PARADIGM MEDICAL INDUSTRIES, INC.
2355 South 1070 West
Salt Lake City, Utah 84119
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed Proxy is solicited on behalf of the Board of Directors of
Paradigm Medical Industries, Inc., a Delaware corporation (the "Company") for
use at the Annual Meeting of Shareholders (the "Annual Meeting") to be held on
Friday, December 27, 2002, beginning at 10:00 a.m., local time (MST), or at any
adjournment(s) thereof. The purposes of the meeting are set forth herein and in
the accompanying Notice of Annual Meeting of Shareholders. The Annual Meeting
will be held at the Company's corporate headquarters at 2355 South 1070 West,
Salt Lake City, Utah. This Proxy Statement and accompanying materials are being
mailed on or about November 30, 2002. The Company will bear the cost of this
solicitation.
Record Date
Shareholders of record of the Company's Common Stock at the close of
business on November 20, 2002 are entitled to notice of and to vote at the
meeting. At the record date, 21,948,208 shares of the Company's Common Stock,
$.001 par value, 5,627 shares of the Series A Preferred Stock, 8,986 shares of
Series B Preferred Stock, no shares of Series C Convertible Preferred Stock,
5,000 shares of Series D Convertible Preferred Stock, 1,500 shares of Series E
Convertible Preferred Stock and 6,273.75 shares of Series F Preferred Stock were
issued and outstanding. Shareholders of Series A Series B, Series C, Series D,
Series E and Series F Preferred Stock are not entitled to vote at the Annual
Meeting. Shareholders holding at least one-third of the outstanding shares of
Common Stock represented in person or by proxy, shall constitute a quorum for
the transaction of business at the Annual Meeting.
Revocability of Proxies
Shareholders may revoke any appointment of proxy given pursuant to this
solicitation by delivering the Company a written notice of revocation or a duly
executed proxy bearing a later date or by attending the meeting and voting in
person. An appointment of proxy is revoked upon the death or incapacity of the
shareholder if the Secretary or other officer of the Company authorized to
tabulate votes receives notice of such death or incapacity before the proxy
exercises its authority under the appointment.
Voting and Solicitation
Each shareholder will be entitled to one vote for each share of Common
Stock held at the record date. Assuming a quorum is present, a plurality of
votes cast by the shares entitled to vote in the election of directors will be
required to elect each director. Because the shares of Series A, Series B,
Series C, Series D, Series E and Series F Preferred Stock are non-voting
securities, the holders thereof will not be entitled to vote at the Annual
Meeting. To approve the granting of the stock options to the outside directors
of the Company, holders of a majority of the shares entitled to vote at the
Annual Meeting must vote in favor of the stock options. The principal executive
offices of the Company are located at 2355 South 1070 West, Salt Lake City,
Utah. In addition to the use of the mails, proxies may be solicited personally,
by telephone, or by facsimile, and the Company may reimburse brokerage firms and
other persons holding shares in the Company in their names or those of their
nominees for their reasonable expenses in forwarding soliciting materials to the
beneficial owners.
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ELECTION OF DIRECTORS
Proposal 1
Nominees
The Company's Bylaws do not limit the number of persons serving on the
Company's Board of Directors, and it is contemplated that a board of three
directors will be elected at the Annual Meeting. The Board of Directors
recommends that the shareholders vote "FOR" the election of the three director
nominees listed below. Assuming a quorum is present, a plurality of votes cast
by the shares entitled to vote in the election of directors will be required to
elect each director. Unless otherwise instructed, the proxy holders will vote
the proxies received by them for management's four nominees named below, all of
whom are presently directors of the Company.
In the event that any management nominee is unable or declines to serve
as a director at the time of the Annual Meeting, the proxies will be voted for
any nominee who shall be designated by the present Board of Directors to fill
the vacancy. In the event that additional persons are nominated as directors,
the proxy holders intend to vote all proxies received by them in such a manner
as will ensure the election of as many of the nominees listed below as possible.
It is not expected that any nominee will be unable or will decline to serve as a
director. The term of office of each person elected as a director will continue
until the next annual meeting of shareholders and until such person's successor
has been elected and qualified. Officers are appointed by the Board of Directors
and serve at the discretion of the board.
The name and certain information regarding each nominee as set forth
below. See also "Certain Relationships and Related Transactions."
Name Age Director Since Position with the Company
---- --- -------------- -------------------------
Randall A. Mackey, Esq. 56 January 2000 Chairman of the Board and Secretary
Dr. David M. Silver 61 January 2000 Director
Keith D. Ignotz 54 November 2000 Director
The following biographical information is furnished with respect to the
three director nominees:
Randall A. Mackey, Esq. has served as Chairman of the Board of the
Company since August 30, 2002 and as a director of the Company since January
2000. He had previously served as a director of the Company from November 1995
to September 1998. Mr. Mackey has been President of the Salt Lake City law firm
of Mackey Price & Thompson since 1992 and a shareholder and a director of the
firm and its predecessor firms since 1989. From 1979 to 1989, he practiced law
with the Salt Lake City firm of Fabian & Clendenin, where he was a shareholder
and a director of the firm from 1982 to 1989. From 1977 to 1979, Mr. Mackey was
associated with the Washington D.C. law firm of Hogan & Hartson. Mr. Mackey
received a B.S. degree in Economics from the University of Utah in 1968, an
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. Mr.
Mackey has served as Chairman of the Board since June 2001 and a director since
1998 of Cimetrix, Incorporated, a software development company. Mr. Mackey has
also served as a Chairman of the Board since July 2000 and a trustee since 1993
of Salt Lake Community College.
David M. Silver, Ph.D. has served as a director of the Company since
January 2000. He had previously 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.
Keith D. Ignotz has served as a director of the Company since November
2000. Mr. Ignotz is President and Chief Operating Officer of SpectRx, Inc., a
medical technology company that he founded in 1992, which develops, manufactures
and markets alternatives to traditional blood-based medical tests. From 1986 to
1992, Mr. Ignotz was Senior Vice President of Allergan Humphrey, Inc., a medical
electronics company. From 1985 to 1986, he was President of Humphrey Instruments
Limited - SKB, a medical electronics company, and from 1980 to 1985, Mr. Ignotz
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was President of Humphrey Instruments GMBH, also a medical electronics company.
Mr. Ignotz also served on the Board of Directors of Vismed, Inc., d/b/a Dicon
from 1992 to June 2000. Mr. Ignotz received a B.A. degree in Sociology and
Political Science from San Jose University and an M.B.A. degree from Pepperdine
University. He has served as a trustee of Pennsylvania College of Optometry
since 1990, as a director of FluoRx, Inc. since 1997, and as a member of the
American Marketing Association of the American Association of Diabetes
Education.
Board Meetings and Committees Board Meetings and Committees
The Board of Directors held a total of six meetings during the fiscal
year ended December 31, 2001. The Audit Committee of the Board of Directors
currently consists of directors Randall A. Mackey, Dr. David M. Silver and Keith
D. Ignotz. 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 practices and
procedures and its system of internal accounting controls. The Compensation
Committee of the Board of Directors currently consists of directors Randall A.
Mackey, Dr. David M. Silver and Keith D. Ignotz. 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 2001 fiscal year.
Pursuant to the 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 shareholders meeting,. The Company
has and can presently satisfy each of these requirements. Messrs. Silver and
Ignotz qualify as independent directors.
Executive Officers
The following sets forth certain information with respect to the
executive officers of the Company:
Name Age Title
---- --- -----
Heber C. Maughan 50 Interim Chief Executive Officer, Vice President of Finance,
Treasurer and Chief Financial Officer
Aziz A. Mohabbat 42 Interim Chief Operating Officer and Vice President of
Operations
Heber C. Maughan has served as Interim Chief Executive Officer of the
Company since August 30, 2002 and Vice President of Finance, Treasurer and Chief
Financial Officer of the Company since October 2001. From July 1997 to October
2001, Mr. Maughan served as Controller for Peterbilt of Utah, which sells and
services heavy duty trucks. From 1989 to 1997, he was employed by First Health
Strategies, Inc., where he served as Vice President of Finance from 1995 to
1997. From 1987 to 1989, Mr. Maughan was the Chief Financial Officer at Standard
Optical Company, a regional retail eye care chain. Mr. Maughan received a B.S.
degree in Accounting from Oklahoma State University in 1976 and an M.A. degree
in Accounting from Brigham Young University in 1977.
Aziz A. Mohabbat has served as Interim Chief Operating Officer of the
Company since August 30, 2002 and Vice President of Operations since 2001. From
2000 to 2001, he served as Managing Director of the San Diego Division of the
Company and from 1999 to 2000 as its Regulatory Affairs and Quality Assurance
Manager. From 1997 to 1999, Mr. Mohabbat served as Operations and Regulatory
Affairs and Quality Assurance Manager of Invacare Infusion Systems. From 1989 to
1997, he was Regulatory Affairs and Quality Assurance Manager of Codan U.S., a
subsidiary of Codan GmbH, a manufacturer of disposable sterile and non-sterile
medical devices. Prior to 1989, Mr. Mohabbat held various management and
bioengineering positions in the medical laboratory and diagnostics field in the
Eye Care Clinic of the University Hospital - Eppendorf and the General Hospital
of Barmbek in Hamburg, Germany. Mr. Mohabbat received a B.S. degree in Medical
Laboratory Technology in 1986 from St. George Hospital College in Hamburg,
Germany. He is a member of the American Society for Quality.
Executive Compensation
The following table sets forth, for each of the last three fiscal
years, the compensation received by Thomas F. Motter, the Company's former
Chairman and Chief Executive Officer, and all other executive officers
(collectively, the "Named Executive Officers") at December 31, 2001, whose
salary and bonus for all services in all capacities exceed $100,000 for the
fiscal year ended December 31, 2001.
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Long-Term Compenation
Annual Compensation Awards Payouts
Securities Long-
Other Restricted Underlying term
Name and Annual Stock Options/ Incentive All Other
Principal Position Period Salary($) Bonus($) Compensation ($) Awards($) SARs(#) Payout($) Compensation(#)(4)
Thomas F. Motter, 2001(1) $200,000 $ 22,380(6) 0 0 925,000(9) 0 $ 6,000
Chairman of the 2000(2) 178,357 486,113(7) 0 0 0 0 $28,792(5)
Board and Chief 1999(3) 141,208 0 0 0 50,000(10) 0 $ 5,000
Executive Officer
Mark R. Miehle, 2001(1) $150,000 0 0 0 110,000(8) 0 $ 6,000
President and Chief 2000(2) $235,201 $194,000(9) 0 0 150,000(9) 0 $ 6,000
Operating Officer(8)
------------
(1) For the fiscal year ended December 31, 2001.
(2) For the fiscal year ended December 31, 2000.
(3) For the fiscal year ended December 31, 1999.
(4) The amounts under "Other Annual Compensation" for 2001, 2000 and 1999
consist of payments related to the operation of automobiles and/or
automobiles and insurance by the named executives.
(5) The amounts under "Other Annual Compensation" for 2000 consist of
payments related to the residential housing accommodations for the
Company's employees, living outside of Utah while they were working at
the Company's Corporate headquarters in Salt Lake City, leased from Mr.
Motter at $2,500 per month.
(6) The Company awarded Mr. Motter a cash bonus in June 2001.
(7) On January 21, 2000, the Board of Directors approved a bonus to Mr.
Motter in the form of 38,889 shares of the Company's Common Stock. The
bonus was valued at $486,113 on the basis of the closing bid price of
the Company's Common Stock of $12.50 per share on January 21, 2000, the
date the board approved the bonus.
(8) On September 11, 2001, the Company granted options to purchase the
respective number of shares of the Company's Common Stock at an
exercise price of $2.75 per share.
(9) On June 5, 2000, the Board of Directors issued Mr. Miehle 28,500 shares
of the Company's Common Stock as a initial bonus as part of his
employment agreement. The market price on the date of grant was $6.8125
per share, and compensation expense in the amount of $194,000 was
recognized. Mr. Miehle was also granted options to purchase 150,000
shares of the Company's Common Stock at an exercise price of $6.00 per
share.
(10) On September 10, 1999, the Company granted Mr. Motter options to
purchase 50,000 shares of the Company's Common Stock at an exercise
price of $4.00 per share.
The following table sets forth information concerning the exercise of
options to acquire shares of the Company's Common Stock by the Named Executive
Officers during the fiscal year ended December 31, 2001, as well as the
aggregate number and value of unexercised options held by the Named Executive
Officers on December 31, 2001.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
Number of Securiites Underlying Value of Unexercised
Unexercised Options/SARs In-the-Money Options/SARs at
At December 31, 2001(#) December 31, 2001($)
Shares
Acquired Value
Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
Thomas F. Motter 0 0 787,450 225,000 0 0
Mark R. Miehle 0 0 62,500 342,000 0 0
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Director Compensation
On September 11, 2001, Dr. David M. Silver, Randall A. Mackey and Keith
D. Ignotz were each granted options to purchase 125,000 shares of the Company's
Common Stock at an exercise price of $2.75 per share, of which options to
purchase 31,250 shares of Common Stock were vested on September 11, 2001, with
options to purchase 31,250 shares of Common Stock to be vested at the end of
each three month period thereafter until all such options are vested. On
September 11, 2001, Dr. David M. Silver and Randall A. Mackey also were each
granted options to purchase 200,000 shares of the Company's Common Stock at an
exercise price of $2.75 per share in consideration for past services as
directors of the Company from November 1995 to September 1998 and since January
2000. In addition, 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. The
options were not issued at a discount to the then market price.
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, 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 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 for issuance thereunder from 300,000
shares to 600,000 shares. On September 3, 1998, the Company's shareholders
approved an amendment to the Plan to increase the number of shares of Common
Stock reserved for issuance thereunder from 600,000 shares to 1,200,000 shares.
On November 29, 2000, the Company's shareholders approved an amendment to the
Plan to increase the number of shares of Common Stock reserved for issuance
thereunder from 1,200,000 shares to 1,700,000 shares. On September 11, 2001, the
Company's shareholders approved an amendment to the Plan to increase the number
of shares of Common Stock reserved for issuance thereunder from 1,700,000 shares
to 2,700,000 shares.
The Plan is administered by the Compensation Committee. In general, the
Compensation Committee will select the person to whom options will be granted
and will determine, subject to the terms of the Plan, the number, exercise, and
other provisions of such options. Options granted under the Plan will become
exercisable at such times as may be determined by the Compensation Committee.
Plan Options granted may be either incentive stock options ("ISOs"), as such
term is defined in the Internal Revenue Code, 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 Compensation Committee believes has contributed, or
will contribute, to the success of the Company. The Compensation Committee shall
determine the exercise price of options granted under the Plan, provided that,
in the case of ISOs, such price may not be less than 100% (110% in the case of
ISOs granted to holders of 10% of voting power of 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 shareholders, 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
5
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 an employment agreement with Thomas F. Motter
which commenced on January 1, 1998 and will expire on December 31, 2003. The
agreement requires Mr. Motter to devote substantially all of his working time to
the Company, provided that he may be terminated for "cause" (as provided in the
agreement) and prohibits him from competing with the Company for two years
following the termination of his employment agreement. The agreement provides
for the payment of an initial annual base salary of $135,000, effective as of
January 1, 1998. The agreement also provides for salary increases and bonuses as
shall be determined at the discretion of the Board of Directors. Effective as of
October 1, 1999, the Board of Directors approved an increase in Mr. Motter's
annual base salary to $160,000, and effective as of July 1, 2000, the board
approved an increase in his annual base salary to $200,000.
The Company entered into an employment agreement with Mark R. Miehle,
which commenced on June 5, 2000 and will expire on June 4, 2003. The agreement
requires Mr. Miehle to devote substantially all of his working time to the
Company, provided that he may be terminated for "cause" (as provided in the
agreement) and prohibits him from competing with the Company for two years
following the termination of his employment agreement. The agreement provides
for the payment of an initial annual base salary of $150,000, effective as of
June 5, 2000, and the issuance of stock options to purchase 150,000 shares of
the Company's Common Stock at $6.00 per share, to be vested in equal annual
amounts over a three year period. The agreement also provides for salary
increases and bonuses as shall be determined at the discretion of the Board of
Directors. On August 30, 2002, the Board of Directors terminated the employment
agreement with Mr. Miehle, effective as of that date, and entered into a
consulting agreement with Mr. Miehle.
Limitation of Liability and Indemnification
The Company reincorporated in Delaware in February 1996, in part, to
take advantage of certain provisions in Delaware's corporate law relating to
limitations on liability of corporate officers and directors. The Company
believes that the reincorporation into Delaware, the provisions of its
Certificate of Incorporation and Bylaws and the separate indemnification
agreements outlined below are necessary to attract and retain qualified persons
as directors and officers. The Company's Certificate of Incorporation limits the
liability of directors to the maximum extent permitted by Delaware law. This
provision is intended to allow the 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 it 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.
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
unaffiliated parties.
Patrick M. Kolenik, a director of the Company from November 1997 to
January 21, 2000, is President, a director and a 25% shareholder of Win Capital
Corp ("Win Capital"), the placement agent for the Company's Series C Convertible
Preferred Stock offering, and Steven J. Bayern, a director of the Company from
July 26, 1999 to January 21, 2000, is Chairman, a director and a 25% shareholder
of Win Capital. Under the terms of an agency agreement with Win Capital, the
Company agreed to pay to Win Capital a commission equal to 9% of the aggregate
purchase price of the shares sold, or $269,820. Win Capital was also paid a
nonaccountable expense allowance equal to 3% of the aggregate purchase price of
the shares sold.
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The Company has also entered into an agreement with Win Capital dated
August 20, 1997, wherein Win Capital agreed to perform unspecified investment
banking services for the Company for a two year period, for which the Company
agreed to pay Win Capital 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 Capital agreed to accept $7,500 in cash plus $60,500 in
Common Stock valued at the close of business the day prior to the initial close
of the Company's Series D Convertible Preferred stock offering in addition to a
$50,000 finders fee as it related to that offering. In addition, the Company
issued warrants to Win Capital to purchase 191,000 shares of Common Stock at an
exercise price of $3.00 per share in connection with the investment banking
agreement and additional warrants to purchase 100,000 shares of common stock at
$3.00 per share for services rendered in the private placement of Series C
Convertible Preferred Stock.
Prior to the initial closing of the Series D preferred stock offering,
the Company borrowed $75,000 from Cyndel & Co., Inc. ("Cyndel"), of which
Messrs. Kolenik and Bayern are each an officer, a director and a 50% shareholder
of Cyndel, 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 warrants to Cyndel to purchase 105,000 shares of Common Stock
and warrants to Win Capital to purchase 35,000 shares of Common Stock, both at
an exercise price equal to the closing price of the Common Stock on the business
day immediately prior to the issuance date of the warrants, or $2.30 per share,
the closing price of the Company's Common Stock on the business day immediately
prior to the issue date of the warrants. The Company also entered into a
one-year consulting agreement dated January 19, 1999, with Win Capital to
provide financial consulting services to the Company in consideration for a fee
of $5,000 per month for the term of the agreement.
In addition, on April 23, 1999, the Company agreed to issue warrants to
Cyndel to purchase 75,000 shares of Common Stock at an exercise price equal to
$4.00 per share, upon the condition that Cyndel exercises its warrants to
purchase 105,000 shares of Common Stock at $2.30 per share within 72 hours after
receiving notice that a registration statement has become effective registering
the shares issuable upon the exercise of the warrants to purchase 105,000 shares
of Common Stock at $2.30 per share. On April 23, 1999, the Company also agreed
to issue warrants to Win Capital to purchase 25,000 shares of Common Stock at an
exercise price equal to $4.00 per share, upon the condition that Win Capital
exercise its warrants to purchase 35,000 shares of Common Stock at $2.30 per
share within 72 hours after receiving notice that a Registration Statement has
become effective registering the shares issuable upon the exercise of the
warrants to purchase 35,000 shares of Common Stock at $2.30 per share.
On October 1, 1999, the Company entered into a consulting agreement
with Cyndel, in which Cyndel agreed to perform unspecified investment banking
services for the Company for a one-year period, for which the Company agreed to
pay Cyndel a monthly retainer of $8,333.33, plus reimburse Cyndel for any
expenses incurred in connection with such investment banking services. The
October 1, 1999 consulting agreement was terminated when the Company entered
into a new consulting agreement with Cyndel on April 1, 2000. Under the terms of
the April 1, 2000 consulting agreement, Cyndel has agreed to perform unspecified
investment banking services for the Company for a one-year period, for which the
Company agreed to pay Cyndel a monthly retainer of $16,666.66, plus reimburse
Cyndel for any expenses incurred in connection with such investment banking
services.
