SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 0-28498
Paradigm Medical Industries, Inc.
(Name of small business issuer in its charter)
DELAWARE 87-0459536
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2355 South 1070 West, Salt Lake City, Utah 84119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 977-8970
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each Class on which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the 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 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, 2002 were
$5,368,000.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 31, 2003 was approximately $3,741,000 based on the
closing price on that date on the Nasdaq SmallCap Market.
As of March 31, 2003, Registrant had outstanding 23,378,378 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.
DOCUMENTS INCORPORATED 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, that 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.
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 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 be 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.
2
The rights to the ophthalmic diagnostic instruments, that 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
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.
In January 2002, the Company purchased the InnovatomeTM microkeratome
of Innovative Optics, Inc. ("Innovative Optics") by issuing an aggregate of
1,272,825 shares of its common stock, 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, and $100,000 in cash. The transaction was accounted
for as a purchase in accordance with Statement of Financial Accounting Standards
No. 141 ("SFAS No. 141").
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 was unsuccessful in supplying the disposable blades. The Company
discontinued the marketing and sales efforts of this product during the third
quarter of 2002.
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 could all contribute to eye
disorders. The most common eye disorders are either pathological or refractive.
3
Many pathological disorders of the eye can be corrected by surgery. These
include cataracts (clouded lenses), glaucoma (elevated pressure in the eye),
corneal disorders such as scars, defects and irregular surfaces and
vitro-retinal disorders such as the attachment of membrane growths to the retina
causing blood leakage within the eye. All of these disorders can impair vision.
Many refractive disorders can be corrected through the use of eyeglasses and
contact lenses. Myopia (nearsightedness), hyperopia (farsightedness) and
presbyopia (inability to focus) are three of the most common refractive
disorders.
Ultrasound Technology: Ultrasound devices have been used in
ophthalmology since the late 1960's for diagnostic and surgical applications
when treating or correcting eye disorders. In diagnostics, ultrasound
instruments are used to measure distances and shapes of various parts of the eye
for prescription of eyeglasses and contact lenses and for calculation of lens
implant prescriptions for cataract surgery treatment. These devices emit sound
waves through a hand-held probe that is placed onto or near the eye with the
sound waves emitted being reflected by the targeted tissue. The reflection
"echo" is computed into a distance value that is presented as a visual image, or
cross-section of the eye, with precise measurements displayed and printed for
diagnostic use by the surgeon.
Surgical use of ultrasound in ophthalmology is limited to treatment of
cataract lenses in the eye through a procedure called phacoemulsification or
"phaco." A primary objective of cataract surgeries is the removal of the
opacified (cataract) 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 cataracts 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 lenses, 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 was 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 tissues. 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
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.
4
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 a soft-key
membrane panel for flexible programmable operation. The system provides
real-time "on-the-fly" adjustment capabilities for each surgical parameter
during the surgical procedure for high-volume applications. In addition, the
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 2002 or 2001.
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 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 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 marketplace. If the FDA approves 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-cataracts tissues within
the eye, the Company's Photon(TM) laser cataract system should only affect
tissues it comes into direct contact with.
5
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
used with a 532mm 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 veins". 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 ophthalmic surgery
market will accept the laser in this capacity or that the FDA will grant
approval. See the Regulation section below ..
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 11% and 8% of total revenues for 2002
and 2001, 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 slit lamp, which is then placed
on the cornea of the patient's eye to measure the intraocular pressure within
the eye. The device is unique in that it reads a series of intraocular pressure
pulses over a short period of time (approximately five to ten seconds) and
generates a waveform profile, which can be correlated to blood flow volume
within the eye. A proprietary software algorithm developed by David M. Silver,
Ph.D., of Johns Hopkins University Applied Physics Laboratory calculates the
blood flow volume. The device presents a numerical intraocular pressure reading
and blood flow analysis rating in a concise printout, which is affixed to the
patient history file. In addition, the data generated by the device can be
downloaded to a personal computer system for advanced database development and
management.
The Company markets the Blood Flow Analyzer(TM) as a stand-alone model
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 9% and 25% of total 2002 and
2001 revenues, respectively. On November 4, 2002, the Company received FDA
approval for expanded indications of use of the Blood Flow Analyzer(TM) for
pulsatile ocular blood flow, volume and pulsatility equivalence index. Also, the
Company is continuing its aggressive campaign to educate the payers about the
Blood Flow Analyzer(TM), its purposes and the significance of its performance in
6
patient care in order to achieve reimbursements to the providers. These efforts
should lead to a more positive effect on sales
When the Company completed a stock purchase transaction on June 20,
2000, it acquired all of the outstanding shares of common stock of Ocular Blood
Flow, Ltd., ("OBF"), from Malcolm Redman, the sole shareholder of OBF, including
the rights to the Blood Flow Analyzer(TM). The Company entered into a three-year
consulting agreement with Mr. Redman, requiring the payment of 36 equal monthly
installments of $6,000 through June 20, 2003, for consulting services. As of
December 31, 2002, the Company owed $12,000 to Mr. Redman for payments due on
November 20, 2002 and December 20, 2002. The Company also entered into a Royalty
Agreement with Mr. Redman on June 20, 2000, requiring a royalty of 10% of the
net sales of the Blood Flow Analyzer(TM), including underlying workstation
units, sold by the Company. As of December 31, 2002, approximately $169,016 in
royalties were due and owing to Mr. Redman under the Royalty Agreement.
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
a 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 20% and 15% of the 2002 and 2001 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 7% and 12% of the total revenues for 2002 and 2001,
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 3% and 1% to the total revenues for 2002 and 2001,
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% of the total 2002 and 2001
revenues.
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 6% and 5% of the total 2002 and 2001 revenues,
respectively.
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
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 13% and 11% of total revenues for
the years ended December 31, 2002 and 2001, respectively. The P45 contributed
approximately 12% of total revenues for 2002 and approximately 9% of total 2001
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 2002.
7
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 he can offer this procedure to his 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
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, 2002, the Company had five direct
domestic sales representatives in the United States and sixty-five 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
31,000 square foot facility in Salt Lake City and an 800 square foot facility in
Oceanside, California. The Company transferred the manufacturing activities for
the Blood Flow Analyzer(TM) to San Diego from OBF in England during 2001. During
the second quarter of 2002, the Company consolidated and closed the San Diego
operations into the Salt Lake City facility. The facility accommodates the
Company's 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.
8
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 shipments to its dealers. After the
warranty period expires, the Company offers one year and three year service
contracts to its domestic customers and will continue to sell parts to
international dealers who in turn create their own service plans with their
customers.
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 research and
development 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. 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 dominate the surgical
equipment industry. 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, the major
manufacturers utilizing ultrasonic technology offer products currently in use.
Those systems rely on accessories including single-use cassette packs and other
ancillary surgical disposables such as saline solution, sutures and intraocular
lenses for their profits. The cassette packs are required for fluid and tissue
collection during the surgical procedure. The cassette packs are generally
unique and proprietary to their respective systems and represent a barrier to
entry for third-party, lower-cost after-market suppliers. While there is growing
market resistance in the United States and internationally to single-use
cassettes, the Company anticipates that manufacturers of ultrasound equipment
will continue to develop and enhance their present ultrasound products in order
to protect their investments in system and cassette technology and to protect
their profits from sales of these cassettes and accessories. The Company's
Precisionist Thirty Thousand(TM) ultrasonic phaco system has the ability to use
either reusable or single-use disposable components. The Photon(TM) laser
cataract system will utilize probes and cassette packs designed for single-use
and semi-disposable instruments priced at a level consistent with the demands of
health care cost containment. This will allow the health care providers a
substantial measure of cost containment, while providing the Company with the
quality control and income capability of cassette sales.
The 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
9
is establishing itself and, as yet, does not hold a significant share of the
market. The Company currently recognizes Bausch & Lomb, 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 this 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 nearsighted. 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
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 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 subspecialties 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."
10
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.
Regulation
----------
The FDA under the FD&C Act regulates the Company's surgical and
diagnostic systems as medical devices. 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
Premarket approval for the proposed device. A PMA application would have to be
submitted and be supported by extensive data, including preclinical and clinical
11
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 a 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 other companies have sought PMA approval 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 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 substances. 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.
12
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.
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 the 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 ongoing 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. On May 7, 2002, the Company received a letter from the FDA
requesting further clinical information. The Company is in the process of
generating the additional clinical information in response to the letter. The
Company expects to make a submission to the FDA with the additional clinical
information when accumulated. The Company believes the cost of generating the
additional clinical information will not be substantial and will not adversely
impact the results of its operations.
Employees
---------
As of December 31, 2002, the Company had 39 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.
13
Item 2. Description of Property
The Company's executive offices are currently located at 2355 South
1070 West, Salt Lake City, Utah. This facility consists of approximately 29,088
square feet of leased office space under a three-year lease that will expire on
March 1, 2003 with an additional three-year renewal option. These facilities are
leased from Eden Roc, a California partnership, at a base monthly rate of
$21,163 plus a $3,342 monthly common area maintenance fee. Pursuant to the
lease, the Company pays all real estate and personal property taxes and the
insurance costs on the premises.
The Company renegotiated a three-year lease in January 2003 at a
monthly rate of $12,500 plus a $2,500 common area maintenance fee for the year
2003, with rate increases to $12,875 for 2004 and to $13,261 for 2005.
The Company maintains a facility located at 3355 Mission Avenue, Suite
222, Oceanside, California. This facility consists of approximately 800 square
feet of leased office space under a two-year lease that expires on June 30,
2004. These facilities are leased from San Diego Sunland Partners I., a
California limited partnership, at a monthly rate of $1,040.
The Company believes that these facilities are adequate to 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 $14,736 to bring all payments
up to date through June 30, 2001. 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 the 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 breach of contract relative
to printing services. The Company 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 received a demand letter dated December 30, 2002 from
counsel for Thomas F. Motter, the former Chairman and Chief Executive Officer of
the Company. Mr. Motter claims in the letter that he was entitled to certain
stock options that had not been issued to him in a timely manner. By the time
the options were actually issued to him, however, they had expired. Mr. Motter
contends that if the options had been issued in a timely manner, he would have
exercised them in a manner that would have given him a substantial benefit. Mr.
Motter requests restitution for the loss of the financial opportunity. Mr.
Motter also claims that he was defrauded by the Company by not being given an
extended employment agreement when he terminated the change of control agreement
that he had entered into with the Company.
