City for over twenty years. He serves as a
director of HealthCare Services Group, Inc., the nation's largest provider of
housekeeping, linen and laundry services to long term care facilities, and of
NuCo2 Inc., the nation's largest provider of bulk carbon dioxide to restaurant,
fast food outlets and convenience stores. Mr. Frome is a trustee of Daytop
Village Foundation and The Hospital for Joint Diseases of New York University
Medical Center. He received an LL.B. from Harvard Law School in 1961 and LL.M.
and B.S. degrees from New York University in 1962 and 1958, respectively.
David M. Silver, Ph.D. has been re-appointed a director of the Company in
January 2000. He had served as a director of the Company from November 1995 to
September 1998. Dr. Silver is a Principal Senior Scientist in the Milton S.
Eisenhower Research and Technology Development Center at the Johns Hopkins
University Applied Physics Laboratory, where he has been employed since 1970. He
served as the J. H. Fitzgerald Dunning Professor of Ophthalmology in the Johns
Hopkins Wilmer Eye Institute in Baltimore during 1998-99. He received a B.S.
degree from Illinois Institute of Technology, an M.A. degree from Johns Hopkins
University and a Ph.D. degree from Iowa State University before holding a
postdoctoral fellowship at Harvard University and a visiting scientist position
at the University of Paris.
Randall A. Mackey has been re-appointed a director of the Company in
January 2000. He had served as a director of the Company from November 1995 to
September 1998. Since 1989, Mr. Mackey has been a shareholder of the Salt Lake
City law firm of Mackey Price & Williams and its predecessor firms. Mr. Mackey
received a B.S. degree in Economics from the University of Utah in 1968, a
M.B.A. degree from Harvard University in 1970, a J.D. degree from Columbia
University in 1975 and a B.C.L. degree from Oxford University in 1977. Since
January 1998, Mr. Mackey has served as a director of Cimetrix Incorporated, a
software development company. Mr. Mackey is Vice Chair of the Board of Trustees
of Salt Lake Community College.
28
<PAGE>
Technical and Medical Advisory Personnel
The Company utilizes an informal Clinical Advisory Board of recognized
practicing ophthalmic surgeons in technical and medical advisory capacities.
Outside consultants are generally used on an ad hoc basis and such individuals
do not meet together as a group and are not compensated. The Members of the
Company's Clinical Advisory Board are as follows:
Paul L. Archambeau, M.D. -- Dr. Archambeau is an ophthalmologist in Santa
Rosa, California and a faculty member at the University of California at San
Francisco. He received his medical degree at the University of Buffalo Medical
School in 1959 and performed his residency at the Mayo Clinic in Rochester,
Minnesota.
Daniele S. Aron-Rosa, Ph.D, M.D. -- Dr. Aron-Rosa is a faculty member at
the Rothschild Eye Institute in Paris, France. She received a doctorate degree
in physics from the University of Paris in 1957 and received her medical degree
there in 1962 and performed her residency at the University of Paris Hospital.
David C. Brown, III, M.D. -- Dr. Brown is an ophthalmologist in Fort
Myers, Florida. He received his medical degree at the University of Florida in
1963 and also performed his residency at that facility.
Alan S. Crandall, M.D. -- Dr. Crandall is an ophthalmologist in Salt Lake
City, Utah. He received his medical degree at the University of Utah in 1973 and
performed his residency at the University of Pennsylvania.
I. Howard Fine, M.D. -- Dr. Fine is an ophthalmologist practicing in
Eugene, Oregon and a member of the Oregon Health Sciences University faculty.
Dr. Fine received his medical degree at Boston University in 1966 and also
performed his residency at that facility.
Stephane P. Ganem, M.D. -- Dr. Ganem is chairman of the ophthalmology
department at the Rothschild Eye Institute in Paris, France.
Frederic B. Kremer, M.D. -- Dr. Kremer is an ophthalmologist in Radnor,
Pennsylvania. He received his medical degree at the Jefferson Medical Center in
1976 and performed his residency at the Wills Eye Hospital in Philadelphia,
Pennsylvania.
Francis A. L'Esperance, M.D. -- Dr. L'Esperance is President of the
American Board of Laser Surgery and a faculty member at the Columbia College of
Physicians and Surgeons. He received his medical degree from Harvard Medical
School in 1956 and performed his residency at the Massachusetts Eye and Ear
Infirmary.
Michael B. Limberg, M.D. -- Dr. Limberg is an ophthalmologist practicing
in San Luis Obispo, California. He received his medical degree at the University
of Utah Medical School in 1982 and
29
<PAGE>
performed his residency at Louisiana State University.
Marc A. Michelson, M.D. -- Dr. Michelson is an ophthalmologist in
Birmingham, Alabama. He received his medical degree at the University of Alabama
in 1975, and performed his residency at the Eye Foundation Hospital in
Birmingham, Alabama.
Lawrence E. Noble, M.D. -- Dr. Noble is an ophthalmologist in Provo, Utah.
He received his medical degree at the University of Oregon in 1964, and
performed his residency at the Good Samaritan Hospital.
Jaswant Singh Pannu, M.D. -- Dr. Pannu is an ophthalmologist in Lauderdale
Lakes, Florida. He received his medical degree at the University of Miami in
1967 and performed his residency at the Milwaukee, Wisconsin Veterans
Administration Hospital and at Evanston Hospital in Evanston, Illinois.
David M. Schneider, M.D. -- Dr. Schneider is an ophthalmologist in
Cincinnati, Ohio. He received his medical degree at the University of Cincinnati
in 1975, and performed his residency at the University of Cincinnati.
Jeffrey G. Straus, M.D. -- Dr. Straus is an ophthalmologist in Metairie,
Louisiana. He received his medical degree at State University of New York at
Buffalo in 1984 and performed his residency at Ochsner Foundation Hospital and
Clinic in New Orleans, Louisiana.
Gerald Zelman, M.D. -- Dr. Zelman is a Ophthalmologist in Manhasset, New
York. He received his medical degree at the University of Lausanne in 1964, and
performed his residency at the Brooklyn Eye and Ear facility in Brooklyn, New
York.
Board Meetings and Committees
The Board of Directors held a total of nine meetings during the fiscal
year ended December 31, 1999. The Audit Committee of the Board of Directors
consists of directors Robert L. Frome, David M. Silver, and Randall A. Mackey.
The Audit Committee last met on September 10, 1999. The Audit Committee is
primarily responsible for reviewing the services performed by the Company's
independent public accountants and internal audit department and evaluating the
Company's accounting principles and its system of internal accounting controls.
The Compensation Committee of the Board of Directors consists of directors
Thomas F. Motter, David M. Silver, and Randall A. Mackey. The Compensation
Committee also last met on September 10, 1999. 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 1999 fiscal year.
Pursuant to Nasdaq corporate governance requirements recently made
applicable to Nasdaq SmallCap Market companies, the Company must have (i) a
minimum of two independent directors; (ii) an audit committee with a majority of
independent directors; and (iii) an annual stockholders meeting. The Company has
and can presently satisfy each of these requirements. Messrs. Frome, Silver, and
Mackey qualify as independent directors.
30
<PAGE>
Compliance with Section 16(a) of the Securities and Exchange Act of 1934
Item 10. Executive Compensation
The following table sets forth, for each of the last three fiscal years,
the compensation received by Thomas F. Motter, Chairman of the Board, President,
Chief Executive Officer, and acting Chief Financial Officer of the Company all
other executive officers (collectively, the "Named Executive Officers") at
December 31, 1999 whose salary and bonus for all services in all capacities
exceed $100,000 for the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards Payouts
Other Securities
Annual Restricted Underlying Long-term All Other
Name and Compensa- Stock Options/ Incentive Compensa-
Principal Position Period Salary($) Bonus($) tion($)(6) Awards($) SARs(#) Payout($) tion ($)(5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas F. Motter, 1999(1) $141,208 0 0 0 50,000(5) 0 $5,000(4)
Chairman of the 1998(2) $122,497 0 0 0 0 0 $6,000(4)
Board, President 1997(3) $129,584 0 $5,250 0 0 0 0
and Chief Executive
Officer
Robert W. Millar(6), 1999(1) $114,383 0 0 0 0 0 $3,125(4)
Vice President of 1998(2) $121,019 0 $5,250 0 0 0 $6,000(4)
Engineering and 1997(3) 114,675 0 0 0 0 0 0
Manufacturing
Michael W. Stelzer(7),1999(1) $113,019 0 0 0 20,000(5) 0 $8,000(4)
Secretary/Treasurer, 1998(2) $78,541 0 0 0 0 0 0
Chief Financial 1997(3) $20,060 0 0 0 0 0 0
Officer, Chief
Operating Officer,
Vice President of
Operations, Director
</TABLE>
(1) For the fiscal year ended December 31, 1999
(2) For the fiscal year ended December 31, 1998
(3) For the fiscal year ended December 31, 1997
(4) The amounts indicated under "Other Annual Compensation" for 1998 and 1999
consist of payments related to the operation of automobiles by the named
executive.
(5) On September 10, 1999, the Company granted Mr. Motter and Mr. Stelzer
options to purchase 50,000 and 20,000 shares, respectively, of the
Company's Common Stock at an exercise price of $4.00 per share. These
options expire on September 10, 2004.
(6) Mr. Millar resigned as an officer of the Company on August 27, 1999, and as
a director on September 30, 1999.
(7) Mr. Stelzer resigned as an officer and a director of the Company on January
21, 2000.
The following table sets forth information concerning the exercise of
options to acquire shares of the Company's Common Stock by the Named Executive
Officers during the fiscal year ended December 31,
31
<PAGE>
1999, as well as the aggregate number and value of unexercised options held by
the Named Executive Officers on December 31, 1999.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs In-the-Money Options/SARs at
at December 31, 1999(#) December 31, 1999($)
Shares Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Thomas F. Motter -0- -0- 193,450 -0- 193,450 -0-
Robert W. Millar -0- -0- -0- 121,450 -0- -0-
John W. Hemmer -0- -0- 57,450 -0- 57,450 -0-
Michael W. Stelzer -0- -0- 77,450 -0- 77,450 -0-
Curtis G. Page -0- -0- 10,080 -0- 3,360 6,720
Richard D. Dirkson -0- -0- 5,040 -0- 5,040 -0-
</TABLE>
Director Compensation
Steven J. Bayern and Patrick M. Kolenik, who were directors of the Company
during 1999, and subsequently resigned as directors on January 21, 2000, and
Robert L. Frome were each granted stock options to purchase 75,000 shares of the
Company's Common Stock at an exercise price of $4.00 per share. Outside
directors are also reimbursed for their expenses in attending Board and
committee meetings. Directors are not precluded from serving the Company in any
other capacity and receiving compensation therefor.
Employee 401(k) Plan
In October 1996, the Company's Board of Directors adopted a 401(k)
Retirement Savings Plan. Under the terms of the 401(k) plan, effective as of
November 1, 1996, the Company may make discretionary employer matching
contributions to its employees who choose to participate in the plan. The plan
allows the Board to determine the amount of the contribution at the beginning of
each year. The Board adopted a contribution formula specifying that such
discretionary employer matching contributions would equal 100% of the
participating employee's contribution to the plan up to a maximum discretionary
employee contribution of 3% of a participating employee's compensation, as
defined by the plan. All persons who have completed at least six months' service
with the Company and satisfy other plan requirements are eligible to participate
in the 401(k)plan.
1995 Stock Option Plan
The Company adopted a 1995 Stock Option Plan (the "Plan"), for officers,
employees, directors and consultants of the Company on November 7, 1995. The
Plan authorized the granting of stock options ("Plan Options")to purchase an
aggregate of not more than 300,000 shares of the Company's Common Stock. On
February 16,1996, options for substantially all 300,000 shares were granted. On
June 9, 1997, the Company's shareholders approved an amendment to the Plan to
increase the number of shares of Common Stock reserved from issuance thereunder
by an aggregate of 300,000 shares. That same day, 20,000 options each were
granted to Michael W. Stelzer, formerly Vice President of Operations and Chief
Operating Officer of the Company, and John W. Hemmer, then Vice President of
Finance, Treasurer and Chief Financial Officer of the Company. On September 14,
1998, 37,450 options each were granted to Thomas F. Motter, President and Chief
Executive Officer of the Company, Robert W. Millar, then Vice President of
Engineering and Manufacturing, and Messrs. Stelzer and Hemmer, and 75,000
options each to Patrick M.
32
<PAGE>
Kolenik and Robert L. Frome, two outside directors of the Company at the time.
On September 10, 1999, 50,000 options were granted to Mr. Motter, 20,000
options were granted to Mr. Stelzer, and 75,000 options were granted each to
Messrs. Kolenik, Frome and Steven J. Bayern, the three outside directors of the
Company at the time. There are presently outstanding options to purchase 908,750
shares of the Company's Common Stock that have been granted under the Plan. No
such options had been exercised as of December 31, 1999.
The Plan is administered by the Board of Directors or a Compensation
Committee of not less than two disinterested members of the Board of Directors.
In general, the Board of Directors or the Compensation Committee, as the case
may be, will select the person to whom options will be granted and will
determine, subject to the terms of the Plan, the number, exercise, and other
provisions of such options. Options granted under the Plan will become
exercisable at such times as may be determined by the Board of Directors or the
Compensation Committee, as the case may be.
Options under the Plan may be either incentive stock options ("ISOs"), as
such term is defined in the Internal Revenue Code of 1986, as amended, or
non-ISOs. ISOs may only be granted to persons who are employees of the Company.
Non-ISOs may be granted to any person, including, but not limited to, employees
of the Company, independent agents, consultants, as the Board of Directors or
the Compensation Committee, as the case may be, believes has contributed, or
will contribute, to the success of the Company. The Board of Directors or the
Compensation Committee as the case may be, shall determine the exercise price of
options granted under the Plan, provided that, in the case of ISOs, such price
may not be less than 100% (110% in the case of ISOs granted to holders of 10% of
voting power of the Company's stock) of the fair market value (as defined in the
Plan) of the Common Stock on the date of grant. The aggregate fair market value
(determined at the time of option grant)of stock with respect to which ISOs
become exercisable for the first time in any year cannot exceed $100,000.
The term of each option shall not be more than 10 years (five years in the
case of ISOs granted to holders of 10% of the voting power of the Company's
stock) from the date of grant. The Board of Directors has a right to amend,
suspend or terminate the Plan at any time; provided, however, that unless
ratified by the Company's stockholders, no amendment or change in the Plan will
be effective which would increase the total number of shares which may be issued
under the Plan, materially increase the benefits accruing to persons granted
under the Plan or materially modify the requirements as to eligibility and
participation in the Plan. No amendment, supervision or termination of the Plan
shall, without the consent of an employee to whom an option shall heretofore
have been granted, affect the rights of such employee under such option.
Employment Agreements
The Company entered into employment agreements with each of Thomas F.
Motter, Michael W. Stelzer, Robert W. Millar and John W. Hemmer and which
commenced on January 1, 1998 and expire on January 1, 2003. The agreements
require each employee to devote substantially all of his working time to the
Company, provide that each of them may be terminated for "cause" (as provided in
the agreements)and prohibit each of them from competing with the Company for two
years following the termination of his employment agreement. The agreements
provide for the payment of an initial base salary of $135,000 to Mr. Motter,
$100,000 to Mr. Stelzer, $125,000 to Mr. Millar and $120,000 to Mr. Hemmer, and
became effective as of January 1, 1998. In January 1998, Mr. Hemmer also
received a bonus of 50,000 shares of the Company's Common Stock in recognition
of the services previously rendered by him. The agreements provide for salary
increases and bonuses as shall be determined at the discretion of the Board of
Directors.
33
Profit Sharing Plan
On February 16, 1996, the Company adopted a Profit Sharing Plan, pursuant
to which an amount equal to 10% of the pretax profits of the Company will be set
aside for the benefit of the Company's officers and key employees. This funding
will be paid to the Company's officers and key employees as follows: Thomas W.
Motter, Chairman of the Board, President and Chief Executive Officer--30%; and a
pool of 70% to be allocated among the other officers and key employees as
determined by the Compensation Committee and approved by the Board of Directors.
This funding will only be paid if the Company's qualified pretax profits exceed
$10,000,000 for any fiscal year beginning October 1, 1996 and ending December
31, 2001. If the Company's pretax profits reach $10,000,000 for any fiscal year,
the entire pretax profits for that year will qualify for the funding. The plan
expires at the end of its fifth fiscal year on December 31, 2001, when all funds
held will be disbursed.
35
<PAGE>
Limitation of Liability and Indemnification
The Company re-incorporated in Delaware in February 1996, in part, to take
advantage of certain provisions in Delaware's corporate law relating to
limitations on liability of corporate officers and directors. The Company
believes that the re-incorporation into Delaware, the provisions of its
Certificate of Incorporation and Bylaws and the separate indemnification
agreements outlined below are necessary to attract and retain qualified persons
as directors and officers. The Company's Certificate of Incorporation limits the
liability of directors to the maximum extent permitted by Delaware law. This
provision is intended to allow the Company's directors the benefit of Delaware
General Corporation Law which provides that directors of Delaware corporations
may be relieved of monetary liabilities for breach of their fiduciary duties as
directors, except under certain circumstances, including breach of their duty of
loyalty, acts or omissions not in good faith or involving intentional misconduct
or a knowing violation of law, unlawful payments of dividends or unlawful stock
repurchases or redemptions or any transaction from which the director derived an
improper personal benefit. The Company's Bylaws provide that the Company shall
indemnify its officers and directors to the fullest extent provided by Delaware
law. The Bylaws authorize the use of indemnification agreements and the Company
has entered into such agreements with each of its directors and executive
officers.
There is no pending litigation or proceeding involving a director,
officer, employee or other agent of the Company as to which indemnification is
being sought, nor is the Company aware of any threatened litigation that may
result in claims for indemnification by any director, officer, employee or other
agent.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the SEC, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of December 31, 1999 for
(i) each executive officer of the Company (ii) each director of the Company
(iii) each person known to the Company to be the beneficial owner of more than
5% of the outstanding shares, and (iv) all directors and officers as a group.
36
<PAGE>
Percent of
Name and Address(1) Number of Shares Ownership(2)
Thomas F. Motter(3) 495,083 5.6%
Douglas MacLeod 418,451 4.8%
Michael W. Stelzer(4) 77,450 *
Patrick M. Kolenik (5) 29,577 *
Robert L. Frome(6) 56,855 *
Steven J. Bayern(7) 0 *
Curtis G. Page (8) 3,176 *
Richard D. Dirkson (9) 0 *
Executive officers and
directors as a group
(8 persons) 1,080,592 12.3%
- ---------------
* Less than 1%.