Besides a monthly retainer, the Company has agreed in the April 1, 2000
consulting agreement to pay Cyndel additional compensation of an unspecified
amount to be mutually agreed upon if Cyndel brings to the Company a candidate
for merger, acquisition, joint venture or other combination or relationship, and
the Company enters into a business relationship with such entity. The April 1,
2000 consulting agreement is automatically renewable for additional, successive
one-year periods through March 31, 2003, unless either party delivers to the
other party on or before January 1 of the contract year written notice of its
intent not to renew the agreement.
Randall A. Mackey, Chairman of the Board of the Company since August
30, 2002, and a director of the Company since January 21, 2000, and a former
director of the Company from September 1995 to September 3, 1998, is President
and a shareholder of the law firm of Mackey Price & Thompson, which rendered
legal services to the Company in connection with the Company's public offering
and other corporate matters. Legal fees and expenses paid to Mackey Price &
Thompson for the fiscal years ended December 31, 2000 and 2001 totaled $167,022
and $158,990, respectively.
Thomas F. Motter, Chairman of the Board and Chief Executive Officer of
the Company from 1993 to August 30, 2002, leased his former residence, which he
still owns, to the Company for $2,500 per month. The primary use of the
residential property was for housing accommodations for the Company's employees
7
living outside of Utah while they were working at the Company's corporate
headquarters in Salt Lake City. The Company obtained an appraisal from an
independent appraiser which has concluded that the monthly rate of $2,500
represented the fair market rate for leasing the residential property. The lease
agreement was terminated on October 31, 2000.
Report of the Audit Committee
The Company has an Audit Committee consisting of three non-management
directors, Randall A. Mackey, Keith D. Ignotz, and Dr. David M. Silver. Each
member of the audit committee is considered independent and qualified in
accordance with applicable independent director and audit committee listing
standards. The Company's Board of Directors has adopted a written charter for
the Audit Committee.
During the year 2001, the Audit Committee met two times. The Audit
Committee has met with management and discussed the Company's internal controls,
the quality of the Company's financial reporting, the results of internal and
external audit examinations, and the audited financial statements. In addition,
the Audit Committee has met with the Company's independent auditors, Tanner &
Co., and discussed all matters required to be discussed by the auditors with the
Audit Committee under Statement on Auditing Standards No. 61 (communication with
audit committees). The Audit Committee received and discussed with the auditors
their annual written report on their independence from the Company and its
management, which is made under Independence Standards Board Standard No. 1
(independence discussions with audit committees), and considered with the
auditors whether the provision of financial information systems design and
implementation and other non-audit services provided by them to the Company
during 2001 was compatible with the auditors' independence.
In performing these functions, the Audit Committee acts only in an
oversight capacity. In its oversight role, the Audit Committee relies on the
work and assurances of the Company's management, which is responsible for the
integrity of the Company's internal controls and its financial statements and
reports, and the Company's independent auditors, who are responsible for
performing an independent audit of the Company's financial statements in
accordance with generally accepted auditing standards and for issuing a report
on these financial statements.
Pursuant to the reviews and discussions described above, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2001, for filing with the Securities and Exchange
Commission.
Compliance with Section 16(a) of the Securities and Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who own more than 10% of any
class of the Company's Common Stock to file initial reports of ownership and
reports of changes of ownership of the Company's Common Stock. Such persons are
also required to furnish the Company with copies of all Section 16(a) reports
they file.
Based solely on its review of the copies of such reports received by it
with respect to fiscal 2001, or written representations from certain reporting
persons, the Company believes that all filing requirements applicable to its
directors, officers and greater than 10% beneficial owners were complied with,
except that Thomas F. Motter, Chairman and Chief Executive Officer from 1993 to
August 30, 2002, through an oversight, filed one late stock transaction report
covering one transaction, and Dr. David M. Silver, a director of the Company,
through an oversight, filed one late stock transaction report covering two
transactions. No other late filings occurred during 2001.
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 October 31, 2002 for
(i) each executive officer of the Company, (ii) each director, (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.
8
Percent of
Name and Address(1) Number of Shares Ownership(2)
------------------------------------------------------------------------------
Dr. David M. Silver (3) 505,666 *
Randall A. Mackey (3) 495,000 *
Keith D. Ignotz (4) 204,560 *
Heber C. Maughan (5) 30,000 *
Aziz Mohabbat (6) 60,000 *
Executive officers and director
as a group (5 persons) 1,295,226 6.2%
----------------------------
* Less than 1%.
(1) The address for Dr. Silver is 17 Avalon Court, Bethesda, Maryland
20816. The address for Mr. Mackey is 1474 Harvard Avenue, Salt Lake
City, Utah 84105. The address for Mr. Ignotz is 5597 Fitzpatrick Trace,
Norcross, Georgia 30092. The address for Messrs. Maughan and Mohabbat
is c/o Paradigm Medical Industries, Inc., 2355 South 1070 West, Salt
Lake City, Utah 84119.
(2) Assumes no exercise of the options described in this Proxy Statement or
any other options or any warrants that the Company may have issued and
no conversion of outstanding shares of the Company's Series A, Series
B, Series C, Series D, Series E and Series F Preferred Stock into
shares of Common Stock.
(3) Includes options granted to each of Dr. Silver and Mr. Mackey to
purchase 495,000 shares of Common Stock.
(4) Includes options granted to Mr. Ignotz to purchase 203,851 shares of
Common Stock.
(5) Includes options granted to Mr. Maughan to purchase 30,000 shares of
Common Stock.
(6) Includes options granted to Mr. Mohabbat to purchase 60,000 shares of
Common Stock.
APPROVAL OF INCREASE IN THE NUMBER OF AUTHORIZED SHARES
Proposal 2
The Certificate of Incorporation currently authorizes the issuance of
40,000,000 shares of Common Stock. As of the record date, approximately
21,948,208 shares were issued and outstanding. There have been 6,753 shares of
Common Stock set aside and reserved in the event that holders of shares of
Series A Preferred Stock elect to convert those shares into shares of Common
Stock, 10,783 shares of Common Stock set aside and reserved in the event that
holders of shares of Series B Preferred Stock elect to convert those shares into
shares of Common Stock, 8,750 shares of Common Stock set aside and reserved in
the event that holders of shares of Series D Preferred Stock elect to convert
those shares into shares of Common Stock, 80,000 shares of Common Stock set
aside and reserved in the event that holders of shares of Series E Preferred
Stock elect to convert those shares into shares of Common Stock, and 334,600
shares of Common Stock set aside and reserved in the event that holders of
shares of Series F Preferred Stock elect to convert those shares into shares of
Common Stock. An additional 2,683,882 shares are available for issuance to
officers and employees under the 1995 Stock Option Plan.
As a result of our prior financings, acquisitions and efforts to
provide incentives to employees, officers and directors, the Company has issued
or reserved for issuance a sufficient amount of its authorized Common Stock. The
Board of Directors has determined that it is in the best interest of the Company
and its shareholders to amend Article III of the Company's Certificate of
Incorporation (the "Amendment") to increase the number of authorized shares of
Common Stock of the Company from 40,000,000 to 80,000,000 shares, and hereby
solicits the approval of the shareholders of the Amendment. If the shareholders
approve the Amendment, the Board of Directors currently intends to file an
Amendment to the Company's Certificate of Incorporation reflecting the Amendment
with the Secretary of State of the State of Delaware as soon as practicable
following such stockholder approval. If Amendment is not approved by the
shareholders, Article III of the existing Certificate of Incorporation will
continue in effect.
The objective of the increase in the authorized number of shares of
Common Stock is to ensure that the Company will have sufficient shares available
for future issuances. The Board of Directors believes that it is prudent to
increase the authorized number of shares of Common Stock to the proposed levels
in order to provide a reserve of shares available for issuance to meet the
Company's business needs as they arise. Though the Board of Directors has no
immediate plans to issue a significant number of additional shares of Common
Stock, such future business needs may include, without limitation, funding
future financings and acquisitions and providing equity incentives to the
Company's officers and employees.
9
Possible Effects of Proposed Amendment to Certificate of Incorporation
All authorized but unissued shares of Common Stock will be available
for issuance from time to time for any proper purpose approved by the Board of
Directors. There are currently no arrangements, agreements or understandings for
the issuance or use of the additional shares of the authorized Common Stock. The
Board of Directors does not presently intend to seek further shareholder
approval of any particular issuance of shares unless such approval is required
by law or the rules of The Nasdaq Stock Market.
The Company's shareholders do not currently have any preemptive or
similar rights to subscribe for or purchase any additional shares of Common
Stock that may be issued in the future, and therefore, future issuances of
Common Stock may, depending on the circumstances, have a diluted effect on the
earnings per share, voting power and other interest of the existing
shareholders.
Vote Required and Recommendation of the Board of Directors
The affirmative vote of the holders of a majority of the outstanding
shares of the Company's Common Stock entitled to vote at the Special Meeting
will be required to approve the proposed Amendment, assuming a quorum is
present.
The Board of Directors recommends that shareholders vote "FOR" approval
of the amendment to increase the number of authorized shares of Common Stock
from 40,000,000 to 80,000,000 shares
APPROVAL OF AMENDMENT TO THE 1995 STOCK OPTION PLAN
Proposal 3
The Board of Directors adopted on November 18, 2002, subject to the
approval by the stockholders, an amendment (the "2002 Amendment") to the
Company's 1995 Stock Option Plan. The 2002 Amendment increases from 2,700,000 to
3,700,000 the number of shares of the Company's Common Stock available for
issuance under the 1995 Stock Option Plan. The Company has in the past used, and
intends in the future to use, stock options as incentive devices to motivate and
compensate its salaried officers and other key employees, and believes that
equity incentives represented by stock options enhances the Company's ability in
attracting and retaining the best possible persons for positions of significant
responsibility by providing its officers and other key employees with additional
incentives to contribute to the Company's success.
Management further believes that the availability of such equity
incentives has served, and will continue to serve, an important part in the
implementation of the Company's acquisition strategy. As of October 31, 2002,
options to purchase an aggregate of 85,300 shares of Common Stock have been
exercised under the 1995 Plan; as of such date, options to purchase 2,683,882
shares of Common Stock were outstanding under the 1995 Stock Option Plan.
Accordingly, options to purchase only 16,118 shares of Common Stock remain
available for future grants under the 1995 Stock Option Plan as of such date.
The Board of Directors recommends that the shareholders vote "FOR"
approval of the 2002 Amendment.
10
RATIFICATION OF THE GRANTING OF STOCK OPTIONS TO OUTSIDE DIRECTORS
Proposal 4
The proposal would ratify the granting of stock options on September
11, 2001to purchase 125,000 shares of Common Stock at an exercise price of $2.75
per share to each of Dr. David M. Silver, Randall A. Mackey and Keith D. Ignotz,
outside directors of the Company, of which options to purchase 31,250 shares of
Common Stock were fully vested as of September 11, 2001, the date of grant, with
options to purchase 31,250 shares of Common Stock to be vested at the end of
each three month period thereafter until all such options are vested. These
options granted to Messrs. Silver, Mackey and Ignotz may be exercised at any
time not later than September 11, 2008. The proposal would also approve the
granting of stock options to purchase 250,000 shares of Common Stock at an
exercise price of $2.75 per share to each of Messrs. Silver and Mackey, of which
options to purchase 250,000 shares of Common Stock were fully vested as of
September 11, 2001, in consideration for past services to the Company by Messrs.
Silver and Mackey. The Company is required to register the shares of Common
Stock issuable upon the exercise of the options.
The options contain provisions that protect the holders against
dilution by adjustment of the exercise price per share and the number of shares
issuable upon exercise thereof upon the occurrence of certain events, including
stock dividends, stock splits, mergers and the sale of substantially all of the
Company's assets. The options are to be exercised by delivering to the Company
payment of the purchase price of the shares to be purchased or by delivering
shares of the Company's stock already owned by the holder and having a fair
market value on the date of exercise equal to the exercise price of the option,
or a combination of such shares and cash.
The Board of Directors recommends that shareholders vote "FOR"
ratification of the granting of stock options to the outside directors.
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Proposal 5
The independent public accounting firm of Tanner & Co. has been the
Company's independent accountants since fiscal year 1998. The Audit Committee
has recommended and the Board of Directors has appointed Tanner & Co. for
purposes of auditing the consolidated financial statements of the Company for
the fiscal year ending December 31, 2002. It is anticipated that representatives
of Tanner & Co. will be present at the Annual Meeting and will be provided an
opportunity to make a statement if they desire, and to be available to respond
to appropriate questions.
The Board of Directors recommends that shareholders vote "FOR"
ratification of the appointment of Tanner & Co. as the Company's independent
accountants for fiscal 2002.
AUDIT FEES, FINANCIAL INFORMATION SYSTEMS DESIGN
AND IMPLEMENTATION FEES AND ALL OTHER FEES
Fees for the year 2001 annual audit and related quarterly reviews were
approximately $38,500, and all other fees were approximately $17,000. Other fees
consisted of assistance in filing of reports on the EDGAR system of the
Securities and Exchange Commission, and assistance with other filings made with
the Securities and Exchange Commission.
ADDITIONAL INFORMATION
The Company will provide without charge to any person from whom a Proxy
is solicited by the Board of Directors, upon the written request of such person,
a copy of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 excluding certain exhibits thereto, as filed with the
Securities and Exchange Commission. Written requests for such information should
11
be directed to Heber C. Maughan, Interim Chief Executive Officer, Paradigm
Medical Industries, Inc., 2355 South 1070 West, Salt Lake City, Utah 84119.
OTHER MATTERS
As of the date of this Proxy Statement, the Company knows of no
business that will be presented for consideration at the Annual Meeting other
than the items referred to above. However, if any other matters are properly
brought before the meeting, it is the intention of the persons named as proxies
in the accompanying Proxy to vote the shares they represent on such business in
accordance with their best judgment. In order to assure the presence of the
necessary quorum and to vote on the matters to come before the Annual Meeting,
please indicate your choices on the enclosed Proxy and date, sign and return it
promptly in the postage pre-paid envelope provided. The signing and delivery of
a Proxy by no means prevents you from attending the Annual Meeting.
By order of the Board of Directors,
Randall A. Mackey
Chairman of the Board
November 27, 2002.
12
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 27, 2002
-------------------------
To our Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders
(the "Annual Meeting") of Paradigm Medical Industries, Inc. (the "Company") to
be held on Friday, December 27, 2002, beginning at 10:00 a.m. local time (MST)
at the Company's corporate headquarters at 2355 South 1070 West, Salt Lake City,
Utah. At the Annual Meeting, shareholders will act on the following matters:
1. To elect three directors to serve until the next annual meeting of
the shareholders and until their respective successors are elected
and qualified.
2. To approve the proposed Amendment to the Company's Certification
of Incorporation to increase the number of authorized shares of
Common Stock from 40,000,000 to 80,000,000 shares.
3. To amend the Company's 1995 Stock Option Plan to authorize an
additional 1,000,000 shares of Common Stock to be made available
for issuance under the Plan.
4. To ratify the granting of stock options to purchase shares of
Common Stock at $2.75 per share to each of Dr. David Silver,
Randall A. Mackey and Keith D. Ignotz, outside directors of the
Company.
5. To ratify the appointment of Tanner & Co. as the Company's
independent accountants for the fiscal year ending December 31,
2002.
6. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Also included is a single-page Proxy/Voting
Instruction Form and a postage prepaid return envelope. Only shareholders of
record at the close of business on November 20, 2002 are entitled to notice of,
and to vote at, the Annual Meeting or any adjournment thereof.
It is important that your shares be represented at the Annual Meeting.
Whether or not you plan to attend, we hope that you will complete and return
your Proxy/Voting Instruction Form in the postage prepaid envelope as promptly
as possible.
Sincerely yours,
Randall A. Mackey
Chairman of the Board
November 27, 2002
Salt Lake City, Utah
PARADIGM MEDICAL INDUSTRIES, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
December 27, 2002
THIS PROXY SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF
PARADIGM MEDICAL INDUSTRIES, INC.
The undersigned hereby appoints Randall A. Mackey and Heber C. Maughan or either
of them, each with full power of substitution, as proxies to vote at the Annual
Meeting of Shareholders to be held on Friday, December 27, 2002, beginning at
10:00 a.m., local time, at the corporate headquarters of Paradigm Medical
Industries, Inc. at 2355 South 1070 West, Salt Lake City, Utah, and at all
adjournments thereof, all shares of common stock which the undersigned would be
entitled to vote on matters set forth below, if personally present:
1. ELECTION OF DIRECTORS, NOMINEES: RANDALL A. MACKEY, DR. DAVID M. SILVER
AND KEITH D. IGNOTZ.
|_| FOR all nominees listed (except as indicated in writing to the
contrary below)
|_| WITHHOLD AUTHORITY to vote for all nominees listed below
Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name here:
--------------------------------------------------------------------------------
2. APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 40,000,000 TO 80,000,000
SHARES.
|_| FOR |_| AGAINST |_| ABSTAIN
3. APPROVAL OF AMENDMENT TO THE 1995 STOCK OPTION PLAN TO AUTHORIZE AN
ADDITIONAL 1,000,000 SHARES OF COMMON STOCK
|_| FOR |_| AGAINST |_| ABSTAIN
4. RATIFICATION OF THE GRANTING OF STOCK OPTIONS TO THE OUTSIDE DIRECTORS.
|_| FOR |_| AGAINST |_| ABSTAIN
5. RATIFICATION OF APPOINTMENT OF TANNER & CO. AS THE COMPANY'S
INDEPENDENT ACCOUNTANTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.
|_| FOR |_| AGAINST |_| ABSTAIN
6. IN THEIR DISCRETION, ON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE
THE MEETING.
-------------------------------------------------------------------------
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY
DIRECTION IS INDICATED, WILL BE VOTED FOR PROPOSALS 1, 2, 3, 4 AND 5. In their
discretion, the proxies are authorized to vote upon such other matters as may
properly come before the meeting or any adjournment(s) thereof.
DATED ______________________________, 2002.
SIGNATURE: _____________________________________________________________________
(This proxy should be marked, dated and signed by each shareholder exactly as
such shareholder's name appears hereon and returned promptly. Persons signing in
a fiduciary capacity should so indicate. If shares are held by joint tenants or
as community property, both should sign. If a corporation, please sign in full
corporation name by the President or by an authorized corporate officer. If a
partnership, please sign in partnership name by an authorized person).
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the year ended December 31, 2001
[ ] 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 of IRS Identification Number
incorporation or organization)
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 [ ]
Indicate 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, 2001 were
$7,919,000.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 31, 2002 was approximately $48,425,223 based on the
closing price on that date on the Nasdaq SmallCap Market.
As of March 31, 2002 Registrant had outstanding 17,017,129,shares of Common
Stock, 5,757 shares of Series A Preferred Stock, 8,986 shares of Series B
Preferred Stock, no shares of Series C Preferred Stock and 10,000 shares of
Series D Preferred Stock, 13,050 shares of Series E Preferred Stock and 39,866
shares of Series F Preferred Stock.
1
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]
PART I
Item 1. Description of Business
General
The Company develops, manufactures, sources, markets and sells
ophthalmic surgical and diagnostic instrumentation and related accessories,
including disposable products. The Company's surgical equipment is designed for
minimally invasive cataract treatment. The Company markets three cataract
surgery systems with related accessories and disposable products. The Company's
flagship cataract removal system, the Photon(TM) laser system, is a laser
cataract surgery system marketed as the next generation of cataract removal. The
Photon(TM) product is currently under review by the Food Drug and Administration
("FDA"). The Photon(TM) is available for sale in many markets outside of the
United States. Both the Photon(TM) and the Precisionist ThirtyThousand (TM) are
manufactured as an Ocular Surgery Workstation(TM). The Company plans to market
the Ocular Surgery Workstation(TM) as a plug-in module for the Photon(TM) and
other lasers for use in eye care and other medical specialties. The Company also
offers the SIStem(TM), a mid-range priced ultrasonic phaco, and competes in the
market segment that only desires an ultrasonic phaco.
The Company's diagnostic products include a pachymeter, an A-Scan, an
A/B Scan, an UBM biomicroscope, a perimeter, a corneal topographer and the Blood
flow Analyzer(TM). The diagnostic ultrasonic products including the pachymeter,
the A-Scan, the A/B Scan and the UBM biomicroscope were acquired from Humphrey
Systems a division of Carl Zeiss in 1998. The Company developed and offered for
sale in the fall of 2000 the P45 which combines the A/B Scan and the UBM in one
machine. The perimeter and the corneal topographer were added when the company
acquired the outstanding shares of the stock of Vismed, Inc. d/b/a/ Dicon(TM) in
June 2000. The Company purchased Ocular Blood Flow, Ltd. ("OBF") in June 2000
whose principal product is the Blood Flow Analyzer(TM). 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 two 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.