Mr. Motter is further claiming payment for accrued vacation time during
the 13 years he had been employed by the Company, asserting that he only had a
total of four weeks of vacation during that period. Finally, Mr. Motter is
threatening a shareholder derivative action against the Company because of the
board of directors' alleged failure to conduct an investigation into
conversations that took place in a chat room on Yahoo. Mr. Motter asserts that
certain individuals participating in the conversations were officers or
directors of the Company whose interests were in conflict with the interests of
the shareholders. The Company believes that Mr. Motter's claims and assertions
are without merit and it intends to vigorously defend against any legal action
that Mr. Motter may bring.
The Company received a demand letter dated January 6, 2003 from counsel
for Westcore STIPG, LLC, the landlord with regard to the lease on our former
facilities in San Diego, California. The letter demands payment of $10,567 plus
interest, attorney's fees and costs for the repairs and restoration work on the
San Diego facilities, after a deduction of the Company's $6,000 security
deposit. The Company rejects these claims, contending that the security deposit
was adequate to pay for any repairs or restoration expenses on the premises.
The Company received a demand letter dated December 9, 2002 from
counsel for Dan Blacklock, dba Danlin Corp. The letter demands payment in the
amount of $65,160 for manufacturing and supplying parts for microkeratome
blades. The Company's records show that it received approximately $34,824 in
parts from the Danlin Corp., but that the additional amounts that the Danlin
Corp contends are owed were from parts that were received but rejected by the
Company because they had never been ordered.
The Company received demand letters dated September 29, 2002 and
December 10, 2002 from counsel for CitiCorp, Vendor Finance, Inc. and its
successor-in-interest, The Copy Man, dba TCM Business. The letters demand
14
payment of $49,627 plus interest for the leasing of two copy machines that were
delivered to the Salt Lake City facilities on or about April of 2000. The
majority of the amounts alleged to be owed by the Company are from the remaining
payments on the leases. The Company disputes the amounts allegedly owed,
asserting that the copy machines, which it returned to the leasing company, did
not work properly.
An action was brought by Dr. John Charles Casebeer against the Company
in the Montana Second Judicial District Court, Silver Bow County, state of
Montana. The complaint alleges that Dr. Casebeer entered into a personal
services contract with the Company memorialized by a letter dated April 20,
2002, with it being alleged that Dr. Casebeer fully performed his obligations.
Dr. Casebeer asserts that he is entitled to $43,750 per quarter for consultant
time and as an incentive to be granted each quarter $5,000 in options issued at
the fair market value. An additional purported incentive was $50,000 in shares
of stock being issued at the time a formalized contract was to be signed by the
parties. In the letter it is provided that at its election, the Company may pay
the consideration in the form of stock or cash and that stock would be issued
within 30 days of the close of the quarter. Prior to the litigation, the Company
issued 43,684 shares to Dr. Casebeer. The referenced letter provides that
termination may be made by either party upon giving 90 days written notice.
Notice was given by the Company in early November 2002. The Company recently
filed its answer in defense of the action. Issues include whether or not Dr.
Casebeer fully performed as asserted.
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 the annual shareholders meeting held on December 27, 2002, the
sufficient number of votes to constitute a quorum was not received; therefore,
no items were acted upon. The meeting was adjourned to allow time for the
shareholders to vote. The date of the adjourned meeting has not yet been
rescheduled. The following matters were items that were on the ballot for
shareholder approval: (i) the election of three directors consisting of Randall
A. Mackey, Dr. David M. Silver and Keith D. Ignotz; (ii) the 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; (ii) the amendment to the
1995 Stock Option Plan to authorize an additional 1,000,000 shares of common
stock; (iv) the ratification of stock options granted to the outside directors;
and (v) the ratification of appointment of Tanner & Co. as the Company's
independent accountants for the fiscal year ending December 31, 2002.
PART II
Item 5. Market for Common Equity and related Stockholder Matters
The Authorized capital stock of the Company consists of 40,000,000
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,
2003 the closing sale prices of the Common Stock and Class A Warrants were $.16
per share and $0.05 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, 2001.
15
Common Stock Class A Warrants
Price Range Price Range
Period (Calendar Year) High Low High Low
--------------------------------------------------------------------------------
2001
First Quarter $4.13 $1.50 $1.00 $.19
Second Quarter 3.54 1.61 .74 .19
Third Quarter 2.75 1.86 .45 .16
Fourth Quarter 3.08 1.94 .39 .17
2002
First Quarter 3.33 2.15 .38 .19
Second Quarter 3.10 .60 .32 .05
Third Quarter 1.50 .21 .20 .08
Fourth Quarter .36 .12 .09 .01
2003
First Quarter .42 .14 .09 .01
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, 2003, there
were 765 record holders of Common Stock, six record holders of Series A
Preferred Stock, four record holders of Series B Preferred Stock, no record
holders of Series C Preferred Stock, one record holder of Series D Preferred
Stock, 14 record holders of Series E Preferred Stock and 52 record holders of
Series F Preferred Stock.
The Company has never paid any cash dividends on its Common Stock and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. The Company must pay cash dividends to holders of its Series
A Preferred, Series B Preferred, Series C Preferred, 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 biomicroscope 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
16
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.
Activities for the twelve months ended December 31, 2002, included
sales of the Company's products and related accessories and disposable products.
On May 7, 2002, the Company received a letter from the FDA requesting further
clinical information. The Company is in the process of generating the additional
clinical information in response to the letter. The Company cannot market or
sell the Photon(TM) in the United States until FDA approval is granted. On
November 4, 2002, the Company received FDA approval for expanded indications of
use of the Blood Flow Analyzer(TM) for pulsatile ocular blood flow, volume and
pulsatility equivalence index. Also, the Company is continuing its aggressive
campaign to educate the payers of Medicare claims throughout the country about
the Blood Flow Analyzer(TM), its purposes and the significance of its
performance in patient care in order to achieve reimbursements to the providers.
These efforts should lead to a more positive effect on sales.
In April 2002, the Company announced the closure of its San Diego
facility in anticipation of the termination of the lease for that location. The
operations were transferred to the Salt Lake City facility. The Company incurred
a reduction of force of 28 San Diego personnel. The consolidation was intended
to save costs and to eliminate duplicities in functions and facilities that
occurred with the acquisition of Dicon. The costs of downsizing included
one-time expenses of approximately $43,000 for moving and travel costs, which
were charged to general and administrative expenses.
In January 2002, the Company purchased certain assets and lease
obligations of Innovative Optics, Inc. ("Innovative Optics") by issuing an
aggregate of 1,272,825 shares of its common stock (636,412 shares are held in
escrow pending the result of a project to reduce the cost of the disposable
razor blades utilized by the microkeratome, which was acquired in the
transaction), 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, and $100,000 in cash. The transaction was accounted for as a purchase in
accordance with Statement of Financial Accounting Standards No. 141 ("SFAS No.
141").
The Company acquired from Innovative Optics, the raw materials, work in
process and finished goods inventories. Additionally, it acquired the patents
and trade name associated with the product, 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
subsequently issued 477,039 shares of common stock that were held in escrow at a
value of $630,000, based in the market price of such shares on the date of
issuance. This amount was charged to in-process research and development because
the issuance of such shares related to the continuing research and development
of the microkeratome blades. . The Company was unsuccessful in reducing the
costs of the blade production process and was unable to supply blades to the
user base. The Company terminated its marketing and sales efforts for the
microkeratome, but it continues to search for an alternative source of blades or
a purchaser of the product line. Because the Company determined that it could
not manufacture the blades to support its customer base at an economical cost,
in accordance with SFAS No. 142, due to the lack of projected future cash flows,
during 2002 the Company recorded an impairment expense of $2,082,000 for the
remaining book value of property and equipment and intangible assets purchased
from Innovative Optics. In addition, the Company recorded an inventory reserve
for the remaining inventory purchased from Innovative Optics of approximately
$160,000.
On September 19, 2002, the Company completed a transaction with
International Bio-Immune Systems, Inc., a Delaware corporation ("IBS"), in which
it acquired 2,663,254, or 19.9% of the outstanding shares of IBS and warrants to
purchase 1,200,000 shares of common stock of IBS at $2.50 per share for a period
of two years, through the exchange and issuance of 736,945 shares of the
Company's common stock the lending of 300,000 shares of the Company's common
stock to IBS, and the payment of certain expenses of IBS through the issuance of
an aggregate of 94,000 shares of our common stock to IBS and its counsel. The
issuance of 736,945 shares were valued based on the market price of the
Company's common stock on the date of the transaction and resulted in an
investment in IBS, when combined with a cash investment of $65,000 made in 2000,
of $879,000. The 300,000 shares were also valued at the market price on the date
of issuance and were recorded as a stock subscription receivable of $294,000
because such shares will either be paid for or returned in the future. IBS is a
privately held biotechnology based, cancer diagnostic and immunotherapy company
with potential clinically effective products for the diagnosis, treatment and
imaging of patients with major tumor types (e.g. colon, lung, cervix, pancreas
and breast). IBS is located in Great Neck, New York. IBS does not produce
significant revenues as its products have not received FDA approval. Due to the
uncertainty of future cash flows and the fact that the products have not been
approved by the FDA, The Company was unable to support the value of the
investment by substantiated methods and determined that the likelihood of
17
recovery of its investment was remote. . Therefore, in accordance with generally
accepted accounting principles , the investment of $879,000 was charged to
impairment expense.
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. .
Results of Operations
---------------------
Fiscal Year Ended December 31, 2002 Compared to Fiscal Year Ended December 31,
------------------------------------------------------------------------------
2001:
-----
Consolidated sales for the twelve months ended December 31, 2002 were
$5,368,000 compared to $7,919,000 for the same period for 2001, approximately a
32% decrease due principally to a decline in sales of the Blood Flow
Analyzer(TM). The Company has experienced a general decline in sales during
2002. The reduction of its domestic sales force, competition and the downturn in
the economy are all factors contributing to the decline in sales. Additionally,
certain payers have elected not to reimburse the doctors per the common
procedure terminology ("CPT") code assigned to the Company by the American
Medical Association, which has caused decreased sales of the Blood Flow
Analyzer(TM) in 2002. The revenues generated from sales of the Blood Flow
Analyzer(TM) were $459,000 and slightly less than $2,000,000, or 9% and 25% of
total revenues for 2002 and 2001, respectively. On November 4, 2002, the Company
received FDA approval for expanded indications of use of the Blood Flow
Analyzer(TM) for pulsatile ocular blood flow, volume and pulsatility equivalence
index. Also, the Company is continuing its aggressive campaign to educate the
payers about the Blood Flow Analyzer(TM), its purposes and the significance of
its performance in patient care in order to achieve reimbursements to the
providers. This effort should have a positive effect on sales.