(1) The address for Mr. Motter is c/o Paradigm, 2355 South 1070 West, Salt
Lake City, UT, 84119. The address for Mr. Stelzer is 7468 Tall Oaks
Drive, Park City, UT 84098. The address for Mr. MacLeod is 1002 South
10th Street, Tacoma, Washington 98405. 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. The
address for Mr. Bayern is 5 Cedarwood Court, Laurel Hollow, New York,
11791.
(2) Assumes no exercise of Class A Warrants.
(3) Includes 300 shares held by Jerry Motter, Mr. Motter's wife, but does
not include options to purchase 193,450 shares of Common Stock granted
to Mr. Motter under the Company's 1995 Option Plan.
(4) Does not include options to purchase 77,450 shares of Common Stock
granted to Mr. Stelzer under the Company's 1995 Option Plan.
(5) Includes 28,570 shares held by an IRA account for the benefit of Mr.
Kolenik, does not include options to purchase 150,000 shares of Common
Stock granted to Mr. Kolenik, 105,000 shares held by Cyndel & Co., and
warrants to purchase 150,000 shares of Common Stock granted by the
Company to Cyndel & Co., of which Mr. Kolenik is an officer, director,
and 50% owner, 40,200 shares of Common Stock held by Win, and warrants
to purchase 435,000 shares of Common Stock granted by the Company to
Win, of which Mr. Kolenik is an officer, director, and shareholder.
(6) Does not include options to purchase 150,000 shares of Common Stock
granted to Mr. Frome.
(7) Does not include options to purchase 75,000 shares of Common Stock
granted to Mr. Bayern, 105,000 shares of Common Stock held by Cyndel &
Co., and warrants to purchase 150,000 shares of Common Stock granted by
the Company to Cyndel & Co., of which Mr. Bayern is an officer,
director, and 50% owner, 40,200 shares of Common Stock held by Win, and
warrants to purchase 435,000 shares of Common Stock granted by the
Company to Win, of which Mr. Bayern is an officer, director, and
shareholder.
(8) Does not include options to purchase 10,080 shares of Common Stock
granted to Mr. Page under the Company's 1995 Option Plan.
(9) Does not include options to purchase 5,040 shares of Common Stock
granted to Mr. Dirkson under the Company's 1995 Option Plan.
Item 12. Certain Relationships and Related Transactions
- -------------------------------------------------------
The information set forth herein describes certain transactions between
the Company and certain affiliated parties. Future transactions, if any, will be
approved by a majority of the disinterested members of the Company and will be
on terms no less favorable to the Company than those that could be obtained from
37
<PAGE>
unaffiliated parties.
The Company had subcontracted the manufacture of its Precisionist(TM)
Ocular Surgery Workstation(TM) to one of its shareholders, Zevex, Inc. ("Zevex")
which is located in Salt Lake City, Utah. On September 23, 1996, the Company
entered into a Design, Engineering and manufacturing Agreement with Zevex for
the engineering and manufacture of the Workstation(TM)and Precisionist(TM). On
November 24, 1999 the Company entered into a Mutual Release and Settlement
Agreement, in which the Company purchased the remaining finished good and raw
material inventory pertaining to the Precisionist(TM), with the intent to take
its development and manufacture in house. For the fiscal year ended ended
December 31, 1999, the Company purchased design and manufacturing services in
the amount of $225,252 from Zevex.
On January 8, 1997, the Company subcontracted the subassembly of the laser
module piece of the Photon(TM) Laser Phaco(TM) from Sunrise Technologies, Inc.
("Sunrise"). During the 12 month period ending December 31, 1997, the Company
purchased 10 laser module subassemblies for a total purchase price of $160,000,
from Sunrise whose president was a member of the Company's Board of Directors at
the time the manufacturing agreement was signed.
On December 19, 1995, the Company entered into a settlement and release
agreement(the "Settlement Agreement") with Douglas A. MacLeod, a significant
shareholder of the Company. Pursuant to this agreement, Mr. MacLeod agreed to
terminate certain anti-dilution rights granted to him by the Company. Under the
terms of this Settlement Agreement, Mr. MacLeod agreed to terminate his
anti-dilution rights in consideration for the following:(i) Mr. Motter agreeing
to sell to Mr. MacLeod from his personal holdings 61,111 shares of the Company's
Common Stock at a purchase price of $611.11, (ii) Mr. Millar agreeing to sell to
Mr. MacLeod from his personal holdings 38,889 shares of the Company's Common
Stock at a purchase price of $388.89, and (iii) the Company agreeing to issue to
MacLeod an additional 20,000 shares of Common Stock. Based on the value assigned
by the Company's investment banker, Kenneth Jerome & Company, Inc., of $1.50 per
share, the Company recognized $30,000 of expense for the 20,000 shares issued by
the Company and $149,000 of expense and additional paid-in-capital for the
100,000 shares sold by Mr. Motter and Mr. Millar. The Company represented in the
Settlement Agreement that a public offering of the Company's securities would be
completed by June 1, 1996. On May 24, 1996, the Company and Mr. MacLeod amended
the Settlement Agreement to indicate that a public offering of the Company's
securities would be completed by July 15, 1996. By order dated July 10, 1996,
the SEC declared the Company's Registration Statement to be effective and
following the sale of the Company's securities, the closing of the public
offering occurred on July 25, 1996.
The Photon(TM) Laser Phaco(TM) system is protected under a United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. (U.S. Patent Number
4,694,828) for the utility and methods of laser ablation, aspiration and
irrigation of tissue through a hand-held probe of a unique design and assigned
to Photomed, a corporation owned in part by Dr. Eichenbaum. The Company secured
the exclusive worldwide right to this patent shortly after its issue, and to the
international patents pending, from Photomed by means of a License Agreement
that entitled Dr. Eichenbaum to royalty payments equal to 1% of the proceeds
from the net commercial sales of the Photon(TM) Laser Phaco(TM) system and
accessories in all medical specialties. The License Agreement terminates
38
<PAGE>
July 7, 2003. The License Agreement was amended on December 5, 1997 to allow
Photomed the right to conduct research, development and marketing utilizing the
patent in certain medical sub-specialties other than ophthalmology for which the
Company would receive royalty payments equal to 1% of the proceeds from the net
sales of products utilizing the patent.
Mr. Mackey, a director of the Company from September 1995 to September 3,
1998, and a director since January 21, 2000, is President and a shareholder of
the law firm of Mackey Price & Williams, which has rendered legal services to
the Company since February 1995 in connection with the Company's public offering
and other corporate matters. Legal fees and expenses paid to Mackey Price &
Williams for the ended December 31, 1999, the Company paid legal fees and
expenses in the amount of $53,324 and at year end owed $8,967.
Mr. Kolenik, a director of the Company from November 1997 to January 21
2000, and Mr. Bayern, a director of the company from July, 1999, to January 21,
2000, are officers, directors, and shareholders of Win, the placement agent for
the Series C Convertible Preferred Stock offering. Under the terms of an agency
agreement with Win, the Company agreed to pay to Win a commission equal to 9% of
the aggregate purchase price of the Shares sold, or $269,820. Win was also paid
a non-accountable expense allowance equal to 3% of the aggregate purchase price
of the Shares sold. The Company has also entered into an agreement with Win
dated August 20, 1997, wherein Win agreed to perform unspecified investment
banking services for the Company for a two year period, for which the Company
agreed to pay Win a monthly retainer of $2,000 for the first six months of the
agreement, $4,000 per month for the second six months, and $6,000 per month for
the remainder of the agreement. In an agreement entered into in February 1999,
WIN agreed to accept $7,500 in cash plus $60,500 in Common Stock valued at the
close of business April 1, 1999, in addition to a $50,000 finders fee as it
relates to the Series D Preferred Stock Offering.
In addition, the Company issued Win warrants to purchase 191,000 shares of
Common Stock at an exercise price of $3.00 per share in connection with the
investment banking agreement and additional warrants to purchase 100,000 shares
of Common Stock at $3.00 per share for services rendered in the private
placement of Series C Convertible Preferred Stock (collectively, the "Win
Warrants").
Prior to the initial closing of the Offering, the Company borrowed $75,000
from Cyndel, of which Messrs. Kolenik and Bayern are each an officer, director,
and 50% shareholder, and $25,000 from Win. The combined $100,000 loan bore
interest at a rate of 10% per annum, and was paid back at the end of six months.
The Company issued to Cyndel five-year warrants to purchase 105,000 shares of
Common Stock and Win warrants to purchase 35,000 share of Common Stock, both at
an initial exercise price equal $2.30, the closing price of the Company's Common
Stock on the business day immediately prior to the issuance date of the
warrants. The Company also entered into a one-year consulting agreement, wherein
Win would provide financial consulting services to the Company in consideration
for a fee of $5,000 per month for the term of the agreement. On April 7, 1999
the Board of Directors agreed to grant 25,000 warrants to Win and 75,000
warrants to Cyndel, both at an exercise price of 4.00 per share, if they
exercised their outstanding warrants, which warrants were exercised in June and
August of 1999.
PART IV
39
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-B or are incorporated by reference to previous filings.
Table No. Document
2.1 Amended Agreement and Plan of Merger between Paradigm Medical Industries,
Inc., a California corporation and Paradigm Medical Industries, Inc., a
Delaware corporation(1)
3.1 Certificate of Incorporation(1)
3.2 Bylaws(1)
4.1 Specimen Common Stock Certificate (2)
4.2 Specimen Class A Warrant Certificate(2)
4.3 Form of Class A Warrant Agreement(2)
4.4 Underwriter's Warrant with Kenneth Jerome & Co., Inc.(3)
4.5 Attorney's Warrant with Mackey Price & Williams(1)
4.6 Warrant to Purchase Common Stock with Win Capital Corp.(5)
4.7 Specimen Series C Convertible Preferred Stock Certificate(5)
4.8 Certificate of the Designations, Powers, Preferences and Rights of the
Series C Convertible Preferred Stock(5)
10.1 Exclusive Patent License Agreement with Photomed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 Confidential Disclosure Agreement with Zevex, Inc.(1)
10.4 Indemnity Agreement with Zevex International, Inc.(1)
10.5 Manufacturing Agreement with Sunrise Technologies, Inc.(1)
10.6 Royalty Agreement dated January 30, 1992, with Dennis L. Oberkamp Design
Services(1)
10.7 Indemnity Agreement dated January 30, 1992, with Dennis L. Oberkamp Design
Services(1)
10.8 Royalty Agreement (for Ultrasonic Phaco Handpiece) with Dennis L. Oberkamp
Design Services(1)
10.9 Lease Agreement with Eden Roc
10.10 1995 Stock Option Plan and forms of Stock Option Grant Agreements(1)
10.11 Design, Engineering and Manufacturing Agreement with Zevex, Inc.(4)
10.12 License and Manufacturing Agreement with O.B.F. Labs, Ltd. (5)
10.13 Agreement with Win Capital Corp. (5)
10.14 Securities Exchange Agreement (5)
40
<PAGE>
10.15 Stock Exchange for Satisfaction of Debt Agreement with Zevex
International, Inc. (6)
10.16 Co-Distribution Agreement with Pharmacia & Upjohn Company and National
Healthcare Manufacturing Corporation (6)
10.17 Agreement for Purchase and Sale of Assets with Humphrey Systems Division
of Carl Zeiss, Inc. (6)
10.18 Employment Agreement with Thomas F. Motter (7)
10.19 Employment Agreement with Robert W. Millar (7)
10.20 Employment Agreement with John W. Hemmer (7)
10.21 Employment Agreement with Michael W. Stelzer (7)
10.22 Change of Control Termination Agreement with Thomas F. Motter (7)
10.23 Change of Control Termination Agreement with Robert W. Millar (7)
10.24 Change of Control Termination Agreement with John W. Hemmer (7)
10.25 Change of Control Termination Agreement with Michael W. Stelzer (7)
10.26 Asset Purchase Agreement with Mentor Corp., Mentor Ophthalmics Inc., and
Mentor Medical Inc.
10.27 Transition Services Agreement with Mentor Corp., Mentor Ophthalmics Inc.,
and Mentor Medical Inc.
10.28 Severance Agreement and General Release with Michael W. Stelzer
10.29 Consulting Agreement with Dr. Michael B. Limberg
10.30 Renewed Consulting Agreement with Dr. Michael B. Limberg
10.31 Mutual Release and Settlement Agreement with Zevex, Inc.
10.32 Consulting Agreement with Douglas Adams
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
December 30, 1996.
(5) Incorporated by reference from Annual Report on Form 10-KSB, as filed on
April 16, 1998.
(6) Incorporated by reference from Quarter Report on Form 10-QSB, as filed on
August 19, 1998.
(7) Incorporated by reference from Quarter Report on Form 10-QSB, as filed on
November 12, 1998.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Company during the fourth
quarter of 1999.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PARADIGM MEDICAL INDUSTRIES, INC.
Dated: March 30, 2000 By: /s/Thomas F. Motter
----------------------------------------
Thomas F. Motter, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons in counterpart on behalf of the Company
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Thomas F. Motter Chairman of the Board, March 30, 2000
- ---------------------- President and Chief Executive Officer
Thomas F. Motter (Principal Executive Officer)
/s/Randall A. Mackey, Esq. Secretary and Director March 30, 2000
- ----------------------
Randall A. Mackey, Esq.
/s/Robert L. Frome, Esq. Director March 30, 2000
- ----------------------
Robert L. Frome, Esq.
/s/David M. Silver, Ph.D. Director March 30, 2000
- ----------------------
David M. Silver, Ph.D.
</TABLE>
42
LEASE AGREEMENT
THIS LEASE AGREEMENT made and entered into this _21st day of
_____February, 2000, by and between Eden Roc Partnership a California General
Partnership, hereinafter referred to as the "Landlord", and Paradigm Medical
Industries, hereinafter referred to as the "Tenant":
WITNESSETH
ARTICLE_L PREMISES AND TERN. Landlord hereby leases and by these
presents does lease and demise to the Tenant, and the Tenant does lease and take
from the Landlord, the premises, consisting of approximately 29,088 square feet
of office/warehouse space, the "Demised Premises", situated in the building
erected at 2355 South 1070 West, Salt Lake City, Utah, Suite A and B, together
with all the easements, rights, privileges and appurtenances thereunto belonging
or in any way appertaining to the Demised Premises.
TO HAVE AND TO HOLD the said Demised Premises, together with all and
singular the improvements, appurtenances, rights, privileges and easements
thereunto belonging to or in anywise appertaining, unto Tenant for a term
commencing as of the date set forth herein under Article 3 and continuing
thereafter to and including the date three years from the first day of the first
month immediately following such commencement date, subject, however, to
extension and renewal if hereafter provided. When the date of commencement of
the term has been determined, Landlord and Tenant may enter into an agreement in
recordable form setting forth such date at the request of either the Landlord or
the Tenant.
ARTICLE 3. TENANT'S POSSESSION. The term of this Lease shall commence
when the Landlord delivers to Tenant, in a condition ready for occupancy,
possession of the Demised Premises described on Exhibit "B"located in the
building constructed by the Landlord. Tenant shall accept possession of the said
improvements when they are ready for occupancy.
ARTICLE 4. OBLIGATIONS OF TENANT AND LANDLORD.
4.1 Real Estate Taxes. Tenant shall pay, within ten (10) days from the
date Landlord submits to Tenant a statement setting forth the amount due
Landlord under the provisions of this paragraph, Tenant's proportionate share of
the real property taxes and assessments on the Demised Premises as additional
rent hereunder. Tenant's proportionate share of such taxes and assessments shall
be determined by multiplying the total amount of such taxes and assessments by a
fraction, the numerator of which is the floor area of the Demised Premises and
the denominator of which is the total floor area of the building or buildings
being assessed. If the Landlord shall be required to maintain a tax impound
account, Tenant shall, at Landlord's request, pay one-twelfth (1/12) of Tenant's
proportionate share of the estimated annual taxes in advance each month in
additional to the minimum rental payment due hereunder. Landlord shall pay all
taxes, and assessments lawfully levied or assessed against the building or
buildings or any part thereof; provided, however, that Landlord may, dispute and
contest the same. Tenant may, at its sole cost and expense, after it has paid in
full its proportionate share of any taxes or assessments due hereunder, upon
fifteen (15) days prior written notice to Landlord, contest with the appropriate
governmental authority such tax or assessment. Tenant shall be entitled to any
refund of any tax or penalty paid by Tenant, or paid by Landlord and reimbursed
by Tenant to Landlord. (See Lease Rider "A" Building Expenses attached hereto
and incorporated herein).
4.2 Personal Property Taxes. Tenant shall additionally
<PAGE>
pay, when due, all personal property taxes and license fees levied and assessed
against the Demised Premises during the terms of the lease. Nothing contained in
this Lease shall require or be construed to obligate the Tenant to pay any
franchise , excise, corporate, estate, inheritance, succession, capital levy or
transfer tax of the Landlord, or any income, profits or revenue tax upon the
income of the Landlord; provided however, that in any case when a tax may be
levied, assessed or imposed upon the Landlord for the privilege of renting or
leasing the Demised Premises or which is based upon the rental revenue derived
therefrom, Tenant shall pay to Landlord as additional rent hereunder the amount
of said tax, but in no event shall the Tenant be obligated to pay an amount
greater than that which would be payable if the Demised Premises were the only
asset of the Landlord.
43. Tenant Insurance. The Tenant shall, during the entire term of this
Lease, at the Tenant's sole cost and expense, but for the mutual benefit of the
Landlord and Tenant, maintain general public liability insurance against claims
for personal injury, death or property damage occurring upon, in or about the
entire property described on Exhibit "B" attached hereto and on, in or about the
adjoining streets and passageways, such insurance to afford protection to the
limit of not less than $500,000 in respect to injury or death to a single
person, and to the limit of not less than $1,000,000 in respect to one accident,
and the the limit of not less than $100,000 in respect to property damage or a
combined single limit policy not less than $1,000 per occurrence. All policies
shall name Landlord and the mortgagee of the property as an additional named
insured, as their interest may appear.
Tenant shall also provide insurance coverage to the extent of the full
replacement value covering all of Tenant's property, fixtures, equipment, tools,
improvements, stock, goods, wares or merchandise, that it may have in or on or
about the Demised Premises.
Other forms of insurance may be reasonably required to cover future
risks against which a prudent Tenant would protect itself.
All policies of insurance provided for herein shall be issued by
insurance companies with a general nolicy holder's rating of not less than A and
a financial rating of AAA, as rated in the most current available "Best's Guide"
Insurance Reports, and qualified to do business in the state of Utah.