2
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. In June 2000 the
company purchased OBF, the manufacturer of the Blood Flow Analyzer(TM). The
terms and conditions of the sale were $100,000 in cash and 100,000 shares of
common stock. In April 2001, the Company received authorization to use a CPT
code for procedures performed with the Blood Flow Analyzer(TM) which provides
for a reimbursement to doctors using the device. In the fall of 2001, the
manufacturing of the Blood Flow Analyzer(TM) was moved to the Company's San
Diego facility from an outsourced facility in England.
On June 26, 1998, the Company entered into a Co-Distribution Agreement
with Pharmacia & Upjohn Company ("Pharmacia") and MAXXIM Corporation, which
provided for the marketing and sale of a range of ophthalmic products. The
contract was renewable for one-year periods. The companies do not intend to
renew the agreement upon expiration in 2002. Under the terms of the
Co-Distribution Agreement, the Company, Pharmacia 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 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. Pharmacia also manufactures 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 78,947 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. If the net proceeds received
by Humphrey Systems from the sale of the shares issued pursuant to the Agreement
was less than $375,000, after payment of commissions, transfer taxes and other
expenses relating to the sale of such shares, the Company would required to
issue additional shares of Common Stock, or pay additional funds to Humphrey
Systems as would be necessary to increase the net proceeds from the sale of the
assets to $375,000. Since Humphrey Systems realized only $162,818 from the sale
of 78,947 shares of the Company's common stock, The Company issued 80,000
additional shares in January 1999, to enable Humphrey Systems to receive its
guaranteed amount. The amount of $21,431 was paid to the Company as excess
proceeds from the sale of this additional stock.
The rights to the ophthalmic diagnostic instruments which have been
purchased from Humphrey Systems 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 lens 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. The Company introduced the
3
P45 in the fall of 2000 which combines the A/B Scan and the Ultrasonic Biometer
in one machine.
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 entry-level, moderately priced cataract surgery products.
The transaction was paid for with $1.5 million worth of Paradigm common stock.
On June 5, 2000, the Company purchased Vismed Inc. d/b/a Dicon(TM)
under a pooling of interest accounting treatment. The purchase included the
Dicon(TM) perimeter product line consisting of the LD 400, the TKS 4000, the
SST(TM), FieldLink(TM), FieldView(TM) and Advanced FieldView and the corneal
topographer product line the CT 200(TM), the CT 50 and an ongoing service and
software business. Perimeters are used to determine retinal sensitivity testing
the visual pathway. Corneal topographers are used to determine the shape and
integrity of the cornea, the anterior surface of the eye. Corneal topographers
are used for the refractive surgical applications that eliminate the need for
eyeglasses and for optometric applications including contact lens fitting.
Background
Corporate History: The Company's business originated with Paradigm
Medical, Inc. ("PMI"), a California corporation formed in October 1989. 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.
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
4
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. Market Scope's (Manchester,
Missouri), "The 2001 Report on the Worldwide Cataract Market", January 2001
indicates that phaco cataract treatment is the technology for cataract removal
used in over 80% of surgeries in the United States and over 20% of all foreign
surgeries.
Laser Technology: The term "laser" is an acronym for Light
Amplification by Stimulated Emission of Radiation. Lasers have been commonly
used for a variety of medical and ophthalmic procedures since the 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 is used 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
cyclophotocoagulation). Argon, Nd:YAG and excimer lasers are primarily used for
5
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 proprietary surgical products are systems for
use by ophthalmologists to perform surgical treatment procedures to remove
cataracts. The Company has complete ownership of each product with no
technological licensing limitations.
The SIStem(TM): The SIStem(TM) is the Company's state-of-the-art,
entry-level phacoemulsification system. 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. Fiscal years 2001 and 2000 sales
of the SIStem(TM) represented approximately 3% and 9% of total revenues,
respectively.
Precisionist ThirtyThousand(TM): The Precisionist ThirtyThousand(TM)
(the "Precisionist(TM)") is the Company's core phaco surgical technology. The
Precisionist(TM) was placed into production and offered for 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 solves
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. Sales of the Precisionist(TM) were not
significant in the fiscal years 2001 or 2000.
Ocular Surgery Workstation(TM): The Ocular Surgery Workstation(TM) (the
Workstation(TM) ) comprises the base system of the Precisionist(TM)
ThirtyThousand(TM) and 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(TM) utilizes an embedded open architecture computer
developed for the Company and controlled by a proprietary software system
6
developed by the Company that interfaces with all components of the system.
Ultrasound, fluidics (irrigation), aspiration, venting, coagulation and anterior
vitrectomy (pneumatic) are all included in the base model. 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 implemented by means of a
pre-existing expansion rack which resides in the base of the Workstation(TM).
These expanded capabilities could include, but would not be limited to laser
systems, video surgical fiber optic imaging, cutting and electrosurgery
equipment. However, there is no guarantee that the Workstation(TM) will be
accepted in the market place. Upon approval from the FDA for the Photon(TM), the
Company will refer to the Workstation(TM) as the Photon(TM) Ocular Surgery
Workstation(TM). To date, the Company has not commercially developed or offered
for sale any other added hardware or software features to its Workstation (TM).
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 cataract probe. 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 Precisionist(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 denature 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.
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 and other medical procedures. In October of
2000, the Company received FDA approval for the Photon(TM) Workstation(TM) to be
7
used with a 532nm green laser which is effective for medical procedures other
than cataract removal, such as, photocoagulation of retinal and venous anomalies
within or outside the eye, pigmented lesions around the orbital socket,
posterior or anterior procedures associated with glaucoma or diabetes and
general photocoagulation for various dermatological venous anomalies including
telangiectasia (surface veins), or commonly referred to as "spider viens". The
goal is to be able to integrate multiple laser wavelengths into one system or
workstation that can be used for multiple medical specialties. This approval
represents only one of the potential applications that could represent
substantial growth opportunities including additional sales of equipment,
instruments, accessories and disposables. The Photon(TM) Ocular Surgery
Workstation(TM) has not been commercially developed with any other added
hardware or software features. There is no guarantee that the laser will be
accepted by the ophthalmic surgery market in this capacity or that the FDA will
grant approval.
Surgical Instruments, Accessories and Disposables: In addition to the
cataract surgery equipment, the Company's surgical systems utilize or will
utilize accessory instruments and disposables, some of which are proprietary to
the Company. These include replacement ultrasound tips, sleeves, tubing sets and
fluidics packs, instrument drapes and laser cataract probes. The Company intends
to expand its disposable accessories as it further penetrates the cataract
surgery market and expands the treatment applications for its Workstation(TM).
These products contributed approximately 8% and 14% of total revenues for 2001
and 2000, respectively.
Diagnostic Eye Care Products: Glaucoma is a second leading cause of
adult 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, visual field and
observation of the optic nerve head 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. Some companies produce color Doppler
equipment in the $80,000 price range intended to provide measurement of ocular
blood flow activity in order to diagnose and treat glaucoma at an earlier stage.
Blood Flow Analyzer(TM): 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. This was the Company's first diagnostic eye care
device. The device is a portable desktop system that utilizes a proprietary and
patented pneumatic Air Membrane Applanation Probe(TM) (the "AMAP TM") which can
be 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
8
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 packaged with a custom built computer
system. 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
products, this diagnostic product allowed 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. In April 2001,
the Company received authorization from the CPT Code Research and Development
Division of the American Medical Association to use a common procedure
terminology (CPT) code for its Blood Flow Analyzer(TM) which provides for a
reimbursement to doctors. In the fall of 2001, the manufacturing activities for
the Blood Flow Analyzer(TM) were moved to the San Diego facility from the
outsourced plant located in England. The revenues from sales of the Blood Flow
Analyzer(TM) represented approximately 25% of total 2001 revenues and were not
significant in 2000 due to the fact that major sales efforts for the product
commenced in 2001.
Dicon(TM) perimeters consist of the LD 400, the TKS 4000, the SST(TM),
FieldLink(TM), FieldView(TM) and Advanced FieldView. Perimeters are used to
determine retinal sensitivity testing the visual pathway. Perimeters have become
standard of care in the detection and monitoring of glaucoma worldwide.
Perimetry is reimbursable worldwide. The Dicon(TM) perimeters feature patented
kinetic fixation and voice synthesis now in 27 different languages. Software
programs are sold to assist in the analysis of the test results. Sales of the
perimeters generated approximately 15% and 26% of the 2001 and 2000 total
revenues, respectively.
Dicon(TM) corneal topographers include the CT 200(TM) and the CT 50.
Corneal topographers are used to determine the shape and integrity of the
cornea, the anterior surface of the eye. Clinical applications for corneal
topographers include refractive surgery that eliminates the need for eyeglasses
and optometric applications including contact lens fitting. Revenues from the
topographer were slightly less than 12% and 17% of the total revenues for 2001
and 2000, respectively.
Pachymetric Analyzer: The ultrasonic pachymeter is used for measurement
of corneal thickness. The Model P55 is positioned as a standard office
pachymeter. This device is targeted to the refractive surgery market and
contributed approximately 1% and 2% to the total revenues for 2001 and 2000,
respectively.
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. A-Scan sales were approximately 2% and 4% of the total 2001 and
2000 revenues, respectively.
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. Sales from this
product were approximately 5% of the total 2001 and 2000 revenues.
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 and its intellectual property were included
in the purchase from Humphrey Systems and gives the Company the proprietary
rights to this device. The UBM creates a high-resolution computer image of the
9
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
with its proprietary UBM and to its knowledge, the only commercially viable
product of this type on the market, as a leader in the rapidly expanding
glaucoma imaging and treatment segment. In the fall of 2000 the company
introduced the P45 which combines the UBM and the A/B Scan in one instrument.
The Company believes that by combining functions the P45 will appeal to a
broader market. UBM sales were approximately 11% and 14% of total revenues for
the years ended December 31, 2001 and 2000, respectively. The P45 which was
available for sale for all of 2001, contributed approximately 9% of total
revenues for 2001 and approximately 3% of total 2000 revenues.
In July of 2000, the Company received ISO 9001 and EN 46001
certification using TUV Essen as the notified body. Under ISO 9001
certification, all of the Companies products are now CE marked. The CE mark
allows the Company to ship product for revenue into the European Community. The
Company successfully retained its certification in 2001.
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 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 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 principal purchasers of
the Company's products have been ophthalmologists, optometrists 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, (The National Eye Institute reported in March 2002 that
the number of blind or visually impaired Americans is likely to double over the
next 30 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. The
Secretary of Health and Human Services, Tommy Thompson, stated in March 2002
10
that early detection and treatment can reduce blindness and visual impairment
from most eye diseases and disorders.
Marketing Organization: The Company markets its products
internationally through a network of dealers and domestically through direct
sales representatives. As of December 31, 2001, the Company had fourteen direct
domestic sales representatives in the United States and sixty-six foreign
dealers. 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 Ocular Surgery 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.
Product advertising is focused in the major industry trade newspapers.
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 maintains a
29,000 square foot facility in Salt Lake City and a 26,000 square foot facility
in San Diego. The Company transferred the manufacturing activities for the Blood
Flow Analyzer(TM) to San Diego from OBF in England during 2001. These facilities
accommodate the Company's expanded manufacturing, marketing and engineering
capabilities. The Company manufactures under systems of quality control and
testing, which complies with the Quality System Requirements (QSR) established
by the FDA, as well as similar guidelines established by foreign governments,
including the CE Mark and IS0-9001.
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 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.
Product Service and Support: Service for the Company's products is
overseen from its Salt Lake City and San Diego locations 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 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
11
international dealers who in turn create their own service plans with their
customers.
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.
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.
Competition
General. The Company is subject to competition in the cataract surgery
and the glaucoma diagnostic markets 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 lines. The Company believes that the combined sales of five
entities account for over 90% of the cataract 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
12
substantial measure of cost containment, while providing the Company with the
quality control and income capability of cassette sales.
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 have 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. These companies can be differentiated by the laser wavelength employed
for the cataract surgery. Based on the information currently available to the
Company, Er:YAG laser wavelength appears to offer a less viable means of
removing cataracts than the Nd:Yag wavelength used by the Photon(TM). One
competitor uses a Nd:YAG wavelength, however the laser is used only to vibrate
an ultrasonic needle. Thus the device remains an ultrasonic system subject to
same risk factors of phaco, thereby eliminating the benefits of using a laser to
remove the cataract. 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 National Eye Institute stated
in 2002 that the number of visually impaired Americans is likely to double over
the next three decades. Their report estimated that 2.4 million people suffer
some vision impairment in the country. 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 regularly 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
13
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 to continues to derive
revenues from the sale of its 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. Other ophthalmic diagnostic devices that 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.
Intellectual Property Protection
The Company's cataract surgical products are proprietary in design,
engineering and performance. The Company's surgical 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 Company did acquire proprietary intellectual property in the
transaction with Humphrey Systems when it purchased the diagnostic ultrasonic
product line in 1999. This technology uses ultrasound to create a
high-resolution computer image of the unseen parts of the eye that is a "map"
for the practitioner.
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 to
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."
The Blood Flow Analyzer(TM) has been granted a patent in the European
Economic Community and the United States and has a patent pending in Japan.
The Dicon(TM) Perimeter and the Dicon(TM) Corneal Topographer each have
a U.S. patent with a wide scope of claims.
The Company's trademarks are important to its business. It is the
Company's policy to pursue trademark registrations for its trademarks associated
with its products as appropriate. Also, 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.
14
Regulation
The Company's surgical and diagnostic systems are regulated as medical
devices by the FDA under the FD&C 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 FD&C 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 approval for devices. Recommendations by the FDA that the
Company not be allowed to enter into government contracts and criminal
prosecution may also be made.
Following the enactment of the Medical Device Amendments to the FD&C
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 FD&C 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
15
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 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 (Phase I) 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 FD&C 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 end users pursuant to specific performance standards, and to comply with
16
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 non-reimbursable 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, China 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 investigational
sites.
Regulatory Status of Products
All of the Company's products, with the exception of the Photon(TM) are
approved for sale in the U. S. by the FDA under a 510(k). All of the Companies
products have been accepted for import into CE countries and various non-CE
countries.
17
The Company acquired permission from the FDA to export the Photon(TM)
Laser Cataract System outside the United States under an open IDE granted by the
FDA in September 1994. 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 is similar to the current ultrasound cataract treatment employed by
ophthalmologists.
The Company submitted a Premarket Notification 510(k) application to
the FDA for the Photon(TM) laser cataract system in September 1993. The FDA
requested clinical support data for claims made in the 510(k), 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 for a
Phase I Feasibility Study. The Company began human clinical trials in April 1996
and completed the Phase I study in November 1997. The Company started Phase II
trials in September 1998 and completed numerous cases of treatment group and
control group patients which were included in the Company's submission to the
FDA. The Company received a warning letter dated August 30, 2000, from the
Office of Compliance, Center for Devices and Radiological Health of the Food and
Drug Administration ("FDA") relating to the human clinical trials for its
Photon(TM) Laser Cataract System. The warning letter concerns the conditions
found by the FDA during several audits at Company's clinical sites. The FDA's
comments were isolated to the administrative procedures of compiling data from
the clinical sites. The Company responded to the warning letter in a submission
dated September 27, 2000. In the submission the Company took corrective action
that included submitting a revised clinical protocol and case report forms and
procedures for the collection and control of data. In a subsequent letter dated
November 2, 2000 to the Company, the FDA requested clarification of two issues.
Subsequent to the warning letter, the Company received approval to
continue its clinical trials, the results of which were included in its
supplemental submission to the FDA for the existing (510)(k) predicate device
application for the Photon(TM) laser system. In December 2001, the Company
received a preliminary review from the FDA regarding the supplemental
submission. As a result of that preliminary review, the Company submitted
additional clinical information to the FDA on February 6, 2002. The application
is receiving on-going review by the FDA. The Company believes all items in the
warning letter have been satisfied and the clinical trials and their data are in
good standing.
Employees
As of December 31, 2001, the Company had 88 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
18
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 maintains a facility located at 10373 Roselle Street, San
Diego, California. This facility consists of approximately 25,952 square feet of
leased office space under a five-year lease that will expire on August 1, 2002.
These facilities are leased from Torrey Sorrento Associates, Ltd., a California
limited partnership, at a gross monthly rate of $17,544. The Company is
currently looking at various alternatives to securing suitable facilities by the
end of the lease term.
The Company believes that these facilities are adequate and satisfy its
needs for the foreseeable future.
Item 3. Legal Proceedings
An action was brought against the Company in March 2000 by George
Wiseman, a former employee, in the Third District Court of Salt Lake County,
State of Utah. The complaint alleges that the Company owes Mr. Wiseman 6,370
shares of its common stock plus costs, attorney's fees and a wage penalty (Equal
to 1,960 additional shares of Paradigm common stock) pursuant to Utah law. The
action is based upon an extension of a written employment agreement. The Company
believes the complaint is without merit and intends to vigorously defend against
the action.
An action was brought against the Company in September 2000 by PhotoMed
International, Inc. and Daniel M. Eichenbaum in the Third District Court of Salt
Lake County, State of Utah. The action involves an amount of royalties that are
allegedly due and owing to PhotoMed International, Inc. and Dr. Eichenbaum with
respect to the sales of certain equipment plus attorney's fees. Discovery has
taken place and the Company has paid royalties of $15,000 to bring all payments
up to date through June 30, 2001. However, the legal action has not been
dismissed as a result of the payments. The Company is in the process of working
with Photomed International and Dr. Eichenbaum to ensure that the calculations
have been correctly made on the royalties paid as well as the proper method of
calculation for the future. It is anticipated that once the parties can agree on
the correct calculations on the royalties, the legal action will be dismissed.
An Action was brought against the Company on March 7, 2000 in the Third
District Court of Salt Lake County, State of Utah, by Merrill Corporation that
alleges that the Company owes the plaintiff approximately $20,000 together with
interest thereon at the rate of 10% per annum from August 30, 1999, plus costs
and attorney's fees. The complaint alleges a breech of contract relative to
printing services. The Company has filed an answer to the complaint and
discovery is proceeding. The Company believes that the complaint against the
Company is without merit and intends to vigorously defend against the action.
The Company is not a party to any other 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
At a special meeting of the shareholders held on December 28, 2001 to
approve the proposed amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of common stock from 20,000,000 to
40,000,000 shares, it was determined to adjourn the meeting until January 28,
2002 because the shares entitled to vote, which were present in person or
represented by proxy, did not constitute a quorum at the meeting. At the January
28, 2002 special meeting of the shareholders, the proposed amendment to the
19
Certificate of Incorporation was approved (with votes cast of 10,474,115 for,
1,076,070 votes against and 39,740 votes abstaining).
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 six classes
of Preferred Stock, designated as Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock , Series D Preferred Stock, Series E Preferred
Stock and Series F 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 31,
2002 the closing sale prices of the Common Stock and Class A Warrants were $2.93
per share and $0.19 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 January 1, 2000.
Common Stock Class A Warrants
Price Range Price Range
-----------------------------------------------------------
Period (Calendar Year) High Low High Low
------------------------------------------------------------------------------------------------------------------
2000
----
First Quarter 14.500 6.880 6.500 2.630
Second Quarter 10.500 4.190 3.630 1.190
Third Quarter 6.190 3.380 2.000 0.500
Fourth Quarter 4.940 1.310 1.250 0.500
2001
----
First Quarter 4.130 1.500 1.000 0.190
Second Quarter 3.540 1.610 0.740 0.190
Third Quarter 2.750 1.860 0.450 0.160
Fourth Quarter 3.080 1.940 0.390 0.170
2002
----
First Quarter 3.310 2.210 0.380 0.190
The Company's Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock are not publicly traded. As of March 31, 2002, there
were 717 record holders of Common Stock, five record holders of Series A
Preferred Stock, three record holders of Series B Preferred Stock, no record
holders of Series C Preferred Stock , two record holders of Series D Preferred
Stock, 17 holders of Series E Preferred Stock and 56 holders of Series F
Preferred Stock.
20
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, Series D Preferred Stock,
Series E Preferred Stock and Series F 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, Series D,
Series E and Series F 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
This report contains forward-looking statements and information
relating to the Company that is based on beliefs of management as well as
assumptions made by, and information currently available to management. These
statements reflect the current view of the Company respecting future events are
subject to risks, uncertainties and assumptions, including the risks and
uncertainties noted throughout the document. Although the Company has attempted
to identify important factors that could cause the actual results to differ
materially, there may be other factors that cause the forward-looking statements
not to come true as anticipated, believed, projected, expected or intended.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may differ materially
from those described herein as anticipated, believed, projected, estimated,
expected or intended.