Sales of the Ultrasonic Biomicroscope were approximately $1,361,000
during 2002, or 25% of total annual revenues, compared to sales of $1,584,000,
or 20% of total revenues for the same period of 2001. Revenues from the
ultrasonic product line, not including the Ultrasonic Biomicroscope, totaled
approximately $606,000 during 2002, or 11% of total annual revenues, compared to
$646,000, or 8% of total revenues for the same period last year. The Company has
seen a recent interest in certain of its ultrasound products and is endeavoring
to take advantage of this interest to the best of its capabilities.
Sales of the perimeter and corneal topographer decreased by $649,000,
from $2,128,000 in 2001, or 27% of total revenues to $1,479,000, or 27% of total
revenues. The perimeter and corneal topographer, both mature products, declined
in sales in 2001 from those in 2000 by approximately 37%. 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 $596,000, 11% of total revenues for the twelve months ended
December 31, 2002 compared to $641,000, or 8% of total revenues for the same
period in 2001. The Company concentrated much of its marketing focus on its
diagnostic products (Blood Flow Analyzer(TM) and the Ultrasonic Biomicroscope
Workstation or P45) during 2002 and 2001. The Company also continued
aggressively in its efforts to obtain FDA approval for its Photon(TM) laser
system. The Company sold one Photon(TM) laser system in 2002 and none in 2001.
The Photon(TM) cannot be sold within the United States until FDA approval is
received. International sales of the Photon(TM) have not occurred 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 2002 was approximately 22
% compared to 45% for the same period in 2001. The profit margin decline can be
attributed principally to an increase of $1,755,000 in the reserved for obsolete
inventory. Due to the lack of significant sales volume of certain products, many
inventory items were reduced in cost to reflect obsolescence, technological
advances and product enhancements. Of this amount, approximately $160,000
related to inventory purchased from Innovative Optics in 2002, and the remainder
was mainly related to the Mentor surgical line of products, namely the SIStem,
Odyssey and the Surg-E-trol, which have not experienced significant sales in
2002 and 2001. In addition, the Company reduced sales prices during the year in
18
an attempt to increase sales, which has reduced its margins. International sales
contributed a greater portion in 2002, compared to 2001, which sales also
produce lower gross margins.
Marketing and selling expenses decreased $1,967,000, or 41%, to
$2,795,000 for the twelve months ended December 31, 2002 from $4,762,000 for the
comparable period in 2001. The Company's sales force decreased to five domestic
sales people during 2002 resulting in a reduction of personnel and travel costs
of $1,356,000 from the prior year. Marketing efforts were reduced, including the
number of trade shows attended, which resulted in a cost reduction of $611,000
during the fiscal year ended December 31, 2002, compared to the same period in
2001.
General and administrative expenses decreased by $1,423,000, or 28%, to
$3,702,000 for the 2002 fiscal year from $5,125,000 for the comparable period in
2001, due principally to the cost reduction program implemented during 2002.
During the twelve months ended December 31, 2002 compared to the same period in
2001, payroll related costs decreased by $197,000, travel related costs declined
$139,000 and outside consulting costs decreased lower by $932,000. General
operating costs were reduced by $169,000 due principally to the closure of the
San Diego facility.
Research, development and service expenses (which includes production
and manufacturing support and the service department expenses) decreased by
$128,000, or 4%, to $2,819,000 for the twelve months ended December 31, 2002
from $2,947,000 for the same period in 2001. The cost reduction program and the
closure of the San Diego office resulted in lower payroll related expenses of
$927,000 in 2002 compared to the same period last year. Pursuant to the asset
purchase agreement with Innovative Optics, Inc., the Company issued 477,000
shares of common stock, which was valued at $630,000 based upon the current
market value of the stock at the time of issue. This amount was recorded as
in-process research and development costs related to the blade cost reduction
project. No such expense was recorded in 2001. Consulting fees related to
software development and enhancements increased by $71,000 during 2002 compared
to the year ended December 31, 2001.
The Company recognized impairment expenses of $2,961,000 during the
year ended December 31, 2002 principally due to the requirements of SFAS No.
142, which requires impairment of intangible assets if the valuation cannot
support the asset value recorded. The Company acquired the assets of Innovative
Optics, Inc. in January 2002. The principal product was a microkeratome with the
corresponding disposable blades. This acquisition resulted in goodwill of
$1,949,000. The Company was unsuccessful in producing the blades for the user
base at a cost that was economically feasible. The original process proved
unworkable and unprofitable. The Company decided not to continue supporting the
product, thus creating an event that resulted in impairing the intangible asset
as recorded at the time of purchase of $1,949,000. In addition, the Company
impaired the fixed assets acquired from Innovative Optics, Inc. in the amount of
$30,000.
On September 19, 2002, the Company completed a transaction with
International Bio-Immune Systems, Inc., a Delaware corporation ("IBS"), in which
it acquired 2,663,254, or 19.9% of the outstanding shares of IBS and warrants to
purchase 1,200,000 shares of common stock of IBS at $2.50 per share for a period
of two years, through the exchange and issuance of 736,945 shares of the
Company's common stock the lending of 300,000 shares of the Company's common
stock to IBS, and the payment of certain expenses of IBS through the issuance of
an aggregate of 94,000 shares of our common stock to IBS and its counsel. The
issuance of 736,945 shares were valued based on the market price of the
Company's common stock on the date of the transaction and resulted in an
investment in IBS, when combined with a cash investment of $65,000 made in 2000,
of $879,000. The 300,000 shares were also valued at the market price on the date
of issuance and were recorded as a stock subscription receivable of $294,000
because such shares will either be paid for or returned in the future. IBS is a
privately held biotechnology based, cancer diagnostic and immunotherapy company
with potential clinically effective products for the diagnosis, treatment and
imaging of patients with major tumor types (e.g. colon, lung, cervix, pancreas
and breast). IBS is located in Great Neck, New York. IBS does not produce
significant revenues as its products have not received FDA approval. Due to the
uncertainty of future cash flows and the fact that the products have not been
approved by the FDA, the Company was unable to support the value of the
investment by substantiated methods and determined that the likelihood of
recovery of its investment was remote. Therefore, in accordance with generally
accepted accounting principles the investment of $879,000 was charged to
impairment expense
Net interest expense was $36,000 during 2002 compared to net interest
income of $7,000 for the twelve months ended December 31, 2001 due to interest
expense incurred from capital leases for the purchase of certain fixed assets
and due to smaller amounts of cash on deposit during 2002. Other expense
included a charge to expense in 2001of $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 during 2001.
The Company incurred a net loss of $11,155,000, or ($.63) per share
based upon 17,736,0000 weighted average shares outstanding for the year ended
December 31, 2002. This compares to a net loss applicable to common shareholders
of $13,044,000, or ($.98) per share, based on 13,245,000 weighted average shares
outstanding for the year ended December 31, 2001. For the year ended December
31, 2001, the net loss attributable to common shareholders included a reduction
of $2,901,000 in connection with two private placements offered by the Company
in 2001 ($2,587,000 was attributable to the beneficial conversion feature
19
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 calculation was included in the net loss for
the fiscal year 2002. The net loss for 2002 included $2,961,000 of impairment
expense due principally to the write down of intangible assets in excess of
current valuation.
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 slowdown 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
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 Company
introduced the P45 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 noncash transactions during 2000
by granting warrants to nonemployees as payment for services, stock bonuses
granted to officers of the Company and stock granted to nonemployees as payment
for services. During 2001, the Company recorded $558,000 of noncash transactions
from granting warrants and stock to nonemployees 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.
20
Research, development and service expenses increased by $980,000, or
69%, to $2,405,000 for the twelve months ended December 31, 2002 from $1,425,000
for the same period in 2001. 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
expense calculation was included in the net loss for the fiscal year 2002. The
Mentor settlement charge of $812,000 included in the net loss for 2001 was an
increase over the comparable period a year ago.
Liquidity and Capital Resources
-------------------------------
The Company used cash in operating activities of $2,872,000 for twelve
months ended December 31, 2002, compared to $8,799,000 for the twelve months
ended December 31, 2001. The Company decreased its inventory balance by $952,000
during the year by decreasing purchases as compared to 2001 and utilizing the
inventory on hand in its production. The Company in anticipation of building
product to meet sales demand, more specifically, for the Blood Flow Analyzer and
the P45 ultrasonic Biomicroscope workstation plus purchased significant amounts
of inventory in 2001. Trade receivables, decreased by $1,473,000 mainly due to
the increased collection of outstanding accounts and to lower sales during 2002
.. The company used cash in investing activities of $299,000 for the twelve
months ended December 31, 2002, compared to $246,000 for the year 2001 due
mainly to less fixed asset additions during 2002 compared to the same period in
2001. Net cash provided by financing activities for the twelve months ended
December 31, 2002 was $503,000, compared to $9,553,000 for the year ended
December 31, 2001. The Company received $8,965,000 in net proceeds from two
private placements, the Series E and Series F Preferred Stock offerings during
2001, compared to net proceeds from one private placement of common stock in
2002 of $562,000. 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 $18,500,000. No sales of common stock
under the equity line occurred during 2002. Debt reduction for the year was
$59,000.
The Company had raised approximately $1,500,000 during the fiscal years
ended December 31, 2000 and 2001 through the $20,000,000 equity line of credit.
As of December 31, 2002, approximately $18,500,000 was available under the
equity line of credit subject to the NASDAQ trading limitations. Management is
uncertain whether or not 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, 2003. 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.
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, compared to 27% of total outstanding receivables as of
December 31, 2002. Much of the increase in the allowance relates to the
Company's outstanding receivable balance pertaining to its international
dealers. The downturn in the economy worldwide has resulted in increased
difficulty in collecting certain accounts. Certain international dealers have
some aged unpaid invoices that have not been resolved. The Company has addressed
its credit procedures and collection efforts during 2002 and has instituted
changes that require more payments at the time of sale via letters of credit and
not on a credit term basis.
21
The Company carries an allowance for obsolete inventory of $2,126,000
as of December 31, 2002, or approximately 45% of total inventory. This inventory
reserve was increased by $1,755,000 during 2002 mainly due to sales declines and
the discontinuance of the microkeratome purchased from Innovative Optics in
2002. 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. In addition, the Company has a significant amount of inventory
relating to its Photon laser system, which does not yet have FDA approval in
order to sell the product domestically. Therefore, the allowance for inventory
was established to reserve for these potential eventualities.
At December 31, 2002, the Company had net operating loss carryforwards
(NOLs) of approximately $41,000,000 and research and development tax credit
carryforwards of approximately $34,000. These carryforwards are available to
offset future taxable income, if any, and began to expire in the year 2001 and
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 carryforwards 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 its
products 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
in US Dollars.
Impact of New Accounting Pronouncements
---------------------------------------
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations". This Statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. This Statement addresses financial
accounting and reporting for the disposal of long-lived assets. The Company is
currently assessing the impact of this statement.