To the extent that Tenant fails to provide the foregoing insurance,
either hazard or liability, Tenant shall be responsible to Landlord, as his
interest appears, for such damage that would have been insured by said policies
but for Tenant's failure to obtain such insurance.
The policies for the foregoing insurance shall provide that the proceeds
thereof shall be payable to the Tenant and to the Landlord, as their respective
interests may appear. Said required Tenant insurance coverage shall be verified
to the Landlord by an insurance carrier in the form of either a certified copy
of the policy or other written verification of insurance coverage acceptable to
Landlord and the lending institution for the Demised Premises. Such insurance
policies shall provide that Landlord be given thirty (30) days written notice
prior to any cancellation or alteration of any policy.
4.4 Landlord's Insurance. Subject to Tenant's reimbursement, Landlord
shall provide fire, lightning, and extended coverage ("all risk") insurance and
such additional insurance coverage as may be required by Landlord's mortgage
(including "loss of rents" insurance) on the building, of which the Demised
Premises is a part, for the full replacement value thereof or such value as is
required by Landlord's mortgagee, whichever is greater, against such loss.
Tenant shall reimburse
<PAGE>
Landlord, as additional rental hereunder, for Tenant's proportionate share
(determined in the same manner as Tenant's proportionate share of taxes and
assessments herein above) of the costs of the insurance premium therefor within
ten (10) days from the date Landlord submits to Tenant a statement setting forth
the amount due Landlord under the provisions of this paragraph. If the Landlord
is required to maintain a building insurance premium impound account, Tenant
shall pay 1/12 of Tenant's proportionate share of the estimated annual building
insurance premium in advance each month along with the minimum rental payment.
(See Lease Rider "A" Building Expenses attached hereto and incorporated herein).
4.5 Subrogation. Landlord and any other Tenants of the building shall
not be liable to Tenant or anyone claiming by, through or under Tenant,
including an insurance carrier or carriers, for any insurable loss or damage,
and no such carriers shall have the right to subrogate against Landlord, or any
other Tenant. All of the insurance policies required hereunder pertaining to the
Demised Premises shall contain an endorsement by the respective insurance
carriers waiving any and all rights of subrogation against Landlord, and any
other Tenant of the building, a copy of which endorsement or endorsements, or
evidence thereof by way of certificate shall be furnished to the Landlord.
4.5 Assumption of Risk. Anything herein to the contrary notwithstanding,
after the commencement of the term as provided in Article 3 the Tenant assumes
full risk of damage to its property, fixtures, equipment, tools, improvements,
stock, goods, wares or merchandise, that it may have in or on or about the
Demised Premises, resulting from fire, lightning, extended coverage perils,
flood and any catastrophe, regardless of cause or origin. The Landlord shall not
be liable to Tenant or anyone claiming by, through or under Tenant, including
Tenant's insurance carrier or carriers, for any loss or damage resulting from
fire, lightning, or extended coverage perils or from an act of God. Landlord
shall not be liable to the insurance carrier for damages insured against, either
directly or by way of subrogation.
ARTICLE 5. TENANT'S USE. The Tenant may use the Demised Premises for
conducting its warehouse, administration and distribution business. Tenant shall
use the Demised Premises only for lawful and proper purposes, which are
permissible under applicable law (including under applicable zoning laws).
Tenant shall not make any use of the Demised Premises which will cause
cancellation of any insurance policy covering the same and shall not keep or use
on the Demised Premises any article, item, or thing which is prohibited by the
terms of the hazard insurance policy covering the improvements. Tenant shall not
commit any waste upon the Demised Premises and shall not conduct or allow any
business, activity or thing on the Demised Premises which is or becomes
unlawful, prohibited, or a nuisance or which may cause damage to Landlord, to
occupants or other tenants in the vicinity, or to other third parties. Tenant
shall comply with and abide by all laws, ordinances, and regulations of all
municipal, county, state and federal authorities which are now in force or which
may hereafter become effective with respect to use and occupancy of the Demised
Premises. Tenant shall make no alteration or addition to the premises without
the prior written approval of Landlord.
Tenant represents to Landlord that neither Tenant or any affiliates of
Tenant will unlawfully generate, store or dispose of any Hazardous Substances
(as defined below) at or in the area of the Demised Premises.
Tenant covenants with Landlord: a) to prohibit any unlawful generation,
storage or disposal of Hazardous Substances at the Premises, b) to deliver
promptly to Landlord true and complete copies of all notices received by Tenant
from any governmental
<PAGE>
authority with respect to the unlawful generation, storage or disposal by Tenant
of Hazardous Substances (whether or not at the Premises); and c) to permit entry
onto the Premises by Landlord or Landlord's representative(s) at any reasonable
time to verify Tenant's compliance with the foregoing.
Tenant agrees to indemnify and defend Landlord (with legal counsel
reasonably acceptable to Landlord) from and against any costs, fees or expenses
(including, without limitation, cleanup expenses, third party claims and
environmental impairment expenses and reasonable attorneys' fees and expenses)
incurred by Landlord caused by Tenant's unlawful generation, storage, or
disposal of Hazardous Substances at or near the Demised Premises in accordance
with the foregoing and with Tenant's compliance with the foregoing
representations and covenants. This indemnification by Tenant shall survive
termination or expiration of this Lease.
"Hazardous Substances" shall mean (i) hazardous substances as defined in
the Comprehensive Environmental Response, Compensation and Liability Act, as
amended, (ii) "PCBs", as defined in 40 C.F.R. 761 et seq. and "TCDD" a defined
in 40 C.F.R. 755 et seq. (or in either case analogous regulations promulgated
under the Toxic Substances Control Act, as amended) (iii) "asbestos" as defined
in 29C.F.R. 1910.1001 et seq. (analogous regulations promulgated under the
Occupational Safely and Health Act of 1970, as amended), and (iv) waste oils.
ARTICLE 6. POSSESSION. Possession of the Demised Premises shall be
delivered to the Tenant as herein provided, free and clear of all Tenants and
occupants and the rights of either. The Demised Premises shall be free of liens,
encumbrances and violations of laws, ordinances and regulations adversely
affecting the use and occupancy of the Demised Premises, except those presently
of record including mortgages and trust deeds and those that may be specified
herein. Tenant agrees to deliver to the Landlord physical possession of the
Demised Premises including all keys to the Demised Premises, upon the
termination or expiration of this Lease, or any extension thereof, in as good
order, condition and state of repair as when received by Tenant, reasonable wear
and tear thereof and damage by fire, acts of God or the elements excepted.
ARTICLE 7.
7.1 Minimum Rent. The Tenant agrees to pay the Landlord, at such address
as shall from time to time be designated by Landlord, as minimum rental during
the initial term of this Lease without right of offset or deduction, the sum of:
1st Lease year $191,988/year $15,999/month
2nd Lease year $197,747/year $16,479/month
3rd Lease year $203,680/year $16,973/month
Minimum rental shall be payable monthly, in advance, without demand on
the first day of each calendar month throughout the Lease term. Should Tenant's
occupancy of the Demised Premises commence on any day other than on the first
(1st) day of the calendar month, the first rental shall be prorated accordingly.
7.2 Late Penalty. Both rental payment (minimum or additional) shall be
increased by the sum of Twenty Dollars ($50.00) for each day that payment of
such rental to Landlord is later that the fifth (5th) day after which such
rental is due.
ARTICLE 8. SIGNS. With the prior written approval of Landlord, which
approval shall not be unreasoflably withheld, Tenant shall have the right and
privilege to place on the building or Demised Premises signage necessary for the
operation of Tenant's business. Such sign installation shall not adversely
affect or damage the physical structure of the building, nor detract from the
overall harmony of the building and the Metro
<PAGE>
Business Park development. All such signs must conform with the codes and
regulations of West Valley City and adhere to the signage criteria for the
development. (See Exhibit "D" Metro Business Park Signage Criteria.)
ARTICLE 9. FIXTURES AND PERSONAL PROPERTY. All fixtures (not including
trade fixtures) installed or attached to the Demised Premises by and/or at the
expense of Tenant shall become the property of Landlord. Any trade fixtures
installed in the Demised Premises by and at the expense of the Tenant shall
remain the property of the Tenant or Tenant's Lessor;, and the Landlord agrees
that so long as Tenant is not in default hereunder, Tenant or its Lessors shall
have the right at any time, and from time to time or within ten (10) days after
the termination of the Lease and this Lease Agreement or any extension or
renewal thereof, to remove any and all of its trade fixtures which it may have
stored or installed in the Demised Premises, provided, however, that (a) Tenant
will repair all damage to the Demised Premises occasioned by such removal, and
(b) if Tenant utilizes all or any portion of the ten (10) day period allowed for
removal of such fixtures and equipment beyond the term of the Lease or renewal
thereof, it shall pay to the Landlord as rental thereof, a sum equal to the
prorata portion of monthly rental thereof. Landlord expressly agrees to waive or
subordinate any claim which Landlord may or might have against the trade
fixtures and personal property of Tenant in favor of a Lessor who intends to
Lease any of the same to Tenant.
ARTICLE 10. UTILITIES. The Tenant shall pay for all water, heat, gas,
electricity, and other costs of utilities connected with, consumed, or used by
it in connection with its occupancy of the Demised Premises. In the event that
one or more of such utilities or related services shall be supplied to the
Demised Premises and to one or more other Tenants within Metro Business Park
development without being individually metered or measured to the Demised
Premises, Tenant's appropriate proportionate share thereof shall be paid as
additional rent based upon Landlord's estimate of Tenant's anticipated usage. In
the event any utility service to the Demised Premises is interrupted or
temporarily discontinued for any reason whatsoever, Landlord shall not be liable
therefor to Tenant and the rent required to be paid hereunder shall not be
abated as a result thereof, and Tenant waives any claims it might otherwise have
against Landlord as a result of any such interruption or discontinuation.
ARTICLE 11. MAINTENANCE AND REPAIRS. It is understood and agreed that
the Landlord shall, at its sole cost and expense, keep and maintain, during the
term of the Lease Agreement or any extension or renewal thereof, the
foundations, and structural support portion of the improvements in proper
condition and in a good state of repair. Landlord shall not be responsible for
any maintenance or repair caused by the fault or neglect of the Tenant, or due
to hazards and risks covered or required to be covered by insurance hereunder
except as insurance proceeds are available therefor. All other maintenance and
repair of said structure, including, but not limited to, painting of walls, and
maintenance, repair and replacement of equipment, shall be the responsibility of
the Tenant.
It is understood and agreed that should either party to this Agreement
fail or refuse to start and to proceed thereafter with due diligence to make any
repairs or maintenance as may be reasonably necessary for the purpose of
fulfilling the terms and conditions of the agreements herein set forth within a
reasonable length of time (not to exceed seven (7) days) after being notified in
writing of the need thereof, that the other party hereto may make such repairs
at the cost and expense of the party so failing or refusing. In the event of an
emergency situation, Tenant may, in its discretion, make emergency repairs
without giving written notification to Landlord, and Landlord shall reimburse
Tenant in the event that such repairs were the responsibility of the Landlord
hereunder and were not due to the fault of Tenant or Tenant's agents. The rights
of Tenant
<PAGE>
hereunder specifically do not include the right to offset or deduct any amounts
claimed hereunder from rentals due.
Landlord reserves the right to enter upon the Demised Premises (in a
manner that will not unnecessarily interfere with the business of Tenant) during
business hours at any time to inspect the same and to make necessary repairs to
fulfill Landlord's obligation hereunder.
ARTICLE 12. RESTORATION OF DAMAGE. If the Demised Premises are partially
damaged by fire, the elements or other casualty covered by the "all risk"
insurance policy referred to herein above, Landlord shall promptly repair all
damage and restore the Demised Premises to their condition immediately prior to
the occurrence of such damage. During the period of reconstruction referred to
above, rent payable by Tenant shall ratably abate, based upon the percentage of
the Demised Premises usable during reconstruction. The term of the Lease shall
extend one additional day for each day the entire Demised Premises are not
usable due to the reconstruction process.
If the Demised Premises shall be totally destroyed and/or shall it be
determined that more than sixty (60) days will be required to repair or rebuild
the Demised Premises, both Landlord and Tenant shall have the right to terminate
this Lease Agreement upon written notice to the other within thirty (30) days of
the occurrence at which time this Lease Agreement shall become null and void.
ARTICLE 13. EMINENT DOMAIN. If during the term hereof, or any renewal
term, the entire Demised Premises shall be taken for any public or quasi--public
use under any governmental law, ordinance or regulation, or by right of eminent
domain, this Lease and all right, title and interest of Tenant hereunder shall
cease and come to an end on the date of vesting of title pursuant to such
proceeding, or upon the date Tenant is dispossessed under an order of immediate
occupancy, whichever first occurs. If less than all of the Demised Premises
shall be taken for any public or quasi--public use under any governmental law,
ordinance or regulation, or by right of eminent domain, this Lease shall not
terminate, but the rent payable hereunder during the unexpired portion of this
Lease shall be reduced to such extent as may be fair and reasonable under all of
the circumstances. In the taking of the Demised Premises or any part thereof,
whether or not this Lease is terminated as provided in this Paragraph, the
parties hereto may claim and shall be entitler1 to receive an award or
compensation thereof in accordance with their respective legal rights and
interests.
ARTICLE 14. DEFAULT IN PAYMENT OF RENT OR ABANDONMENT. In
the event of default by Tenant in the performance of its obligation to pay rent
hereunder, or in the event Tenant shall vacate or abandon the Demised Premises,
or in the event Tenant, or any guarantor hereunder, shall be adjudicated as
bankrupt for the benefit of creditors, or enter into an arrangement or
participate voluntarily or involuntarily in any bankruptcy or related proceeding
under Federal or State Law, Landlord shall have the right to terminate this
Lease and to re-enter the Demised Premises or any part thereof with or without
process of law; or Landlord, at his option, without terminating this Lease,
shall have the right to re-enter the Demised Premises and sublet the whole or
any part thereof, for the account of the Tenant, upon as favorable terms and
conditions as the market will allow. In the latter event, the Landlord shall
have the right to collect any rent which may thereafter become payable under
such sublease and to apply the same first to the payment of any expenses
incurred by the Landlord in the dispossessing the Tenant and in subletting the
Demised Premises, and Landlord may charge interest at the rate equal to one
percentage point higher than the prime bank rate of Valley Bank & Trust in Salt
Lake City, which rate shall vary from time to time as the prime bank rate
varies, per annum on such expenses; and, second, to the payment of the rental
herein reserved and the fulfillment of Tenant's covenants hereunder, and the
Tenant shall be liable for amounts equal to
<PAGE>
the installments of rent as they become due, less any amounts actually received
by the Landlord and applied on account of rental as aforesaid. The Landlord
shall not be deemed to have terminated this Lease by reason of taking possession
of the Demised Premises unless written notice of such termination has been
served on the Tenant.
ARTICLE 15. OTHER DEFAULTS BY TENANT. It is mutually agreed that if the
Tenant shall default in performing any of the terms or provisions of this Lease
Agreement other than as provided in the preceding Article, and if the Landlord
shall give to the Tenant notice in writing of such default, and if the Tenant
shall fail to cure such default within fifteen (15) days after the date of
receipt of such notice, or if the default is of such a character as to require
more than fifteen (15) days to cure, and if Tenant shall fail to use reasonable
diligence in curing such default, then in such applicable event the Landlord may
cure such default for the account of and at the cost and expense of Tenant, plus
interest at the rate equal to one percentage point higher than the prime bank
rate of Valley Bank & Trust, in Salt Lake City, which rate shall vary from time
to time as the prime bank rate varies, per annum, and the sum so expended by the
Landlord and interest shall be deemed to be additional rent and on demand shall
be paid by the Tenant on the day when rent shall next become due and payable.
Failure to pay any additional rent as provided in this Article shall be deemed a
failure to pay rent within the meaning of Article 14.
ARTICLE 16. NON-DISTURBANCE. Landlord represents and warrants that it
has full right and authority to enter into this Lease. Tenant, upon paying all
rentals and performing all the Tenant's covenants, terms and conditions in this
Lease Agreement, shall and may peacefully and quietly hold and enjoy the Demised
Premises for the term of this Lease Agreement. Tenant understands that other
persons and entities conduct business or reside near the Demised Premises.
Tenant covenants and agrees to conduct its business in such a manner as to not
unreasonably interfere with the occupants of surrounding properties.
ARTICLE 17. WAIVER. No delay or omission by either party hereto to
exercise any right or power accruing upon any noncompliance or default by the
other party with respect to any of the terms hereof shall impair any such right
or power to be construed to be a waiver thereof. Subject to the provisions of
this Article, every such right and power may be exercised at anytime during the
continuance of such default. It is further agreed that a waiver by either of the
parties hereto of any of the covenants and agreements hereof to be performed by
the other shall not be construed to be a waiver of any succeeding breach thereof
or of any other covenants or agreements herein contained.
ARTICLE 18. ATTORNEY'S FEES. In the event of any action at law or in
equity between Landlord and Tenant to enforce any of the provisions and/or
rights hereunder or to recover damages for breach hereof, the unsuccessful party
to such litigation covenants and agrees to pay to the successful party all costs
and expenses, Including reasonable attorney's fees, incurred therein by such
successful party, and if such successful party shall recover judgment in any
such action or proceeding, such costs and expenses and attorney's fees shall be
included in and as a part of such judgment.
ARTICLE 19. NOTICE. Any notice or demand required or permitted to be
given under this Lease Agreement shall be deemed to have been property given
when, and only when, the same is in writing and has been deposited in the United
States Mail, with postage prepaid, to be forwarded by certified mail and
addressed as follows:
TO THE LANDLORD AT: Eden Roc Partnership
c/o ChrisLynn Investments, LLC
P.O. Box 980427
<PAGE>
Park City, Utah 84098-0427
Ph. (435) 647--9916
Fax (435) 615--2142
TO THE TENANT AT: Paradigm Medical Industries
2355 South 1070 West
Salt Lake City, Utah 84119
Ph. (801) 977--8970
Fax (801) 977--8355
Such addresses may be changed from time to time by either party by serving
notices as above provided.
