SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003, 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: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Class A Warrant to Purchase One Share of Common Stock
(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, 2003 were
$3,059,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of the last business day of registrant's most recently completed
second fiscal quarter was $6,690,000 based on the closing price on that date on
the OTC Bulletin Board.
As of March 31, 2004, Registrant had outstanding 25,509,868,shares of common
stock, 5,627 shares of Series A preferred stock, 8,986 shares of Series B
preferred stock, no shares of Series C preferred stock and 5,000 shares of
Series D preferred stock, 1,000 shares of Series E preferred stock, 4,598.75
shares of Series F preferred stock, and 1,981,560 shares of Series G 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]
1
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 two cataract surgery
systems with related accessories and disposable products. The Company's cataract
removal system, the Photon(TM) laser system, is a laser cataract surgery system
marketed as the next generation of cataract removal. Because of the "going
concern" status of the Company, management has focused efforts on those products
and activities that will, in its opinion, achieve the most resource efficient
short-term cash flow to the Company. As reflected in the results for the fiscal
year ended December 31, 2003, diagnostic products are currently the Company's
major focus and the Photon(TM) and other extensive research and development
projects have been put on hold pending future evaluation when the financial
position of the company improves. Due to the lack of FDA approval and the lack
of current evidence to support recoverability, the Company has recorded an
inventory reserve to offset the majority of the inventory associated with the
Photon(TM). In addition, most inventory associated with the Precisionist Thirty
Thousand(TM) has been reserved for due to the estimated lack of recoverability.
The Company's focus is not on any specific diagnostic product or products, but
rather on its entire group of diagnostic products. The Photon(TM) can be sold in
markets outside of the United States. Both the PhotonTM and the Precisionist
ThirtyThousand TM are manufactured as an Ocular Surgery Workstation(TM). The
Company is considering marketing the Photon(TM) and other lasers for use in eye
care.
The Company's diagnostic products include a pachymeter, a P55
pachymetric analyzer, a P37 Ultrasonic A/B Scan, a P40 UBM Ultrasound
Biomicroscope, a perimeter, a corneal topographer and the Blood flow
Analyzer(TM). The diagnostic ultrasonic products including the P55 pachymetric
analyzer, the P37 Ultrasonic A/B Scan and the P40 UBM Ultrasound 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 P37 Ultrasonic A/B Scan and the UBM biomicroscope 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. 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 monitoring 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 Occular Blood Flow, Ltd., 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 common procedure terminology or CPT code from the
American Medical Association for procedures performed with the Blood Flow
Analyzer(TM) , for reimbursement purposes for doctors using the device. However,
certain payers have elected not to reimburse doctors using the Blood Flow
Analyzer(TM).
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
2
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 its common stock, the Company issued 80,000 additional
shares in January 1999 to enable Humphrey Systems to receive its guaranteed
amount. The amount of $21,431 was paid to the Company as excess proceeds from
the sale of this additional stock.
The rights to the ophthalmic diagnostic instruments, which have been
purchased from Humphrey Systems, complement both the Company's cataract surgical
equipment and the Company's ocular Blood Flow Analyzer(TM). The Ultrasonic
Biometer calculates the prescription for the intraocular lens to be implanted
during cataract surgery. The P55 pachymetric measures corneal thickness for the
new refractive surgical applications that eliminate the need for eyeglasses and
for optometric applications including contact lens fitting. The P37 Ultrasonic
A/B Scan combines the Ultrasonic Biometer and ultrasound imaging for advanced
diagnostic testing throughout the eye and is a viable tool for retinal
specialists. The P40 UBM 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 P37
Ultrasonic 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 was an attempt to round 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 the
Company's common stock. Due to the lack of sales volume of these products, they
were determined to be obsolete and a reserve was established to offset all
inventory associated with these products. During the fourth quarter of 2003, the
Company sold all inventory rights associated with the SIStem(TM) and Odyssey(TM)
for $125,000.
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 5000, the
SSTTM, 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 Innovatome(TM) microkeratome
of Innovative Optics, Inc. by issuing an aggregate of 1,272,825 shares of its
common stock, warrants to purchase 250,000 shares of its 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.
The Company acquired from Innovative Optics raw materials, work in
process and finished goods inventories. Additionally, the Company acquired the
furniture and equipment 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. On April 1, 2002, the Company entered into a consulting agreement with
John Charles Casebeer, M.D. to develop and promote the microkeratome. For Dr.
Casebeer's services during the period from April 1, 2002 to September 30, 2002,
the Company issued him a total of 43,684 shares of its common stock,
representing payment of $100,000 in stock for his services. All assets acquired
from Innovative Optics, including remaining inventory with a book value of
$160,000 and equipment and intangible assets with a book value of $2,082,000,
were written off during 2002.