In April 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." This statement
requires the classification of gains or losses from the extinguishments of debt
to meet the criteria of Accounting Principles Board Opinion No. 30 before they
can be classified as extraordinary in the income statement. As a result,
companies that use debt extinguishment as part of their risk management cannot
classify the gain or loss from that extinguishment as extraordinary. The
statement also requires sale-leaseback accounting for certain lease
modifications that have economic effects similar to sale-leaseback transactions.
The Company does not expect Adoption of SFAS No. 145 did have a material impact
on financial position or future operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This standard, which is effective
for exit or disposal activities initiated after December 31, 2002, provides new
guidance on the recognition, measurement and reporting of costs associated with
these activities. The standard requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
the company commits to an exit or disposal plan. The adoption of SFAS No. 146 by
the Company is not expected to have a material impact on the Company's financial
position or future operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123," which is effective for all fiscal years ending after
December 15, 2002. SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation under SFAS No. 123 from the intrinsic value based method
of accounting prescribed by Accounting Principles Board Opinion No. 25. SFAS 128
also changes the disclosure requirements of SFAS 123, requiring a more prominent
disclosure of the pro-forma effect of the fair value based method of accounting
for stock-based compensation. The adoption of SFAS No. 148 by the Company did
not have a material impact on the Company's financial position or future
operations.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Ethics (FIN No. 46),
which addresses consolidation by business enterprises of variable interest
entities. FIN No. 46 clarifies the application of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN No. 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company does not expect to identify any variable interest entities that must
22
be consolidated. In the event a variable interest entity is identified, the
Company does not expect the requirements of FIN No. 46 to have a material impact
on its financial condition or results of operations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN No. 45). FIN No. 45 requires certain
guarantees to be recorded at fair value, which is different from current
practice to record a liability only when a loss is probable and reasonably
estimable, as those terms are defined in FASB Statement No. 5, Accounting for
Contingencies. FIN No. 45 also requires the Company to make significant new
disclosures about guarantees. The disclosure requirements of FIN No. 45 are
effective for the Company in the first quarter of fiscal year 2003. FIN No. 45's
initial recognition and initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
Company's previous accounting for guarantees issued prior to the date of the
initial application of FIN No. 45 will not be revised or restated to reflect the
provisions of FIN No 45. The Company does not expect the adoption of FIN No. 45
to have a material impact on its consolidated financial position, results of
operations or cash flows.
Item 7. Financial Statements
23
PARADIGM MEDICAL INDUSTRIES, INC.
Financial Statements
December 31, 2002 and 2001
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, 2002, and the related statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 2002 and
2001. 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, 2002, and the results of its operations and its cash
flows for the years ended December 31, 2002 and 2001, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2, the Company
has incurred significant losses, and has been unable to generate positive cash
flows from operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
TANNER + CO.
Salt Lake City, Utah
March 11, 2003
F-2
PARADIGM MEDICAL INDUSTRIES, INC.
Balance Sheet
December 31,
---------------------------------------------------------------------------------------
Assets
------
Current assets:
Cash $ 194,000
Receivables, net 944,000
Inventories, net 2,649,000
Prepaid and other current assets 81,000
-----------------
Total current assets 3,868,000
Intangibles, net 910,000
Property and equipment, net 495,000
Other assets 16,000
-----------------
Total $ 5,289,000
-----------------
---------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 904,000
Accrued liabilities 1,414,000
Current portion of capital lease obligations 44,000
-----------------
Total current liabilities 2,362,000
-----------------
Capital lease obligations, net of current portion 80,000
-----------------
Commitments and contingencies -
Stockholders' equity:
Preferred stock $.001 par value, 5,000,000 shares authorized,
27,385 shares issued and outstanding (aggregate liquidation
preference of $6,726,000) -
Common stock, $.001 par value, 40,000,000 shares authorized,
21,954,238 shares issued and outstanding 22,000
Additional paid-in capital 56,775,000
Stock subscription receivable (294,000)
Accumulated deficit (53,656,000)
-----------------
Total stockholders' equity 2,847,000
-----------------
Total liabilities and stockholders' equity $ 5,289,000
-----------------
---------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-3
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Operations
Years Ended December 31,
-------------------------------------------------------------------------------------------------------------
2002 2001
---------------------------------------
Sales $ 5,368,000 $ 7,919,000
Cost of sales 4,210,000 4,370,000
---------------------------------------
Gross profit 1,158,000 3,549,000
---------------------------------------
Operating expenses:
General and administrative 3,702,000 5,125,000
Marketing and selling 2,795,000 4,762,000
Research, development and service 2,819,000 2,947,000
Impairment of assets 2,961,000 -
---------------------------------------
Operating loss (11,119,000) (9,285,000)
Other income (expense):
Interest income 10,000 48,000
Interest expense (46,000) (41,000)
Other income (expense) - (865,000)
---------------------------------------
Total other income (expense) (36,000) (858,000)
---------------------------------------
Loss before provision for income taxes (11,155,000) (10,143,000)
Provision for income taxes - -
---------------------------------------
Net loss $ (11,155,000) $ (10,143,000)
---------------------------------------
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 $ (11,155,000) $ (13,044,000)
---------------------------------------
Loss per common share - basic and diluted $ (0.63) $ (0.98)
---------------------------------------
Weighted average common shares - basic and diluted 17,736,000 13,245,000
---------------------------------------
-------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-4
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Stockholders' Equity
Years Ended December 31, 2002 and 2001
------------------------------------------------------------------------------------------------------------------------------------
Preferred Common Stock Additional Treasury Stock Stock
Stock ------------------- Paid-in ---------------- Subscription Accumulated
(see note 10) Shares Amount Capital Shares Amount Receivable Deficit
-------------------------------------------------------------------------------------------
Balance, January 1, 2001 $ - 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, December 31, 2001 - 15,072,531 15,000 52,156,000 - - - (42,501,000)
Conversion of preferred stock - 3,132,356 3,000 (3,000) - - - -
Issuance of common stock for:
Cash - 1,262,000 2,000 560,000 - - - -
Settlement of litigation - 75,000 - 34,000 - - - -
Services - 167,684 - 183,000 - - - -
Assets - 1,467,358 2,000 2,626,000 - - - -
In process research and development - 477,309 - 630,000 - - - -
Subscription receivable - 300,000 - 294,000 - - (294,000) -
Issuance of stock warrants in
acquisition - - - 295,000 - - - -
Net loss - - - - - - - (11,155,000)
-------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ - 21,954,238 $ 22,000 $ 56,775,000 - $ - $ (294,000) $ (53,656,000)
-------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-5
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Cash Flows
Years Ended December 31,
---------------------------------------------------------------------------------------------------------------
2002 2001
-----------------------------------
Cash flows from operating activities:
Net loss $ (11,155,000) $ (10,143,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 624,000 671,000
Issuance of common stock for compensation - 8,000
Issuance of common stock for services 183,000 48,000
Issuance of common stock for in process research and development 630,000
Issuance of stock option/warrant for services - 503,000
Common stock issued for litigation settlement 34,000 812,000
Recovery of bad debt expense (23,000) -
Provision for losses on inventory 1,755,000 -
Impairment of intangibles and other assets 2,961,000 -
(Gain) loss on disposal of assets - 23,000
(Increase) decrease in:
Receivables 1,473,000 (787,000)
Inventories 952,000 (684,000)
Prepaid and other assets 255,000 (152,000)
Increase (decrease) in:
Accounts payable (313,000) 530,000
Accrued liabilities (158,000) 372,000
-----------------------------------
Net cash used in operating activities (2,782,000) (8,799,000)
-----------------------------------
Cash flows from investing activities:
Purchase of property and equipment (28,000) (220,000)
Increase in intangibles (103,000) (26,000)
Proceeds from the disposal of assets 2,000 -
Net cash paid in acquisition (100,000) -
-----------------------------------
Net cash used in investing activities (229,000) (246,000)
-----------------------------------
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
Principal payments on capital lease obligations (59,000) (85,000)
Proceeds from the issuance of common stock, including
exercise of common stock warrants and options 562,000 673,000
-----------------------------------
Net cash provided by financing activities 503,000 9,553,000
-----------------------------------
Net change in cash (2,508,000) 508,000
Cash, beginning of year 2,702,000 2,194,000
-----------------------------------
Cash, end of year $ 194,000 $ 2,702,000
-----------------------------------
---------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-6
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
December 31, 2002 and 2001
--------------------------------------------------------------------------------
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.
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-7
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Intangible Assets
and Significant As of December 31, 2002, intangible assets consisted of
Accounting goodwill related to the purchase of Ocular Blood Flow,
Policies Ltd., product rights, capitalized payments to
Continued manufacturers for engineering and design services and
patent costs.
Effective January 1, 2002, the Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets." The
adoption of SFAS No. 142 required an initial impairment
assessment involving a comparison of the fair value of
goodwill and other intangible assets to current carrying
values. As of January 1, 2002, the initial impairment
assessment did not result in any impairment charge.
Intangible assets determined to have indefinite useful
lives are not amortized. The Company tests such
intangible assets with indefinite useful lives for
impairment annually or more frequently if events or
circumstances indicate that an asset might be impaired.
Intangible assets determined to have definite lives are
amortized on a straight-line basis over their useful
lives. Product rights are being amortized over five
years, capitalized engineering and design costs are
fully amortized as of December 31, 2002, and patents are
being amortized over the life of the patents which is
ten years. We review such intangible assets with
definite lives for impairment to ensure they are
appropriately valued if conditions exist that may
indicate the carrying value may not be recoverable. Such
conditions may include an economic downturn in a
geographic market or a change in the assessment of
future operations. Goodwill is not amortized. We perform
tests for impairment of goodwill annually or more
frequently if events or circumstances indicate it might
be impaired. Such tests include comparing the fair value
of a reporting unit with its carrying value, including
goodwill.
Impairment assessments are performed using a variety of
methodologies, including cash flow analysis, estimates
of sales proceeds and independent appraisals. Where
applicable, an appropriate discount rate is used, based
on the Company's cost of capital rate or
location-specific economic factors.
--------------------------------------------------------------------------------
F-8
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Evaluation of Other Long-Lived Assets
and Significant The Company evaluates the carrying value of the
Accounting unamortized balances of other long-lived assets to
Policies determine whether any impairment of these assets has
Continued 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, impairment of intangible assets, stock
compensation expense, and accrued liabilities.
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. No
stock-based employee compensation cost is reflected in
net income, as all options granted under those plans had
an exercise price equal to or greater than the market
value of the underlying common stock on the date of
grant.
--------------------------------------------------------------------------------
F-9
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.
The following table illustrates the effect on net income
and earnings per share if the company had applied the
fair value recognition provisions of FASB Statement No.