ARTICLE 20. SUBORDINATION. This Lease shall be subject and subordinate
to all mortgages or trust deeds which may now or hereafter affect the real
property comprising the Demised Premises, and also to all renewals,
modifications, consolidations and replacements of said mortgages and Trust
Deeds. Although no instrument or act on the part of Tenant shall be necessary to
effectuate such subordination, Tenant will, nevertheless, execute and deliver in
a prompt and diligent manner such further instruments confirming such
subordination of this Lease as may be desired by the holders of said mortgage or
Trust Deeds
ARTICLE 21. ASSIGNMENT AND SUBLETTING. With the specific prior written
consent of Landlord first obtained, Tenant can, at any time, can assign this
Lease or sublet all or any portion of the Demised Premises. Landlord's consent
shall not be unreasonably withheld. Any purported assignment or sublease without
Landlord's prior written approval shall be null and void and of no force and
effect whatsoever.
ARTICLE 22. SCOPE OF THE AGREEMENT. This Lease Agreement shall be
considered to be the only agreement between the parties hereto. All negotiations
and oral agreements acceptable to both parties are included therein.
ARTICLE 23. OBLIGATIONS OF SUCCESSORS. Landlord and Tenant agree that
all of the provisions hereof are to be construed as covenants and agreements as
though the words importing such covenants and agreements were used in each
separate paragraph hereof, and that all of the provisions hereof shall bind and
inure to the benefit of the parties hereto, and their respective heirs, legal
representatives, successors and assigns.
ARTICLE 24. HOLD OVER. If, at the expiration or termination of this
Lease or any extension thereof, Tenant shall hold over for any reason, if
Landlord consents to the holding over, the tenancy of Tenant thereafter shall be
from month to month only and shall, in the absence of a written agreement to the
contrary, be subject to all the other terms and conditions of this Lease with
the monthly rental adjusted to One Hundred Fifty Percent (150%) of the monthly
rental for the last month of the primary lease renewal term.
ARTICLE 25. PARKING. The plans and specifications for the construction
of the Demised Premises, as approved by the parties, depict adjacent parking for
the non-exclusive use of Tenant. Such parking and maintenance thereof shall
remain under the control of Landlord (subject to reimbursement as hereinafter
set forth) and Landlord shall have the right from time to time to publish
reasonable non--discriminatory regulations for Tenant's use of the parking, with
which Tenant covenants to comply.
ARTICLE 26. METRO BUSINESS PARK DEVELOPMENT. The parties acknowledge
that Exhibit "C" hereto contains a proposed site plan for Landlord's entire
construction project to be known as Metro Business Park (hereinafter referred to
as the "Development"). Tenant acknowledges that the site plan for the
Development is subject to change and that Landlord may construct the Development
in a totally different configuration or may not develop certain
<PAGE>
portions. During or after construction of the Development, Landlord reserves the
right to sell the Development or portions thereof as developed with buildings or
as undeveloped property. The parties understand that in the event of Landlord's
sale of portions of the property developed as an integral part of the
Development, prior to such sale, Landlord shall place cross easement, access and
parking easements, suitable to Landlord upon released and unreleased portions of
the Development to facilitate its continued integral use. Common Area
Maintenance provisions contained in the next immediate paragraphs of this Lease
Agreement shall be unaffected by any such partial sale and the Landlord shall
exercise his best efforts to ensure the parking and common areas of the entire
Development, as built, will be under common management.
ARTICLE 27. COMMON AREAS. Areas with the outer property lines of the
Development as delineated on the plat attached hereto marked Exhibit "C",
exclusive of areas therein specified or as build for leasing to Tenants shall be
known as Common Areas, as shall all other areas from time to time designated by
Landlord for use as part of the Development. Landlord covenants and agrees at
its sole cost and expense to improve said Common Areas by installing and
constructing thereon parking lots, access roads, pedestrian walkways, sidewalks,
exterior canopies, delivery and landscaped areas and lighting facilities to the
extent to which Landlord shall determine to be necessary. Said Common Areas
shall be available for the common use of all Landlord's Tenants in the
Development, their employees, customers and invitee. Notwithstanding anything
elsewhere herein contained, Landlord reserves the right from time to time to
make reasonable changes in, additions to and deletions from the Common Areas and
the purposes to which the same may be devoted, and the use of Common Areas shall
at all times be subject to such reasonable rules and regulations as may be
promulgated by Landlord.
ARTICLE 28. COMMON AREA MAINTENANCE. Landlord will maintain or cause to
be maintained the Common Areas and Tenant will reimburse Landlord for Tenant's
prorata share of the cost of such maintenance as hereinafter provided.
(a) Common area maintenance costs and expenses shall be determined in
accordance with generally accepted accounting principles consistently applied
and allocated to any particular calendar year on the accrual method of
accounting. Such costs and expenses shall include, but shall not be limited to
upkeep, exterior painting, repairs, replacement and improvements in the Common
Areas, snow removal, sweeping and cleanup, depreciation allowance on any
machinery and equipment owned by Landlord and used in connection therewith,
payroll and payroll costs, utility services including fire line water service
charges, police protection, night watchmen, premiums for public liability,
property damage and fire insurance which shall insure Landlord in the Common
Areas, any real estate tax consultant expense incurred for the purpose of
maintaining equitable tax assessments on the Development, all property taxes or
assessment3 levied or assessed against all Common Areas, which, if not
separately assessed, shall be determined, for land, by the ratio of land area
designated for Common Area use to the total land area in the Development and,
for improvements, on a fair and equitable allocation among the various
improvements in the Development, giving weight to the factors which determine
the amount of the real property tax or assessment in question. In addition, such
costs shall include administrative costs equal to ten percent (10%) of the total
cost paid or incurred by Landlord under this paragraph.
(b) Tenant shall pay as additional rent to Landlord, Tenant's prorata
share of such Common Area expenses in the following manner:
(1) From and after the date the minimum rental
<PAGE>
provided for herein has commenced, but subject to adjustment as hereinafter in
this subparagraph (1) provided, Tenant shall pay Landlord in advance on the
first day of each calendar month of the term of this Lease an amount computed by
applying the rate of $0.03 per square foot to the gross leasable area of the
Demised Premises. The foregoing rate per square foot may be adjusted by the
Landlord by notice to Tenant at the end of any calendar month on the basis of
Landlord's experience and reasonably anticipated costs. (See Lease Rider "A"
Building Expenses attached hereto and incorporated herein.)
(2) Within thirty (30) days following the end of each calendar
year, Landlord shall furnish Tenant a statement covering the calendar year just
expired, showing the total operating costs, the amount of Tenant's prorata share
of such Common Area expenses for such calendar year and the payments made by
Tenant with respect to such calendar year as set forth in subparagraph (b) (1).
If Tenant's prorata share of such Common Area expenses exceeds Tenant's payments
so made, Tenant shall pay Landlord the deficiency within ten (10) days after
receipt of such statement. If said payments exceed Tenant's prorata share of
such Common Area expenses, Tenant shall be entitled to offset the excess against
payments next thereafter to become due Landlord as set forth in said
subparagraph (b) (1). Tenant's prorata share of the total Common Area expenses
for the previous calendar year shall be that portion of all such expenses which
is equal to the proportion which the number of square feet of gross leasable
area in the Demised Premises bears to the total number of square feet of gross
leasable area of buildings in the entire Development which are from time to time
completed and occupied as of the commencement of each calendar year.
There shall be an appropriate adjustment of Tenant's share of the Common
Area expenses as of the commencement and expiration of the term of this Lease.
The term "Gross Leasable Area", as used herein, shall de deemed to mean and
include all fully enclosed areas for the exclusive use and occupancy by
occupant, measured from the exterior surface of exterior walls (and from the
extensions thereof, in the case of openings), including warehousing or storage
areas, clerical or office areas, mezzanines or the second levels of any spaces
and employee areas. "Gross Leasable Area" shall not include docks, areas for
truck loading and unloading nor any utility and/or mechanical equipment vaults
or rooms (to the extent such facilities lie outside exterior building lines).
Anything to the contrary notwithstanding, in the event Landlord or his
designated agent do not maintain the entire common area in the Development, then
and in that event, for the length of time such condition may exist, Landlord's
responsibility shall only be towards the maintenance and repair of those
portions of the Common Area not maintained by others, and the "expense in
connection with said common areas" shall only refer to such areas maintained by
Landlord. In this event, Tenant's proportionate share of the expenses shall be
determined on the basis of the proportion of such expenses which the number of
square feet of gross leasable area in the Demised Premises bears to the total
number of square feet of gross leasable area of buildings in the entire
Development which are from time to time completed and occupied as of the
commencement of each calendar year, exclusive of the area occupied and
maintained by others.
ARTICLE 29. SECURITY DEPOSIT. Tenant shall pay an amount equal and first
and months rent at the time of signing of this Lease. The amount equal to first
months rent shall be applied to the first full month of the Lease term. The
amount equal to last months rent shall be held by Landlord as security for the
faithful performance of Tenant throughout the Lease term. The security deposit
shall be refundable to Tenant at the end of the Lease term upon Tenant's
satisfactory performance throughout the Lease term.
<PAGE>
ARTICLE 30. FORCE MAJEURE. In the event that either party hereto shall
be delayed or hindered in or prevented from the performance of any act required
hereunder by reason of strikes, lockouts, labor troubles, inability to procure
materials, failure of power, restrictive governmental laws or regulations,
riots, insurrection, war or other reason of a like nature not the fault of the
party delayed in performing work or doing acts required under the terms of this
Lease, then performance of such act shall be excused for the period of the delay
and the period for the performance of any such act shall be extended for a
period equivalent to the period of such delay. The provisions of this Section
shall not operate to excuse Tenant from prompt payment of rent or any other
payments required by the terms of this Lease.
ARTICLE 31. The Landlord hereby grants Tenant the right and option to
extend this Lease for an additional five (5) years, with written notice six (6)
months prior to expiration of this lease. If, at the time of exercise of such
option, Tenant is more than twenty (20) days in arrears in any such payment due
under this Lease, Landlord may, at its option, deny such renewal.
ARTICLE 32. The Minimum Rent payable under Article Seven (7) of the
Lease for the option years shall be ninethy-five percent (95%) of the then
current market rate for the building. The minimum rent will not be less than the
per square foot monthly rental rate of the sixtith (60th) month of the lease.
ARTICLE 33. The submission of this Lease for examination does not
constitute a reservation of or option for the Lease Premises and this Lease
becomes effective as a Lease only upon execution and delivery thereof by
Landlord to Tenant.
IN WITNESS WHEREOF, the Landlord and Tenant have duly executed and
affixed their respective seals to this Lease Agreement on the day and year first
above written.
LANDLORD: Eden Roc Partnership
a California general partnership
By:/s/ Stanley C. Ellman
------------------------
Stanley C. Ellman
Managing General Partner
TENANT: Paradigm Medical Industries
By:/s/ Thomas F. Motter
------------------------
Thomas F. Motter, President/CEO
Attached hereto and incorporated herein: Lease Rider "A" -- Building Expenses
Exhibit "A" - Building Site Plan Exhibit "B" - Building Floor Plan Exhibit "C" -
Overall Metro Business Park Site Plan Exhibit "D" - Metro Business Park Signage
Criteria
Exhibit "E" -- Declaration of Easements, Covenants, and
Restrictions
<PAGE>
LEASE RIDER "A"
"BUILDING EXPENSES"
With reference to Tenant's appropriate proportionate share of property
tax, insurance expenses and common area service expenses as defined in the Lease
Agreement, Tenant hereby agrees to pay, as additional monthly rental, Two
Thousand Three Hundred Fifty Six and no cents ($2,356.00) to be paid monthly, in
advance, along with the monthly rental previously stated in Lease Article 7.
Minimum Rent. The above stated fee is an estimated and adjustable fee for such
expenses and services. At the end of each calendar year, Landlord shall furnish
a statement to Tenant defining what the actual tax, insurance and common area
expenses are for the calendar year just expired, stating what Tenant's
appropriate proportionate share of such expenses are and compare such to that
amount which has been prepaid by Tenant. If Tenant's proportionate share of such
expenses exceeds Tenant's payments so made, Tenant shall pay Landlord the
deficiency within ten (10) days after receipt of said statement. If Tenant's
prepaid payments exceed Tenant's proportionate share of such expenses, the
excess shall be applied against future payments for such expenses.
Landlord's Initials Tenant's Initials
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (this "Agreement") is entered into as of
the date the last party signs as shown on the signature page hereto, by and
among Mentor Corporation, a Minnesota corporation, Mentor Ophthalmics, Inc., a
Massachusetts corporation, and Mentor Medical Inc., a Delaware corporation
(collectively "Seller") on the one hand, and Paradigm Medical Industries, Inc.,
a Delaware corporation ("Purchaser") on the other hand.
RECITALS
WHEREAS, Seller is engaged in the business of marketing and selling
ophthalmic products, including a cataract surgery system product line consisting
of the Mentor(TM) Phacoemulsification S.I.S.tem, the Odyssey(TM)
Phacoemulsification System, the Surg-E-Trol(R) System I and System II, and all
accessories thereto (collectively, the "Phaco" product line); and
WHEREAS, in accordance with the provisions of this Agreement, Purchaser
desires to purchase from Seller and Seller desires to sell to Purchaser certain
assets described herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties set forth in this Agreement, the parties hereto
agree as follows.
1. PURCHASE AND SALE.
1.1 Purchase and Sale of Assets. Subject to the terms and
conditions set forth in this Agreement, at the Closing (as defined in Section
1.4), Seller shall sell, transfer, assign, convey, delegate and deliver to
Purchaser, and Purchaser shall purchase and acquire from Seller, all of Seller's
right, title, obligation and interest in and to the assets (collectively, the
"Assets") which are used by Seller to develop, manufacture, market and sell the
Phaco product line and are owned by Seller or in which Seller has any right,
title or interest as of the Closing Date (as defined in Section 1.4). The Assets
include but are not limited to:
(a) Sales and Marketing. Copies (and originals if in
Seller's possession) of Seller's Phaco customer lists, advertising materials and
sales literature, sales booth graphics, ad slicks, artwork, un-filled purchase
orders and supporting documents, and other marketing information and records,
warranty and/or warranty policies and/or other records used exclusively for the
Phaco, which are in Seller's possession as of the Closing Date.
(b) Inventories. All inventories relating exclusively
to the Phaco product line, including finished goods and products, goods and
products in process and materials and supplies on hand and in transit, as of the
Closing Date.
(c) Intellectual Property. All patents, patent
applications, trade names, trademarks and copyrights used exclusively for the
Phaco product line. The list of Intellectual Property transferred hereunder is
set forth in Schedule 1.1(c) hereto.
(d) Registrations. All governmental registrations,
registration applications, temporary registrations, experimental use permits,
applications and emergency use exemptions used primarily for the Phaco product
line, including those listed on Schedule 1.1(d) hereto (the "Registrations").
(e) Material Contracts. All contracts, agreements and
licenses which are listed on Schedule 1.1(e), together with all consignment
contracts with customers, but excluding any such contracts that expire or are
terminated prior to Closing and such contracts where the Seller is unable to
obtain an assignment prior to the Closing (the "Contracts").
(f) Equipment. All machinery, tools, instruments and
personal property used exclusively in connection with the Phaco product line
(the "Equipment").
(g) Technical Information. All of the Seller's
technical information and data, including, but not limited to, know-how, trade
secrets, inventions, formulas, processes, designs, drawings, technology,
software (including source codes), databases, manufacturing and quality control
procedures and records, product composition data and specifications, packaging
specifications, material safety data sheets, customer specifications, product
standards, competitive samples and reports of analyses thereof, lab notebooks,
records of inventions, patent application drafts, and research and development
projects, materials, results and records, wherever located, used exclusively for
the Phaco product line ("Technical Information").
(h) Warranties. All manufacturers', vendors' and
suppliers' warranties, to the extent assignable, relating directly to the Assets
or the Phaco product line.
(i) Goodwill. The goodwill of Seller relating
directly to the Assets or the Phaco product line.
1.2 Excluded Assets. The Assets shall not include the
following (the "Excluded Assets"):
(a) Cash.
(b) Securities.
(c) Bank deposits.
(d) Accounts receivable.
(e) Assets, properties and rights of the Seller (i)
not currently used exclusively for the Phaco product line or (ii) currently used
exclusively for the Phaco product line but that are ancillary to the operation
of the Phaco product line, including, without limitation, any office equipment,
furniture and fixtures of the Seller.
(f) Any and all rights and assets, including without
limitation intellectual property rights, relating to product lines other than
the Phaco product line.
1.3 Purchase Price. The aggregate consideration for the
transfer to Purchaser of the Assets hereunder (the "Purchase Consideration")
shall consist of 485,751 shares of Purchaser's common stock, par value $.001 per
share (the "Common Shares"). Such number of Common Shares represents the result
of the following calculation: (a) the sum of $1,500,000, divided by (b)
$3.08800, which is the product of (i) 90%, times (ii) $3.43125, which is the
average closing price of Purchaser's common stock on the Nasdaq National Market
System (as reported in The Wall Street Journal) for the twenty trading days
ending on October 13, 1999. Certain agreements of the parties as to registration
of the Common Shares and related matters are set forth in the Registration
Rights Statements attached hereto as Exhibit A and by this reference made a part
hereof.
1.4 Closing. The consummation of the transactions contemplated
by this Agreement (the "Closing") shall take place at the offices of Seller
located at 201 Mentor Drive, Santa Barbara, CA 93111 on October 22, 1999, at
11:59 p.m. local time or at such other time, date or place as Purchaser and
Seller may mutually agree upon (the "Closing Date").
1.5 Liabilities. Purchaser shall assume, pay, perform, defend
and discharge all liabilities and obligations relating to the Phaco product line
and the Assets which arise after the Closing Date and are based upon or arise
from any act, omission, transaction, circumstance, performance of services,
state of facts or other condition which occurred after the Closing Date.
Purchaser is not assuming or agreeing to pay or perform any liabilities or
obligations of Seller which existed on or before the Closing Date, including
without limitation any judgments, claims, actions or proceedings relating to the
Phaco product line or the Assets. Notwithstanding the foregoing, Purchaser
specifically assumes the following: (i) all of Seller's warranty obligations for
Phaco products previously sold; (ii) all of Seller's repair and maintenance
obligations for Phaco products previously sold; (iii) all liabilities and
obligations of the Seller under the Contracts and Registrations included in the
Assets; (iv) all accounts payable and accrued liabilities; (v) all liabilities
shown on the books and records of the business relating exclusively to the Phaco
product line as of the Closing Date; (vi) all liabilities or obligations to
third parties for personal injury, property damage, consequential damages,
punitive damages or incidental damages arising from any injury, event or damage
as a result of any product or good shipped, sold or manufactured by Purchaser or
by Seller pursuant to the Transition Services Agreement; (vii) all liabilities
or obligations to third parties with respect to the Intellectual Property; and
(viii) all obligations associated with open purchase orders on and as of the
Closing Date. All sales or transfer taxes, including but not limited to document
recording fees, transfer taxes, sales and excise taxes, arising out of or in
connection with the consummation of the transactions contemplated herein, shall
be paid by Purchaser. Purchaser acknowledges that Xomed, Inc. owns certain of
the accounts receivable for Phaco products previously sold by Mentor. In the
event of a customer dispute regarding a product for which Xomed, Inc. owns a
receivable, Purchaser will resolve the problem with Xomed, Inc.