On September 19, 2002, the Company completed a transaction with
International Bio-Immune Systems, Inc., a Delaware corporation , in which the
Company acquired 2,663,254 shares, or 19.9% of the outstanding shares of its
common stock, and warrants to purchase 1,200,000 shares of its common stock at
$2.50 per share for a period of two years, through the exchange and issuance of
736,945 shares of its common stock, the lending of 300,000 shares of its common
stock to the company and the payment of certain of its expenses through the
issuance of an aggregate of 94,000 shares of its common stock to the company and
its counsel.
International Bio-Immune Systems, Inc. may sell the 300,000 shares of
the Company's common stock loaned by the Company and the proceeds therefrom
shall be deemed a loan from the Company payable on the earlier of September 19,
2002, or the closing of any private placement or public offering of the
securities of International Bio- Immune Systems, any merger involving more than
50% of the outstanding shares of International Bio-Immune Systems, or any sale,
dissolution, transfer, or assignment of corporate assets other than in the
ordinary course of business. Interest shall accrue on the unpaid principal of
the loan at the rate of 10% per annum. If International Bio- Immune Systems does
not sell the shares by September 19, 2004, it is required to return the shares,
or any amount which has not been sold, to us. International Bio-Immune Systems
currently controls the voting decisions regarding these shares. The President
and Chief Executive Officer of International Bio-Immune Systems is Leslie F.
Stern, who exercises sole voting and investment powers regarding the shares.
On December 3, 2003, the Company executed a purchase agreement with
American Optisurgical, Inc. for the sale of the Mentor surgical products line,
consisting of the Phaco SlStem(TM) and the Odyssey(TM). The assets sold in the
transaction included patents, trademarks, software codes and programs, supplies,
3
work in process, finished goods, and molds related to the equipment. The
purchase price paid to the Company by American Optisurgical for the assets was
$125,000. The purchase agreement also contained a noncompete provision in which
the Company agreed for a period of three years from the closing date not to own,
manage, operate or control any business that competes with cataract removal
equipment substantially the same as the proprietary technology of the Phaco
SlStem(TM) and the Odyssey(TM).
Background
Corporate History: The Company's business originated with Paradigm
Medical, Inc., a California corporation formed in October 1989. Paradigm
Medical, Inc. developed its present ophthalmic business and was operated by its
founders Thomas F. Motter and Robert W. Millar. In May 1993, Paradigm Medical,
Inc. merged with Paradigm Medical Industries, Inc. At the time of the merger,
the Company was a dormant public shell existing under the name French Bar
Industries, Inc. French Bar had operated a mining and tourist business in
Montana. Prior to its merger with Paradigm Medical, Inc. in 1993, French Bar had
disposed of its mineral and mining assets in a settlement of outstanding debt
and had returned to the status of a dormant entity. Pursuant to the merger, 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 Paradigm Medical, Inc. 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
Paradigm Medical, Inc. 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.
Many pathological disorders of the eye can be corrected by surgery. These
include cataracts (clouded lenses), glaucoma (elevated or low pressure in the
eye), loss of nerve fibers resulting in loss of vision, 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 ultrasonics 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.
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
4
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 its 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.
Precisionist ThirtyThousand(TM): The Precisionist ThirtyThousand(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.
However, due to the lack of recent sales, the majority of the Company's
inventory associated with the Precisionist Thirty Thousand(TM) has been
estimated to be obsolete and therefore a reserve for such inventory has been
recorded. 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) and related accessories were 0% and 3%
of total revenues in the fiscal years 2003 and 2002, respectively.
Ocular Surgery Workstation(TM): The Ocular Surgery Workstation(TM)
comprises the base system of the Precisionist ThirtyThousand(TM) and is the
first system to the Company's knowledge, 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
5
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 us. The main elements of the laser system are the Nd:YAG laser
module, Photon(TM) laser software package and interchangeable disposable
hand-held fiber optic laser 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 could 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 that 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). Because of the "going concern" status of the Company,
management has focused efforts on those products and activities that will, in
its opinion, achieve the most resource efficient short-term cash flow to the
Company. As reflected in the results for the fiscal year ended December 31,
2003, diagnostic products are currently the Company's major focus and the
Photon(TM) and other extensive research and development projects have been put
on hold pending future evaluation when the Company's financial position
improves. Due to the uncertainty surrounding the timetable for obtaining FDA
approval and the lack of significant revenue from the other surgical products,
the Company has recorded an inventory reserve against the majority of the
inventory associated with the Photon(TM) and the Precisionist Thirty Thousand
(TM). The Company's focus is not on any specific diagnostic product or products,
but rather on its entire group of diagnostic products.