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
result of certain factors discussed in this section. The Company's fiscal year
is from January 1 through December 31.
The Company's ultrasound diagnostic products include a pachymeter, an
A-Scan, an A/B Scan and a biomicroscope, the technology for which was acquired
from Humphrey Systems in 1998. The Company introduced the P45 in the fall of
2000 which combines the A/B Scan and the biomicrscope in one machine. In
addition, the Company markets its Blood Flow Analyzer(TM) acquired in the
purchase of Ocular Blood Flow Ltd. in June 2000. Other diagnostic products are
the Dicon (TM) Perimeter and the Dicon (TM) Corneal Topographer which were
acquired in the acquisition of Vismed d/b/a Dicon in June 2000. The Company
purchased the inventory and design and production rights of the SIStem(TM) from
Mentor Corporation in October 1999 which was designed to perform minimally
invasive cataract surgery. In November 1999, the Company entered into a Mutual
Release and Settlement Agreement with the manufacturer of the Precisionist
ThirtyThousand(TM) in which the Company purchased the raw material and finished
goods inventory to bring the manufacturing of this product in-house. FDA
approval for the Company's Photon(TM) laser system for cataract removal is in
process.
21
Activities for the twelve months ended December 31, 2001 included sales
of the Company's products and related accessories and disposable products. The
Company completed a sufficient number of cases in its Phase II Clinical Trials
relating to the Photon(TM) laser system (many of which were audited by
independent parties) to be included in its supplemental submission to the FDA
for the existing (510)(k) predicate device application for the Photon(TM) laser
system. In December 2001, the Company received a preliminary review from the FDA
regarding the supplemental submission. As a result of that preliminary review,
the Company submitted additional clinical information to the FDA on February 6,
2002. The application is receiving on-going review by the FDA. If the FDA
approves the application, the Company will be able to market its Photon(TM)
laser system within the United States. In December 2001, the Company announced a
reduction of force of total personnel of approximately 20% (22 employees). The
layoff was intended to save costs and to eliminate duplicities in functions that
occurred with the acquisition of Dicon. The Company believes that the
elimination of headcount will not adversely affect its operations.
The tragic events of September 11, 2001 combined with a recessionary
trend in the economy have had a negative effect on the Company's sales.
International attendance at the largest trade show of the year in November 2001
was down markedly. The absence of these professionals eliminates many
opportunities for the Company to demonstrate and sell its products to this
sector. It is difficult to quantify how much an effect that these events have
had on the Company, but management believes that the Company has suffered some
negative impact due to September 11, 2001 and the downturn in the economy in
general which may continue for an indefinite period of time.
On June 5, 2000 the Company purchased under a pooling of interest
Vismed Inc. d/b/a Dicon(TM, a California Corporation and manufacturer and
distributor of diagnostic instrumentation for the detection of chronic eye
diseases. The purchase included the Dicon(TM) perimeter product line consisting
of the LD 400, the TKS 4000, the SST(TM), FieldLink(TM), FieldView(TM) and
Advanced FieldView and the corneal topographer product line the CT200(TM), the
CT50 and an ongoing service and software business. Perimeters are used to
determine retinal sensitivity, testing the visual pathway. Corneal topographers
are used to determine the shape and integrity of the corneal and anterior
surface of the eye. Corneal topographers are used for the refractive surgical
applications that eliminate the need for eyeglasses and for optometric
applications, including contact lens fitting.
In June of 2000, the Company completed the purchase of Ocular Blood
Flow Ltd. ("OBF"). OBF manufactured a blood flow analyzer representing
proprietary technology for measuring blood flow to the eye. Many clinicals were
performed demonstrating the clinical efficacy of the product in glaucoma. The
Company received authorization in April 2001 to use a CPT code that provides for
a reimbursement to doctors for procedures performed on patients using the Blood
Flow Analyzer(TM). In 2001, the manufacturing activities were moved from England
to the Company's facilities in San Diego, California.
Results of Operations
Fiscal Year Ended December 31, 2001 Compared to Fiscal Year Ended
-----------------------------------------------------------------
December 31, 2000:
------------------
Consolidated sales for the twelve months ended December 31, 2001 were
$7,919,000 compared to $7,989,000 for the same period for 2000, approximately a
1% decrease. The Company restructured its outside sales force during 2001 to
provide nationwide coverage. This resulted in a slow down of sales activity due
to the time it took to hire and train the new personnel. The Company believes
that sales activity was hampered for about a ninety day period. The Company also
launched in earnest the sales of the Blood Flow Analyzer(TM) during the second
quarter of 2001 after receiving authorization to use a CPT code which provides
for a reimbursement to doctors. The Company believes that the investment in
22
time, training and resources in developing the sales force will provide positive
results in the future despite a loss of sales activity in 2001.
Sales of the Blood Flow Analyzer(TM) was the single largest contributor
to total 2001 revenues generating slightly less than $2,000,000 (25%) of
revenues. Sales in 2000 were not significant as the major marketing efforts did
not take place until 2001. Sales of the P45 ultrasonic Biomicroscope workstation
accounted for approximately 9% of total 2001 revenues, or $686,000, compared to
approximately a 3% contribution to total 2000 revenues, or $219,000. The P45 was
introduced by the Company in the fall of 2000 resulting in a full year's of
selling activity during 2001 as compared to a few months during 2000. The
remainder of the ultrasonic product line (UBM, A-Scan, A/B scan and Pachymeter)
contributed $1,543,000 in revenues in 2001 (19%) compared to $2,027,000 in 2000
(25%).
Sales of the perimeter and corneal topographer decreased by $1,283,000,
from $3,411,000 in 2000 (43%) to $2,128,000 (27%). The perimeter and corneal
topographer, both mature products, declined in sales in 2000 from those in 1999
by approximately 20%. One of the strategies of the Dicon/Paradigm merger in June
of 2000 was to piggyback these products with the phaco surgical line to achieve
penetration into the ophthalmic market, in addition to the optometric market,
resulting in a growth in the sales of the Dicon products. This anticipated
growth has not occurred and may continue to decrease in the future or remain at
a lower level than originally expected.
The phaco surgical line and related disposable products accounted for
approximately $641,000 (8%) of total revenues for the twelve months ended
December 31, 2001 compared to $1,144,000 (14%) in revenues for the same period
in 2000. The Company concentrated much of its marketing focus on its diagnostic
products (Blood Flow Analyzer(TM) and the Ultrasonic Biomicroscope Workstation
or P45) during 2001. The Company also continued aggressively in its efforts to
obtain FDA approval for its Photon(TM) laser system. The Company did not
recognize any sales of its Photon(TM) laser system in 2001. The Photon(TM)
cannot be sold within the United States until FDA approval is received.
International sales of the Photon(TM) did not occur due in part to the lack of
FDA approval. Although not required in the international market, the Company
believes many potential customers rely on the FDA approval of products before
purchasing.
The gross profit on sales for the fiscal year 2001 was approximately
38% compared to 17% for the same period in 2000. The sharp difference was due
principally to an inventory write-down of $1,596,000 during 2000 to net
realizable value. Gross profit on sales for the fiscal year ended December 31,
1999 was 38% which indicates a more consistent trend with the exception of the
inventory adjustment that was recognized in 2000.
Marketing and selling expenses increased $812,000, or 21%, to
$4,762,000 for the twelve months ended December 31, 2001 from $3,950,000 for the
comparable period in 2000. The Company increased costs for enhanced tradeshow
participation of $355,000 due mainly to expenses incurred in relation to the
annual meeting of the American Academy of Ophthalmology in November 2001. This
is the largest event in the country in which the Company participates. This
increase was also partly due to the addition of fifteen direct sales people to
cover the United States rather than working through distributors adding
approximately $382,000 of additional expenses. The hiring of the sales force
took place during the second and third quarters of 2001 and will result in a
higher level of expenses in the form of salaries and travel reimbursements in
future operating periods.
General and administrative expenses decreased by $307,000, or 6%, to
$5,125,000 for the 2001 fiscal year from $5,432,000 for the comparable period in
2000. The Company had recognized $1,883,000 in non-cash transactions during 2000
by granting warrants to non-employees as payment for services, stock bonuses
granted to officers of the Company and stock granted to non-employees as payment
23
for services. During 2001, the Company recorded $558,000 of non-cash
transactions from granting warrants and stock to non-employees for consulting
services. Consulting expenses paid in cash for financial and investor relations
services increased by approximately $165,000 over the comparable period in 2000.
The Company initiated procedures to cancel or not to renew outside consulting
agreements during the fourth quarter of 2001.
The expenses associated with clinical trials for the FDA approval
process for the Photon(TM) increased over the 2000 fiscal year by approximately
$67,000. Payroll and benefits expense increased approximately $350,000 from 2000
to 2001. The number of personnel decreased over the second half of 2000, due to
a shift in responsibilities between the Salt Lake and San Diego facilities and
to attrition as a result of the merger. Responsibilities were redistributed
between the two facilities at the beginning of 2001, and personnel were rehired.
A new Chief Financial Officer was hired in the fourth quarter of 2000, filling a
nine-month vacancy. Travel expenses increased by $84,000 in 2001, largely as a
result of travel between the Salt Lake and San Diego facilities and due
diligence pertaining to potential international acquisitions. An increase in
depreciation expense of $42,000 in 2001 was due to the acquisition of
approximately $455,000 of additional capital items and a full year of
depreciation expense which was recognized on the $613,000 of capital equipment
and software purchased in 2000.
Other increases included general liability and directors' and officers'
insurance premiums totaling $40,000. Amortization expense of the intangible
resulting from the OBF acquisition was $40,000 more than the amortization
expense recorded in 2000 because the purchase did not take place until June
2000. Approximately, $84,000 of expense was contributed by OBF as a result of
closing down their physical operations and transferring the manufacturing
process to San Diego including travel and shipping costs.
Research and Development expenses (which includes production and
manufacturing support and the service department expenses) increased by
$980,000, or 69%, to $2,405,000 for the twelve months ended December 31, 2001
from $1,425,000 for the same period in 2000. This increase was due principally
to added personnel in engineering, in service and in manufacturing support. As a
result, payroll and benefits expense increased by a total of $692,000 in
anticipation of sales demands which did not occur as expected. Personnel in this
area, therefore, were affected by the layoffs at the end of December 2001 in a
strategic decision to retain and focus resources in the sales and marketing
area. Consulting expense and purchases of sample parts and tooling related to
new product development increased by $182,000, and $145,000, respectively. The
main development project in 2001 was postponed to concentrate sales efforts on
the Company's existing product line and to aggressively pursue FDA approval for
its Photon(TM) laser.
Net interest income was approximately $6,000 during 2001 compared to
$130,000 for the twelve months ended December 31, 2000 due to increased interest
expense incurred by entering into capital leases for the purchase of certain
fixed assets and due to smaller amounts of cash on deposit during 2001. Other
expense included a charge to expense of $812,000 representing the value of the
350,000 shares of common stock issued to Mentor Corporation in settlement of a
legal action brought against the Company.
The Company incurred a net loss of $13,044,000, or $.98 per share based
upon 13,245,0000 weighted average shares outstanding for the year ended December
31, 2001. This compares to a net loss of $9,305,000, or $.81 per share, based on
11,547,000 weighted average shares outstanding for the year ended December 31,
2000. The increase in the net loss attributable to common shareholders was due
principally to losses recognized in accordance with Financial Accounting
Standards Board Statement Number 123 ("SFAS 123") in connection with two private
placements offered by the Company in 2001 of $2,901,000 ($2,587,000 was
attributable to the beneficial conversion feature included in the Series E and
Series F Preferred Stock offerings and $314,000 represented the computed value
of the warrants associated with the Series E Preferred Stock offering). No such
24
expense calculation was included in the net loss for the fiscal year 2000. The
Mentor settlement charge of $812,000 included in the net loss for 2001 was an
increase over the comparable period a year ago.
Fiscal Year Ended December 31, 2000 Compared to Fiscal Year Ended
-----------------------------------------------------------------
December 31, 1999:
------------------
On June 5, 2000, the Company concluded a pooling of interests
transaction with Vismed, Inc., d/b/a Dicon. As a result of the pooling, and in
accordance with GAAP, the financial results of each organization are reported as
though they were one for all periods presented.
Consolidated sales increased by $515,000, or 7%, to $7,989,000 for the
twelve months ended December 31, 2000, from $7,474,000 for the comparable period
in 1999. Sales of the phaco surgical line, the ultrasonic product line, and
related accessories increased $2,258,000, which were offset by a decrease in
sales of the Perimeter, the Corneal Topographer, and the Blood Flow Analyzer.
Sales of the phaco surgical line accounted for approximately
$1,144,000, or 51%, of the $2,258,000 increase in sales from 1999 to 2000. Of
this increase, $1,057,000 was due to sales of the Mentor SIStem and related
consumables and accessories. The increase in sales of the Mentor SIStem from
1999 to 2000 was attributed to the fact that the Mentor product line was
purchased at the end of October 1999, affording only two months of sales
activity in the year 1999, compared to a full year of sales activity in 2000.
Sales of the ultrasonic product line and related accessories accounted
for approximately 1,114,000, or 49% of the $2,258,000 increase. Shipment of the
ultrasonic product line did not commence until June 1999, once these products
were released for production, affording seven months sales activity in the year
1999, compared to a full year of sales activity in 2000.
Sales of the Perimeter and Corneal Topographer decreased by $1,717,000
from 1999 to 2000, with approximately 78% of the decrease attributed to sales in
the domestic market. The Perimeter and Corneal Topographer, both mature
products, have seen a decline in sales over the past two years, both at a rate
of approximately 20% per year. The anticipation with the Dicon/Paradigm merger
in mid 2000 was that the combination of sales forces and the Pharmacea-Upjohn
alliance would piggyback these products with the phaco surgical line to begin
their penetration into the ophthalmic market, in addition to the optometric
market, resulting in a growth in their sales. Such growth had not taken place as
of year-end 2000.
Cost of sales increased by $2,002,000, or 43%, to $6,626,000 for the
twelve months ended December 31, 2000, from $4,624,000 for the like period in
1999. The gross profit on sales of 17% for the fiscal year ended December 31,
2000 was 55% lower than the gross profit on sales of 38% for the year ended
December 31, 1999. This sharp profit margin decline can be attributed
principally to an inventory write-down of $1,596,000 for the fiscal year 2000 to
net realizable value and an increase of $167,000 in the reserve for obsolete
inventory. Many inventory items obtained principally through the acquisition of
new product lines were reduced in cost to reflect obsolescence, technological
advances and product enhancements.
Of the total inventory write-down amount, $419,000 in parts and
finished goods was utilized for further research and development, $299,000 was
deemed obsolete, and $878,000 was a cost adjustment. Of the $878,000 cost
adjustment, 74% was for the ultrasonic line, 21% for the Mentor line, and 5% for
the Zevex line.
25
The Humphrey ultrasonic product line was purchased in July 1998, the
Mentor line in October 1999, and the Zevex inventory in November 1999. Because
of engineering redesign, many of the raw material components associated with all
three product lines were changed to reflect current technology, and/or were
found at lower costs after re-quoting suppliers. In the process of redesigning
for production, some components were deemed obsolete. The $299,000 deemed
obsolete consisted of items from all product lines.
Marketing and selling expenses increased by $994,000, or 34%, to
$3,950,000 for the twelve months ended December 31, 2000, from $2,956,000 for
the comparable period in 1999. This increase was partly the result of the
addition of three international area managers in an effort to improve the
international distribution system, and employing a United States direct sales
force rather than working through distributors. Payroll expenses increased by
$384,000, commissions increased by $95,000 and travel expenses increased by
$66,000. The increase also included building of additional awareness in the
international market, increased tradeshow participation, and updating marketing
materials to reflect company integration due to the merger. This resulted in an
increase in advertising and tradeshow expenses of $399,000.
General and administrative expenses increased by $2,049,000, or 61%, to
$5,432,000 for the twelve months ended December 31, 2000, from $3,383,000 for
the comparable period in 1999. This increase was mainly due to certain non-cash
transactions in the total amount of $1,883,000, resulting from warrants granted
to non-employees as payment for services, stock bonuses granted to officers of
the company, and stock granted to non-employees as payment for services. Also
included in the increase is $167,000 paid to Cyndel & Co. for consulting
services rendered during the year 2000.
Research and development expenses increased by $205,000, or 17%, to
$1,425,000 for the twelve months ended December 31, 2000, from $1,220,000 for
the same period in 1999. This increase was due in part as the result of added
personnel in engineering and regulatory affairs increasing personnel costs by
$91,000. Expenses related to new product development increased by $32,000, and
FDA clinical expenses increased by $14,000.
Other income (expense) increased by $161,000, or 732%, to $139,000 for
the twelve months ended December 31, 2000, from ($22,000) for the same period in
1999. This was due to interest earned on investment in money market instruments
in the year 2000 and a decrease in interest paid on debt in the same year.
The Company had a net loss of $9,305,000, or $.81 per share, based on
11,547,000 weighted average shares outstanding for the year ended December 31,
2000. This is compared to a net loss of $4,731,000, or $.62 per share, based on
7,655,000 weighted average shares outstanding for the year ended December 31,
1999, an increase of $4,574,000. The increase in the net loss was partially
attributable to the Black-Scholes valuation for warrants granted non-employees
in payment for services ($529,000), the valuation of stock granted non-employees
and officers of the company ($1,404,000), and a write-down of inventory
($1,596,000) principally for devaluation of certain active inventory items due
to technical advances, product enhancements, and obsolescence. The increase was
also attributable to an increase in consulting and regulatory fees paid in
connection with ISO 9001 and CE Mark certification and FDA compliance of
$195,000, investment banking fees of $138,000 and in the addition of personnel
company-wide for $389,000.
Liquidity and Capital Resources
The Company used cash in operating activities of $8,799,000 for twelve
months ended December 31, 2001, compared to $5,424,000 for the twelve months
ended December 31, 2000. The Company increased its net inventory balance by
26
$684,000 during the year in anticipation of building product to meet
sales demand, more specifically, for the Blood Flow Analyzer and the P45
ultrasonic Biomicroscope workstation plus. Trade receivables increased mainly
due to the increased sales during the fourth quarter 2001 of $787,000. The
Company incurred higher operating expenses during the year related to sales and
marketing and product development and service. The company used cash in
investing activities of $246,000 for the twelve months ended December 31, 2001,
compared to $725,000 for the year 2000. The difference was due to investment in
property and equipment for production of the Precisionist(TM) system, the move
to a larger facility, and cash paid for the acquisition of OBF Labs and the
merger with Vismed d/b/a Dicon during 2000. Net cash provided by financing
activities for the twelve months ended December 31, 2001, was $9,553,000,
compared to $7,225,000 for the year ended December 31, 2000. The Company
received $8,964,000 in net proceeds from two private placements, the Series E
and Series F Preferred Stock offerings during 2001. The Company also sold
392,000 shares of its common stock under the $20,000,000 equity line for
$673,000 in 2001 reducing the amount available under the equity line to
approximately $19,000,000. Debt reduction for the year was $85,000.
As the Company gained regulatory approval of its products, it was
aggressive in gaining market presence. The majority of revenues during 2000 were
derived from the sales of product in foreign countries. Because of the foreign
nature of these revenues and the more liberal acceptance of customers in order
to gain market share and product awareness, the Company experienced difficulty
in the collection of receivables. As of December 31, 2000, the Company's
allowance for doubtful accounts was 19% of total outstanding receivables. The
Company has taken measures to reduce the amount of uncollectible accounts
receivable such as more thorough and stringent credit approval, improved
training and instruction by sales personnel, and frequent direct communication
with the customer subsequent to delivery of the system. The allowance for
doubtful accounts was 13% of total outstanding receivables as of December 31,
2001. Much of the increase in the outstanding receivable balance occurred during
the fourth quarter of 2001 due to the increased sales of primarily the Blood
Flow Analyzer(TM) in the United States. The Company has addressed its credit
procedures and collection efforts during 2001 and believes that the enhanced
procedures will produce positive results. Therefore, the Company believes that
the allowance for doubtful accounts is adequate at 13% of total outstanding
receivables as of December 31, 2001 compared to 19% of the 2000 year end
receivable balance.