1.6 Instruments of Conveyance and Transfer. Upon receipt of
the Purchase Consideration, Seller shall execute and deliver to Purchaser a Bill
of Sale with the appropriate schedules attached thereto that shall be reasonably
acceptable to Purchaser and necessary to effect the transfer to Purchaser of and
to vest in Purchaser a complete, valid and legal title and/or license to the
Assets.
1.7 Transitional Support Services. Concurrent with the
Closing, the parties will execute a Transition Services Agreement.
1.8 Limited License. Purchaser will acquire certain inventory
which displays the "Mentor" name and mark (the "Mark"). Seller grants to
Purchaser as of the Closing Date a limited license to use the Mark in an
informational sense only to identify the existing inventory transferred under
this Agreement and on any related advertising and promotional materials.
Purchaser agrees to comply with Seller's guidelines for use of the Mark, which
Seller will provide to Purchaser. Purchaser acknowledges that Seller is the
exclusive owner of the Mark. Purchaser agrees to refrain from any action which
is in any way inconsistent with Seller's ownership of the Mark, or which could
damage Seller's interest in the Mark or Seller's reputation, or to use the Mark
in connection with any other products. Seller retains the right to review and
pre-approve any written materials using the Mark.
2. REPRESENTATIONS AND WARRANTIES.
2.1 Mutual Representations and Warranties. Each party
represents and warrants as follows:
(a) Organization and Good Standing. It is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation. It is in good standing in each other state or
jurisdiction in which the ownership of its properties or where the conduct of
its business requires it to be qualified or registered.
(b) Authority and Status. It has full power and
authority to execute and deliver this Agreement, to perform its obligations
hereunder, and to consummate the transactions contemplated hereby without the
necessity of any act or consent of any other entity. It has taken all necessary
and appropriate corporate action, including, if necessary, Board of Directors
consents with respect to the execution, delivery and performance by it of this
Agreement and each and every agreement, document and instrument provided for
herein. This Agreement and each and every agreement, document and instrument to
be executed, delivered and performed by each party in connection herewith,
constitute or will when executed and delivered constitute, the valid and legally
binding obligations of each party enforceable against it in accordance with
their respective terms, except as enforceability may be limited by applicable
equitable doctrines or by bankruptcy, insolvency, reorganization, moratorium or
similar laws from time to time in effect affecting the enforcement of creditors'
rights generally.
(c) No Finder or Brokers. Neither it, nor any party
acting on its behalf, has paid or has become obligated to pay any fee or
commission to any broker, finder or intermediary for, or on account of, the
transactions contemplated by this Agreement.
(d) No Conflict or Default. Neither the execution and
deliver of this Agreement nor compliance with the terms and provisions hereof,
including, without limitation, the consummation of the transactions contemplated
hereby, will violate any statute, regulation or ordinance of any governmental
authority or conflict with or result in the breach of any term, condition or
provision of its Articles of Incorporation or By-Laws, or of any material
agreement, deed, contract, mortgage, indenture, writ, order, decree, legal
obligation or instrument to which it is or may be bound, or constitute a default
(or an event which, with the lapse of time or the giving of notice, or both,
would constitute a default) thereunder.
(e) Litigation. There is no claim, litigation, suit
or proceeding, administrative or judicial, pending, or to its knowledge,
threatened, against it relating to this Agreement or the transactions
contemplated hereunder, at law or in equity, before any federal, state, local or
foreign court or regulatory agency or other governmental authority which could
result in the institution of legal proceedings to prohibit or restrain the
consummation or performance of this Agreement or the transactions contemplated
hereby or claim damages as a result of this Agreement or the transactions
contemplated hereby.
2.2 Representations and Warranties of Purchaser.
(a) Review of Documents. Purchaser has had the
opportunity to, and has reviewed to its satisfaction, all of the documents it
has requested prior to the Closing Date.
(b) Issuance of Common Shares. The common shares of
Purchaser to be issued to Mentor Corporation at the Closing (the "Common
Shares") are duly authorized and, upon issuance, will be validly issued, fully
paid and non-assessable, free and clear of any and all liens, claims and
encumbrances. The issuance of the Common Shares will be exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act") by reason of compliance with the provisions of Securities Act
Regulation D. The Common Shares, when registered under an effective registration
statement under the Securities Act of 1933, as amended (the "Securities Act") or
upon compliance with Securities Act Rule 144, and when authorized for trading
under the rules of the Nasdaq (as defined below), will be entitled to be traded
on the National Association of Securities Dealers Automated Quotation system
("Nasdaq"), and the holders of the Common Shares shall be entitled to all rights
and preferences accorded to a holder of Purchaser's common stock. The
outstanding common stock of Purchaser is currently quoted on the Nasdaq.
(c) No Conflicts. The execution, delivery and
performance of this Agreement by Purchaser and the consummation by Purchaser of
the transactions contemplated hereby and the issuance of the Common Shares to
Mentor Corporation do not and will not (i) result in a violation of Purchaser's
Articles or By-Laws, or (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture, patent, patent license or instrument
to which Purchaser or any of its subsidiaries is a party, or result in a
violation of any federal, state, local or foreign law, rule, regulation, order,
judgment or decree (including Federal and state securities laws and regulations)
applicable to Purchaser or any of its subsidiaries or by which any property or
asset of Purchaser or any of its subsidiaries is bound or affected (except for
such conflicts, defaults, terminations, amendments, accelerations, cancellations
and violations as would not, individually or in the aggregate, have a material
adverse effect). Except for such filings as Purchaser has made or will make
prior to the Closing, Purchaser is not required under Federal, state, local or
foreign law, rule or regulation to obtain any consent, authorization or order
of, or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement, or issue and sell the Common Shares in accordance with the terms
hereof.
(d) SEC Documents; Financial Statements. The
outstanding common stock of Purchaser is registered pursuant to Section 12(g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
Purchaser has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the Securities and Exchange Commission
("SEC") pursuant to the reporting requirements of the Exchange Act (all of the
foregoing, including filings incorporated by reference therein, being referred
to herein as the "SEC Documents"). Purchaser has delivered or made available to
Mentor Corporation true and complete copies of all SEC Documents (including,
without limitation, proxy information and solicitation materials) filed with the
SEC since December 31, 1996. Purchaser has not provided to Mentor Corporation
any material non-public information or any information which, according to
applicable law, rule or regulation, should have been disclosed publicly by
Purchaser but which has not been so disclosed. As of their respective dates,
Purchaser's Form 10-K for the year ended December 31, 1998, and all documents
subsequently filed with the SEC (the "Current Filings"), together with
Purchaser's second quarter 1999 earnings press release, dated September 1, 1999,
complied in all material respects with the requirements of the Exchange Act and
the rules and regulations of the SEC promulgated thereunder and other federal,
state and local laws, rules and regulations applicable to such Current Filings,
and none of the Current Filings contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Current Filings contain all
material information concerning Purchaser, and no event or circumstance has
occurred which would require Purchaser to disclose such event or circumstance in
order to make the statements in the Current Filings, taken as a whole, not
misleading on the date hereof or on the Closing Date but which has not been so
disclosed. The financial statements of Purchaser included in the Current Filings
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC or other
applicable rules and regulations with respect thereto at the time of filing.
Such financial statements were prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except (i) as may be otherwise indicated in such financial statements or the
notes thereto or (ii) in the case of unaudited interim statements, to the extent
they may not include footnotes or may be condensed or summary statements) and
fairly present in all material respects the financial position of Purchaser as
of the dates thereof and the results of operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).
(e) No Material Adverse Change. Since December 31,
1998, the date through which the most recent report of Purchaser on Form 10-K
has been prepared and filed with the SEC, a copy of which is included in the SEC
Documents, no material adverse effect has occurred or exists with respect to
Purchaser or its subsidiaries, except as otherwise disclosed or reflected in
other SEC Documents filed or press releases issued as of a date subsequent to
December 31, 1998.
(f) No Undisclosed Liabilities. Purchaser and its
direct and indirect subsidiaries have no liabilities or obligations not
disclosed in the SEC Documents, other than those liabilities incurred in the
ordinary course of Purchaser's or its subsidiaries' respective businesses since
December 31, 1998, which liabilities, individually or in the aggregate, do not
or would not have a material adverse effect on Purchaser or its direct or
indirect subsidiaries.
(g) No Undisclosed Events or Circumstances. No event
or circumstance has occurred or exists with respect to Purchaser or its direct
or indirect subsidiaries or their respective businesses, properties, prospects,
operations or financial condition, which, under applicable law, rule or
regulation, requires public disclosure or announcement by Purchaser but which
has not been so publicly announced or disclosed.
(h) No General Solicitation. Neither Purchaser, nor
any of its affiliates, or, to its knowledge, any person acting on its or their
behalf has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D under the Securities Act of 1933, as amended
(the "Act")) in connection with the offer or sale of the Common Shares.
(i) No Integrated Offering. Neither Purchaser, nor
any of its affiliates, nor to its knowledge any person acting on its or their
behalf has, directly or indirectly, made any offers or sales of any security or
solicited any offers to buy any security, under circumstances that would require
registration of the Common Shares under the Act.
2.3 Representations and Warranties of Seller.
(a) Title to the Assets. Except for permitted
encumbrances, Seller has good and marketable title and/or license to the Assets
free and clear of any pledges, liens, encumbrances, security interests,
equities, charges and restrictions of any nature whatsoever. The term "permitted
encumbrances" shall mean liens for taxes not due and payable.
(b) Litigation. There is no claim, litigation,
action, suit or proceeding, administrative or judicial, pending or to Seller's
knowledge threatened against Seller relating to the Phaco product line or the
Assets, at law or in equity, before any federal, state, local or foreign court,
or regulatory agency or other governmental authority.
(c) Limitation. EXCEPT FOR THE EXPRESS
REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS SECTION 2.3: (i) NO
REPRESENTATION OR WARRANTY WHATSOEVER IS MADE BY SELLER, AND SELLER HEREBY
DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES IMPLIED AS TO THE CONDITION, VALUE
OR QUALITY OF THE ASSETS AND SPECIFICALLY DISCLAIMS WITH RESPECT TO THE ASSETS
ANY REPRESENTATIONS AND WARRANTIES OF VALUE, MERCHANTABILITY, USAGE OR FITNESS
FOR ANY PARTICULAR PURPOSE AND NON-INFRINGEMENT; AND (ii) THE ASSETS BEING
TRANSFERRED TO THE PURCHASER ARE CONVEYED ON AN "AS IS" AND "WHERE IS" BASIS,
AND PURCHASER SHALL RELY UPON ITS OWN EXAMINATION THEREOF.
(d) ADDITIONAL LIMITATIONS. WITHOUT LIMITING THE
GENERALITY OF THE FOREGOING:
(i) NONINFRINGEMENT. SELLER DOES NOT WARRANT
AND MAKES NO REPRESENTATION THAT PURCHASER'S EXERCISE OF THE RIGHTS ASSIGNED
UNDER THIS AGREEMENT IS OR WILL BE FREE FROM CLAIMS OF INFRINGEMENT OR
MISAPPROPRIATION OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS, AND SELLER WILL
HAVE NO OBLIGATION WHATSOEVER TO INDEMNIFY PURCHASER AGAINST ANY SUCH CLAIM.
(ii) VALIDITY OR SCOPE. SELLER DOES NOT
WARRANT AND MAKES NO REPRESENTATION AS TO THE VALIDITY, ENFORCEABILITY, OR SCOPE
OF ANY OF THE INTELLECTUAL PROPERTY RIGHTS LICENSED TO PURCHASER PURSUANT TO THE
ASSIGNMENT MADE UNDER SECTION 1.1.
(iii) ENFORCEMENT. SELLER DOES NOT WARRANT
AND MAKES NO REPRESENTATION THAT ANY OF THE INTELLECTUAL PROPERTY RIGHTS
ASSIGNED TO PURCHASER PURSUANT TO SECTION 1.1 WILL BE FREE OF INFRINGEMENT OR
MISAPPROPRIATION, AS APPLICABLE, BY THIRD PARTIES, AND WILL HAVE NO OBLIGATION
TO COOPERATE IN ENFORCEMENT OF ANY SUCH INTELLECTUAL PROPERTY RIGHTS OR
OTHERWISE TAKE ACTION AGAINST THIRD PARTIES ALLEGED TO HAVE COMMITTED
INFRINGEMENT OR MISAPPROPRIATION.
(iv) PROSECUTION. SELLER WILL HAVE NO
OBLIGATION TO PROSECUTE, MAINTAIN, OR OTHERWISE SECURE INTELLECTUAL PROPERTY
RIGHTS, INCLUDING WITHOUT LIMITATION ANY PATENTS, PATENT APPLICATIONS, INVENTION
REGISTRATIONS, OR COPYRIGHT REGISTRATIONS, WITH RESPECT TO THE ASSETS ASSIGNED
TO PURCHASER PURSUANT TO SECTION 1.1.
(v) NO OTHER ASSIGNMENT OR LICENSES.
PURCHASER OBTAINS NO ASSIGNMENTS OR LICENSES UNDER ANY SELLER INTELLECTUAL
PROPERTY RIGHTS NOT SPECIFIED IN THIS AGREEMENT.
3. PURCHASER'S COVENANTS. So long as Seller holds any of the
Common Shares, Purchaser agrees to:
(a) Make and keep available at all times adequate current
public information, as those terms are understood and defined in Securities Act
Rule 144;
(b) File with the SEC in a timely manner all reports and other
documents required of Purchaser under the Securities Act and the Exchange Act;
(c) Furnish to Seller promptly upon its written request (i) a
written statement by Purchaser that it has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
and has been subject to these filing requirements for the past 90 days, (b) a
copy of Purchaser's most recent annual or quarterly report filed with the SEC,
and (c) any other reports and documents filed with the SEC by Purchaser that
Seller may reasonably request in order to sell the Common Shares without
registration under the Securities Act.
4. INDEMNIFICATION
4.1 Indemnification of Seller. Purchaser hereby agrees to
indemnify and hold Seller harmless from, against and in respect of (and shall on
demand reimburse Seller for):
(a) any and all loss, liability or damage resulting
from any untrue representation, breach of warranty or non-fulfillment of any
covenant or agreement by Purchaser contained herein or in any certificate,
document or instrument delivered to Seller hereunder;
(b) any and all debts, liabilities or obligations
relating to the Phaco product line or the Assets, accrued, absolute, contingent,
unliquidated or otherwise which arise after the Closing Date which are based
upon or arise from any act, omission, transaction, circumstance, performance of
services, state of facts or other condition which occurred after the Closing
Date, whether or not then known, due or payable;
(c) any and all debts, liabilities or obligations
arising from the Assumed Liabilities; and
(d) any and all actions, suits, proceedings, claims,
demands assessments, judgments, costs and expenses (including, without
limitation, legal fees and expenses) incident to any of the foregoing or
incurred in investigating or attempting to avoid the same or to oppose the
imposition thereof or in enforcing this Agreement.
4.2 Indemnification of Purchaser. Seller hereby agrees to
indemnify and hold Purchaser harmless from, against and in respect of (and shall
on demand reimburse Purchaser for):
(a) any and all loss, liability or damage resulting
from any untrue representation, breach of warranty or non-fulfillment of any
covenant or agreement by Seller contained herein or in any certificate, document
or instrument delivered to Purchaser hereunder;
(b) any and all debts, liabilities or obligations
relating to the Phaco product line or the Assets accrued, absolute, contingent,
unliquidated or otherwise which arise on or before the Closing Date and are
based upon or arise from any act, omission, transaction, circumstance,
performance of services, state of facts or other condition which occurred or
existed on or before the Closing Date, whether or not then known, due or
payable, except for any such debts, liabilities or obligations arising from the
Assumed Liabilities; and
(c) any and all actions, suits, proceedings, claims,
demands assessments, judgments, costs and expenses, including, without
limitation, legal fees and expenses incident to any of the foregoing or incurred
in investigating or attempting to avoid the same or to oppose the imposition
thereof or in enforcing this Agreement.
4.3 Procedure for Indemnification. In the event any damages or
expenses are incurred by the indemnified party for which the indemnified party
would be entitled to indemnification hereunder, the indemnified party shall
promptly notify the indemnifying party in writing of such damages and expenses.
The indemnifying party agrees that it will promptly reimburse and pay the
indemnified party for such damages and expenses. If any claim for
indemnification hereunder is based upon an action or claim filed or made against
the indemnified party by a third party, then the indemnifying party shall have
the sole right to negotiate a settlement or compromise of any such action or
claim subject to the indemnified party's approval, which approval shall not be
unreasonably withheld or delayed, or to defend any such action or claim at the
sole expense or cost of the indemnifying party with counsel selected by the
indemnified party. Provided, however, that the indemnified party at its expense
shall have the right to have its counsel participate in such proceedings and any
compromise or settlement of any claim other than for money damages shall be
subject to the prior written consent of the indemnified party.
4.4 Time to Assert Claims. All claims for indemnification must
be asserted no later than one year after the Closing Date, provided, however,
that Mentor Corporation may assert claims for indemnification related to
Purchaser's representations and warranties set forth in Sections 2.2(b) through
2.2(i) and Purchaser's covenants set forth in Article 3, up to the applicable
statute of limitations.
4.5 Deductible. The Purchaser may make no claim against the
Seller for indemnification unless and until the aggregate amount of such claims
exceeds $20,000.00 (the "Deductible"), in which event the Purchaser may claim
indemnification for the amount of such claims in excess of the Deductible.
4.6 Limitation. The Seller's obligation for indemnity shall
only be up to a maximum aggregate liability of $225,000.00. In calculating any
amount of damages to be paid by the indemnifying party pursuant to this
Agreement, the amount of such damages will be reduced by all reimbursements
credited to or received by the indemnified party, relating to such damages, and
will be net of any tax benefits and insurance proceeds (after giving effect to
any premium increases or deductibles) received by the indemnified party with
respect to the matter for which indemnification is claimed.