At some point in the future, the Company may intend, subject to
economic feasibility and the availability of adequate funds, to refine the laser
delivery system and laser cataract surgical technique used on soft cataracts
through expanded research and clinical studies. Subject to the aforementioned
constraints, the Company intends to refine the fluidics management system by
improving chamber maintenance during surgical procedures and to develop
techniques to optimize time and improve invasive techniques through expanded
research and clinical studies. As for 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 with which it comes into direct contact.
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.
6
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. Regulatory approval would require
completion of pending Photon(TM) clinical trials and resubmission of a 510(k)
predicate device application to the FDR. Because of the "going concern" status
of the Company, management has focused efforts on those products and activities
that will, in its opinion, achieve the most resource efficient short-term cash
flow to the Company. As reflected in the results for the fiscal year ended
December 31, 2003, diagnostic products consisting mainly of the P40 UBM
Ultrasound Biomicroscope, perimeter, CT 50 Corneal Topographer, and Blood Flow
Analyzer(TM) are currently the Company's major focus and the Photon(TM) and
other extensive research and development projects have been put on hold pending
future evaluation when the financial position of the company improves. The
Company's focus is not on any specific diagnostic product or products, but
rather on the entire group of diagnostic products.
The SIStem(TM) and the Odyssey(TM): The SIStem(TM) and the Odyssey(TM)
have been the Company's entry-level phacoemulsification systems. The SIStem(TM)
and the Odyssey(TM) were designed to be full-featured, cost-effective, reliable
phaco machines; however, due to the lack of sales in 2002, the products were
determined to be obsolete. Sales of the SIStem(TM), the Odyssey(TM), and related
accessories represented approximately 11% and 4% of the total revenues for
fiscal years 2003 and 2002, respectively. On December 3, 2003, the Company
completed the sale of the SIStem(TM) and the Odyssey(TM), including patents,
trademarks, software codes and programs, supplies, work in process, finished
goods and molds, to American Optisurgical, Inc.
Surgical Instruments 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 us.
These include replacement ultrasound tips, sleeves, tubing sets and fluidics
packs, instrument drapes and laser cataract probes. The Company intend 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 0% and 3% of total revenues for 2003 and 2002,
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 its first diagnostic eye care device. The
device is a portable desktop system that utilizes a proprietary and patented
pneumatic Air Membrane Applanation Probe(TM) or 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., at Johns
Hopkins University, 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 the Air Membrane Applanation
Probe(TM), a corneal probe which is shipped in sterile packages. The 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 written authorization from the CPT
Editorial Research and Development Department of the American Medical
Association to use common procedure terminology or CPT code number 92120 for its
Blood Flow Analyzer(TM), for reimbursement purposes for doctors using the
device. However, certain payers have elected not to reimburse doctors using the
7
Blood Flow Analyzer(TM). 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 doctors. Currently, there is reimbursement by insurance
payors to doctors using the Blood Flow Analyzer(TM) in 22 states and partial
reimbursement in four other states. The amount of reimbursement to doctors using
the Blood Flow Analyzer(TM) generally ranges from $56.00 to $76.00 per patient,
depending upon the insurance payor. Insurance payors providing reimbursement for
the Blood Flow Analyzer(TM) have the discretion to increase or reduce the amount
of reimbursement. The Company is endeavoring to obtain reimbursement by
insurance payors in other states where there is currently no reimbursement being
made.
The manufacturing activities for the Blood Flow Analyzer(TM) have been
moved to the Salt Lake City facility from the outsourced plant located in
England. On October 21, 2002, the Company received FDA approval on its 510(k)
application for additional indications of use for the Blood Flow Analyzer(TM).
The additional indications include pulsatile ocular blood flow and pulsatile
ocular blood volume. These are diagnostic measurements that assess the
hemodynamic and vascular health of the eye. Also, the Company is continuing its
aggressive campaign to educate the insurance 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 doctors using its Blood Flow
Analyzer(TM). Sales of the Blood Flow Analyzer(TM) and related accessories
accounted for approximately 16% and 12% of total sales for the fiscal years
ended December 31, 2003 and 2002, respectively.
Dicon(TM) Perimeters: Dicon(TM) perimeters consist of the LD 400, the
TKS 5000, 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 and related accessories generated
approximately 27% and 20% of the total revenues for 2003 and 2002, respectively.
Dicon(TM) Corneal Topographers: 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 and related accessories were 9% and 7% of
the total revenues for 2003 and 2002, respectively. An enhanced version of the
CT 200(TM), the CT 2000(TM), is scheduled to be introduced during the fourth
quarter of 2003. The Company is completing the development of upgrades to the CT
200(TM) and the CT 50 Corneal Topographer, which will be operating upon
completion of the upgrades with Windows XP software rather than the former
Windows 95 operating systems. The Company is also revising its upgrade to offer
the CT 200(TM) with Windows 2000 software rather than the Windows XP software
that the Company announced in August 2003.