The Company carries an allowance for obsolete inventory of $371,000 as
of December 31, 2001, or approximately 7% of total inventory. The Company
recorded an allowance for obsolete inventory of $489,000 which was approximately
10% of total inventory at December 31, 2000 and incurred $1,596,000 of expenses
by adjusting inventory to its net realizable value during 2000. The Company's
means of expansion and development of product has been largely from acquisition
of businesses, product lines, existing inventory, and the rights to specific
products. Through such acquisitions, the Company acquired substantial inventory,
some of which the eventual use and recoverability was uncertain.
As of December 31, 2001 the Company had raised approximately $933,000
through a $20,000,000 equity line of credit under an investment banking
arrangement, which the Company will continue to use, if required. As of December
31, 2001, approximately $19,000,000 was available under the equity line of
credit. Management anticipates that the combination of existing working capital
and the private equity line of credit will be sufficient to assure continuation
of the Company's operations through December 31, 2002. The Company will also
seek funding to meet its working capital requirements through other
collaborative arrangements and strategic alliances, additional public offerings
and/or private placements of its securities or bank borrowings, if necessary.
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.
At December 31, 2001, the Company had net operating loss carry-forwards
(NOLs) of approximately $34,000,000 and research and development tax credit
carry-forwards of approximately $240,000. These carry-forwards are available to
offset future taxable income, if any, and began to expire in the year 2001 and
27
extend for twenty years. The Company's ability to use its NOLs to offset future
income is dependent upon the tax laws in effect at the time the NOLs can be
utilized. The Tax Reform Act of 1986 significantly limits the annual amount that
can be utilized for certain of these carry-forwards as a result of changes 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. All sales transactions to date have
been denominated is US Dollars.
Impact of New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 eliminates the pooling-of-interests method of accounting
for business combinations except for qualifying business combinations that were
initiated prior to July 1, 2001. In addition, SFAS 141 further clarifies the
criteria to recognize intangible assets separately from goodwill. Specifically,
SFAS 141 requires that an intangible asset may be separately recognized only if
such an asset meets specific criterion. The requirements of Statement 141 are
effective for any business combination accounted for by the purchase method that
is completed after June 30, 2001. The Company is currently evaluating the impact
of SFAS 141 and has not yet determined the impact that adopting SFAS 141 will
have on its financial statements. On adoption, the Company will be required to
reassess the goodwill and intangible assets previously recorded in acquisitions
prior to July 1, 2001 to determine if the new recognition criteria for an
intangible asset to be recognized apart from goodwill are met.
In July 2001, the FASB issued Statements of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." Under
SFAS 142, goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually (or more frequently if impairment indicators
arise) for impairment. For intangible assets with indefinite useful lives, the
impairment review will involve a comparison of fair value to carrying value,
with any excess of carrying value over fair value being recorded as an
impairment loss. For goodwill, the impairment test shall be a two-step process,
consisting of a comparison of the fair value of a reporting unit with its
carrying amount, including the goodwill allocated to each reporting unit. If the
carrying amount is in excess of the fair value, the implied fair value of the
reporting unit goodwill is compared to the carrying amount of the reporting unit
goodwill. Any excess of the carrying value of the reporting unit goodwill over
the implied fair value of the reporting unit goodwill will be recorded as an
impairment loss. Separable intangible assets that are deemed to have a finite
life will continue to be amortized over their useful lives (but with no maximum
life). Intangible assets with finite useful lives will continue to be reviewed
for impairment in accordance with Statements of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of."
The amortization provisions of SFAS 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the Company will apply the new
accounting rules beginning July 1, 2002 and will reassess the useful lives of
its separately recognized intangible assets in the third quarter of fiscal 2002.
The Company will review for impairment previously recognized intangible assets
that are deemed to have indefinite lives upon the completion of this analysis in
28
the first quarter of fiscal 2003. Additionally, upon the adoption of SFAS 142,
the Company will perform a transitional impairment review related to the
carrying value of goodwill as of July 1, 2002 by the end of the third quarter of
fiscal 2002. The Company is currently in the process of determining its
reporting units for the purpose of applying the impairment test, analyzing how
fair value will be determined for purposes of applying SFAS 142 and quantifying
the anticipated impact of adopting the provisions of SFAS 142. Amortization of
goodwill was $80,000 for the twelve months ended December 31, 2001.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets," which supercedes SFAS 121 and the provisions of Accounting
Principles Board Opinion (APB 30), "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and extraordinary,
Unusual and Infrequently Occurring Events and Transactions" with regard to
reporting the effects of a disposal of a segment of a business. SFAS 144 retains
many of the provisions of FAS 121, but significantly changes the criteria that
would have to be met to classify an asset as held for disposal such that
long-lived assets to be disposed of other than by sale are considered held and
used until disposed of. In addition, SFAS 144 retains the basic provisions of
APB 30 for presentation of discontinued operations in the statement of
operations but broadens that presentation to a component of an entity. The
Company will apply SFAS 144 beginning July 1, 2002. The Company is currently
evaluating the potential impact, if any, the adoption of SFAS 144 will have on
its financial position and results of operations.
Item 7. Financial Statements
PARADIGM MEDICAL INDUSTRIES, INC.
Index to Financial Statements
--------------------------------------------------------------------------------
Page
----
Report of Tanner + Co. F-2
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-7
--------------------------------------------------------------------------------
F-1
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, 2001, and the related statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 2001 and
2000. 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 auditing standards generally accepted
in the United States of America. 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, 2001, and the results of its operations and its cash
flows for the years ended December 31, 2001 and 2000, in conformity with
accounting principles generally accepted in the United States of America.
TANNER + CO.
Salt Lake City, Utah
March 6, 2002
F-2
PARADIGM MEDICAL INDUSTRIES, INC.
Balance Sheet
December 31, 2001
----------------------------------------------------------------------------------------------------------
Assets
------
Current assets:
Cash $ 2,702,000
Receivables, net 2,394,000
Inventories, net 5,131,000
Prepaid and other assets 327,000
-----------------
Total current assets 10,554,000
Intangibles, net 1,158,000
Property and equipment, net 840,000
Other assets 90,000
-----------------
Total assets $ 12,642,000
-----------------
----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Payables $ 1,217,000
Accrued liabilities 1,572,000
Current portion of capital lease obligations 59,000
-----------------
Total current liabilities 2,848,000
-----------------
Capital lease obligations, net of current portion 124,000
-----------------
Commitments and contingencies -
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized,
91,392 shares issued and outstanding (aggregate liquidation
preference of $6,726,000) -
Common stock, $.001 par value, 20,000,000 shares authorized,
15,072,531 shares issued and outstanding 15,000
Additional paid-in capital 52,156,000
Accumulated deficit (42,501,000)
-----------------
Total stockholders' equity 9,670,000
-----------------
Total liabilities and stockholders' equity $ 12,642,000
-----------------
----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-3
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Operations
Years Ended December 31,
----------------------------------------------------------------------------------------------------------
2001 2000
----------------------------------
Sales $ 7,919,000 $ 7,989,000
Cost of sales 4,912,000 6,626,000
----------------------------------
Gross profit 3,007,000 1,363,000
----------------------------------
Operating expenses:
General and administrative 5,125,000 5,432,000
Marketing and selling 4,762,000 3,950,000
Research and development 2,405,000 1,425,000
----------------------------------
Total operating expenses 12,292,000 10,807,000
----------------------------------
Operating loss (9,285,000) (9,444,000)
----------------------------------
Other income (expense):
Interest income 48,000 146,000
Interest expense (41,000) (16,000)
Other income (expense) (865,000) 9,000
----------------------------------
Total other income (expense) (858,000) 139,000
----------------------------------
Loss before provision for income taxes (10,143,000) (9,305,000)
Provision for income taxes - -
----------------------------------
Net loss $ (10,143,000) $ (9,305,000)
----------------------------------
Beneficial conversion feature on Series E preferred stock (2,587,000) -
Deemed dividend from Series E preferred detachable
warrants (314,000) -
----------------------------------
Net loss applicable to common shareholders $ (13,044,000) $ (9,305,000)
----------------------------------
Loss per common share - basic and diluted $ (.98) $ (.81)
----------------------------------
Weighted average common shares - basic and diluted 13,245,000 11,547,000
----------------------------------
----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-4
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Stockholders' Equity
Years Ended December 31, 2001 and 2000
----------------------------------------------------------------------------------------------------------------------------------
Preferred Additional Stock
Stock Common Stock Paid-In Treasury Stock Subscription Accumulated
(see Note 8) Shares Amount Capital Shares Amount Receivable Deficit
------------------------------------------------------------------------------------------------
Balance at January 1, 2000 $ - 9,707,078 $ 10,000 $ 31,142,000 2,600 $ (4,000) $ (8,000) $ (23,053,000)
Treasury stock retired - (2,600) - (4,000) (2,600) 4,000 - -
Conversion of preferred stock - 297,238 - - - - - -
Issuance of common stock for:
Cash - 910,933 1,000 2,571,000 - - - -
Exercise of warrants and
stock options - 1,355,646 1,000 4,841,000 - - - -
Assets - 100,000 - 675,000 - - - -
Services - 242,894 1,000 1,403,000 - - - -
Issuance of stock options and
warrants for services - - - 529,000 - - - -
Net loss - - - - - - - (9,305,000)
------------------------------------------------------------------------------------------------
Balance at December 31,2000 - 12,611,189 13,000 41,157,000 - - (8,000) (32,358,000)
Issuance of Series E
preferred stock for cash - - - 4,607,000 - - - -
Issuance of Series F
preferred stock for cash - - - 4,358,000 - - - -
Conversion of preferred stock - 1,758,617 2,000 (2,000) - - - -
Issuance of common stock for:
Cash - 328,725 - 673,000 - - - -
Settlement of litigation - 350,000 - 812,000 - - - -
Services - 24,000 - 48,000 - - - -
Compensation - - - - - - 8,000 -
Issuance of stock options and
warrants for services - - - 503,000 - - - -
Net loss - - - - - - - (10,143,000)
------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ - 15,072,531 $ 15,000 $ 52,156,000 - $ - $ - $ 42,501,000
------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-5
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Cash Flows
Years Ended December 31,
-----------------------------------------------------------------------------------------------------------
2001 2000
----------------------------------
Cash flows from operating activities:
Net loss $ (10,143,000) $ (9,305,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 671,000 528,000
Issuance of common stock for compensation 8,000 -
Issuance of common stock for services 48,000 1,404,000
Issuance of stock option/warrant for services 503,000 529,000
Common stock issued for settlement 812,000 -
Provision for losses on receivables - (30,000)
Provision for losses on inventory - 489,000
(Gain) loss on disposal of assets 23,000 (2,000)
(Increase) decrease in:
Receivables (787,000) 153,000
Inventories (684,000) 449,000
Prepaid and other assets (152,000) 4,000
Increase (decrease) in:
Payables 530,000 140,000
Accrued liabilities 372,000 217,000
----------------------------------
Net cash used in
operating activities (8,799,000) (5,424,000)
----------------------------------
Cash flows from investing activities:
Purchase of property and equipment (220,000) (613,000)
Increase in intangibles (26,000) (26,000)
Proceeds from the disposal of assets - 9,000
Net cash paid in acquisition - (95,000)
----------------------------------
Net cash used in
investing activities (246,000) (725,000)
-----------------------------------
Cash flows from financing activities:
Proceeds from issuance of Series E preferred stock 4,607,000 -
Proceeds from issuance of Series F preferred stock 4,358,000 -
Proceeds from issuance of common stock - 2,572,000
Principal payments on notes payable and long-term debt (85,000) (189,000)
Proceeds from exercise of common stock warrants and options 673,000 4,842,000
----------------------------------
Net cash provided by
financing activities 9,553,000 7,225,000
----------------------------------
Net increase in cash 508,000 1,076,000
Cash, beginning of year 2,194,000 1,118,000
----------------------------------
Cash, end of year $ 2,702,000 $ 2,194,000
----------------------------------
-----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-6
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
December 31, 2001 and 2000
--------------------------------------------------------------------------------
1. Organization Organization
and Significant Paradigm Medical Industries, Inc. (the Company) is a
Accounting Delaware Corporation incorporated in October 1989. The
Policies Company is engaged in the design, development,
manufacture, and sale of high technology surgical and
diagnostic eye care products. Its surgical equipment is
designed to perform minimally invasive cataract surgery
and is comprised of surgical devices and related
instruments and accessories, including disposable
products. Its diagnostic products include a pachymeter,
an A-Scan, an A/B Scan, a biomicroscope, a perimeter, a
corneal topographer, and a blood flow analyzer.
Its ultrasound diagnostic products technology were
acquired from Humphrey Systems in 1998. In October 1999,
the Company purchased the inventory and design and
production rights of another line of surgical equipment,
also designed to perform minimally invasive cataract
surgery. The line includes the Mentor SIStem (TM), the
Odyssey (TM), and the Surgitrol (TM). In November 1999,
the Company entered into a Mutual Release and Settlement
Agreement with the manufacturer of the Precisionist
Thirty Thousand (TM) in which the Company purchased the
raw materials and finished goods inventory to bring
manufacture of this product in-house. The Dicon (TM)
perimeter and the Dicon (TM) topographer were acquired
when the Company acquired Vismed in June 2000. The blood
flow analyzer was acquired when Ocular Blood Flow LTD
(OBF) was purchased in June 2000.
--------------------------------------------------------------------------------
F-7
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Liquidity
and Significant The Company has incurred net losses and negative cash
Accounting flows from operating activities for the years ended
Policies December 31, 2001 and 2000 and has an accumulated
Continued deficit. The Company currently has a private equity line
of credit agreement with Triton West Group, Inc.,
(Triton), which allows the Company to sell $20 million
of common stock over a three year period beginning June
30, 2000 to Triton by tendering put notices to purchase
shares. The company sold approximately 329,000 shares of
common stock for approximately $674,000 during 2001 (see
note 5). Management believes that the combination of
existing working capital and the private equity line of
credit will be sufficient to assure continuation of the
Company's operations through December 31, 2002. In the
past, the Company has relied heavily upon sales of its
common and preferred stock to fund operations. There can
be no assurance that such equity financing will be
available on terms acceptable to the Company in the
future. If the Company is unable to obtain such
financing or secure debt financing, it may be unable to
continue development of its products and may be required
to substantially curtail operations.
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.
Inventories
Inventories are stated at the lower of cost or market,
cost is determined using the weighted average method.
Property and Equipment
Property and equipment are recorded at cost, less
accumulated depreciation. Depreciation on property and
equipment is determined using the straight-line method
over the estimated useful lives of the assets or terms
of the lease. Expenditures for maintenance and repairs
are expensed when incurred and betterments are
capitalized. Gains and losses on sale of property and
equipment are reflected in operations.
--------------------------------------------------------------------------------
F-8
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Intangible Assets
and Significant Intangible assets consist of the purchase price in
Accounting excess of net assets acquired in the purchase of Ocular
Policies Blood Flow, Ltd., product rights, capitalized payments
Continued to manufacturers for engineering and design services and
patent costs. These costs are being amortized using the
straight line method over a three to ten year period.
Evaluation of Intangible and Other Long-Lived Assets
The Company evaluates the carrying value of the
unamortized balances of intangible and other long-lived
assets to determine whether any impairment of these
assets has occurred or whether any revision to the
related amortization periods should be made. This
evaluation is based on management's projections of the
undiscounted future cash flows associated with each
asset. If management's evaluation were to indicate that
the carrying values of these assets were impaired, such
impairment would be recognized by a write down of the
applicable asset.
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, stock compensation expense, 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. Options and warrants to purchase
6,191,798 and 3,412,181 shares of common stock at prices
ranging from $2.00 to $12.98 per share were outstanding
at December 31, 2001 and 2000, respectively, but were
not included in the diluted earnings per share
calculation because the effect would have been
antidilutive.
--------------------------------------------------------------------------------
F-9
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Revenue Recognition
and Significant Revenues for sales of products that require specific
Accounting installation and acceptance by the customer are
Policies recognized upon such installation and acceptance by the
Continued customer. Revenues for sales of other surgical systems,
ultrasound diagnostic devices, and disposable products
are recognized when the product is shipped. A signed
purchase agreement and a deposit or payment in full from
customers are required before a product leaves the
premises. Title passes at time of shipment (F.O.B.
shipping point).
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
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Concentration of Risk - Continued
and Significant A significant portion of the Company's product sales are
Accounting in foreign countries. The economic and political
Policies instability of some foreign countries may affect the
Continued 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 years ended December 31, 2001 and 2000, no
single customer represented more than 10 percent of
total net sales.
Accounts receivable are due from medical distributors,
surgery centers, hospitals, optometrists and
ophthalmologists located throughout the U.S. and a
number of foreign countries. The receivables are
generally due within thirty days for domestic customers
with extended terms offered for some international
customers. The Company maintains an allowance for
estimated potentially uncollectible amounts.
Warranty
The Company provides product warranties on the sale of
certain products that generally extend for one year from
the date of sale. The Company maintains a reserve for
estimated warranty costs based on historical experience
and management's best estimates.
Stock-Based Compensation
For stock options and warrants granted to employees the
Company employs the footnote disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation. SFAS No.
123 encourages entities to adopt a fair-value based
method of accounting for stock options or similar equity
instruments. However, it also allows an entity to
continue measuring compensation cost for stock-based
compensation using the intrinsic-value method of
accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). The Company has elected to continue
to apply the provisions of APB 25 and provide pro forma
footnote disclosures required by SFAS No. 123. The
appropriate disclosures required by SFAS No. 123 are
included in note 10.
--------------------------------------------------------------------------------
F-11
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Stock-Based Compensation - Continued
and Significant Stock options and warrants granted to non-employees for
Accounting services are accounted for in accordance with SFAS 123
Policies which requires expense recognition based on the fair
Continued value of the options/warrants granted. The Company
calculates the fair value of options and warrants
granted by use of the Black-Scholes pricing model.
Use of Estimates in the Preparation of Financial
Statements
The preparation of financial statements in conformity
with accounting principles generally accepted in the
United States of America 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 2000 financial statements have
been reclassified to conform with the presentation of
the current year financial statements.
2. Acquisitions In June 2000, the Company acquired Vismed, Inc. dba
Dicon in exchange for 921,500 shares of common stock.
The business combination has been accounted for by the
pooling-of-interest method in accordance with APB 16.
Accordingly, the historical financial statements have
been restated to reflect the combination with Vismed as
if it had occurred as of January 1, 1999. Vismed was
founded in 1989 and manufactures and distributes Dicon
branded diagnostic products. These products include a
perimeter used to detect retinal sensitivity and a
corneal topographer used to measure the curvature of the
cornea which is useful in the fitting of contact lenses
and refractive surgery.
In June 2000, the Company completed the purchase of
Ocular Blood Flow, Ltd. (OBF) for $100,000 and 100,000
shares of common stock. This transaction has been
accounted for using the purchase method of accounting.
OBF manufactures a blood flow analyzer representing
proprietary technology for measuring blood flow to the
eye. Pro forma results of operations as if the companies
had been combined have not been presented since OBF
operations were not significant.
--------------------------------------------------------------------------------
F-12
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
3. Detail of Receivables:
Certain Trade receivables $ 2,750,000
Balance Other 14,000
Sheet Allowance for doubtful
Accounts accounts (370,000)
---------------
$ 2,394,000
---------------
Inventories:
Finished goods $ 2,318,000
Raw materials 2,896,000
Work in process 288,000
Reserve for obsolescence (371,000)
---------------
$ 5,131,000
---------------
Accrued liabilities:
Warranty and return allowance $ 596,000
Customer deposits 41,000
Payroll and employee benefits 306,000
Royalties 145,000
Commissions 100,000
Deferred revenue 220,000
Other 164,000
---------------
$ 1,572,000
---------------
--------------------------------------------------------------------------------
F-13
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
3. Detail of Intangible assets:
Certain Purchase price in excess of
Balance net asset $ 799,000
Sheet Product and technology rights 773,000
Accounts Engineering and design costs 482,000
Continued Patents 169,000
---------------
2,223,000
Accumulated amortization (1,065,000)
---------------
Net intangible assets $ 1,158,000
---------------
Amortization expense for the years ended December 31,
2001 and 2000 was $341,000 and $260,000, respectively.
4. Property and Property and equipment consists of the following:
Equipment
Office equipment $ 770,000
Computer equipment 707,000
Automobile 52,000
Furniture and fixtures 264,000
Leasehold improvements 227,000
---------------
2,020,000
Accumulated depreciation and
amortization (1,180,000)
---------------
$ 840,000
---------------
--------------------------------------------------------------------------------
F-14
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
5. Equity Line The Company currently has a private equity line of
of Credit credit agreement with Triton West Group, Inc., (Triton),
which allows the Company to sell $20 million of common
stock over a three year period beginning June 30, 2000
to Triton by tendering put notices to purchase shares.