4.7 Exclusive Remedy; Release.
(a) The indemnification provided pursuant to this
Agreement shall be the sole and exclusive remedy hereto for any losses as a
result of, with respect to or arising out of breach of this Agreement, or any of
the transactions or other agreements or instruments contemplated or entered into
in connection herewith (including, but not limited to, all Schedules attached or
referenced herein); provided, however, that such indemnification shall not be
the sole and exclusive remedy and shall in no way limit the rights of the
parties for fraud, willful breach, Purchaser's breach of the representations and
warranties set forth in Sections 2.2(b) through Section 2.2(i), or Purchaser's
failure to fulfill the covenants set forth in Article 3.
(b) Except as specifically provided in this Article
4, neither party nor its affiliates or representatives shall be liable to the
other party for, and (except as so provided) each party hereby releases and
discharges the other party and its affiliates and representatives from, any and
all losses incurred as a result of, with respect to or arising out of the
ownership or operation of the Assets.
5. CONFIDENTIALITY.
5.1 Confidential Information. The Confidentiality Agreement
between the parties dated August 30, 1999 shall remain in full force and effect
and shall be incorporated herein by this reference.
5.2 Public Announcements. For the period beginning with the
Closing Date and ending thirty (30) days thereafter, no public announcement may
be made by either party with regard to the transactions contemplated by this
Agreement without the prior written consent of both the Seller and the
Purchaser; provided that either party may make such disclosure to the extent
required by applicable law or regulation of any governmental agency or stock
exchange upon which the securities of such party are registered. For the one
month period following the Closing Date, the Seller and the Purchaser will
discuss any public announcements or disclosures concerning the transactions
contemplated by this Agreement with the other party prior to making such
announcements or disclosures.
6. CONDITIONS PRECEDENT TO OBLIGATIONS.
6.1 Conditions to Obligations of Purchaser. Each and every
obligation of Purchaser to be performed at the Closing shall be subject to the
satisfaction as of or before the Closing Date of the following conditions
(unless waived in writing by Purchaser):
(a) Representations and Warranties. The
representations and warranties of Seller set forth in Section 2 of this
Agreement shall have been true and correct when made and shall be true and
correct at and as of the Closing Date as if such representations and warranties
were made as of such date and time.
(b) Performance of Agreement. All covenants,
conditions and other obligations under this Agreement which are to be performed
or complied with by Seller shall have been fully performed and complied with at
or prior to the Closing Date, including the delivery of instruments and
documents as required herein.
(c) Absence of Governmental or Other Objection. There
shall be no pending or threatened lawsuit or any other legal or regulatory
proceeding challenging the transaction by any body or agency of the federal,
state or local government or by any third party and the consummation of the
transaction shall not have been enjoined, or threatened to be enjoined, by a
court of competent jurisdiction as of the Closing Date.
6.2 Conditions to Obligations of Seller. Each and every
obligation of Seller to be performed at the Closing shall be subject to the
satisfaction as of or before the Closing Date of the following conditions
(unless waived in writing by Seller):
(a) Representations and Warranties. The
representations and warranties of Purchaser set forth in Section 2 of this
Agreement shall have been true and correct when made and shall be true and
correct at and as of the Closing Date as if such representations and warranties
were made as of such date and time.
(b) Performance of Agreement. All covenants,
conditions and other obligations under this Agreement which are to be performed
or complied with by Purchaser shall have been fully performed and complied with
at or prior to the Closing Date, including the delivery of instruments and
documents as required herein.
(c) Absence of Governmental or Other Objection. There
shall be no pending or threatened lawsuit challenging the transaction by any
body or agency of the federal, state or local government or by any third party
and the consummation of the transaction shall not have been enjoined by a court
of competent jurisdiction as of the Closing Date.
7. DELIVERIES AT CLOSING. All transactions at the Closing shall be
deemed to take place simultaneously and no transaction at the Closing shall be
deemed to have been completed until all documents set forth herein have been
delivered by the parties hereto except as waived by the party to who such
document is to be delivered.
7.1 Obligations of Seller. At the Closing, Seller shall
deliver to Purchaser:
(a) such good and sufficient bills of sale,
assignments, deeds and other good and sufficient instruments of sale,
conveyance, transfer and assignment as shall be required or as may be
appropriate in order to effectively vest in Purchaser good and marketable title
to the Assets;
(b) Mentor Corporation's irrevocable proxy to
Purchaser's Board of Directors to vote the Common Shares for a period of one
year following the Closing Date; provided, however, that if during such one year
period Mentor Corporation sells any of such Common Shares, following such sale
the proxy shall terminate and be of no force and effect with respect to the
Common Shares which are sold; and
(c) such other instruments or documents as may be
reasonably requested by Purchaser or Purchaser's counsel to fully and
effectively convey the Assets to Purchaser in accordance with the provisions of
this Agreement.
7.2 Obligations of Purchaser. At the Closing, Purchaser
shall deliver to Seller:
(a) original share certificates (with the number of
and denomination of such certificates as reasonably requested by Seller),
representing the Common Shares registered in the name of Mentor Corporation.
(b) an opinion of Purchaser's counsel, dated the
Closing Date, reasonably satisfactory in form and substance to Seller.
(c) such other instruments or documents as may be
reasonably requested by Seller or Seller's counsel to fully and effectively
evidence Purchaser's compliance with the provisions of this Agreement.
8. MISCELLANEOUS.
8.1 Expenses. Each party to this Agreement shall bear its own
costs and expenses incurred in connection with the preparation, execution and
delivery of this Agreement and the transactions contemplated by this Agreement.
8.2 Notices. All notices, claims, certificates, requests,
demands and other communications under this Agreement shall be made in writing
and shall be delivered by hand or sent, postage prepaid by registered, certified
or express mail, or reputable overnight courier service, and shall be deemed
given when so delivered by hand or if mailed, three days after mailing, one
business day in the case of express mail or overnight courier service, to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
If to Seller:
Mentor Corporation
Attention: Loren McFarland
201 Mentor Drive
Santa Barbara, CA 93111
Telephone: (805) 879-6000
Facsimile: (805) 964-2712
With a copy to:
Chief Counsel
Mentor Corporation
201 Mentor Drive
Santa Barbara, CA 93111
Telephone: (805) 879-6000
Facsimile: (805) 681-6006
If to Purchaser:
Paradigm Medical Industries, Inc.
Attention: Mike Stelzer
1127 West 2320 South, Suite A
Salt Lake City, UT 84119
8.3 Agreements and Waivers. This Agreement may be amended or
modified only by a written instrument executed by the parties to this Agreement.
No failure or delay on the part of any party in exercising any of its respective
rights hereunder upon any failure by any other party to perform or observe any
condition, covenant or provision herein contained shall operate as waiver
thereof, nor shall any single or partial exercise of any such rights preclude
any other or further exercise thereof or the exercises of any other right
hereunder.
8.4 No Assignment. The rights and obligations or each party
under this Agreement shall not be assigned prior to, on or after the Closing
without the written consent of the other party hereto. The obligations of Seller
and Purchaser hereunder shall be binding upon their respective successors and
permitted assigns.
8.5 Benefits. Nothing expressed or referred to in this
Agreement is intended or shall be construed to give any person or entity other
than the parties to this Agreement or their respective successors and permitted
assigns any legal or equitable right, remedy or claim under or in respect
thereof or any provision contained herein, it being the intention of the parties
that this Agreement is for the sole and exclusive benefit of such parties, and
such successors and permitted assigns of this Agreement, and for the benefit of
no other person or entity.
8.6 Headings. The section and other headings contained in this
Agreement are for reference purposes only and shall not in any way affect the
meaning of interpretation of this Agreement.
8.7 Entire Agreement. This Agreement, the Exhibits hereto, the
documents referred to herein, and the documents executed contemporaneously
hereto on the Closing Date constitute the entire Agreement of the parties with
respect to the subject matter of this Agreement and supercede all prior oral or
written agreements, understandings or representations relating to the subject
matter of this Agreement (except the August 30, 1999 Confidentiality Agreement
entered into between the parties).
8.8 Governing Law. This Agreement shall be construed in
accordance with, and governed by, the internal laws of the State of California,
without regard to its conflict of law provisions.
8.9 Choice of Forum. Any suit, action or proceeding against
any party hereto with respect to the subject matter of this Agreement must be
brought in the United States District Court for the Central District of
California, and each party hereby irrevocably submits to the exclusive
jurisdiction of such court for the purpose of any such suit, action, proceeding
or judgment. Each party hereto irrevocably waives any objection which either of
them may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement, brought as provided in
this Section, and hereby further irrevocably waives any claim that any such
suit, action or proceeding brought in any such court has been brought in an
inconvenient forum. The parties hereto agree that exclusive jurisdiction of all
disputes, suits, actions or proceedings between the parties hereto with respect
to the subject matter of this Agreement lies in the court as hereinabove
mentioned. Service of process by mailing (by certified mail, return receipt
requested) or delivering a copy of such process to a party in accordance with
Section 8.2 hereof will be deemed good and sufficient service thereof.
8.10 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute one and the same Agreement.
8.11 Severability. If any provision of this Agreement or any
covenant, obligation or agreement contained herein is determined by a court of
competent jurisdiction to be invalid or unenforceable, such determination shall
not affect any other provision, covenant, obligation or agreement, each of which
shall be construed and enforced as if such valid or unenforceable provision were
not contained herein. Such invalidity or unenforceability shall not affect any
valid and enforceable application thereof, and each such provision, covenant,
obligation or agreement shall be deemed to be effective, operative, made,
entered into or taken in the manner to the full extent permitted by law.
8.12 Termination. This Agreement may be terminated and the
transactions herein contemplated may be abandoned at any time without liability,
but not later than the Closing Date:
(a) by mutual written consent of the parties; or
(b) by Seller or Purchaser if the Closing has not
occurred by November 15, 1999, through no fault of the party who initiates
termination.
8.13 Obligations After Termination. Termination of this
Agreement pursuant to section 8.12 will terminate all obligations of the parties
hereto, except for the obligations under Section 2.1(c) (Brokerage), Section 4
(Indemnity), and Section 5 (Confidentiality).
IN WITNESS WHEREOF, Seller and Purchaser have caused their respective,
duly authorized officers to execute this Agreement as of the day and year first
above written.
MENTOR CORPORATION PARADIGM MEDICAL INDUSTRIES, INC.
By /s/ Anthony R. Gette By /s/ Thomas F. Motter
-------------------- --------------------
Anthony R. Gette, CEO and President Thomas F. Motter, CEO and President
MENTOR MEDICAL INC.
By /s/ Loren McFarland
-------------------
Loren McFarland, Secretary/Treasurer
MENTOR OPHTHALMICS, INC.
By /s/ Loren McFarland
-------------------
Loren McFarland, Secretary/Treasurer
<PAGE>
SCHEDULE 1.1(c)
Intellectual Property
See attached schedules of patents, patent applications, trademarks and trademark
applications.
Copyrights
All unregistered copyrights to written materials transferred hereunder.
<PAGE>
SCHEDULE 1.1(d)
Registrations
o TUV Product Service Gmbh ISO 9001 and EN 46001 Certificate No. Q1 97 04
28718 006 (Norwell) (as it relates to the Phaco product line but not as
it relates to other products)
o EC Certificate No. G1 98 10 28718 005 (as it relates to the Phaco
product line but not as it relates to other products)
o FDA 510(k) No. K912904 (Odyssey Phacoemulsification System)
o FDA 510(k) No. K955245 (Meridian Phacoemulsification System)
o FDA 510(k) No. K974469 (Phacoemulsification SIStem Remote Control)
o FDA 510(k) No. K890622 (Surg-E-Trol System I and System II)
o International permits and approvals:
o Mentor SIStem: Argentina, Austria, Belgium, Brazil, Bulgaria, Canada,
Chile, Colombia, Denmark, Egypt, Finland, France, Germany, Greece,
Iceland, India, Ireland, Israel, Italy, Korea, Liechtenstein,
Luxembourg, Malaysia, Netherlands, Norway, Pakistan, Peru, Portugal,
Puerto Rico, Singapore, Spain, South Africa, Sweden, Switzerland,
Taiwan, Thailand, Turkey, United Kingdom, Venezuela. Pending: China
o Odyssey System: Russia.
o Surg-E-Trol System I and System II: Australia.
<PAGE>
SCHEDULE 1.1(e)
Material Contracts
o October 4, 1999 License Agreement with Xomed, Inc.
o July 4, 1997 Software License Agreement with Dialogue Technology, Inc.
<PAGE>
TRANSITION SERVICES AGREEMENT
This Transition Services Agreement (the "Transition Agreement") is
entered into as of the date the last party signs as shown on the signature page
hereto, by and among Mentor Corporation, a Minnesota corporation, Mentor
Ophthalmics, Inc., a Massachusetts corporation, and Mentor Medical Inc., a
Delaware corporation (collectively "Seller") on the one hand, and Paradigm
Medical Industries, Inc., a Delaware corporation ("Purchaser") on the other
hand.
RECITALS
WHEREAS, concurrent with the execution and delivery of this Transition
Agreement, Seller is selling and Purchaser is purchasing a cataract surgery
system product line consisting of the Mentor(TM) Phacoemulsification S.I.S.tem,
the Odyssey(TM) Phacoemulsification System, the Surg-E-Trol(R) System I and
System II, and all accessories thereto (collectively, the "Phaco" product line)
pursuant to that certain Asset Purchase Agreement, of even date herewith,
between Seller and Purchaser (the "Asset Purchase Agreement"); and
WHEREAS, Purchaser has requested and Seller has agreed to provide
certain transition services after the Closing subject to the terms and
conditions of this Transition Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements set forth herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Definitions. All capitalized terms used in this Transition Agreement
which are not otherwise defined herein shall have the meaning set forth for such
term in the Asset Purchase Agreement.
2. Cooperation of the Parties. Purchaser has requested Seller to
perform the Services (defined below) to assist Purchaser in its efforts to
maintain the CE on the acquired products. To help Purchaser achieve this result
and to minimize any disruption to the ongoing operations of Seller, the parties
agree to cooperate in good faith and shall direct their respective employees to
work with the representatives of the other party and to provide such information
and other assistance as may be reasonably required in order to fulfill the terms
of this Transition Agreement.
3. Access to Facilities, Assets and Personnel. During the term of this
Transition Agreement, Seller shall:
(a) Allow Purchaser's employees, agents and contractors to
enter onto the premises of Seller as needed, following reasonable prior notice
and during normal business hours, or such other time or times as the parties may
mutually agree, for the purpose of identifying the Assets, utilizing the Assets
for the operation of the business, and arranging for the relocation of the
Assets (provided that Purchaser shall be solely responsible for the costs of
shipping any such Assets); and
(b) Allow Purchaser's employees, agents and contractors to
have reasonable access to employees who remain employed by Seller having
knowledge or information relevant to the Assets, provided that such access shall
not unreasonably interfere with the continued performance of such employees'
duties for Seller. Seller shall instruct such employees to cooperate fully with
Purchaser. Access to Seller employees shall include the opportunity to hold in
person meetings at the facilities of either Seller or Purchaser, provided that
Purchaser shall reimburse Seller employees for any expenses reasonably incurred
by such employees related to travel undertaken at Purchaser's request, and
Seller shall allow such employees the necessary and reasonable time off from
work for such travel.
4. Transition Services. During the term of this Transition Agreement, Seller
shall use commercially reasonable efforts to provide on behalf of Purchaser the
services set forth in Attachment "A" (the "Services"). The Services shall be
performed in a timely and professional manner consistent with service and
quality levels maintained by Seller prior to Closing. Purchaser acknowledges
that Seller's ability to manufacture products is dependent upon circumstances
that are outside of Seller's control, including the availability of materials
and components, timing of delivery of such items to Seller, and the willingness
of personnel to remain employed by Seller.
5. Key Employees. On or before October 18, 1999, Purchaser will provide
Seller with a list of Key Employees to be attached hereto as Exhibit "B." Seller
will use its best efforts to retain the Key Employees pursuant to the
termination schedule set forth therein. "Best efforts" shall mean (i) the
continuation of the retention packages which Seller previously offered to the
Key Employees through termination hereunder, and (ii) not terminating or
decreasing the compensation or benefits of any Key Employee except, in each
case, for good cause and, except in an emergency, with Purchaser's consent,
which consent will not be unreasonably withheld or delayed. In the event the
termination schedule changes, Purchaser will notify Seller as soon as practical,
and in any case, Purchaser will be responsible for paying the Key Employees for
their final two weeks of employment, regardless of whether they received two
weeks notice.
6. Compensation. Purchaser shall reimburse Seller for: (i) incremental,
out-of-pocket costs incurred by Seller in providing the Services and such other
cooperation and assistance provided by Seller pursuant to this Transition
Agreement; (ii) labor costs, which will be based on an hourly rate that reflects
the actual salary and benefits for those Key Employees providing Services; (iii)
retention benefits for Key Employees accruing between October 22, 1999 and each
Key Employee's termination date; and (iv) severance for Key Employees which
accrues after October 22, 1999. Purchaser shall not be responsible for: (i) any
retention benefits accrued before October 22, 1999, for any of Seller's
employees; (ii) any expenses relating to Seller's facilities for any
time-period; or (iii) severance for any Seller employee accrued before October
22, 1999. Seller shall submit a monthly invoice for Services rendered during the
previous calendar month. Each monthly invoice shall include a detailed
accounting of charges and expenses. Purchaser shall remit payment within thirty
days from receipt of each monthly invoice.
7. Compliance with Policies and Procedures. While on the premises of
Seller, Purchaser's employees, agents and contractors shall observe all rules,
policies and procedures applicable to the employees of Seller working at such
site.
8. Continuation of Facilities and Compliance with Law. Seller shall
maintain in effect, at its own expense, all leases relating to the facilities,
offices and equipment required to provide the Services, and shall, as available
resources permit, maintain the same in a reasonable state of repair and
operation consistent with past practices and in compliance with all laws, rules
and regulations, including, but not limited to, the Occupational Safety and
Health Act of 1970, as amended, and all Environmental Laws.
9. Confidentiality. The parties acknowledge that confidential
information belonging to a party may be disclosed to the other parties'
employees, agents and contractors as a result of the activities contemplated by
this Transition Agreement. Each party agrees that the terms of the
Confidentiality Agreement, dated August 30, 1999 by and between Seller and
Purchaser (the "Confidentiality Agreement") shall apply to any confidential
information disclosed pursuant to this Transition Agreement and each party shall
cause its employees or contractors to comply with the terms thereof.
10. Status. Seller shall provide the Services as an independent
contractor and Seller's employees shall not for any purpose act as employees or
agents of Purchaser.