123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation.
Years Ended December 31,
---------------------------------
2002 2001
---------------------------------
Net loss - as reported $ (11,155,000) $ (10,143,000)
Deduct: total stock-based employee
compensation determined under fair value
based method for all awards, net of
related tax effects (618,000) (1,432,000)
---------------------------------
Net loss - pro forma $ (11,773,000) $ (11,575,000)
---------------------------------
Earnings per share:
Basic and diluted - as reported $ (.63) $ (.77)
Basic and diluted - pro forma $ (.66) $ (.87)
The fair value of each option grant is estimated at the
date of grant using the Black-Scholes option pricing
model with the following assumptions:
December 31,
----------------------------------------
2002 2001
----------------------------------------
Expected dividend yield $ - $ -
Expected stock price
volatility 102%-103% 106%-107%
Risk-free interest rate 4% 4-5%
Expected life of options 2-7 years 3-5 years
The weighted average fair value of options granted
during 2002 and 2001 are $1.25 and $1.71,
respectively.
--------------------------------------------------------------------------------
F-10
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Earnings Per Share
and Significant The computation of basic earnings per common share is
Accounting based on the weighted average number of shares
Policies outstanding during each year.
Continued
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
5,151,557 and 6,221,798 shares of common stock at prices
ranging from $2.00 to $12.98 per share were outstanding
at December 31, 2002 and 2001, respectively, but were
not included in the diluted earnings per share
calculation because the effect would have been
antidilutive.
Revenue Recognition
Revenues for sales of products that require specific
installation and acceptance by the customer are
recognized upon such installation and acceptance by the
customer. Revenues for sales of other surgical systems,
ultrasound diagnostic devices, and disposable products
are recognized when the product is shipped. A signed
purchase agreement and a deposit or payment in full from
customers is 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 opthalmic 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.
--------------------------------------------------------------------------------
F-11
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Concentration of Risk - Continued
and Significant The Company's high technology product line requires the
Accounting Company to deal with suppliers and subcontractors
Policies supplying highly specialized parts, operating highly
Continued 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 may suffer from any
product liability litigation could have a material
adverse effect on the Company.
A significant portion of the Company's product sales is
in foreign countries. The economic and political
instability of some foreign countries may affect the
ability of medical personnel to purchase the Company's
products and the ability of the customers to pay for the
procedures for which the Company's products are used.
Such circumstances could cause a possible loss of sales,
which would affect operating results adversely.
During the years ended December 31, 2002 and 2001, 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.
--------------------------------------------------------------------------------
F-12
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Warranty
and Significant The Company provides product warranties on the sale of
Accounting certain products that generally extend for one year from
Policies the date of sale. The Company maintains a reserve for
Continued estimated warranty costs based on historical experience
and management's best estimates.
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 2001 financial statements have
been reclassified to conform to the presentation of the
current year financial statements.
2. Going The accompanying financial statements have been prepared
Concern on a going concern basis, which contemplates the
realization of assets and the satisfaction of
liabilities in the normal course of business.
Historically, the Company has not demonstrated the
ability to generate sufficient cash flows from
operations to satisfy their liabilities and sustain
operations and the Company has incurred significant
losses. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
--------------------------------------------------------------------------------
F-13
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
2. Going The Company's continuation as a going concern is
Concern dependent on its ability to generate sufficient income
Continued and cash flow to meet its obligations on a timely basis
and/or obtain additional financing as may be required.
The Company is actively seeking options to obtain
additional capital and financing. 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 December 2000 to Triton by
tendering put notices to purchase shares subject to
certain NASDAQ trading restrictions. The company sold
approximately 329,000 shares of common stock for
approximately $673,000 during 2001 (see note 7). No
shares of common stock were sold under the Triton equity
line of credit during 2002. Management is uncertain 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, 2003. 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.
3. Acquisitions Innovative Optics, Inc.
On January 31, 2002, 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-14
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
3. Acquisitions As consideration for the purchase of certain assets of
Continued Innovative Optics, the Company paid $100,000 and issued
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
filed a registration statement with the Securities and
Exchange Commission 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 imited 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, were placed in an escrow account maintained at
the law firm of Mackey Price & Thompson (the "Disbursing
Agent") pursuant to the terms of an Escrow Agreement.
In connection with this acquisition, 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
-------------------
The Company was 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 a
consultant. Immediately after such 90 day period, the
Disbursing Agent was to distribute three-fourths of the
shares held in escrow, or 477,309 shares, to Innovative
Optics, unless the Company had certified that it had
implemented Phase I of the Blade Price Reduction
Program.
--------------------------------------------------------------------------------
F-15
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
3. Acquisitions Despite best efforts, the Company was unable to
Continued manufacture microkeratome blades at a targeted materials
cost per blade. If the Company certified that
implementation of Phase I of the Blade Price Reduction
Program resulted in materials cost that exceeded the
target cost per blade and such certification was not
disputed by Innovative Optics, the number of escrow
shares disbursed to Innovative Optics was to be reduced
by 300 shares for every cent that the materials cost per
blade exceeded the target cost. The Company was not
successful in achieving the blade price reduction.
Innovative Optics requested that the total number of
shares associated with Phase I be issued to them stating
that the Company did not use its best efforts to achieve
the target cost and that proper notification was not
delivered to them. In August 2002, the Company issued
477,309 shares of common stock, which were held in
escrow to Innovative Optics.
The shares were valued at $630,000, based upon the
market price per share at the date of issue. The
transaction amount was recorded as in process research
and development costs and charged to expense.
The Company was also required to use its best efforts to
implement, within six months after closing, Phase II of
the Blade Price Reduction Program. Immediately after
such six month period, the Disbursing Agent was to
disburse the remaining shares in escrow to Innovative
Optics unless the Company certified that it had
implemented Phase II of the Blade Price Reduction
Program and, despite best efforts, was unable to
manufacture the microkeratome blades at a second
targeted materials cost or less per blade. If Paradigm
certified that implementation of Phase II of the Blade
Price Reduction Program resulted in a materials cost
that exceeded the second target cost per blade and such
certification was not disputed by Innovative Optics, the
number of escrow shares disbursed to Innovative Optics
was to be reduced by 300 shares for every cent that the
materials cost per blade exceeded the second target
cost. 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 did not
implement Phase II of the Blade Price Reduction Project
due to the lack of success experienced in Phase I. Also,
the Company has not issued the remaining shares, which
remain in escrow.
--------------------------------------------------------------------------------
F-16
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
3. Acquisitions The Company determined that it could not manufacture the
Continued blades to support its customer base at an economical
cost. There are no blades in inventory at this time. The
Company has attempted to sell the product and related
intangibles, but has not been successful in such
efforts. Accordingly, due to the lack of projected
future cash flows, during 2002 the Company recorded an
impairment expense of $2,082,000 for the remaining book
value of property and equipment and intangible assets
purchased from Innovative Optics.
International Bioimmune Systems, Inc.
During 2002, the Company acquired 2,663,254, or 19.9%,
of the outstanding shares of International Bioimmune
Systems, Inc. (IBS) and warrants to purchase 1,200,000
shares of common stock of IBS at $2.50 per share for a
period of two years, through the exchange and issuance
of 736,945 shares of Paradigm common stock, the lending
of 300,000 shares of Paradigm common stock to IBS, and
the payment of certain expenses of IBS through the
issuance of an aggregate of 94,000 shares of Paradigm
common stock to IBS and its counsel.
The issuance of 736,945 and 94,000 shares were valued
based on the market price of Paradigm's common stock on
the date of the transaction and resulted in an
investment in IBS of $814,000, which combined with a
cash investment of $65,000 made in 2000, resulted in a
total investment of $879,000. The 300,000 shares were
also valued at the market price on the date of issuance
and were recorded as a stock subscription receivable of
$294,000 because such shares will either be paid for or
returned in the future.
Due to the uncertainty of future cash flows and the fact
that the products have not been approved by the FDA, the
Company determined that the likelihood of recovery of
its investment was remote and recorded an impairment
expense for the investment of $879,000.
--------------------------------------------------------------------------------
F-17
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
4. Detail of
Certain
Balance
Sheet
Accounts
Receivables:
Trade receivables $ 1,286,000
Other 5,000
Allowance for doubtful accounts (347,000)
-----------------
$ 944,000
-----------------
Inventories:
Finished goods $ 1,937,000
Raw materials 2,838,000
Reserve for obsolescence (2,126,000)
-----------------
$ 2,649,000
-----------------
Accrued liabilities:
Warranty and return allowance $ 586,000
Customer deposits 88,000
Payroll and employee benefits 175,000
Royalties 182,000
Consulting and other 155,000
Deferred revenue 228,000
-----------------
$ 1,414,000
-----------------
5. Intangible Intangible assets consist of the following at December
Assets 31, 2002:
Goodwill $ 799,000
Product and technology rights 769,000
Engineering and design costs 482,000
Patents 173,000
------------------
2,223,000
Accumulated amortization (1,313,000)
------------------
Net intangible assets $ 910,000
------------------
Amortization expense for the years ended December 31,
2002 and 2001 was $248,000 and $341,000, respectively.
--------------------------------------------------------------------------------
F-18
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
5. Intangible The following table reflects a comparison of net loss
Assets and net loss per share for each of the two years ended
Continued December 31, adjusted to give effect to the adoption of
SFAS 142:
2002 2001
----------------------------------
Reported net loss applicable to common
shareholders $ (11,155,000) $ (13,044,000)
Add-back goodwill amortization,
net of taxes - 80,000
----------------------------------
Adjusted net loss applicable to common
Shareholders $ (11,155,000) $ (12,964,000)
----------------------------------
Reported loss per share-basic and
diluted $ (.63) $ (.98)
Add-back goodwill amortization - -
----------------------------------
Adjusted loss per share-basic and
diluted $ (.63) $ (.98)
----------------------------------
The changes in the carrying amount of goodwill during
the year ended December 31, 2002 are as follows:
Balance as of December 31, 2001 $ 803,000
Goodwill acquired during the year 2,047,000
Adjustments to goodwill (2,051,000)
--------------
Balance as of December 31, 2002 $ 799,000
--------------
6. Property and Property and equipment consists of the following:
Equipment
Office equipment $ 750,000
Computer equipment 657,000
Automobile 52,000
Furniture and fixtures 264,000
Leasehold improvements 166,000
--------------
1,889,000
Accumulated depreciation
and amortization (1,394,000)
---------------
$ 495,000
---------------
--------------------------------------------------------------------------------
F-19
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. 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 in December
2000 to Triton by tendering put notices to purchase
shares. The put notices may be tendered by the Company
at the Company's discretion, subject to certain NASDAQ
trading restrictions. 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 $673,000 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. There were no sales of common
stock through this agreement during 2002.