The put notices may be tendered by the Company at the
Company's discretion. Upon the put notice Triton is
obligated to purchase shares at 88% of the lowest
closing bid price on the trading day immediately
following a five day period commencing two days prior to
put notice and ending two days after such put notice
date. The total amount per put is determined based on
the stock closing bid price and the 30 trading day
volume, with a maximum put amount of $2 million.
The Company sold approximately 329,000 shares of common
stock for approximately $674,000 during 2001 under the
equity line of credit with Triton West Group, Inc. in
five different transactions dating from February 16,
2001 to June 21, 2001.
6. Lease During the years ended December 31, 2001 and 2000, the
Obligations 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 $ 291,000
Less accumulated depreciation (74,000)
--------------
$ 217,000
---------------
Depreciation expense on assets under capital leases
during the years ended December 31, 2001 and 2000 was
$54,000 and $10,000, respectively.
--------------------------------------------------------------------------------
F-15
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
6. Lease Capital lease obligations have imputed interest rates of
Obligations approximately 15% to 22%. The leases are secured by
Continued equipment. Future minimum payments on the capital lease
obligations are as follows:
2002 $ 87,000
2003 61,000
2004 45,000
2005 37,000
2006 15,000
--------------
245,000
Less amount representing interest (62,000)
--------------
Present value of future minimum
lease payments 183,000
Less current portion (59,000)
--------------
Long-term portion $ 124,000
--------------
The Company leases office and warehouse space under an
operating lease agreement. Future minimum rental
payments under the noncancellable operating lease as of
December 31, 2001 are approximately as follows:
Year Ending December 31, Amount
------------------------ --------------
2002 $ 340,000
2003 51,000
-------------
Total future minimum rental payments $ 391,000
--------------
Rent expense related to noncancelable operating leases
was approximately $435,000 and $362,000 for the years
ended December 31, 2001 and 2000, respectively.
--------------------------------------------------------------------------------
F-16
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. Income The provision for income taxes is different than amounts
Taxes 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,
-----------------------------------
2001 2000
-----------------------------------
Federal income tax benefit at
Statutory rate $ 3,753,000 $ 3,443,000
Expiration of research and
development tax credit
carryforwards (181,000) (107,000)
Tax credits - 44,000
Amortization of goodwill (30,000) (15,000)
Other (28,000) (20,000)
Change in valuation allowance (3,514,000) (3,345,000)
-----------------------------------
$ - $ -
-----------------------------------
Deferred tax assets (liabilities) are comprised of the
following:
Net operating loss carryforward $ 12,791,000
Depreciation and amortization 106,000
Allowance and reserves 557,000
Research and development tax credit
carryforwards 59,000
------------------
13,513,000
Valuation allowance (13,513,000)
------------------
$ -
------------------
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.
--------------------------------------------------------------------------------
F-17
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. Income At December 31, 2001, the Company had net operating loss
Taxes carryforwards of approximately $34,000,000 and research
Continued and development tax credit carryforwards of
approximately $240,000. These carryforwards are
available to offset future taxable income and began to
expire in 2001 and extend to 2020. 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.
8. 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. Total
liquidation preference at December 31, 2001 was
$6,000.
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.
--------------------------------------------------------------------------------
F-18
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Stock Series A Preferred Stock - Continued
Continued 4. he 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.
Series B Preferred Stock
On May 9, 1994, the Company established a series of
non-voting preferred shares designated as 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. Total liquidation preference at
December 31, 2001 was $36,000.
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.
--------------------------------------------------------------------------------
F-19
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Stock Series B Preferred Stock - Continued
Continued 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.
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.
--------------------------------------------------------------------------------
F-20
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Stock Series D Preferred Stock
Continued 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.
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. Total liquidation preference at December
31, 2001 was $18,000.
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. The Company in
1999 recorded $872,000 as a beneficial conversion
feature related to the differences in the conversion
price of the preferred stock to common stock.
4. The holders of the shares have no voting rights.
--------------------------------------------------------------------------------
F-21
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Stock Series E Preferred Stock
Continued In May 2001, the Company authorized the issuance of a
total of 50,000 shares of Series E Preferred Stock $.001
par value, $100 stated value. The Series E Preferred
Stock has the following rights and privileges:
1. The holders of the shares are entitled to dividends
at the rate of 8% 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 E 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. Total liquidation preference at December
31, 2001 was $1,930,000.
3. Each share is convertible, at the option of the
holder at any time until January 1, 2005, into
approximately 53.33 shares of Common Stock at an
initial conversion price, subject to adjustment for
stock splits, stock dividends and certain combination
or recapitalization of the common stock, equal to
$1.875 per share of common stock. The Series E
Preferred Stock shall be converted into Common Stock
subject to adjustment (a) on January 1, 2005 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 E 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 E Preferred
Stock is at least $3.50 per share. The Company in
2001 recorded $1,482,000 as a beneficial conversion
feature related to the differences in the conversion
price of the preferred stock to common stock.
--------------------------------------------------------------------------------
F-22
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Stock Series E Preferred Stock - Continued
Continued 4. The holders of the shares have no voting rights.
5. The holders of the shares also were issued warrants
to purchase shares of common stock equal to 1,000
warrants for every 200 shares purchased at an
exercise price of $4.00 per share. Each warrant is
exercisable until May 23, 2006.
Series F Preferred Stock
In August 2001, the Company authorized the issuance of a
total of 50,000 shares of Series F Preferred Stock $.001
par value, $100 stated value. The Series F Preferred
Stock has the following rights and privileges:
1. The holders of the shares are entitled to dividends
at the rate of 8% 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 F 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. Total liquidation preference at December
31, 2001 was $4,736,000.
--------------------------------------------------------------------------------
F-23
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Stock Series F Preferred Stock - Continued
Continued 3. Each share is convertible, at the option of the
holder at any time until January 1, 2005, into
approximately 53.33 shares of Common Stock at an
initial conversion price, subject to adjustment for
stock splits, stock dividends and certain combination
or recapitalization of the common stock, equal to
$1.875 per share of common stock. The Series F
Preferred Stock shall be converted into Common Stock
subject to adjustment (a) on January 1, 2005 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 F 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 F Preferred
Stock is at least $3.50 per share. The Company in
2001 recorded $1,105,000 as a beneficial conversion
feature related to the differences in the conversion
price of the preferred stock to common stock.
4. The holders of the shares have no voting rights.
--------------------------------------------------------------------------------
F-24
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Stock The following table summarizes preferred stock activity
Continued during the years ended December 31, 2001 and 2000:
Series A Series B Series C Series D Series E Series F
--------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------------------------
Balance at January 1, 2000 8,077 $ - 19,236 $ - 500 $ - 313,644 $ - - $ - - $ -
Conversion of preferred stock (2,120) - (4,000) - (500) - (261,144) - - - - -
----------------------------------------------------------------------------------------------------
Balance at December 31, 2000 5,957 - 15,236 - - - 52,500 - - - - -
Issuance of Series E - - - - - - - - 46,219 - - -
preferred stock for cash
Issuance of Series F - - - - - - - - - - 52,472 -
preferred stock for cash
Conversion of preferred stock (210) - (6250) - - - (42,500) - (26,919) - (5,113) -
-----------------------------------------------------------------------------------------------------
Balance at December 31, 2001 5,747 $ - 8,986 $ - - $ - 10,000 $ - 19,300 $ - 47,359 $ -
-----------------------------------------------------------------------------------------------------
Authorized 500,000 500,000 30,000 1,140,000 50,000 50,000
-----------------------------------------------------------------------------------------------------
Liquidation preference $6,000 $36,000 $ - $18,000 $1,930,000 $4,736,000
-----------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
F-25
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Stock Option The Company has a Stock Option Plan (the Option Plan),
Plan and which reserves shares of the Company's authorized but
Warrants unissued common stock for the granting of stock options.
Amendments to the Option Plan increased the number of
shares of common stock reserved for issuance thereunder
to an aggregate of 2,700,000 shares.
The Option Plan provides for the grant of incentive
stock options and non-qualified stock options to
employees and 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.
During the year 2001, the Company granted options and
warrants to non-employees. These options and warrants
were nonforfeitable, vested and fully exercisable at the
time of grant. The exercise prices of these options were
not issued at a discount to the then market price of the
common stock. The options and warrants were valued
according to the Black-Scholes pricing model.
The Company granted warrants to purchase 100,000 shares
of common stock at an exercise price of $4.00 per share,
warrants to purchase 35,000 shares of common stock at an
exercise price of $2.00 per share, and warrants to
purchase 100,000 shares of common stock at $3.00 per
share in return for consulting services. As a result of
these warrants granted the Company recorded
approximately $342,000 of general and administrative
expense.
Warrants to purchase 50,000 shares of common stock at an
exercise price of $4.00 that vested in November 2001
were issued to a consultant as an extension of the
consulting agreement. The Company recognized $133,000 of
general and administrative expense in connection with
these warrants.
In connection with the Series E Preferred Stock
offering, the Company issued warrants to purchase in
aggregate 231,095 shares of common stock at an exercise
price of $4.00 per share.
--------------------------------------------------------------------------------
F-26
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Stock Option In addition, the Company granted the following options
Plan and and warrants to non-employees during the year ended
Warrants December 31, 2000:
Continued
The Company granted warrants to purchase 300,000 shares
of common stock in connection with private placement
offerings of common stock, the pooling of interests
merger with Dicon, and other equity raising activities.
The warrants were immediately fully vested,
nonforfeitable, and fully exercisable at the date of
grant. The exercise price of such warrants was equal to
or in excess of the market price of the Company's common
stock on the date of grant. Because these warrants were
granted in connection with equity transactions they were
recorded as a direct offset to capital rather than as an
expense to operations.
The Company also granted warrants to purchase 120,000
shares of common stock as consideration for consulting
and other services rendered. 70,000 of the warrants were
immediately fully vested, nonforfeitable, and fully
exercisable at the date of grant and the remaining
50,000 vest in May of 2001. The exercise price of such
warrants was equal to or in excess of the market price
of the Company's common stock on the date of grant.
These warrants were valued using the Black-Scholes
Option Pricing Model and an expense of $396,000 was
recorded and is included in general and administrative
expense in the statement of operations. An expense of
$28,000 related to the warrants vesting in May 2001 will
be recorded upon vesting.
--------------------------------------------------------------------------------
F-27
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Stock Option A schedule of the options and warrants is as follows:
Plan and
Warrants
Continued Number of Exercise
----------------------------- Price Per
Options Warrants Share
-----------------------------------------------
Outstanding at
January 1, 2000 1,048,232 2,636,758 $ 2.30 - 12.98
Granted 746,000 400,000 4.00 - 7.27
Exercised (162,490) (1,100,056) 2.38 - 8.13
Expired (18,488) (137,775) 3.33 - 6.49
-----------------------------------------------
Outstanding at
December 31, 2000 1,613,254 1,798,927 2.30 - 12.98
Granted 2,790,000 516,095 2.00 - 4.00
Exercised - - -
Expired (236,626) - 4.87 - 5.00
Forfeited (289,852) - 2.75 - 5.00
-----------------------------------------------
Outstanding at
December 31, 2001 3,876,776 2,315,022 $ 2.00 - 12.98
-----------------------------------------------
10. Stock-Based The Company adopted the disclosure only provisions of
Compensation 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,
------------------------------------
2001 2000
------------------------------------
Net loss - as reported $ (10,143,000) $ (9,305,000)
Net loss - pro forma $ (11,575,000) $ (10,180,000)
Loss per share - as reported $ (.77) $ (.81)
Loss per share - pro forma $ (.87) $ (.88)
------------------------------------
--------------------------------------------------------------------------------
F-28
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Stock-Based The fair value of each option grant is estimated at the
Compensation date of grant using the Black-Scholes option pricing
Continued model with the following assumptions:
December 31,
-----------------------------------
2001 2000
-----------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 106%-107% 106%
Risk-free interest rate 4-5% 6.0%
Expected life of options 3-5 years 2-5 years
-----------------------------------
The weighted average fair value of options granted
during the years ended December 31, 2001 and 2000 are
$1.71 and $2.69, respectively.
The following table summarizes information about stock
options and warrants outstanding at December 31, 2001:
Outstanding Exercisable
-------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
--------------------------------------------------------------------------------
$ 2.00 - 5.00 4,578,890 5.58 $ 3.35 3,584,128 $ 1.95
6.00 - 8.13 1,587,025 .84 7.21 1,359,900 7.15
12.98 25,883 N/A 12.98 25,883 12.98
--------------------------------------------------------------------------------
$ 2.30 -12.98 6,191,798 4.37 $ 4.34 4,969,911 $ 4.54
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
F-29
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
11. Related On October 1, 1999, the Company entered into a
Party consulting agreement with Cyndel & Company, Inc.
Transactions ("Cyndel"), an entity owned by former directors of the
Company, in which Cyndel agreed to perform unspecified
investment banking services for the Company for a
one-year period, for which the Company agreed to pay
Cyndel a monthly retainer of $8,333, plus reimburse
Cyndel for any expenses incurred in connection with such
investment banking services.
The October 1, 1999 consulting agreement was terminated
when the Company entered into a new consulting agreement
with Cyndel on April 1, 2000. Under the terms of the
April 1, 2000 consulting agreement, Cyndel agreed to
perform unspecified investment banking services for the
Company for a one-year period, for which the Company
agreed to pay Cyndel a monthly retainer of $16,667, plus
reimburse Cyndel for any expenses incurred in connection
with such investment banking services.
Besides a monthly retainer, the Company has agreed in
the April 1, 2000 consulting agreement to pay Cyndel
additional compensation of an unspecified amount to be
mutually agreed upon if Cyndel brings to the Company a
candidate for merger, acquisition, joint venture or
other combination or relationship, and the Company
enters into a business relationship with such entity.
The April 1, 2000 consulting agreement is automatically
renewable for additional, successive one-year periods
through March 31, 2003, unless either party delivers to
the other party on or before January 1 of the contract
year written notice of its intent not to renew the
agreement.
--------------------------------------------------------------------------------
F-30
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
11. Related Under the terms of the April 1, 2000 consulting
Party agreement, the Company paid Cyndel approximately
Transactions $182,000 in consulting fees during 2000. In addition,
Continued the Company paid $500,000 and issued warrants to
purchase 150,000 shares of common stock at an exercise
price of $4.00 per share as commission for the private
placement transaction in which 750,000 shares of common
stock were sold for net proceeds of approximately
$1,974,000. The warrants issued and the commissions paid
were considered direct costs of capital, therefore no
expense was recorded but such amounts were recorded as a
direct reduction of capital.
The April 1, 2000 consulting agreement was renewed for
an additional one-year period through March 2002.
However, on December 26, 2001, the Company provided
written notification to Cyndel of its intension not to
renew the agreement after March 31, 2002. The total
amount paid to Cyndel for services under the agreement
from April 1, 2000 to February 28, 2002 was $383,333.
Final payment of $16,667, which was due on March 1,
2002, has not yet been paid.
Thomas F. Motter, Chairman of the Board and Chief
Executive Officer of the Company, leased his former
residence, which he still owns, to the Company for
$2,500 per month. The primary use of the residential
property was for housing accommodations for the
Company's employees living outside of Utah while they
were working at the Company's corporate headquarters in
Salt Lake City. The Company has obtained an appraisal
from an independent appraiser, which has concluded that
the monthly rate of $2,500 represents the fair market
rate for leasing the residential property. This lease
agreement was terminated on October 31, 2000.
On January 21, 2000 the Board of Directors granted
Thomas F. Motter, CEO and President, 100,000 shares of
the Company's Common Stock. 61,111 shares of this total
amount were considered repayment for 61,111 shares Mr.
Motter issued to Douglas A. MacLeod prior to the
Company's initial public offering in July 1996, under a
settlement agreement to terminate certain anti-dilution
rights granted Mr. MacLeod by the Company. The balance
of 38,889 shares was deemed by the Board as a bonus for
work done by Mr. Motter since the initial public
offering. The market price on the date of grant was
$12.50 per share, and compensation expense in the amount
of $486,000 was recognized.
--------------------------------------------------------------------------------
F-31
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
11. Related On January 21, 2000 the Board of Directors granted
Party Michael W. Stelzer, a former officer of the Company,
Transactions 20,000 shares of the Company's Common Stock as part of a
Continued severance agreement, and as part of settlement of Mr.
Stelzer's employment agreement. The market price on the
date of grant was $12.50 per share, and compensation
expense in the amount of $250,000 was recognized.
On June 5, 2000 the Company issued Mark Miehle 28,500
shares of the Company's Common Stock for a signing bonus
as part of Mr. Miehle's employment agreement. The market
price on the date of the grant was $6.8125 per share,
and compensation expense in the amount of $194,000 was
recognized.
A law firm, of which a director of the Company is a
shareholder, has rendered legal services to the Company.
The Company paid this firm $159,000 and $167,000, for
the years ended December 31, 2001 and 2000,
respectively. As of December 31, 2001, the Company owed
this firm $40,000 which is included in accounts payable.
12. Supplemental During the year ended December 31, 2001 the Company
Cash Flow acquired approximately $235,000 of property and
Information equipment in exchange for capital lease agreements.
--------------------------------------------------------------------------------
F-32
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
12. Supplemental During the year ended December 31, 2000 the Company
Cash Flow acquired the assets and liabilities of Ocular Blood
Information Flow, Ltd. (OBF) in a purchase transaction. The
Continued transaction required the payment of $100,000 and 100,000
shares of common stock. The Company recorded the
following:
Accounts receivable $ 22,000
Prepaids 18,000
Inventory 28,000
Intangibles 799,000
Property, plant and equipment 25,000
Accounts payable (48,000)
Accrued liabilities (8,000)
Debt (66,000)
Common stock issued (675,000)
-----------------
Net cash $ 95,000
-----------------
Actual amounts paid for interest and income taxes are as
follows:
Years Ended
December 31,
-----------------------------------
2001 2000
-----------------------------------
Interest $ 41,000 $ 16,000
-----------------------------------
Income taxes $ - $ -
-----------------------------------
--------------------------------------------------------------------------------
F-33
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
13. Export Sales Total sales include export sales by major geographic
area as follows:
Years Ended
December 31,
-----------------------------------
Geographic Area 2001 2000
-----------------------------------
Far East $ 1,416,000 $ 2,428,000
South America 301,000 408,000
Middle East 287,000 200,000
Europe 1,323,000 1,219,000
Canada 200,000 138,000
Mexico 31,000 7,000
-----------------------------------
$ 3,558,000 $ 4,400,000
-----------------------------------
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, 2001 and 2000, the Company contributed
approximately $68,000 and $49,000 to the Plan,
respectively.
15. Commitments and Consulting Agreements
Contingencies 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, 2000, in connection
with the acquisition of OBF, the Company entered a
consulting agreement with the former owner of OBF which
requires monthly payments of $6,000 through June 2003.
--------------------------------------------------------------------------------
F-34
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments and Employment Agreements
Contingencies The Company has employment agreements with two officers
Continued which expire between June 2003 and December 2003. The
agreements provide for aggregate annual compensation of
$350,000. 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
An action was brought against the Company in March 2000
by George Wiseman, a former employee, in the Third
District Court of Salt Lake County, State of Utah. The
complaint alleges that the Company owes Mr. Wiseman
6,370 shares of its common stock plus costs, attorney's
fees and a wage penalty (equal to 1,960 additional
shares of Paradigm common stock) pursuant to Utah law.
The Company believes the complaint is without merit and
intends to vigorously defend against the action.
An action was brought against the Company in September
2000 by PhotoMed International, Inc. and Daniel M.
Eichenbaum in the Third District Court of Salt Lake
County, State of Utah. The action involves an amount of
royalties that are allegedly due and owing to PhotoMed
International, Inc. and Dr. Eichenbaum with respect to
the sales of certain equipment plus attorney's fees.
Discovery has taken place and the Company has paid
royalties of $15,000 to bring all required payments up
to date through June 30, 2001. However, the legal action
has not been dismissed as a result of the payments. The
Company is in the process of working with Photomed
International and Dr. Eichenbaum to ensure that the
calculations have been correctly made on the royalties
paid as well as the proper method of calculation in the
future. It is anticipated that once the parties can
agree on the correct calculations on the royalties, the
legal action will be dismissed. The Company believes
that any additional royalty payments that may be
required as settlement of the action will not have a
material impact on the financial statements.