11. Indemnification. Purchaser shall indemnify and hold harmless
Seller, and the officers, directors, employees, agents, successors and assigns
of Seller, from and against any liabilities, losses, damages, costs and expenses
(including reasonable attorney's fees) ("Damages") incurred by Seller arising
out of or related to (i) the use or occupation of the premises or any facilities
or equipment of Seller by any employees, agents or contractors of Purchaser, and
(ii) any acts or omissions by any employee, agent or contractor of Purchaser,
except and to the extent such Damages are attributable to the negligence or
misconduct of Seller.
12. Term and Termination. This Transition Agreement shall commence on
the Closing Date and terminate on November 30, 1999. Purchaser may earlier
terminate this agreement upon written notice to Seller subject only to
completion of its obligations in this Transition Agreement. Purchaser shall have
no responsibility for costs incurred after termination in connection with the
Services. Seller's sole responsibility is to perform the Services specified
herein, in the manner described herein, up to the termination date; Seller shall
have no responsibility for maintaining the CE mark on the products during the
term of this Transition Agreement or thereafter.
13. Independent Sales Representatives and Distributors. The parties
acknowledge and agree that the agreements between Seller and its Independent
Sales Representatives ("ISRs") and International Distributors ("Distributors")
have not been assigned to, and no obligations arising under those agreements
will be assumed by Purchaser. In order to facilitate Seller's exit from the
business, Purchaser will continue to sell Phaco products to those Distributors
identified by Seller through and including December 31, 1999.
14. General Provisions. Except for the Asset Purchase Agreement and any
documents reference therein and the Confidentiality Agreement, this Transition
Agreement is the entire agreement between the parties relating to the subject
matter hereof, superceding any and all prior agreements between the parties.
This Transition Agreement may not be amended except by a written agreement
signed by an authorized representative of each party, and is for the benefit of
the parties and their permitted assigns. It is not intended to create a benefit
for any third parties.
IN WITNESS WHEREOF, Seller and Purchaser have caused their respective,
duly authorized officers to execute this Agreement as of the day and year first
above written.
MENTOR CORPORATION PARADIGM MEDICAL INDUSTRIES, INC.
By /s/ Anthony R. Gette By /s/ Thomas F. Motter
-------------------- --------------------
Anthony R. Gette, CEO and President Thomas F. Motter, CEO and President
MENTOR MEDICAL INC.
By /s/ Loren McFarland
-------------------
Loren McFarland, Secretary/Treasurer
MENTOR OPHTHALMICS, INC.
By /s/ Loren McFarland
-------------------
Loren McFarland, Secretary/Treasurer
<PAGE>
ATTACHMENT A
Transition Services
I. Customer Service Functions:
Receive and process customer orders, provide technical customer
support, including complaint handling and Medical Device Reporting as
requested by Purchaser.
II. Logistics, Distribution and Inventory Control:
In response to customer orders, ship products to such customers and
also process returns, maintain consignment inventory records, maintain
customer master and item master files, as directed by Purchaser. Upon
request from Purchaser, pack and ship to Purchaser the remaining
product inventory located at Seller's Norwell and Rockland facilities.
III. Systems Maintenance and Support:
Consistent with available resources, maintain and operate all systems,
equipment and facilities required to perform the Services, including
but not limited to voice and data networks, and desktop applications;
provided that Seller shall not be required to purchase additional
hardware or software nor shall it be required to employ additional
personnel to maintain or support the systems, equipment or facilities.
IV. Manufacturing and Repair Operations:
Utilizing materials and components provided by Purchaser, Seller will
use commercially reasonable efforts to manufacture up to 20
phacoemulsification SIStems (subject to the available resources and
access to available materials and components) and repair products to
the same standards, specifications and quality as previously maintained
by Seller.
V. Notifications:
Notify all current Phaco-related vendors of the acquisition and further
notify vendors in writing that ownership to any Phaco inventory in
their possession has been transferred to Purchaser under this
Agreement.
<PAGE>
SEVERANCE AGREEMENT AND GENERAL RELEASE
This SEVERANCE AGREEMENT AND GENERAL RELEASE (the "Agreement") is made
and entered into on this 21st day of January, 2000, by and between PARADIGM
MEDICAL INDUSTRIES, INC. ("PARADIGM") and MICHAEL W. STELZER ("STELZER").
RECITALS:
WHEREAS, STELZER has been employed by, and has served as an officer of
PARADIGM; and
WHEREAS, the parties mutually desire to end this relationship effective
January 21, 2000, and now desire to resolve all issues amicably on the terms set
forth below; and
WHEREAS, STELZER has served as a Director of PARADIGM and desires to
resign from its Board of Directors.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and obligations herein contained, the parties agree as follows:
1. Stelzer Resignation. STELZER shall provide PARADIGM with a letter of
resignation in the form attached hereto as Exhibit "A".
2. Severance Benefits. STELZER will receive 20,000 shares of restricted
common stock of PARADIGM (the "Shares") within seven business days of the
date of this Agreement. PARADIGM shall register the Shares within 90 days
after such date. If for any reason the Shares are not so registered,
STELZER at his option may exchange the Shares for shares of common stock
that have been registered in the January 6, 2000 Prospectus. STELZER will
enter into a lock up agreement with PARADIGM in which he will agree not
to sell the Shares for a period of 90 days following the date of this
Agreement. With respect to the PARADIGM stock options STELZER presently
holds, he may exercise such options at any time between the date of this
Agreement and 18 months following such date. PARADIGM will continue to
pay STELZER his base salary through April 21, 2000. STELZER's 401(k)
benefits that would have accrued as of the date of this Agreement will be
deemed vested. The Board of Directors of PARADIGM shall provide STELZER
with a letter of reference in the form attached hereto as Exhibit "B".
3. Cooperation in Transition. STELZER will provide all passwords, codes,
information, documents, tangible items or other materials arising from or
relating to his employment with or affiliation with PARADIGM and he will
make himself reasonably available for consultation, training and other
services needed in making a successful transition of his former
responsibilities to his successor(s).
<PAGE>
3
4. Mutual Release. In consideration of the benefits provided in this
Agreement, the parties release, hold harmless and forever discharge each
other, any and all other subsidiary or affiliate companies, their
successors, assigns, transferees, past or present officers, employees,
directors, representatives, agents, partners, owners and shareholders, of
and from any and all actions, claims, causes of action, suits,
compensation, wages, benefits, debts, contracts, controversies,
agreements, promises, rights, damages or demands which they have, may
have or ever will have, whether known or unknown, suspected or
unsuspected, ;including but not limited to any claim under state or
federal statutory or common law, any claim arising out of or in
connection with STELZER's employment or affiliation with PARADIGM or the
termination thereof, and any claim based on an express or implied
contract including but not limited to STELZER's Employment Agreement
dated September 14, 1998 and his Change of Control Termination Agreement
dated September 14, 1998.
The parties expressly waive the benefits of any rule or law that
provides, in sum or substance, that a release does not extend to claims
which the party does not know or suspect to exist in his favor at the
time of executing the release, which if known by him would have
materially affected this settlement with the other party. The parties
understand and acknowledge that all such claims are hereby waived and
released.
5. Release of Age Discrimination Claims. STELZER acknowledges and
understands that he is releasing any and all claims or causes of action
he has or may have under state and federal law concerning age
discrimination, including but not limited to, the Age Discrimination in
Employment Act of 1967, 29 U.S.C. Section 621 et seq. He further
acknowledges that he has been advised that this release does not apply to
any age-based rights or claims arising after the date of this Agreement,
that he should seek the advice of his own independent attorney, that he
has been given 21 days in which to review and consider this Agreement and
that he has been advised that he has an additional 7 days after he signs
this Agreement to change his mind and rescind this Section (5) and
release of age discrimination claims without any penalty to himself. This
Section (5) of the Agreement will not become effective or enforceable
until after this 7 day period has expired. The parties agree that one
month of the salary continuation provided in Section (2) above is
allocated to STELZER's release of age-based claims. In the event STELZER
exercises his right of rescission of this Section (5), the salary
continuation will end on March 21, 2000. All other provisions of this
Agreement will remain in full force and effect.
6. Confidentiality, Inventions and Non-Compete Agreement. STELZER agrees
that the Confidentiality, Inventions and Non-Compete provisions (Sections
6-9) of his Employment Agreement dated September 14, 1998 remain in full
force according to their terms and he agrees to abide by and comply with
these provisions.
7. Confidentiality and Non-Assistance in Claims. STELZER agrees that he will
keep strictly confidential all information pertaining to the
negotiations, conditions and terms of this Agreement and will not
directly or indirectly publicize or disclose them in writing or orally,
and whether by himself or any agent, representative or other person.
Notwithstanding the foregoing, he may discuss this Agreement with his
attorneys, accountants or members of his immediate family provided he
obtains their agreement to keep its terms confidential and he remains
responsible for any disclosure they may make.
<PAGE>
STELZER also agrees that he will not encourage, recommend, participate in
or voluntarily assist in any legal or administrative claim against
PARADIGM or its employees, directors, officers, representatives or
affiliated companies and will not attempt to harm their reputations or
speak or write about them in a disparaging manner. Notwithstanding the
foregoing, STELZER may testify or disclose information if subpoenaed,
required by law or in the course of an official agency investigation.
PARADIGM will not attempt to harm STELZER's reputation or speak or write
about him in a disparaging manner.
8. No admission of Liability. By entering into this Agreement, PARADIGM does
not in any way admit or acknowledge liability for any allegation or claim
by STELZER and it specifically denies any such liability. The parties
agree that nothing contained in this Agreement shall be treated or
construed as a admission of liability or wrongdoing of any kind by
PARADIGM, its predecessors, successors, affiliates, agents, officers,
directors, representatives and employees.
9. Ownership of Claims and No Liens. STELZER represents that he ha not
transferred, assigned or encumbered any claim or portion thereof against
PARADIGM, its officers, directors, employees or agents. STELZER further
represents and warrants that there are no liens against the severance
benefits provided under this Agreement.
10. Disputes. In the event any dispute arises between the parties which in
any way relates to this Agreement, and which dispute cannot be resolved
amicably, the parties agree that such dispute shall be resolved in Salt
Lake city, Utah through binding arbitration in accordance with the rules
and procedures of the American Arbitration Association., Further, the
substantially prevailing party shall receive reasonable attorney's fees
and costs.
11. Severability. In the event any part of this Agreement is determined to be
void or unenforceable, the parties agree that the remainder of the
Agreement may be enforced to the fullest extent permitted by law.
12. Complete Agreement. This Agreement sets forth the terms and conditions of
an amicable resolution in full accord and satisfaction of all issues,
claims or controversies between STELZER and PARADIGM. This Agreement sets
forth the complete agreement between the parties. No other promises,
commitments or representations have been made or relied on by the
parties, and no other consideration is due between the parties.
In witness whereof, the parties acknowledge, by their signatures below,
that they have read and understand the terms of this Agreement and are freely
and voluntarily entering into it.
MICHAEL W. STELZER PARADIGM MEDICAL
INDUSTRIES, INC.
/s/ Michael W. Stelzer By: /s/ Thomas F. Motter
- -------------------------------- --------------------
Date signed: January 28, 1999 Its: CFO
--------------------- ----------
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT is entered into this 1st day of December,1998, San
Luis Obispo, California (hereinafter "Consultant"), and Paradigm Medical
Industries, Inc., a Delaware corporation with its place of business at Salt Lake
City, Utah. (hereinafter "Company").
THE PARTIES AGREE AS FOLLOWS:
1. Consultancy. Consultant shall serve as a consultant to the Company for a
period commencing and concluding on the dates set forth in Schedule A hereto,
subject to termination in accordance with Section 7. The period during which
Consultant shall serve as a consultant to the Company pursuant to this Agreement
shall constitute the "Consulting Period".
1. Duties. Consultant shall serve as a consultant to the Company in the
activities of the Company set forth in Schedule A or as otherwise requested by
an officer of the Company. Consultant shall perform such services under the
general direction of the Company or its officers, but Consultant shall determine
the manner and means by which the services are accomplished. During the
Consulting Period, Consultant agrees to perform all duties to the best of his
ability. In the performance of such duties, Consultant shall consult with the
Company at the Company's facilities or at such other places as the Company shall
reasonably request. Consultant shall remain available for telephone consultation
with the officers, employees, or consultants of the Company or any of its
subsidiaries or affiliates.
2. Other Employment
1. Other Affiliation. Consultant represents that he is not a party to any
existing agreement that would prevent him from entering into this Agreement,
and that the only agreements with third parties which may restrict his
consulting activities on behalf of the Company at the time of this Agreement
are Consultant's obligations pursuant to the agreements set forth in
Schedule A. Consultant agrees to use his best efforts to segregate work done
under this Agreement from all work done at, or for, any such company,
corporation, and/or other commercial enterprises. In any dealings with any
such company, corporation, and/or other commercial enterprises, Consultant
shall protect and guard the Company's "Confidential Information" (as defined
in Section 4.1 below) in accordance with the terms of this Agreement.
2. Conflict of Interest. Consultant warrants that he is not obligated under
any other consulting, employment, or other agreement which would affect the
Company's rights or Consultant's duties under this Agreement unless
specifically disclosed in Schedule A.
3. Compensation
1. Consulting Fees. The Company agrees to pay Consultant and Consultant
agrees to accept for Consultant's services under this Agreement consulting
fees (the "Consulting Fees") as set forth in Schedule A
2. Employment Taxes and Benefits. Consultant acknowledges and agrees that it
shall be Consultant's sole obligation to report as self-employment income
all compensation received by Consultant from the Company for Consultant's
services as a consultant. Consultant agrees to indemnify the Company and
hold it harmless to the extent of any obligations imposed by law on the
Company to pay any withholding taxes, social security, unemployment or
disability insurance or similar items in connection with any payment made to
Consultant by the Company for Consultant's services as a consultant.
3. Legal Relationship. Consultant shall be an independent contractor with
respect to the Company and shall not be an employee or agent of the Company.
Consultant shall be entitled to no benefits or compensation from the Company
except as set forth in this Agreement and shall in no event be entitled to
any fringe benefits payable to employees of the Company.
4. Expenses. Consultant will be reimbursed only reasonable costs and
expenses incurred in performing duties hereunder. Such reimbursement shall
be made within thirty (30) days of submission of adequate and appropriate
documentation of such costs and expenses.
5. Alpha Products. Consultant shall receive One (1) pre-production or
production model of each product developed under this Agreement, free of
charge from Company, for use in his clinical practice, teaching or other
professional activities. Each Alpha Product given to Consultant shall carry
a full service and warranty contract at no cost to Consultant during the
term of the Agreement and as further set forth in Schedule A.
4. Confidentiality
1. Confidential Information. Consultant's work for the Company creates a
relationship of trust and confidence between the Company and Consultant.
During and after Consultant's work for the Company, Consultant will not use
or disclose or allow anyone else to use or disclose any "Confidential
Information" (as defined below) relating to the Company, its products,
suppliers or customers, except as may be necessary in the performance of
Consultant's work for the Company or as may be authorized in advance by
appropriate officials of the Company. "Confidential Information" includes
Innovations (as defined in Section 6.2 below), marketing plans, product
plans, business strategies, financial information, forecasts, personnel
information, customer lists, trade secrets, any other non-public technical
or business information, third party information made available to
Consultant, joint research agreements or agreements entered into by the
Company or any of its affiliates, whether in writing or given to Consultant
orally, which Consultant knows or has reason to know the Company would like
to treat as confidential for any purpose, such as maintaining a competitive
advantage or avoiding undesirable publicity. Consultant will keep
Confidential Information secret and will not allow any unauthorized use of
the same whether or not any document containing it is marked as
confidential. These restrictions, however, will not apply to Confidential
Information that has become known to the public generally through no fault
or breach of Consultant or that the Company regularly gives to third parties
without restriction on use or disclosure or was known to the Consultant
prior to this agreement.
2.Records. Consultant agrees to keep separate and segregated from other work
all documents, records, notebooks and correspondence which directly relate
to his/her work under this Agreement. With respect to data stored on
magnetic media such as computer discs or tapes, those directly relating to
Consultant's work under this Agreement may be stored with those of other
work on the same magnetic media; however, they shall be stored in files,
directories, or other appropriate forms, so that those directly relating to
Consultant's work under this Agreement may be identified and separated from
those of other work with reasonable ease.
3. Record of Confidential Information. All notes, memoranda, reports,
drawings, manuals, materials, data and any papers or records of every kind
which are or shall come into Consultant's possession at any time during the
Consulting Period related to Confidential Information of the Company shall
be the sole and exclusive property of the Company. This property shall be
surrendered to the Company upon termination of the Consulting Period or upon
request of the Company at any time either during or after the termination of
the Consulting Period, and no copies, notes, or excerpts thereof shall be
retained, except that, copies, notes, or excerpts of said property already
archived on magnetic tapes by Consultant's backup processes shall be
retained by Consultant for a period no longer than what Consultant normally
would for backup archives, and no part of said archived property shall be
reproduced thereafter from said tapes in any form without written permission
from the Company.
4. Proprietary Properties of Others. In his performance hereunder,
Consultant shall comply with all legal obligations he may now or hereafter
have respecting the information or other property of any other person, firm,
or corporation. Specifically, Consultant shall not disclose to the Company
any proprietary information or trade secrets of others.
5. Innovations
1. Company Property. All Innovations made, conceived, or completed by
Consultant, individually or in conjunction with others during the
Consulting Period shall be the sole and exclusive property of the Company,
provided such Innovations (i) are made, conceived or completed with
equipment, supplies, or facilities of the Company, its subsidiaries or
affiliates, or (ii) are made, conceived or completed by Consultant during
hours in which Consultant is performing services for the Company or any of
its subsidiaries or affiliates. It is understood that nothing contained
herein shall affect the rights or obligations of Consultant with respect
to any Innovations which are protected by Section 2870 of the California
Labor Code.
2. Disclosure, assignment, and waiver
1 Disclosure of Innovations. Consultant shall, at the Company's expense,
disclose in writing to the Company, to the extent of detail that the
Company may reasonably request, all inventions, discoveries, concepts,
ideas, improvements and other innovations of any kind that Consultant
may make, conceive, develop or reduce to practice, alone or jointly with
others, in the course of performing work for the Company or as a result
of that work, whether or not they are eligible for patent, copyright,
trademark, trade secret or other legal protection ("Innovations").
Examples of Innovations include: formulas, algorithms, methods,
processes, databases, mechanical and electronic hardware, electronic
components, computers and their parts, computer languages, computer
programs and their documentation, encoding techniques, articles,
writings, compositions, work of authorship, marketing and new product
plans, production processes, advertising, packaging and marketing
techniques, and improvements to anything.