8. Lease During the years ended December 31, 2002 and 2001, 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 amortization (121,000)
------------------
$ 170,000
------------------
Amortization expense on assets under capital leases
during the years ended December 31, 2002 and 2001 was
$46,000 and $54,000, respectively.
--------------------------------------------------------------------------------
F-20
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. 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:
2003 $ 61,000
2004 45,000
2005 38,000
2006 14,000
-----------------
158,000
Less amount representing interest (34,000)
-----------------
Present value of future minimum lease payments 124,000
Less current portion (44,000)
-----------------
Long-term portion $ 80,000
-----------------
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, 2002 are approximately as follows:
Year Ending December 31, Amount
----------------------- ------------------
2003 $ 42,000
2004 6,000
------------------
Total future minimum rental payments $ 48,000
------------------
In January 2003, the lease for the Company's office and
warehouse space was renewed. This renewal will result in
additional minimum lease payments of $121,000 in 2003,
$155,000 in 2004, and $159,000 in 2005.
Rent expense related to noncancelable operating leases
was approximately $437,000 and $435,000 for the years
ended December 31, 2002 and 2001, respectively.
--------------------------------------------------------------------------------
F-21
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. 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,
-----------------------------------
2002 2001
-----------------------------------
Federal income tax benefit at
statutory rate $ 4,127,000 $ 3,753,000
Expiration of research and
development tax credit
carryforwards (25,000) (181,000)
Amortization of goodwill - (30,000)
Other (32,000) (28,000)
Change in valuation allowance (4,070,000) (3,514,000)
-----------------------------------
$ - $ -
-----------------------------------
Deferred tax assets (liabilities) are comprised of the
following:
Net operating loss carryforward $ 15,282,000
Depreciation, amortization, and impairment 783,000
Allowance and reserves 1,159,000
Impairment of investment in IBS 325,000
Research and development tax credit
carryforwards 34,000
-----------------
17,583,000
Valuation allowance (17,583,000)
-----------------
$ -
-----------------
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-22
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Income At December 31, 2002, the Company had net operating loss
Taxes carryforwards of approximately $41,000,000 and research
Continued and development tax credit carryforwards of
approximately $34,000. These carryforwards are available
to offset future taxable income and expire in 2003
through 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.
10. Capital The Company has established a series of preferred stock
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 40,000,000 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, 2002 was $6,000.
--------------------------------------------------------------------------------
F-23
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Capital Series A Preferred Stock - Continued
Stock 3. The shares are convertible at the option of the
Continued holder at any time into common shares, based on an
initial conversion rate of one share of Series A
Preferred Stock for 1.2 common shares.
4. The holders of the shares have no voting rights.
5. The Company may, at its option, redeem all of the
then outstanding shares of the Series A Preferred
Stock at a price of $4.50 per share, plus accrued
and unpaid dividends related to the fiscal year in
which such redemption occurs.
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 $.001
par value. The Series B Preferred Stock has the
following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of forty-eight cents ($.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, 2002
was $36,000.
--------------------------------------------------------------------------------
F-24
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Capital Series B Preferred Stock - Continued
Stock 3. The shares are convertible at the option of the
Continued holder at any time into common shares, based on an
initial conversion rate of one share of Series B
Preferred Stock for 1.2 common shares.
4. The holders of the shares have no voting rights.
5. The Company may, at its option, redeem all of the
then outstanding share of the Series B Preferred
Stock at a price of $4.50 per share, plus accrued
and unpaid dividends related to the fiscal year in
which such redemption occurs.
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-25
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Capital Series D Preferred Stock
Stock In January 1999, the Company's Board of Directors
Continued 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, 2002 was $3,000.
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-26
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Capital Series E Preferred Stock
Stock In May 2001, the Company authorized the issuance of a
Continued 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, 2002 was $150,000.
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-27
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Capital Series E Preferred Stock - Continued
Stock 4. The holders of the shares have no voting rights.
Continued
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, 2002 was $627,000.
--------------------------------------------------------------------------------
F-28
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Capital Series F Preferred Stock - Continued
Stock 3. Each share is convertible, at the option of the
Continued 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-29
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Capital The following table summarizes preferred stock activity
Stock during the years ended December 31, 2002 and 2001:
Continued
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,
2001 5,957 $ - 8,986 $ - - $ - 52,500 $ - - $ - - $ -
Issuance of Series E
preferred stock for cash - - - - - - - - 46,219 - - -
Issuance of Series F
preferred stock for cash - - - - - - - - - - 52,472 -
Conversion of preferred
stock (210) - (6,250) - - - (42,500) - (26,919) - (5,113) -
----------------------------------------------------------------------------------------------------------
Balance at December 31,
2001 5,747 - 8,986 - - - 10,000 - 19,300 - 47,359 -
Conversion of preferred
stock (120) - - - - - (5,000) - (17,800) - (41,087) -
----------------------------------------------------------------------------------------------------------
Balance at December 31,
2002 5,627 $ - 8,986 $ - - $ - 5,000 $ - 1,500 $ - 6,272 $ -
----------------------------------------------------------------------------------------------------------
Authorized 500,000 - 500,000 - 30,000 - 1,140,000 - 50,000 - 50,000 -
----------------------------------------------------------------------------------------------------------
Liquidation preference - $6,000 36,000 $ - $9,000 $150,000 $627,200
----------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
F-30
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
11. 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 2002, in connection with the Innovative Optics
acquisition (see note 3), the Company granted warrants
to purchase 250,000 shares of common stock at an
exercise price of $5.00 per share. These 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. As a
result of these warrants, the Company included
approximately $295,000 in the purchase price relating to
the acquisition of the assets from Innovative Optics,
Inc.
In addition, the Company granted the following options
and warrants to non-employees during the year ended
December 31, 2001:
o 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 based on a
Black-Scholes valuation.
--------------------------------------------------------------------------------
F-31
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
11. Stock Option o Warrants to purchase 50,000 shares of common stock
Plan and at an exercise price of $4.00 that vested in
Warrants November 2001 were issued to a consultant as an
Continued extension of the consulting agreement. The Company
recognized $133,000 of general and administrative
expense in connection with these warrants based on
a Black-Scholes valuation.
o 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.
A schedule of the options and warrants is as follows:
Exercise
Number of Price Per
----------------------------
Options Warrants Share
-----------------------------------------------
Outstanding at
January 1, 2001 1,613,254 1,798,927 $ 2.30 - 12.98
Granted 2,820,000 516,095 2.00 - 4.00
Exercised - - -
Expired (236,626) - 4.87 - 5.00
Forfeited (289,852) - 2.75 - 5.00
-----------------------------------------------
Outstanding at
December 31, 2001 3,906,776 2,315,022 2.00 - 12.98
Granted 70,000 250,000 2.00 - 5.00
Exercised - - -
Expired (115,479) - 5.00
Forfeited (1,374,762) - 2.31 - 6.00
-----------------------------------------------
Outstanding at
December 31, 2002 2,486,535 2,565,022 $ 2.00 - 12.98
-----------------------------------------------
--------------------------------------------------------------------------------
F-32
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
11. Stock Option The following table summarizes information about stock
Plan and options and warrants outstanding at December 31, 2002:
Warrants
Continued
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 3,438,649 4.12 $ 3.16 3,091,098 $ 3.68
6.00 - 8.13 1,587,025 .73 6.07 1,512,025 7.27
12.98 25,883 N/A 12.98 25,883 12.98
---------------------------------------------------- -----------------------
$ 2.30 -12.98 5,051,557 3.05 $ 4.34 4,629,006 $ 4.90
---------------------------------------------------- -----------------------
12. Related Party Thomas F. Motter, former Chairman of the Board and Chief
Transactions Executive Officer of the Company, leased his former
residence 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
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. The Company paid $14,000 in rent
during 2002. This agreement was terminated on January
31, 2003.
The Company entered into a consulting agreement with a
former executive officer of the Company for a period of
six months commencing in September 2002. The agreement
was renewable for additional six-month terms. The
Company did not renew the contract upon its expiration.
The Company paid $15,000 under this agreement during
2002 and had an accrual of $5,000 as of December 31,
2002.
--------------------------------------------------------------------------------
F-33
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
12. Related Party A law firm, of which the chairman of the board of
Transactions directors of the Company is a shareholder, has rendered
Continued legal services to the Company. The Company paid this
firm $175,000 and $159,000, for the years ended December
31, 2002 and 2001, respectively. As of December 31,
2002, the Company owed this firm $50,000, which is
included in accounts payable.
13. Supplemental o During the year ended December 31, 2002 the Company
Cash Flow acquired certain assets of Innovative Optics, Inc.
Information in a purchase transaction (see note 3). The
transaction required the payment of $100,000 and a
potential issuance of 1,272,000 shares of common
stock. In connection with this acquisition, the
Company recorded the following:
Inventory $ 225,000
Property, 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-34
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
13. Supplemental o During 2002, the Company acquired 2,663,254, or
Cash Flow 19.9%, of the outstanding shares of International
Information Bioimmune Systems, Inc. (IBS) and warrants to
Continued purchase 1,200,000 shares of common stock of IBS
at $2.50 per share for a period of two years,
through the exchange and issuance of 736,945
shares of Paradigm common stock, the lending of
300,000 shares of Paradigm common stock to IBS,
and the payment of certain expenses of IBS through
the issuance of an aggregate of 94,000 shares of
Paradigm common stock to IBS and its counsel.
o During the year ended December 31, 2001, the
Company acquired $235,000 of property and
equipment in exchange for capital lease
agreements.
Actual amounts paid for interest and income taxes are as
follows:
Years Ended
December 31,
-----------------------------------
2002 2001
-----------------------------------
Interest $ 46,000 $ 41,000
-----------------------------------
Income taxes $ - $ -
-----------------------------------
--------------------------------------------------------------------------------
F-35
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
14. Export Sales Total sales include export sales by major geographic
area as follows:
Years Ended
December 31,
-----------------------------------
Geographic Area 2002 2001
-----------------------------------
Far East $ 1,171,000 $ 1,416,000
South America 308,000 301,000
Middle East 337,000 287,000
Europe 505,000 1,323,000
Canada 121,000 200,000
Mexico 61,000 31,000
-----------------------------------
$ 2,503,000 $ 3,558,000
-----------------------------------
15. 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, 2002 and 2001, the Company contributed
approximately $59,000 and $68,000 to the Plan,
respectively.
16. Commitments Consulting Agreements
and During the year ended December 31, 1999 the Company
Contingencies 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-36
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation
and An action was brought against the Company in March 2000
Contingencies by George Wiseman, a former employee, in the Third
Continued 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 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. The Company believes
that any additional royalty payment 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
complaint alleges a breach 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.