An action has been brought against the Company by
Merrill Corporation that alleges that the Company owes
the plaintiff approximately $20,000 together with
interest thereon at the rate of 10% per annum from
August 30, 1999, plus costs and attorney's fee. The
Company has filed an answer to the complaint and
discovery is proceeding. The Company believes that the
complaint against the Company is without merit and
intends to vigorously defend against the action.
--------------------------------------------------------------------------------
F-35
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments and Litigation - Continued
Contingencies The Company received demand letters dated September 14,
Continued 2000 and October 17, 2000 from Mentor Corporation
("Mentor") claiming that the Company failed to register
485,751 shares of common stock issued to Mentor under
the Asset Purchase Agreement dated October 15, 1999,
among the Company, Mentor, Mentor Ophthalmics, Inc. and
Mentor Medical, Inc. The Asset Purchase Agreement
related to the Company's purchase of Mentor's
phacoemulsification product line in consideration for
the issuance by the Company to Mentor of 485,751 shares
of its common stock, valued at the sum of $1,500,000 at
the time of closing.
On July 2, 2001, the Company entered into a settlement
agreement with Mentor Corporation in which the Company
agreed to pay 350,000 shares of common stock to the
Mentor Corporation in exchange for release of all claims
against the Company in connection with the registration
of certain shares of the Company's common stock
previously issued. This settlement resulted in a
litigation settlement expense of $812,000 based on the
market price of the Company's common stock on the date
of settlement.
The Company may become or is subject to other
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 other such items, which it believes
could have a material adverse effect on the financial
statements.
Royalty Agreements
The Company has a royalty agreement with the president
of OBF. The agreement provides for the payment of 10%
royalty of the net sales related to the Blood Flow
Analyzer. The agreement terminates in 2020. As of
December 31, 2001, the Company paid $133,000 of
royalties under this agreement and $94,000 was accrued
at the end of the year.
--------------------------------------------------------------------------------
F-36
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments and Royalty Agreements - Continued
Contingencies The Company has an amended exclusive patent license
Continued agreement with a company which owns the patent for the
laser-probe used on the Photon machine. 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, 2001, no significant royalties have
been paid under this agreement.
The Company has an agreement with a company that
provides for the payment of royalties related to the
sales of the corneal topography instrument referred to
as the CT. During the years ended December 31, 2001 and
2000 payments were made of approximately $146,000 and
$173,000, respectively. In addition, $28,350 was accrued
at the end of 2001.
The Company has an agreement with a Canadian corporation
that provides for the payment of royalties related to
the sales of UBM (Ultrasonic Bio-Microscopy). The
agreement outlines payments of 150 Canadian Dollars for
each licensed product sold for a period of 12 years that
ends in September of 2002. No significant royalties were
due under this agreement during the years ended December
31, 2001 and 2000.
The Company has a royalty agreement with another company
that developed a promotional CD for the Company. Through
the promotion of the CD, the Company hopes to increase
sales in the Autoperimiter and assist doctors currently
using the unit with the interpretation of visual fields.
The royalty base with be 50% each until the Company's
share equals the production costs related to development
of the disk. Thereafter, the developer will receive 70%
and the Company will receive 30% of the royalty base.
Royalties paid during the year relating to this
agreement were not considered material.
16. Fair Value The Company's financial instruments consist of cash,
of Financial receivables, payables, and notes payable. The carrying
Instruments 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.
--------------------------------------------------------------------------------
F-37
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
17. Recent In July 2001, the Financial Accounting Standards Board
Accounting ("FASB") issued Statements of Financial Accounting
Pronounce- Standards No. 141 ("SFAS 141"), "Business Combinations."
ments SFAS 141 eliminates the pooling-of-interests method of
accounting for business combinations except for
qualifying business combinations that were initiated
prior to July 1, 2001. In addition, SFAS 141 further
clarifies the criteria to recognize intangible assets
separately from goodwill. Specifically, SFAS 141
requires that an intangible asset may be separately
recognized only if such an asset meets specific
criterion. The requirements of Statement 141 are
effective for any business combination accounted for by
the purchase method that is completed after June 30,
2001. The Company is currently evaluating the impact of
SFAS 141 and has not yet determined the impact that
adopting SFAS 141 will have on its financial statements.
On adoption, the Company will be required to reassess
the goodwill and intangible assets previously recorded
in acquisitions prior to July 1, 2001 to determine if
the new recognition criteria for an intangible asset to
be recognized apart from goodwill are met.
--------------------------------------------------------------------------------
F-38
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
17. Recent In July 2001, the FASB issued Statements of Financial
Accounting Accounting Standards No. 142 ("SFAS 142"), "Goodwill and
Pronounce- Other Intangible Assets." Under SFAS 142, goodwill and
ments indefinite lived intangible assets are no longer
Continued amortized but are reviewed annually (or more frequently
if impairment indicators arise) for impairment. For
intangible assets with indefinite useful lives, the
impairment review will involve a comparison of fair
value to carrying value, with any excess of carrying
value over fair value being recorded as an impairment
loss. For goodwill, the impairment test shall be a
two-step process, consisting of a comparison of the fair
value of a reporting unit with its carrying amount,
including the goodwill allocated to each reporting unit.
If the carrying amount is in excess of the fair value,
the implied fair value of the reporting unit goodwill is
compared to the carrying amount of the reporting unit
goodwill. Any excess of the carrying value of the
reporting unit goodwill over the implied fair value of
the reporting unit goodwill will be recorded as an
impairment loss. Separable intangible assets that are
deemed to have a finite life will continue to be
amortized over their useful lives (but with no maximum
life). Intangible assets with finite useful lives will
continue to be reviewed for impairment in accordance
with Statements of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." The amortization provisions of SFAS 142
apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, the Company will
apply the new accounting rules beginning July 1, 2002
and will reassess the useful lives of its separately
recognized intangible assets in the third quarter of
fiscal 2002. The Company will review for impairment
previously recognized intangible assets that are deemed
to have indefinite lives upon the completion of this
analysis in the first quarter of fiscal 2003.
Additionally, upon the adoption of SFAS 142, the Company
will perform a transitional impairment review related to
the carrying value of goodwill as of July 1, 2002 by the
end of the third quarter of fiscal 2002. The Company is
currently in the process of determining its reporting
units for the purpose of applying the impairment test,
analyzing how fair value will be determined for purposes
of applying SFAS 142 and quantifying the anticipated
impact of adopting the provisions of SFAS 142.
Amortization of goodwill was $80,000 for the year ended
December 31, 2001.
--------------------------------------------------------------------------------
F-39
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
17. Recent In August 2001, the FASB issued Statement of Financial
Accounting Accounting Standards No. 144 ("SFAS 144"), "Accounting
Pronounce- for the Impairment or Disposal of Long-Lived Assets,"
ments which supercedes SFAS 121 and the provisions of
Continued Accounting Principles Board Opinion (APB 30), "Reporting
the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and
Transactions" with regard to reporting the effects of a
provisions of FAS 121, but significantly changes the
criteria that would have to be met to classify an asset
as held for disposal such that long-lived assets to be
disposed of other than by sale are considered held and
used until disposed of. In addition, SFAS 144 retains
the basic provisions of APB 30 for presentation of
discontinued operations in the statement of operations
but broadens that presentation to a component of an
entity. The Company will apply SFAS 144 beginning July
1, 2002. The Company is currently evaluating the
potential impact, if any, the adoption of SFAS 144 will
have on its financial position and results of
operations.
18. Subsequent On January 31, 2002, Paradigm Medical Industries, Inc.,
Event a Delaware corporation (the "Company") completed the
purchase of certain assets of Innovative Optics, Inc.
("Innovative Optics"), pursuant to the terms of the
Asset Purchase Agreement (the "Agreement") which the
Company entered into on January 31, 2002 with Innovative
Optics and Barton Dietrich Investments, L.P., the
majority shareholder of Innovative Optics. Innovative
Optics is a Georgia domiciled corporation which
manufactures and sells the Innovatome(TM), a software
driven microkeratome that provides ophthalmic surgeons a
means of cutting a corneal flap in refractive surgery,
and microkeratome blades.
--------------------------------------------------------------------------------
F-40
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
18. Subsequent As consideration for the purchase of certain assets of
Event Innovative Optics, the Company paid $100,000 and issued
Continued an aggregate of 1,272,825 shares of its common stock and
warrants to purchase 250,000 shares of the Company's
common stock at $5.00 per share, exercisable over a
period of three years from the closing date. The Company
is required to file a registration statement with the
Securities and Exchange Commission within five months of
the closing date to register the shares of common stock
for resale that Innovative Optics received as purchase
consideration and the shares that Innovative Optics will
receive upon the exercise of the warrants. The assets
purchased included but were not limited to patents,
inventory, work in process and finished goods relating
to the Innovatome(TM), a microkeratome, and
microkeratome blades.
Of the 1,272,825 shares of the Company's common stock
issued to Innovative Optics at closing, one-half the
number of these shares, or 636,412 shares, remained in
an escrow account maintained at the law firm of Mackey
Price & Thompson (the "Disbursing Agent") pursuant to
the terms of an Escrow Agreement. The Company is
required to use its best efforts to implement, within 90
days of the closing, Phase I of a Blade Price Reduction
Program as prepared by Igor Gradov, a consultant.
Immediately after such 90 day period, the Disbursing
Agent will distribute three-fourths of the shares held
in escrow, or 477,309 shares, to Innovative Optics,
unless the Company has certified that it has implemented
Phase I of the Blade Price Reduction Program and,
despite best efforts, is unable to manufacture
microkeratome blades at a materials cost of $29.25 or
less per blade. If the Company certifies that
implementation of Phase I of the Blade Price Reduction
Program has resulted in materials cost that exceeds
$29.25 per blade and such certification is not disputed
by Innovative Optics, the number of escrow shares
disbursed to Innovative Optics will be reduced by 300
shares for every cent that the materials cost per blade
exceeds $29.25. If Innovative Optics disputes the
Company's certification, the dispute will be resolved by
arbitration by submitting the matter for resolution to
the accounting firm of KPMG LLP.
--------------------------------------------------------------------------------
F-41
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
18. Subsequent The Company is also required to use its best efforts to
Event implement, within six months after closing, Phase II of
Continued the Blade Price Reduction Program. Immediately after
such six month period, the Disbursing Agent shall
disburse the remaining shares in escrow to Innovative
Optics unless the Company has certified that it has
implemented Phase II of the Blade Price Reduction
Program and, despite best efforts, is unable to
manufacture the microkeratome blades at a materials cost
of $17.25 or less per blade. If Paradigm certifies that
implementation of Phase II of the Blade Price Reduction
Program has resulted in a materials cost that exceeds
$17.25 per blade and such certification is not disputed
by Innovative Optics, the number of escrow shares
disbursed to Innovative Optics will be reduced by 300
shares for every cent that the materials cost per blade
exceeds $17.25. If Innovative Optics disputes the
Company's certification, the dispute will be resolved by
arbitration by submitting the matter for resolution to
the accounting firm of KPMG LLP.
The Company acquired from Innovative Optics, the raw
materials, work in process and finished goods
inventories. Additionally, it acquired the furniture and
equipment of Innovative Optics used in the manufacturing
process of the microkeratome console and the inspection
and packaging of the disposable blades. The Company
assumed the remaining life of the lease of the
office-warehouse facility at $3,000 per month, which
expires in August 2002. The Company did not continue to
lease employees per the arrangement in place at the time
of purchase. The Company assumed an agreement to
purchase the raw blades from Medical Sterile Products,
Inc., Puerto Rico, extending through December 2003. The
pricing of the raw blades is based upon annual minimum
purchase commitments, but the Company is not required to
purchase the quantities contained in the pricing model.
The Company did not assume any other liabilities.
--------------------------------------------------------------------------------
F-42
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
18. Subsequent The total purchase price recorded in January 2002
Event consisted of the number of issued shares of 636,413 at
Continued the market price of the common stock as of the
acquisition date ($2.85 per share) of $1,814,000, the
value of the warrants to purchase 250,000 shares of
common stock using the Black-Scholes pricing model of
$295,000 and $100,000 in cash. The escrowed shares will
be issued when the conditions of the Agreement have been
met, which value will be recorded at the date (s) of
issue. The Company valued inventories and equipment
purchased at fair market value. The intangible assets of
patents, rights and trade names were valued based upon a
discounted cash flow analysis of potential and estimated
revenues from product and disposable blade sales. None
of the purchase price was allocated to the monthly
facility lease agreement, which expires in August 2002.
Final allocations among goodwill and the separable
intangible assets of patents, rights and trade names
will be determined when the final number of escrowed
shares is issued.
The Company recorded the following:
Inventory $ 225,000
Property, plant and equipment 35,000
Intangibles:
Patents, rights, trade name 530,000
Goodwill 1,419,000
Equity:
Common stock issued (1,814,000)
Warrants issued (295,000)
-----------------
Net cash paid $ 100,000
=================
--------------------------------------------------------------------------------
F-43
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.
The executive officers and directors of the Company, their ages and
their positions are set forth below:
Name Age Position
Thomas F. Motter 53 Chairman of the Board and Chief Executive Officer
Mark R. Miehle 49 President and Chief Operating Officer
Heber C. Maughan 50 Vice President of Finance, Treasurer and Chief Financial Officer
John W. Hemmer 74 Senior Vice President
Randall A. Mackey, Esq. 55 Secretary and Director
David M. Silver, PhD. 59 Director
Keith D. Ignotz 53 Director
The directors are elected for one-year terms that 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.
29
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.
Mark R. Miehle has served as President and Chief Operating Officer of
the Company since June 5, 2000. From December 1997 to June 2000, Mr. Miehle
served as President and Chief Executive Officer of Vismed, Inc., d/b/a Dicon, a
start-up company. In 1982, Dicon was acquired by CooperVision diagnostics. From
1982 to 1985, Mr. Miehle was the Vice President of Sales and Marketing of
CooperVision Diagnostics. Mr. Miehle received a B.S. degree in Organic Chemistry
from Tulane University in 1975. He is a member of the Young Presidents'
Organization (YPO) and the Vision Industry Council of America (VICA).
Heber C. Maughan has served as Vice President of Finance, Treasurer and
Chief Financial Officer since October 2001. From July 1997 to October 2001, Mr.
Maughan served as Controller for Peterbilt of Utah, which sells and services
heavy duty trucks. From 1989 to 1997, he was employed by First Health
Strategies, Inc, where he served as Vice President of Finance from 1995 to 1997.
From 1987 to 1989, Mr. Maughan was the Chief Financial Officer at Standard
Optical Company, a regional retail eye care chain. Mr. Maughan received a B.S.
degree in Accounting from Oklahoma State University in 1976 and an M.A. degree
in Accounting from Brigham Young University in 1977.
John W. Hemmer has served as Senior Vice President since September
2001. He previously served as Vice President of Finance, Treasurer and Chief
Financial Officer of the Company from September 20, 2000 to September 30, 2001.
Mr. Hemmer previously served as Vice President of Finance, Treasurer, Chief
Financial Officer and a director of the Company from November 1995 to June 1999.
Mr. Hemmer has served as a director and consultant since 1989 and Chief
Financial Officer since February 2000 of Bio Marine Technologies, Inc. in Gulf
Breeze, Florida, which develops offshore marine production systems licensed and
permitted for use in the Gulf of Mexico. He was the President and Chief
Executive Officer of John W. Hemmer, Inc., a registered broker/dealer firm from
1987 to 1989, which subsequently changed its name to Westfalia Investments Inc.
Prior thereto he was Vice President of Bankers Trust Company in charge of
venture capital and a member of the research and investment management
committees. Mr. Hemmer was also Vice President of Corporate Finance at Dempsey,
Tegler & Company, Inc., a Senior Analyst at Lazard Freres & Company and an
Investment Officer of the Chase Manhattan Bank. Mr. Hemmer received a B.A.
degree in Economics from Queens College in 1951 and a M.S. degree in Banking and
Finance from Columbia University Graduate School of Business in 1952.
Randall A. Mackey, Esq. has been a director of the Company since
January 2000. He had served as a director of the Company from November 1995 to
September 1998. Mr. Mackey has been president of the Salt Lake City law firm of
Mackey Price & Williams since 1992, and a shareholder and director of the firm
and its predecessor firms since 1989. Mr. Mackey received a B.S. degree in
Economics from the University of Utah in 1968, an 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. Mr. Mackey has served as Chairman of the
Board since June 2001 and a director since 1998 of Cimetrix Incorporated, a
software development company. Mr. Mackey has also served as Chairman of the
Board since July 2000 and as a trustee since 1993 of Salt Lake Community
College.
30
David M. Silver, Ph.D. has been a director of the Company since 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.
Keith D. Ignotz was elected as director in November 2000. He has been
President and Chief Operating Officer of SpectRx, Inc., a medical technology
company that he founded in 1992, which develops, manufactures and markets
alternatives to traditional blood-based medical tests. From 1986 to 1992, Mr.
Ignotz was Senior Vice President of Allergan Humphrey, Inc., a medical
electronics company. From 1985 to 1986, he was President of Humphrey Instruments
Limited - SKB, a medical electronics company, and from 1980 to 1985, Mr. Ignotz
was President of Humphrey Instruments GmbH, also a medical electronics company.
Mr. Ignotz also served on the Board of Directors of Vismed, Inc., d/b/a Dicon
from 1992 to June 2000. Mr. Ignotz received a B.A. degree in Sociology and
Political Science from San Jose University and an M.B.A. degree from Pepperdine
University. Mr. Ignotz has served as a trustee of Pennsylvania College of
Optometry since 1990, as a director for FluoRx, Inc. since 1997, and as a member
of the American Marketing Association of the American Association of Diabetes
Education.
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.
Richard G. Bowe, M.D. - Dr. Bowe is an ophthalmologist practicing in
Tacoma, Washington. He received his medical degree at the University of
Washington in 1964 and performed his residency at Brooke Army Medical Center.
J. Charles Casebeer, M.D. - Dr. Casebeer is an ophthalmologist
practicing in Divide, Montana. He received his medical degree at the University
of Southern California in 1964 and performed his residency at Stanford
University.
Jonathan Cress, M.D. - Dr. Cress is an ophthalmologist practicing in
Santa Cruz, California.
31
Roger F. Husted, M.D. - Dr. Husted is an ophthalmologist practicing in
Monterey, California. He received his medical degree at George Washington
University in1970 and performed his residency at Letterman Army Medical Center.
Stephane P. Ganem, M.D. -- Dr. Ganem is chairman of the ophthalmology
department at the Rothschild Eye Institute in Paris, France.
Michael B. Limberg, M.D. -- Dr. Limberg is an ophthalmologist
practicing in San Luis Obispo, California. He received his medical degree at the
University of Utah Medical School in 1982 and performed his residency at
Louisiana State University.
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.
Sheldon Rabin, M.D. - Dr. Rabin is an ophthalmologist practicing in
Flushing, New York. He received his medical degree at Northwestern University in
1969 and performed his residency at New York University.
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.
David Silver, Ph.D. -- 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. He received a Ph.D. degree from
Iowa State University.
Gerald Zelman, M.D. -- Dr. Zelman is an 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 six meetings during the fiscal
year ended December 31, 2001. The Audit Committee of the Board of Directors
consists of directors Dr. David M. Silver, Randall A. Mackey and Keith D.
Ignotz. The Audit Committee met twice during the fiscal year. 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, Dr. David M. Silver, and Randall A.
Mackey. The Compensation Committee met three times during the fiscal year. 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
2001 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. Ignotz, Silver,
and Mackey qualify as independent directors.
32
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, and
Chief Executive Officer of the Company and other executive officers
(collectively, the "Named Executive Officers") whose salary and bonus for all
services in all capacities exceed $100,000 for the fiscal years ended December
31, 2001, 2000 and 1999.
Summary Compensation Table
--------------------------
Long Term Compensations
Annual Compensation Awards Payouts
Other Securities
Annual Restricted Underlying Long-term All Other
Name and Principal Compensa- Stock Options/SARs Incentive Compensa-
Position Period Salary($) Bonus($) ion ($)(6) Awards($) (8#) Paymout($) tion ($)
-------------------------------------------------------------------------------------------------------------------------
Thomas F. Motter 2001(1) $ 200,000 $ 22,380(7) 0 0 925,000(9) 0 $ 6,000(4)
Chairman of the 2000(2) $ 178,357 $ 486,113(6) 0 0 0 $ 28,792(5)
Board and Chief 1999(3) $ 141,208 0 0 50,000(10) 0 $ 5,000(5)
Executive Officer
Mark R. Miehle 2001(1) $ 150,000 $ 0 0 0 110,000(9) 0 $ 6,000(4)
President and 2000(2) $ 235,201 $ 194,000(8) 0 0 150,000(8) 0 $ 6,000(4)
Chief Operating
Officer
(1) For the fiscal year ended December 31, 2001
(2) For the fiscal year ended December 31, 2000
(3) For the fiscal year ended December 31, 1999
(4) The amounts under "Other Annual Compensation" for 2001, 2000 and 1999
consist of payments related to the operation of automobiles and/or
automobiles and insurance by the named executives.