2 Assignment of Ownership. Consultant agrees that all Innovations
pertaining to the application of the Company will be the sole and
exclusive property of the Company and hereby assigns to the Company all
rights in the Innovations and in all related patents, patent
applications, copyrights, mask work rights, trademarks, trade secrets,
rights of priority and other proprietary rights. The rights of the
consultant to use and market his innovations in other unrelated arenas,
specifically medical applications, are not transferred by this agreement
At the Company's request and expense, during and after the period during
which Consultant acts as a consultant to the Company, Consultant will
assist and cooperate with the Company in all respects and will execute
documents, and subject to reasonable availability, give testimony and
take further acts requested by the Company to acquire, transfer,
maintain and enforce patent, copyright, trademark, mask work, trade
secret and other legal protection for the Innovation(s). Consultant
hereby appoints the Secretary of the Company as Consultant's
attorney-in-fact to execute documents on Consultant's behalf for this
purpose.
3 Legal Proceedings. Whenever requested to do so by the Company and at
the Company's expense, Consultant shall promptly deliver to the Company
evidence for interference purposes or other legal proceedings and
testify in any interference or other legal proceedings which relates to
any matters on which Consultant has provided services to the Company.
Company shall promptly pay Consultant his usual and customary fees if
Consultant is required to testify, travel or miss his regular office
hours in order to participate in said proceedings.
4 Non-Infringement. Consultant represents and warrants that the services
performed under this Agreement and the Innovations made or contributed
by Consultant hereunder will not infringe on any rights of any third
party.
5 Notification of license requirement. Prior to introduction to the
Company any Innovation that requires or may require a license from
Consultant or a third party, Consultant shall notify the Company about
such requirement or the possibility of such requirement.
6. Non-Solicitation. During the Consulting Period and for a period of two years
after the expiration or earlier termination of the Consulting Period, neither
Consultant nor the Company shall employ the other party's employees, or solicit
or recruit the other party's employees for a third party, without the other
party's prior written consent.
7. Termination. The Consulting Period may be terminated as set forth in Schedule
A. The covenants and agreements set forth in Sections 4, 5 and 6 shall survive
the Consulting Period and remain in full force and effect for two (2) years
regardless of such termination.
8. Severability. If a court finds any provision of this Agreement invalid or
unenforceable as applied to any circumstance, that provision shall be enforced
to the maximum extent permitted by law, and the other provisions will remain in
full force and effect.
9. Notice. Any notice to be delivered pursuant to this Agreement shall be in
writing and shall be deemed delivered upon service, if served personally, or
three days after deposit in the United States Mail, if mailed by registered or
certified with return receipt requested, and addressed to the other party at the
following address, or such address as may be designated in accordance herewith:
To the Company: To Consultant:
Paradigm Medical Industries, Inc. Michael B. Limberg, M.D.
1127 West 2320 South Suite A 1270 Peach Street
Salt Lake City, UT 84119 San Luis Obispo, CA 93401
10. Binding Effect: No Assignment. This Agreement shall be binding upon
Consultant, and except as regards personal services, upon Consultant's heirs,
personal representatives, executors and administrators, and shall inure to the
benefit of the Company, its successors and assigns. This Agreement may not be
assigned by Consultant and any attempted assignment by Consultant shall be void.
11. Amendment. This Agreement may be modified or amended only by mutual written
consent of the parties.
12. Governing Law. This Agreement shall be governed and enforced in accordance
with the laws of the State of California, excluding that body of law known as
choice of law.
13. Entire Agreement. This Agreement contains the entire agreement of the
parties relating to the subject matter hereof, and supersedes all prior and
contemporaneous negotiations, correspondences, understanding and agreements of
the parties relating to the subject matter hereof.
14. Attorney's Fees. In the event that legal proceedings are brought to enforce
any provisions contained herein, the prevailing party shall be entitled to
recover reasonable attorney's fees, costs and expenses.
Executed this Agreement as of the date first above written.
Consultant: Michael B. Limberg, M.D.
By: /s/ Michael B. Limberg, M.D.
----------------------------
Michael B. Limberg, M.D.
Company: Paradigm Medical Industries, Inc.
By: /s/ Michael W. Stelzer
----------------------
Michael W. Stelzer, Chief Operating Officer
February 23, 2000
VIA FACSIMILE (805) 541-0821
AND FEDERAL EXPRESS
Dr. Michael B. Limberg
1270 Peach Street
San Luis Obispo, California 93401
Re: Consulting Agreement with Paradigm Medical Industries, Inc.
Dear Dr. Limberg:
We represent Paradigm Medical Industries, Inc. (the "Company").
Reference is made to the agreement dated December 18, 1998 (the "Agreement"),
between you and the Company which has been incorporated into the Consulting
Agreement, dated December 1, 1998 (the "Consulting Agreement"), between you and
the Company.
The term of the Agreement is for six months, beginning December 1,
1998, with successive six month renewal periods. You and the Company previously
agreed to extend the term of the Agreement for an additional six month period
from June 1, 1999, to November 30, 1999 (the "First Renewal Period"), and now
desire to extend the Agreement for an additional six month period from December
1, 1999, to May 30, 2000 (the "Second Renewal Period"). Accordingly, the parties
agree to extend the Agreement for an additional six month period during the
Second Renewal Period upon the following terms and conditions:
1. The Company agrees to issue you 2,000 shares of its common stock
each month during the Second Renewal Period of the Agreement in consideration
for your providing services to the Company pursuant to the Consulting Agreement.
These shares will be restricted and will be issued to you on a quarterly basis.
As restricted shares each certificate shall bear a legend substantially similar
to the following legend until (a) such securities have been registered under the
Securities Act of 1933, as amended, and effectually been disposed of in
accordance with a registration statement; or (b) in the opinion of counsel for
the Company that such securities may be sold without registration under Rule 144
of the General Rules and Regulations of the Securities Act of 1933, as amended,
as well as any applicable "Blue Sky" or state securities laws:
<PAGE>
Dr. Michael B. Limberg
February 23, 2000
Page 3
-------------------------
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD,
PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (i) PURSUANT TO A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT WHICH HAS BECOME
EFFECTIVE AND IS CURRENT WITH RESPECT TO THESE SECURITIES, OR (ii)
PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT BUT ONLY UPON A HOLDER THEREOF FIRST HAVING OBTAINED THE WRITTEN
OPINION OF COUNSEL OF THE COMPANY, OR OTHER COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY, THAT THE PROPOSED DISPOSITION IS CONSISTENT
WITH ALL APPLICABLE PROVISIONS OF THE SECURITIES ACT AS WELL AS ANY
APPLICABLE "BLUE SKY" OR OTHER STATE SECURITIES LAWS.
2. The Company agrees to grant you warrants to purchase 50,000 shares
of its common stock at an exercise price of $4.75 per share. These warrants
shall vest as of May 30, 2000, in consideration for the services that you will
be providing to the Company during the Second Renewal Period.
3. The Company agrees to register for resale at no expense to you the
following securities: (a) 100,000 shares of common stock that are issuable to
you upon the exercise of the warrants which were granted to you for services you
performed for the Company under the Consulting Agreement during the period from
December 1, 1998, to November 30, 1999; and (b) 50,000 shares of common stock
that are issuable to you upon the exercise of the warrants which are to be
granted to you for services you will be performing for the Company under the
Consulting Agreement during the Second Renewal Period.
4. The Company agrees to file a registration statement with the U.S.
Securities and Exchange Commission within 60 days from the date of this letter
in order to register for resale the shares of common stock issuable to you upon
the exercise of the warrants set forth in paragraphs 2 and 3 above.
5. You and the Company agree to terminate the letter agreement of
November 25, 1999, between you and the Company, a copy of which is attached
hereto as Exhibit "A" and by this reference made a part hereof.
6. All other terms of the Agreement and the Consulting Agreement shall
remain the same in all respects.
<PAGE>
If the foregoing conforms to your understanding, please sign, date and
return to us the enclosed copy of this letter.
Very truly yours,
/s/ Randall A. Mackey
---------------------
Randall A. Mackey
The foregoing is in conformity with our understanding:
PARADIGM MEDICAL INDUSTRIES, INC.
By: /s/ Thomas F. Motter
--------------------
Thomas F. Motter
Its: President and Chief Executive Officer
DATED: February 24, 2000
By: /s/ Michael B. Limberg, MD
--------------------------
Dr. Michael B. Limberg
DATED: February 28, 2000
MUTUAL RELEASE AND SETTLEMENT AGREEMENT
RECITALS
WHEREAS, on September 23, 1996, Zevex, Inc. ("Zevex") and Paradigm
Medical Industries, Inc. ("Paradigm") (collectively, the "Parties") entered into
a Design, Engineering and Manufacturing Agreement ("Manufacturing Agreement");
WHEREAS, each Party agrees to terminate the Manufacturing Agreement by
mutua] agreement in accordance with Paragraph 10.3(a) of the Manufacturing
Agreement;
WHEREAS, each Party desires to settle all disputes between them and
completely release the other Party from any claim arising out or in any way
relating to the Manufacturing Agreement:
NOW THEREFORE, in consideration of the mutual covenants and conditions
set forth herein, and for other good and valuable consideration, the sufficiency
of which are hereby acknowledged, the Parties agree as follows:
1. Incorporation of Recitals. The foregoing Recitals are incorporated
herein by reference as if fully set forth here.
2. Mutual Release.
A. Zevex. Zevex hereby fully and completely releases, remises,
acquits and forever discharges and agrees to hold harmless,
Paradigm, any affiliates thereof, and their respective
directors, officers, shareholders, employees, representatives
and agents, and any person or entity acting for or on their
behalf (collectively the "Paradigm Group") from and against
any and all judgments, claims, expenses, actions, causes of
action, suits, demands, damages and liabilities, and costs of
every kind or nature, whether judicial, administrative or
otherwise, in law or in equity, known or unknown, foreseen,
unforeseen or unforeseeable, which Zevex, any affiliates
thereof, and/or their respective directors, officers,
shareholders, employees, representatives and agents, and any
person or entity acting for or on their behalf (collectively,
the "Zevex Group") now has or may have, whether heretofore
asserted or not, arising from, out of, or in any way related
to, directly or indirectly, or based in whole or in part on
any facts or matters concerned with the Manufacturing
Agreement or the design, sale or rnatiufacture of the Photon
Laser Phaecoemulsification system, the Precisionist Thirty
Thousand, the Photon Laser Phaco or any other product, system
or part that either party designed, manufactured or sold
under the Manufacturing Agreement.
<PAGE>
B. Paradigm. Paradigm hereby fully and completely releases,
remises, acquits and forever discharges, and agrees to hold
harrriless, the Zevex Group from and against any and all
judgments, claims, expenses, actions, causes of action,
suits, demands, damages and liabilities, and costs of every
kind and nature, whether judicial, administrative or
otherwise, in law or in equity, known or unknown, foreseen,
unforeseen or unforeseeable, which the Paradigm Group, or any
part thereof, now has or may have, whether heretofore
asserted or not, arising from, out of, or in any way related
to, directly or indirectly, or based in whole or in part on
any facts or matters concerned with the Manufacturing
Agreement or the design, sale or manufacture of the Photon
Laser Phaecoemulsification system, the Precisionist Thirty
Thousand, the Photon Laser Phaco or any other product, system
or part that either party designed, manufactured or sold
under the Manufacturing Agreement.
3. Consideration.
A. Zevex.
1. In consideration of this release, Paradigm hereby
issues to Zevex 300,000 shares of Paradigm's common
stock. The stock is issued in a private transaction
and the Parties acknowledge that such shares will be
"restricted securities". On or after August 1, 2000
Zevex will have the right to request that Paradigm
register for public sale with the SEC all Paradigm
shares that Zevex owns either on a short-form
registration statement, if such form is available,
or, if such form is not available, then on a
long-form registration statement. Within thirty (30)
days of the date this Agreement is signed by both
Parties, the Parties shall enter into an appropriate,
definitive registration rights agreement.
2. Paradigm will have an option to repurchase the
300,000 shares described above at $5.55 per share.
This option will expire on July 31, 2000.
3. Zevex hereby agrees to vote the shares as instructed
by Paradigm's Board of Directors.
B. Paradigm.
1. Within twenty (20) days of the date this Agreement is
signed by both Parties, Zevex will deliver to
Paradigm all
<PAGE>
model Thirty Thousand and Photon systems inventories,
work in progress and compJeted systems and all
support documentation related thereto.
2. Notwithstanding the above, promptly after both
Parties have signed this Agreement, Zevex will
deliver to Paradigm the source code for the software,
as well as intellectual property related to the model
Thirty Thousand and Photon systems (with the
exception of the technology related to the Phaco
drive circuit).
4. Publicity. The Parties agree that they shall not issue any reports,
statements or releases pertaining to this Agreement; provided, however, that
either party may issue any press release or other announcement or make any
filing required to comply with its obligations under federal or state securities
laws or NASDAQ National Market rules. The Parties further agree that they will
keep the terms of this Agreement strictly confidential and will not reveal the
terms and conditions of the Agreement to any third party.
5. Confidentiality. Neither Party will release, publish, reveal or
disclose, directly or indirectly, any of the other Party's confidential or
proprietary information, unless: (1) the information is publicly known at the
time of its disclosure; (2) the information is lawfully received from a third
party not bound by a confidential relationship to the other Party; (3) is
published or made known to the public by the other Party; or (4) can be shown to
have been developed independently by the receiving Party without any reference
to information shared or developed pursuant to the Manufacturing Agreement.
6. Entire Agreement. This Agreement is the entire agreement between the
Parties and will supercede any other written or oral agreements or
understandings with respect to the subject matter herein.
7. Interpretation and Construction. This Agreement will be interpreted
and construed only by its contents and no presumption or standard of
construction in favor of any party will apply. The Settlement Agreement will be
interpreted by the laws of the State of Utah.
8. Attorney's Fees. In the event either Party hereto commences a legal
proceeding to enforce any of the terms of this Agreement, the prevailing Party
in such action shall have the right to recover reasonable attorneys' fees and
the costs from the other Party, to be fixed by the court in the same action.
9. Scope of the Agreement. The terms, covenants and conditions herein
contained shall be binding and inure to the benefit of the heirs, successors,
transferees and assigns of the Parties.
<PAGE>
10. Counterparts. This Agreement may be executed in counterparts, and
each such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute one agreement.
11. Representations and Warranties. The individuals signing this
Agreement on behalf of each party hereby represent and warrant that they have
the power and authority to bind the entity for which they are signing.
Dated: Nov. 24,1999 Dated: Nov. 24, 1999
/s/ Dean Constantine /s/ Thomas Motter
- ------------------------------- ---------------------------------
Dean Constantine, President/CEO Thomas Motter, President/CEO
Zevex, Inc. Paradigm Medical Industries, Inc.
February 22, 1999
Tom Motter
President & CEO
Paradigm Medical Industries, Inc.
1127 West 2320 South, Suite A
Salt Lake City, UT 84119
Dear Tom:
This letter confirms your engagement of Doug Adams as business development
consultant and sets forth the terms and conditions under which Doug Adams agrees
to serve Paradigm Medical Industries, Inc. with the following consulting
assignment:
1. Look for new technology opportunities in the field of ophthalmic devices
or equipment that are available for acquisition. See "Sale Transaction."
2. Explore options relating to an eventual merger of Paradigm within the
ophthalmic industry.
For the purposes of this agreement, a "Sale Transaction" includes any
transaction from a qualified buyer or seller that results in a cash or stock
payment. A qualified purchaser or seller is defined as a financially able
corporation with serious intent, a strategic plan, and a timetable.
Authorization from the Company in advance of approaching potential buyers or
sellers will be required in writing.
1. Scope. The representation of the Company by Doug Adams shall be exclusive
and shall be applicable to specific potential buyers/sellers identified
by Doug Adams to the Company and with respect to which the Company has
not had prior communications with respect to a merger/acquisition.
2. Term. This agreement shall be in effect for a period of one year from the
date of the Company's signing, and may be terminated on thirty (30) days
written notice.
3. Business Information. Company shall furnish complete and accurate
business and financial information during the term of this agreement.
4. Retainer Fee. Upon signing this agreement, Paradigm agrees to issue to
Doug Adams 25,000 shares of Paradigm stock. 15,000 shares are to be
issued upon signing this agreement and the balance to be issued upon
obtaining a LOI from a qualified candidate.
5. Expenses. All expenses in connection with the services to be provided
shall be pre-approved for reimbursement by the Company prior to such
expenses being incurred.
<PAGE>
6. Success Fee. In the event of any "Merger/Acquisition", developed by Doug
Adams during this agreement, Company agrees to pay Doug Adams at closing,
a "Success fee" based upon the total consideration paid or received by
Company. Such "Success Fee" shall be equal to 10% of the proceeds from
the "Merger/Acquisition" to a maximum of $1,000,000. The "Success Fee"
shall be paid at closing in the same form of consideration received or
paid by Company.
7. Indemnity. Company agrees to indemnify Doug Adams against any and all
claims that may be asserted by any party which arise out of the Agreement
or the services of Doug Adams.
8. Authority. By executing this agreement, you represent that you have the
absolute authority to enter into this agreement on behalf of Company.
9. Disclaimer. Doug Adams makes no representations, expressed or implied
that a sale transaction will result from the services furnished by Doug
Adams under the Agreement. The obligations of Doug Adams under the
Agreement shall not include legal or accounting services, which services
the Company shall obtain at its own expense.
Tom, I look forward to working with you on this important project. Please
indicate your acceptance of this Agreement by executing and returning the
enclosed copy.
Sincerely,
/s/ Doug Adams
- --------------
Doug Adams
Accepted and agreed to this day of February 22, 1999
By /s/ Thomas F. Motter
------------------------------------------
Its: President and Chief Executive Officer
<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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,002,000
<SECURITIES> 0
<RECEIVABLES> 936,000
<ALLOWANCES> 375,000
<INVENTORY> 4,153,000
<CURRENT-ASSETS> 5,807,000
<PP&E> 342,000
<DEPRECIATION> 138,000
<TOTAL-ASSETS> 6,622,000
<CURRENT-LIABILITIES> 417,000
<BONDS> 25,000
0
0
<COMMON> 9,000
<OTHER-SE> 6,171,000
<TOTAL-LIABILITY-AND-EQUITY> 6,622,000
<SALES> 1,701,000
<TOTAL-REVENUES> 1,731,000
<CGS> 1,031,000
<TOTAL-COSTS> 5,334,000
<OTHER-EXPENSES> 4,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,000
<INCOME-PRETAX> (3,622,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,622,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,622,000)
<EPS-BASIC> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