--------------------------------------------------------------------------------
F-37
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and The Company received demand letters dated September 14,
Contingencies 2000 and October 17, 2000 from Mentor Corporation
Continued ("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 received a demand letter dated December 9,
2002 from counsel for Dan Blacklock, dba Danlin Corp.
The letter demands payment in the amount of $65,000 for
manufacturing and supplying parts for our microkeratome
blades. The Company's records show that it received
approximately $35,000 in parts from the Danlin Corp.,
but that the additional amounts that the Danlin Corp
claims are owed, were from parts that were received but
rejected because they had never been ordered.
The Company received demand letters dated September 29,
2002 and December 10, 2002 from counsel for CitiCorp,
Vendor Finance, Inc. and its successor-in-interest, The
Copy Man dba TCM Business. The letters demand payment of
$50,000 plus interest for the leasing of two copy
machines that were delivered to the Salt Lake City
facilities on or about April of 2000. The majority of
the amounts alleged to be owed are from the remaining
payments on the leases. The Company disputes the amounts
allegedly owed, asserting that the copy machines, which
were returned to the leasing company, did not work
properly.
--------------------------------------------------------------------------------
F-38
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and The Company received a demand letter dated December 30,
Contingencies 2002 from counsel for Thomas F. Motter, former Chairman
Continued and Chief Executive Officer. Mr. Motter claims in the
letter that he was entitled to certain stock options
that had not been issued to him in a timely manner. By
the time the options were actually issued to him,
however, they had expired. Mr. Motter contends that if
the options had been issued in a timely manner, he would
have exercised them in a manner that would have given
him a substantial benefit. Mr. Motter requests
restitution for the loss of the financial opportunity.
Mr. Motter also claims that he was defrauded by the
Company by not being given an extended employment
agreement when he terminated the change of control
agreement that he had entered into with the Company.
Mr. Motter is further claiming payment for accrued
vacation time during the 13 years he had been employed,
asserting that he only had a total of four weeks of
vacation during that period. Finally, Mr. Motter is
threatening a shareholder derivative action against the
Company because of the board of directors' alleged
failure to conduct an investigation into conversations
that took place in a chat room on Yahoo. Mr. Motter
asserts that certain individuals participating in the
conversations were officers or directors of the Company
whose interests were in conflict with the interests of
the shareholders. The Company believes that Mr. Motter's
claims and assertions are without merit and intend to
vigorously defend against any legal action that Mr.
Motter may bring against the Company.
The Company received a demand letter dated January 6,
2003 from counsel for Westcore STIPG, LLC, the landlord
with regard to the lease on the former facilities in San
Diego, California. The letter demands payment of $11,000
plus interest, attorney's fees and costs for the repairs
and restoration work on the San Diego facilities, after
a deduction of a $6,000 security deposit. The Company
rejects these claims, contending that the security
deposit was adequate to pay for any repairs or
restoration expenses on the premises.
An action was brought by Dr. John Charles Casebeer
against the Company in the Montana Second Judicial
District Court, Silver Bow County, state of Montana. The
complaint alleges that Dr. Casebeer entered into a
personal services contract with the Company memorialized
by a letter dated April 20, 2002, with it being alleged
that Dr. Casebeer fully performed his obligations. Dr.
Casebeer asserts that he is entitled to $43,750 per
quarter for consultant time and as an incentive to be
granted each quarter $5,000 in options issued at the
fair market value. An additional purported incentive was
$50,000 in shares of stock being issued at the time a
formalized contract was to be signed by the parties. In
the letter it is provided that at its election, the
Company may pay the consideration in the form of stock
or cash and that stock would be issued within 30 days of
the close of the quarter. Prior to the litigation, the
Company issued 43,684 shares to Dr. Casebeer. The
referenced letter provides that termination may be made
by either party upon giving 90 days written notice.
Notice was given by the Company in early November 2002.
The Company recently filed its answer in defense of the
action. Issues include whether or not Dr. Casebeer fully
performed as asserted.
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.
--------------------------------------------------------------------------------
F-39
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Royalty Agreements
and The Company has a royalty agreement with the president
Contingencies of OBF. The agreement provides for the payment of 10%
Continued royalty of the net sales related to the Blood Flow
Analyzer. The agreement terminates in 2020. The Company
did not make any royalty payments during 2002 under this
agreement and $147,000 were accrued at the end of the
year.
The Company has an amended exclusive patent license
agreement with a company which owns the patent for the
laser-probe used on the Photon machine. 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, 2002, no significant royalties have
been paid under this agreement.
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. At December 31, 2002, the
Company had accrued approximately $7,000 in royalties.
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 significant.
17. 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-40
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
18. Recent Recent Accounting Pronouncements
Accounting In June 2001, the FASB issued Statement of Financial
Pronounce- Accounting Standards No. 143, "Accounting for Asset
ments Retirement Obligations". This Statement addresses
financial accounting and reporting for obligations
associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This
Statement is effective for financial statements issued
for fiscal years beginning after June 15, 2002. This
Statement addresses financial accounting and reporting
for the disposal of long-lived assets. The Company is
currently assessing the impact of this statement.
In April 2002, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This
statement requires the classification of gains or losses
from the extinguishments of debt to meet the criteria of
Accounting Principles Board Opinion No. 30 before they
can be classified as extraordinary in the income
statement. As a result, companies that use debt
extinguishment as part of their risk management cannot
classify the gain or loss from that extinguishment as
extraordinary. The statement also requires
sale-leaseback accounting for certain lease
modifications that have economic effects similar to
sale-leaseback transactions. The Company does not expect
Adoption of SFAS No. 145 did have a material impact on
financial position or future operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities."
This standard, which is effective for exit or disposal
activities initiated after December 31, 2002, provides
new guidance on the recognition, measurement and
reporting of costs associated with these activities. The
standard requires companies to recognize costs
associated with exit or disposal activities when they
are incurred rather than at the date the company commits
to an exit or disposal plan. The adoption of SFAS No.
146 by the Company is not expected to have a material
impact on the Company's financial position or future
operations.
--------------------------------------------------------------------------------
F-41
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
18. Recent Recent Accounting Pronouncements - Continued
Accounting In December 2002, the FASB issued SFAS No. 148
Pronounce- "Accounting for Stock-Based Compensation--Transition and
ments Disclosure--an amendment of FASB Statement No. 123,"
Continued which is effective for all fiscal years ending after
December 15, 2002. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair
value based method of accounting for stock-based
employee compensation under SFAS No. 123 from the
intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25. SFAS 148
also changes the disclosure requirements of SFAS 123,
requiring a more prominent disclosure of the pro-forma
effect of the fair value based method of accounting for
stock-based compensation. The adoption of SFAS No. 148
by the Company did not have a material impact on the
Company's financial position or future operations.
In January 2003, the Financial Accounting Standards
Board (FASB) issued Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN No. 46), which
addresses consolidation by business enterprises of
variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities
in which equity investors do not have the
characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated
financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The
Company does not expect to identify any variable
interest entities that must be consolidated. In the
event a variable interest entity is identified, the
Company does not expect the requirements of FIN No. 46
to have a material impact on its financial condition or
results of operations.
--------------------------------------------------------------------------------
F-42
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
18. Recent Recent Accounting Pronouncements - Continued
Accounting In November 2002, the FASB issued Interpretation No. 45,
Pronounce- Guarantor's Accounting and Disclosure Requirements for
ments Guarantees, Including Indirect Guarantees of
Continued Indebtedness of Others (FIN No. 45). FIN No. 45 requires
certain guarantees to be recorded at fair value, which
is different from current practice to record a liability
only when a loss is probable and reasonably estimable,
as those terms are defined in FASB Statement No. 5,
Accounting for Contingencies. FIN No. 45 also requires
the Company to make significant new disclosures about
guarantees. The disclosure requirements of FIN No. 45
are effective for the Company in the first quarter of
fiscal year 2003. FIN No. 45's initial recognition and
initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after
December 31, 2002. The Company's previous accounting for
guarantees issued prior to the date of the initial
application of FIN No. 45 will not be revised or
restated to reflect the provisions of FIN No 45. The
Company does not expect the adoption of FIN No. 45 to
have a material impact on its consolidated financial
position, results of operations or cash flows.
--------------------------------------------------------------------------------
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.
As of March 31, 2003, the executive officers and directors of the
Company, their ages and their positions are set forth below:
Name Age Position
---- --- --------
Jeffrey F. Poore 54 President and Chief Executive Officer
Heber C. Maughan 51 Vice President of Finance, Treasurer, and
Chief Financial Officer
Randall A. Mackey, Esq. 56 Chairman of the Board, Secretary and
Director
David M. Silver, PhD. 61 Director
Keith D. Ignotz 54 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.
Jeffrey F. Poore, D.D.S. has served as President and Chief Executive
Officer since March 24, 2003. Dr. Poore more recently served as Chief Executive
Officer for Outsource Group. He served as a director of Interwest Home Medical
from 1995 until its acquisition by Praxair in June 2001. From 1994 to 1996, Dr.
Poore served as President and Chief Executive Officer of Comphealth, one of the
nation's largest health care professional staffing organizations. He received a
B.A. degree in Economics from Brigham Young University, and earned a degree in
Dentistry from Loyola Medical Center, Maywood, Illinois.
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.
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
24
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.
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.
Thomas F. Motter served as Chairman of the Board of the Company from
April 1993 to August 30, 2002, and as its Chief Executive Officer from May 1994
to August 1997 and from December 1997 to August 30, 2002. He also served as
President of the Company from May 1994 to August 1997 and from December 1997 to
June 2000. On August 30, 2002, Mr. Motter resigned as Chairman of the Board,
Chief Executive Officer and as a Director of the Company.
Mark R. Miehle served as President and Chief Operating Officer of the
Company from June 2000 until August 30, 2002, when the board of directors
removed him from office and entered into a six month consulting agreement with
him at the rate of $5,000 per month. The consulting agreement expired on
February 28, 2003.
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.
Jonathan Cress, M.D. - Dr. Cress is an ophthalmologist practicing in
Santa Cruz, California.
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.
25
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 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.
Elliot Kirstein, O.D. - Dr. Kirstein is an Optometrist practicing in
Ohio.
William Fishkind, M.D. - Dr. Fishkind is an Ophthalmologist practicing
in Arizona.
David Mittleman, M.D. - Dr. Mittleman is an Ophthalmologist practicing
in Florida.
Sonia Yoo, M.D. - - Dr. Yoo is an Ophthalmologist practicing at Bascom
Palmer Eye Institute in Miami, Florida.