(5) The amounts under "Other Annual Compensation" for 2000 and 1999 consist
of payments related to the residential housing accommodations for the
Company's employees, living outside of Utah while they are working at the
Company's Corporate headquarters in Salt Lake City, leased from Mr. Motter
at $2,500 per month.
(6) On January 21, 2000, the Board of Directors approved a bonus to Mr.
Motter in the form of 38,889 shares of the Company's Common Stock. The
bonus was valued at $486,113 on the basis of the closing bid price of the
Company's Common Stock of $12.50 per share on January 21, 2000, the date
the board approved the bonus.
(7) The Company awarded Mr. Motter a cash bonus in June 2001.
(8) On June 5, 2000, the Board of Directors issued Mr. Miehle 28,500 shares
of the Company's Common Stock as a initial bonus as part of his employment
agreement. The market price on the date of grant as $6.8125 per share, and
compensation expense in the amount of $194,000 was recognized. Mr. Miehle
33
was also granted options to purchase 150,000 shares of the Company's Common
Stock at an exercise price of $6.00 per share.
(9) On September 11, 2001, the Company granted options to purchase the
respective number of shares of the Company's Common Stock at an exercise
price of $2.75 per share.
(10) On September 10, 1999, the Company granted Mr. Motter options to
purchase 50,000 shares of the Company's Common Stock at an exercise price
of $4.00 per share.
The following table sets forth information concerning the exercise of
options to acquire shares of the Company's Common Stock by the Named Executive
Officers during the fiscal year ended December 31, 2001 as well as the aggregate
number and value of unexercised options held by the Named Executive Officers on
December 31, 2001.
Number of Securites Underlying Value of Unexercised
Unexercised Options/SARs In-the-Money Options/SARs
At December 31, 2001(#) At December 31, 2001($)
Shares Acquired Value
Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---------------------------------------------------------------------------------------------------------------------
Thomas F. Motter - - 787,450 225,000 - -
Mark R. Miehle - - 62,500 342,000 - -
Director Compensation
On September 11, 2001, Messrs. Randall A. Mackey, Dr. David M. Silver
and Keith D. Ignotz, directors of the Company, were each granted options to
purchase 125,000 shares of the Company's Common Stock at an exercise price of
$2.75 per share. On September 11, 2001, Messrs. Mackey and Silver were each
granted options to purchase 200,000 shares of the Company's Common Stock at an
exercise price of $2.75 per share in consideration for past services as
directors of the Company from November 1995 to September 1998 and since January
2000. In addition, 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 therefore. The
options were not issued at a discount to the then market price.
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.
34
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 for issuance
thereunder from 300,000 shares to 600,000 shares. On September 3, 1998, the
Company's shareholders approved an amendment to the Plan to increase the number
of shares of Common Stock reserved for issuance thereunder from 600,000 shares
to 1,200,000 shares. On November 29, 2000, the Company's shareholders approved
an amendment to the Plan to increase the number of shares of Common Stock
reserved for issuance thereunder from 1,200,000 shares to 1,700,000 shares. On
September 11, 2001, the Company's shareholders approved an amendment to the Plan
to increase the number of shares of Common Stock reserved for issuance
thereunder from 1,700,000 shares to 2,700,000 shares.
The Plan is administered by the Compensation Committee. In general, the
Compensation Committee will select the person to whom options will be granted
and will determine, subject to the terms of the Plan, the number, exercise, and
other provisions of such options. Options granted under the Plan will become
exercisable at such times as may be determined by the Compensation Committee.
Plan Options granted may be either incentive stock options ("ISOs"), as such
term is defined in the Internal Revenue Code, 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 Compensation Committee believes has contributed, or
will contribute, to the success of the Company as the Compensation Committee
believes has contributed, or will contribute, to the success of the Company. The
Compensation Committee shall determine the exercise price of options granted
under the Plan, provided that, in the case of ISOs, such price may not be less
than 100% (110% in the case of ISOs granted to holders of 10% of voting power of
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 shareholders, 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 an employment agreement with Thomas F. Motter,
which commenced on January 1, 1998 and expires on December 31, 2003. The
agreement requires Mr. Motter to devote substantially all of his working time to
the Company, provided that he may be terminated for "cause" (as provided in the
agreements) and prohibits him from competing with the Company for two years
35
following the termination of his employment agreement. The agreement provides
for the payment of an initial base salary of $135,000, effective as of January
1, 1998. the agreement also provides for salary increases and bonuses as shall
be determined at the discretion of the Board of Directors. Effective as of
October 1, 1999, the Board of Directors approved an increase in Mr. Motter's
annual base salary to $160,000, and effective as of July 1, 2000, the board
approved an increase in his annual base salary to $200,000 which remained in
effect at the end of 2001.
The Company entered into an employment agreement with Mark R. Miehle,
which commenced on June 5, 2000 and will expire on June 4, 2003. The agreement
requires Mr. Miehle to devote substantially all of his working time to the
Company, provided that he may be terminated for "cause" (as provided in the
agreement) and prohibits him from competing with the Company for two years
following the termination of his employment agreement. The agreement provides
for the payment of an initial annual base salary of $150,000, effective as of
June 5, 2000, and the issuance of stock options to purchase 150,000 shares of
the Company's Common stock at $6.00 per share, to be vested in equal annual
amounts over a three year period. The agreement also provides for salary
increases and bonuses as shall be determined at the discretion of the Board of
Directors. Mr. Miehle exceeded the annual base in 2000 due to compensation
received prior to the effective date of the agreement. The stated annual
compensation remained in effect through December 31, 2001.
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 redemption's 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 pubic
policy as expressed in the Securities Act and is, therefore, unenforceable.
36
Compliance with Section 16(a) of the Securities and Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who own more than 10% of any
class of the Company's Common Stock to file initial reports of ownership and
reports of changes of ownership of the Company's Common Stock. For fiscal 2001,
Thomas F. Motter, Chairman and Chief Executive Officer, through an oversight,
filed one late stock transaction report covering one transaction, and Dr. David
M. Silver, a director of the Company, through an oversight, filed one late stock
transaction report covering two transactions. In addition, Keith D. Ignotz, a
director of the Company, through an oversight, filed late an initial statement
of beneficial ownership of securities. No other late filings occurred during
2001.
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 March 31, 2002 for (i)
each executive officer of the Company (ii) each director, (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.
Percent of
Name and Address(1) Number of Shares Ownership
Thomas F. Motter(2) 1,413,020 8.3%
Mark R. Miehle(3) 338,966 2.0
John W. Hemmer(4) 106,013 *
Dr. David M. Silver(5) 505,666 3.0
Randall A. Mackey(5) 495,000 2.9
Keith D. Ignotz(6) 204,560 1.2
Heber C. Maughan(7) 30,000 *
Mentor Corporation 761,651 4.5
Executive officers and
directors as a group
(7 persons) 3,854,876 22.7%
---------------
*Less than 1%.
(1) The address for Messrs. Motter and Maughan is c/o Paradigm, 2355 South 1070
West, Salt Lake City, UT, 84119. The address for Mr. Miehle is 10373 Roselle
Street, San Diego, California 92121. The address for Mr. Hemmer is 88 Meadow
Road, Briarcliff Manor, New York 10510. The address for Dr. Silver is 17 Avalon
Court, Bethesda, Maryland 20816. The address for Mr. Mackey is 1474 Harvard
Avenue, Salt Lake City, Utah 84105. The address for Mr Ignotz is 6025-A Unity
Dr., Norcross, Georgia 30071.
(2) Includes options to purchase 312,450 shares of Common Stock granted to Mr.
Motter under the 1995 Option Plan and options to purchase 700,000 shares of
Common Stock granted to Mr. Motter by the Company on September 11, 2001.
(3) Includes options to purchase 260,000 shares of Common Stock granted to Mr.
Miehle under the Company's 1995 Option Plan.
(4) Includes options to purchase 100,000 shares of Common Stock granted to Mr.
Hemmer.
37
(5) Includes options to purchase 495,000 shares of Common Stock granted to each
of Dr. Silver and Mr. Mackey.
(6) Includes options to purchase 203,851 shares of Common Stock granted to Mr.
Ignotz.
(7) Includes options to purchase 30,000 shares of Common Stock granted to Mr.
Maughan.
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
unaffiliated parties.
On October 1, 1999, the Company entered into a consulting agreement
with Cyndel & Company, Inc. ("Cyndel"), in which Cyndel agreed to perform
unspecified investment banking services for the Company for a one-year period,
for which the Company agreed to pay Cyndel a monthly retainer of $8,333, plus
reimburse Cyndel for any expenses incurred in connection with such investment
banking services. Patrick M. Kolenick, a director of the Company from November
1977 to January 21, 2000, and Steven J. Bayern, a director of the Company from
July 1999 to January 21, 2000, are each an officer, a director and a 50%
shareholder of Cyndel. The Company paid $33,333 in fees to Cyndel during 1999.
The October 1, 1999 consulting agreement was terminated when the
Company entered into a new consulting agreement with Cyndel on April 1, 2000.
Under the terms of the April 1, 2000 consulting agreement, Cyndel agreed to
perform unspecified investment banking services for the Company for a one-year
period, for which the Company agreed to pay Cyndel a monthly retainer of
$16,667, plus reimburse Cyndel for any expenses incurred in connection with such
investment banking services.
Besides a monthly retainer, the Company has agreed in the April 1, 2000
consulting agreement to pay Cyndel additional compensation of an unspecified
amount to be mutually agreed upon if Cyndel brings to the Company a candidate
for merger, acquisition, joint venture or other combination or relationship, and
the Company enters into a business relationship with such entity. The April 1,
2000 consulting agreement is automatically renewable for additional, successive
one-year periods through March 31, 2003, unless either party delivers to the
other party on or before January 1 of the contract year written notice of its
intent not to renew the agreement.
Under the terms of the April 1, 2000 consulting agreement, the Company
paid Cyndel approximately $182,000 in consulting fees during 2000. In addition,
the Company paid $500,000 and issued warrants to purchase 150,000 shares of
common stock at an exercise price of $4.00 per share as commission for the
private placement transaction in which 750,000 shares of common stock were sold
for net proceeds of approximately $1,974,000. The warrants issued and the
commissions paid were considered direct costs of capital, therefore no expense
was recorded but such amounts were recorded as a direct reduction of capital.
The April 1, 2000 consulting agreement was renewed for an additional
one-year period through March 2002. However, on December 26, 2001, the Company
provided written notification to Cyndel of its intention not to renew the
agreement after March 31, 2002. The total amount paid to Cyndel for services
under the agreement from April 1, 2000 to February 28, 2002 was $383,333. Final
payment of $16,667, which was due on March 1, 2002, has not yet been paid.
38
Thomas F. Motter, Chairman of the Board and Chief Executive Officer of
the Company, leased his former residence, which he still owns, to the Company
for $2,500 per month. The primary use of the residential property was for
housing accommodations for the Company's employees living outside of Utah while
they were working at the Company's corporate headquarters in Salt Lake City. The
Company has obtained an appraisal from an independent appraiser, which has
concluded that the monthly rate of $2,500 represents the fair market rate for
leasing the residential property. This lease agreement was terminated on October
31, 2000.
On January 21, 2000, the Board of Directors granted Mr. Motter,
Chairman and Chief Executive Officer of the Company, 100,000 shares of the
Company's common stock. Of these total shares, 61,111 shares were considered
repayment for 61,111 shares Mr. Motter that previously issued to Dr. Douglas A.
MacLeod prior to the Company's initial public offering in July 1996 under a
settlement agreement to terminate certain anti-dilution rights that the Company
granted Dr. MacLeod. The balance of 38,889 shares was deemed by the Board as a
bonus for work done by Mr. Motter since the initial public offering. The market
price on the date of grant was $12.50 per share, and compensation expense in the
amount of $486,000 was recognized.
On January 21, 2000 the Board of Directors granted Michael W. Stelzer,
formerly the Vice President of Operations and Chief Operating Officer of the
Company, 20,000 shares of Paradigm common stock as severance under the terms of
a settlement of Mr. Stelzer's employment agreement. The market price on the date
of grant was $12.50 per share, and compensation expense in the amount of
$250,000 was recognized.
On June 5, 2000 the Company issued Mark Miehle 28,500 shares of
Paradigm common stock as a bonus for entering into an employment agreement with
the Company. The market price of the Paradigm common stock on the day the shares
were granted to Mr. Miehle was $6.81 per share, and compensation expense in the
amount of $194,000 was recognized.
Randall A. Mackey, a director of the Company since January 21, 2000,
and a former director of the Company from September 1995 to September 3, 1998,
is President and a shareholder of the law firm of Mackey Price & Williams, which
rendered legal services to the Company in connection with various corporate
matters. Legal fees and expenses paid to Mackey Price & Williams for the fiscal
years ended December 31, 2001 and 2000 totaled $158,990 and $167,022,
respectively.
PART IV
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 Amended Certificate of Incorporation(16)
39
3.3 Bylaws(1)
4.1 Warrant Agency Agreement with Continental Stock Transfer & Trust
Company (3)
4.2 Specimen Common Stock Certificate (2)
4.3 Specimen Class A Warrant Certificate(2)
4.4 Form of Class A Warrant Agreement(2)
4.5 Underwriter's Warrant with Kenneth Jerome & Co., Inc.(3)
4.6 Warrant to Purchase Common Stock with Note Holders re bridge
financing (1)
4.7 Warrant to Purchase Common Stock with Mackey Price & Williams (1)
4.8 Specimen Series C Convertible Preferred Stock Certificate(4)
4.9 Certificate of the Designations, Powers, Preferences and Rights of
the Series Convertible Preferred Stock(4)
4.10 Specimen Series D Convertible Preferred Stock Certificate (7)
4.11 Certificate of the Designations, Powers, Preferences and Rights of
the Series D Convertible Preferred Stock (10)
4.12 Warrant to Purchase Common Stock with Cyndel & Co. (7)
4.13 Warrant Agreement with KSH Investment Group, Inc. (7)
4.14 Warrant to Purchase Common Stock with R.F. Lafferty & Co., Inc.
(7)
4.15 Warrant to Purchase Common Stock with Dr. David B. Limberg (10)
4.16 Warrant to Purchase Common Stock with John W. Hemmer (10)
4.17 Stock Purchase Warrant with Triton West Group, Inc.(12)
4.18 Warrant to Purchase Common Stock with KSH Investment Group, Inc.
(12)
4.19 Warrants to Purchase Common Stock with Consulting for Strategic
Growth, Ltd.(12)
10.1 Exclusive Patent License Agreement with Photomed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 Lease with Eden Roc (4)
10.4 1995 Stock Option Plan and forms of Stock Option Grant Agreement
(1)
10.5 Form of Promissory Note with Note Holders re bridge financing (1)
10.6 Co-Distribution Agreement with Pharmacia & Upjohn Company and
National Healthcare Manufacturing Corporation (5)
10.7 Agreement for Purchase and Sale of Assets with Humphrey Systems
Division of Carl Zeiss, Inc. (5)
10.8 Employment Agreement with Thomas F. Motter (6)
10.9 Asset Purchase Agreement with Mentor Corp., Mentor Opthalmics,
Inc. and Mentor or Medical, Inc. (8)
10.10 Transition Services Agreement with Mentor Corp., Mentor
Opthalmics, Inc., and Mentor Medical, Inc. (8)
10.11 Severance Agreement and General Release with Michael W. Stelzer
(8)
10.12 Consulting Agreement with Dr. Michael B. Limberg (8)
10.13 Renewed Consulting Agreement with Dr. Michael B. Limberg (10)
10.14 Mutual Release and Settlement Agreement with Zevex International,
Inc. (8)
10.15 Consulting Agreement with Douglas Adams (8)
10.16 Agreement and Plan of Reorganization with Paradigm Subsidiary,
Inc., and Vismed, Inc. d/b/a Dicon (9)
10.17 Agreement and Plan of Merger with Paradigm Subsidiary, Inc. and
Vismed Inc. d/b/a Dicon (9)
10.18 Registration Rights Agreement with Paradigm Subsidiary, Inc. and
certain shareholders of Vismed, Inc. d/b/a Dicon (9)
10.19 Indemnification Agreement with Paradigm Subsidiary, Inc. and
certain shareholders of Vismed, Inc. d/b/a Dicon (9)
10.20 Consulting Agreement with Cyndel & Co., Inc. (10)
10.21 Stock Purchase Agreement with Occular Blood Flow, Ltd. and Malcolm
Redman (10)
10.22 Consulting Agreement with Malcolm Redman (10)
10.23 Royalty Agreement with Malcolm Redman (10)
40
10.24 Registration Rights with Malcolm Redman (10)
10.25 Agreements with Steven J. Bayern and Patrick M. Kolenik (11)
10.26 Employment Agreement with Mark R. Miehle (12)
10.27 Employment Agreement with John W. Hemmer (12)
10.28 Private Equity Line of Credit Agreement with Triton West Group,
Inc. (12)
10.29 Renewed Consulting Agreement with Dr. Michael B. Limberg (12)
10.30 Agreement with KSH Investment Group, Inc. (12)
10.31 Renewed Consulting Agreement with Dr. Michael B. Limberg (13)
10.32 Settlement Agreement with Mentor Corporation (13)
10.33 Consulting Agreement with Rodman & Renshaw, Inc. (13)
10.34 Consulting Agreement with Barry Kaplan Associates (14)
10.35 Asset Purchase Agreement with Innovative Optics, Inc. and Barton
Dietrich Investments, L.P. (15)
10.36 Escrow Agreement with Innovative Optics, Inc. and Barton Dietrich
Investments, L.P. (15)
10.37 Assignment and Assumption Agreement with Innovative Optics, Inc.
(15)
10.38 General Assignment and Bill of Sale with Innovative Optics, Inc.
(15)
10.39 Non-competition and Confidentiality Agreement with Mario F. Barton
(15)
(1) Incorporated by reference from Registration Statement on Form
SB-2, as filed on March 19, 1996.
(2) Incorporated by reference from Amendment No. 1 to Registration
Statement on Form SB-2, as filed on May 14, 1996.
(3) Incorporated by reference from Amendment No. 2 to Registration
Statement on Form SB-2, as filed on June 13, 1996.
(4) Incorporated by reference from Annual Report on Form 10-KSB, as
filed on April 16, 1998.
(5) Incorporated by reference from Quarterly Report on Form 10-QSB, as
filed on August 1, 1998.
(6) Incorporated by reference from Quarter Report on Form 10-QSB, as
filed on November 12, 1998.
(7) Incorporated by reference from Registration Statement on Form
SB-2, as filed on April 29, 1999.
(8) Incorporated by reference from Annual Report on Form 10-KSB, as
filed on March 30, 2000.
(9) Incorporated by reference from Form 8-K, as field on June 5, 2000.
(10) Incorporated by reference from Report on Form 10-QSB, as filed on
August 16, 2000.
(11) Incorporated by reference from Report on Form 10-QSB, as filed on
November 1, 2000.
(12) Incorporated by reference from Report on Form 10-KSB, as filed on
April 16, 2001.
(13) Incorporated by reference from Report on Form 10-QSB, as filed on
August 14, 2001.
(14) Incorporated by reference from Report on Form 10-QSB, as filed on
November 14, 2001.
(15) Incorporated by reference from Current Report on Form 8-K, as
filed on March 5, 2002.
(16) Incorporated by reference from Amendment No. 1 to Registration
Statement on Form S-3, as filed on March 20, 2002.
(b) Reports on Form 8-K
------------------------
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 2001.
41
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: June 4, 2002 By:/s/ Thomas F. Motter
-----------------------------
Thomas F. Motter, Chairman of the
Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in counterpart on behalf of
the Company on the dates indicated.
Signature Title Date
/s/Thomas F. Motter Chairman of the Board and June 4, 2002
------------------------- Chief Executive Officer
(Principal Executive Officer)
/s/Heber C. Maughan Vice President of Finance, June 4, 2002
------------------------- Treasurer and Chief Financial
Officer (Principal Financial
and Accounting Officer)
/s/Randall A. Mackey, Esq. Secretary and Director June 4, 2002
-------------------------
/s/David M. Silver, Ph.D Director June 4, 2002
-------------------------
/s/Keith D. Ignotz Director June 4, 2002
-------------------------
42