Board Meetings and Committees
-----------------------------
The Board of Directors held a total of seven meetings during the fiscal
year ended December 31, 2002. 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
-------------------
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 Dr. David M. Silver, Randall A. Mackey and Keith
D. Ignotz. The Compensation Committee met two 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
2002 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.
The following table sets forth, for each of the last three fiscal
years, the compensation received by Thomas F. Motter, former 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 $100,000 for the fiscal years ended December
31, 2002, 2001 and 2000.
Summary Compensation Table
--------------------------
Long-Term Compensation
Annual Compensation Awards Payouts
Other Securities
Annual Restricted Underlying Long-term
Name and Compensa- Stock Options/ Incentive Compensa-
Principal Position Period Salary($) Bonus($) tion($) Awards($) SARs(#) Payout($) tion ($)(4)
------------------ ------ --------- -------- ---------- ----------- --------- ------------ -----------
Thomas F. Motter 2002(1) $ 187,453 $ 0 0 0 0 0 $19,750(5)
Former Chairman 2001(2) $ 200,000 $ 22,380(6) 0 0 925,000(8) 0 $ 6,000(4)
of the Board and 2000(3) $ 178,357 $ 486,113(7) 0 0 0 0 $28,792(5)
Chief Executive
Officer
26
Mark R. Miehle 2002(1) $ 134,202 0 0 0 55,000(13) 0 $ 3,000(4)
Former President 2001(2) $ 150,000 0 0 0 110,000(8) 0 $ 6,000(4)
and Chief Operating 2000(3) $ 235,201 $ 194,000(9) 0 0 150,000(9) 0 $ 6,000(4)
Officer
Aziz Mohabbat 2002(1) $ 126,878 0 0 0 0 0 0
Former
Vice President of
Operations(10)
Heber C. Maughan 2002(1) $ 114,416 0 0 0 0 0 0
Chief Financial 2001(2) $ 27,500 0 0 0 30,000(12) 0 0
Officer(11)
--------------------
(1) For the fiscal year ended December 31, 2002
(2) For the fiscal year ended December 31, 2001
(3) For the fiscal year ended December 31, 2000
(4) The amounts under "All Other Annual Compensation" for 2002, 2001 and
2000 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 the years represented
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) 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) Mr. Mohabbat was named as interim chief operating officer on August 30,
2002. He was not an officer in prior years.
(11) Mr. Maughan was named as interim chief executive officer on August 30,
2002.
(12) On October 1, 2001, the Board of Directors granted options to purchase
the respective number of shares of the Company's Common Stock at an
exercise price of $2.75 per share.
(13) On January 28, 2002, the Board of Directors granted options to purchase
the respective number of shares of the Company's Common Stock at an
exercise price of $2.75 per share.
The following table sets forth information concerning the exercise of
options to acquire shares of the Company's Common Stock by the Named Executive
Officers during the fiscal year ended December 31, 2002 as well as the aggregate
number and value of unexercised options held by the Named Executive Officers on
December 31, 2002.
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs In-the-Money
At December 31, 2002 (#) At December 31, 2002 ($)
Shares Acquired Value
Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
----------------------------------------------------------------------------------------------------------------------
Mark R. Miehle 0 0 102,500 212,500 0 0
Aziz Mohabbat 0 0 17,500 42,500 0 0
Heber C. Maughan 0 0 7,500 22,500 0 0
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
27
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.
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 Compensation Committee administers the Plan. 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, 2002. 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
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. On August 30, 2002,
Mr. Motter resigned as Chairman of the Board, Chief Executive Officer and as a
Director of the Company.
28
The Company entered into an employment agreement with Mark R. Miehle,
which commenced on June 5, 2000, and was to expire on June 4, 2003. The
agreement required 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 prohibited him from competing with the Company for two years
following the termination of his employment agreement. The agreement provided
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 provided for salary
increases and bonuses as to be determined at the discretion of the Board of
Directors. The stated annual compensation remained in effect through December
31, 2001 and into 2002. The board of directors terminated Mr. Miehle on August
30, 2002. He entered into a six month consulting agreement, which expired on
February 28, 2003, for $5,000 per month. Mr. Miehle was paid $15,000 in 2002
under the terms of the consulting agreement.
Limitation of Liability and Indemnification
-------------------------------------------
The Company reincorporated in Delaware in February 1996, in part, to
take advantage of certain provisions in Delaware's corporate law relating to
limitations on liability of corporate officers and directors. The Company
believes that the reincorporation into Delaware, the provisions of its
Certificate of Incorporation and Bylaws and the separate indemnification
agreements outlined below are necessary to attract and retain qualified persons
as directors and officers. The Company's Certificate of Incorporation limits the
liability of directors to the maximum extent permitted by Delaware law. This
provision is intended to allow the Company's directors the benefit of Delaware
General Corporation Law which provides that directors of Delaware corporations
may be relieved of monetary liabilities for breach of their fiduciary duties as
directors, except under certain circumstances, including breach of their duty of
loyalty, acts or omissions not in good faith or involving intentional misconduct
or a knowing violation of law, unlawful payments of dividends or unlawful stock
repurchases or redemptions or any transaction from which the director derived an
improper personal benefit. The Company's Bylaws provide that the Company shall
indemnify its officers and directors to the fullest extent provided by Delaware
law. The Bylaws authorize the use of indemnification agreements and the Company
has entered into such agreements with each of its directors and executive
officers.
There is no pending litigation or proceeding involving a director,
officer, employee or other agent of the Company as to which indemnification is
being sought, nor is the Company aware of any threatened litigation that may
result in claims for indemnification by any director, officer, employee or other
agent.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the SEC, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Compliance with Section 16(a) of the Securities 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 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 2002, 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.
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, 2003 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
-----------------------------------------------------------------------------
Douglas A. MacLeod, M.D. (2) 4,150,707 17.8%
Innovative Optics, Inc. 1,222,825 5.2
Jeffrey F. Poore (3) 1,000,000 4.1
Dr. David M. Silver(4) 491,166 2.1
Randall A. Mackey(4) 475,000 2.0
Keith D. Ignotz(5) 204,560 *
Heber C. Maughan(6) 180,000 *
Executive officers and directors
as a group (five persons) 2,350,726 9.6%
-----------------
*Less than 1%.
29
(1) The address for Mr. Maughan is c/o Paradigm, 2355 South 1070 West, Salt
Lake City, UT, 84119. The address for Dr. Silver is 17 Avalon Court,
Bethesda, MD 20816. The address for Mr. Mackey is 1172 East 100 South,
Salt Lake City, UT 84111. The address for Mr. Ignotz is 6025-A Unity
Dr., Norcross, GA 30071.
(2) Includes the stock held by Douglas A. MacLeod, M.D. Profit Sharing
Trust, St. Mark's Eye Institute and Milan Holdings, Ltd.
(3) Includes options to purchase 1,000,000 shares of Common Stock granted
to Mr. Poore.
(4) Includes options to purchase 475,000 shares of Common Stock granted to
each of Dr. Silver and Mr. Mackey.
(5) Includes options to purchase 203,851 shares of Common Stock granted to
Mr. Ignotz.
(6) Includes options to purchase 180,000 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.
Thomas F. Motter, former Chairman of the Board and Chief Executive
Officer of the Company, leased his former residence 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 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. The Company paid $14,000 in rent during 2002. This
agreement was terminated on January 31, 2003.
The Company entered into a consulting agreement with Mark R. Miehle,
the former president and chief operating officer of the Company for a period of
six months commencing on September 3, 2002. The agreement was renewable for
additional six month terms. The Company did not renew the contract upon its
expiration. The Company paid $15,000 under this agreement during 2002 and had an
accrual of $5,000 as of December 31, 2002.
Randall A. Mackey, a director of the Company since January 21, 2000,
and from September 1995 to September 3, 1998 and chairman of the board since
August 30, 2002, is President and a shareholder of the law firm of Mackey Price
& Thompson, which rendered legal services to the Company in connection with
various corporate matters. Legal fees and expenses paid to Mackey Price &
Thompson for the fiscal years ended December 31, 2002 and 2001, totaled $167,000
and $159,000, respectively. As of December 31, 2002, the Company owed this firm
$47,000, which is included in accounts payable.
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)
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)
30
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 Ocular Blood Flow, Ltd. and Malcolm
Redman (10)
10.22 Consulting Agreement with Malcolm Redman (10)
10.23 Royalty Agreement with Malcolm Redman (10)
10.24 Registration Rights with Malcolm Redman (10)
10.25 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)
10.40 Termination of employment with Mark R. Miehle (17)
10.41 Consulting Agreement with Mark R. Miehle (17)
99.01 Certification Pursuant to Section 906 of Sarbanes-Oxley Act 2002
99.02 Certification Pursuant to Section 906 of Sarbanes-Oxley Act 2002
-------------------------
(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.
31
(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.
(17) Incorporated by reference from Report on Form 10-QSB, as filed on
November 18, 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 2002.
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Based on their evaluations as of a date within 90 days of the filing
date of this report, the principal executive officer and principal financial
officer of the Company have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act) are effective to ensure that information required to be disclosed
by the Company in reports that the Company files or submits under the Securities
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC.
(b) Changes in internal controls
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these internal controls
subsequent to the date of their most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
32
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, there unto duly authorized.
PARADIGM MEDICAL INDUSTRIES, INC.
Dated: April 14, 2003 By:/s/Jeffrey F. Poore
-------------------------------------
Jeffrey F. Poore
President 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/Randall A. Mackey Chairman of the Board and April 14, 2003 March 31, 2003
------------------------
Secretary
/s/David M. Silver, Ph.D Director April 14, 2003 March 31, 2003
------------------------
/s/Keith D. Ignotz Director April 14, 2003 March 31, 2003
------------------------
/s/Jeffrey F. Poore President and Chief Executive Officer
------------------------ (Principal Executive Officer) April 14, 2003 March 31, 2003
/s/Heber C. Maughan Vice President of Finance, April 14, 2003 March 31, 2003
------------------------ Treasurer and Chief Financial
Officer (Principal Financial
and Accounting Officer)
CERTIFICATIONS
I, Jeffrey F. Poore, certify that:
1. I have reviewed this annual Report on Form 10-KSB of Paradigm
Medical Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003 /s/ Jeffrey F. Poore
-----------------------------------
President and Chief Executive
Officer (Principal Executive
Officer) Vice President of Finance,
Treasurer and Chief Financial
Officer (Principal Financial and
Accounting Officer)
33
CERTIFICATIONS
I, Heber C. Maughan, certify that:
1. I have reviewed this annual report on Form 10-QSB of Paradigm
Medical Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003 /s/ Heber C. Maughan
-----------------------------------
Vice President of Finance,
Treasurer and Chief Financial
Officer (Principal Financial and
Accounting Officer)
34