P55 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% of the total revenues for both 2003 and 2002.
P20 A-Scan Biometric Ultrasonic Analyzer: The A-Scan has been removed
from the Company's line of diagnostic products. The A-Scan 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
revenues for both 2003 and 2002.
P37 A/B Scan Ocular Ultrasound Diagnostic: 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 4% and 7% of the total
revenues for 2003 and 2002, respectively.
P40 UBM Ultrasound Biomicroscope: The P40 UBM Ultrasound Biomicroscope
was developed by Humphrey Systems in conjunction with the New York Eye and Ear
Infirmary in Manhattan and the University of Toronto. The UBM biomicroscope, and
its intellectual property were included in the purchase from Humphrey Systems
and gives the Company the proprietary rights to this device. The UBM
biomicroscope creates a high-resolution computer image of the unseen parts of
the eye that is a "map" for the glaucoma surgeon. The UBM biomicroscope 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
biomicroscope at a price-point targeted for the average practitioners seeking to
add glaucoma filtering surgical procedures and income to their cataract surgical
practice.
The P40 UBM Ultrasound Biomicroscope related surgical filtering
procedures are fully reimbursable by Medicare and insurance providers. This
untapped new market positions the Company with its proprietary UBM
biomicroscope, 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 UBM
Ultrasonic Biomicroscope, which combines the P40 UBM Ultrasound Biomicroscope
8
and the P37 A/B Scan Ocular Ultrasound Diagnostic in one instrument. The Company
believes that by combining functions, the P45 will appeal to a broader market.
The P40 UBM Ultrasound Biomicroscope and related accessories sales were
approximately 7% and 12% of the total revenues for 2003 and 2002, respectively.
The P45 UBM Ultrasound Biomicroscope and related accessories sales contributed
approximately 13% and 12% of the total revenues for 2003 and 2002, respectively.
In July of 2000, the Company received ISO 9001 and EN 46001
certification using TUV Essen as the notified body. Under ISO 9001certification,
its 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.
Parts and Services: The parts and service revenue from the repair and
service of equipment sold accounted for approximately 8% and 11% of total
revenues in 2003 and 2002, respectively.
Sales of other products represented approximately 1% and 4% of total
revenues in 2003 and 2002, respectively.
The following table identifies each product class, status of commercial
development, the percentage of sales contributed by that class, reimbursement
status, and status of applicable United States and foreign regulatory approvals:
%
Commercial Reimbursement 2003 Regulatory
Product (1) Product Class Development Status Sales Approvals
P55 Pachymetric System, Imaging, Complete Yes 3% FDA 510(K) K844299*
Analyzer Pulsed Echo Diagnostic ISO 9001: 1994, EN ISO
9001**
P20 A-Scan Biometric System, Imaging, Discontinued Yes 2% FDA 510(K) K844299*
Ultrasound Analyzer Pulsed Echo ISO 9001: 1994,
Diagnostic EN ISO 9001**
P37 A/B Scan Ocular Transducer, Ultrasound Complete Yes 4% FDA 510(K) K844299*
Ultrasound Diagnostic Diagnostic ISO 9001: 1994,
EN ISO 9001**
P40 UBM Ultrasound System, Imaging, Complete Yes 7% FDA 510(K) K844299*
Biomicroscope Pulsed Echo Ultrasound ISO 9001: 1994,
Diagnostic EN ISO 9001**
P45 UBM Ultrasound System, Imaging, Complete Yes 13% FDA 510(K) K844299*
Biomicroscope, Pulsed Echo Ultrasound ISO 9001: 1994,
Workstation Plus Diagnostic EN ISO 9001**
BFA Ocular Blood Flow Tonometer, Manual Complete Yes**** 16% FDA 510(K) K844299*
Analyzer(TM)and Diagnostic ISO 9001: 1994,
Disposables EN ISO 9001**
CT 200 Corneal Topographer Corneal Complete Yes 9% FDA 510(K) K844299*
Topography System AC-Powered ISO 9001: 1994,
Diagnostic EN ISO 9001**
LD 400 Autoperimetry Perimeter, Automatic Complete Yes 24% FDA 510(K) K844299*
System AC-Powered ISO 9001: 1994,
Diagnostic EN ISO 9001**
TKS 5000 Autoperimetry Perimeter, Automatic Complete Yes 3% FDA 510(K) K844299*
System AC-Powered, ISO 9001: 1994,
Diagnostic EN ISO 9001**
Precisionist Thirty Phacofragmentation Complete Yes 0% FDA 510(K) K844299*
Thousand(TM), Ocular ISO 9001: 1994,
Surgery Workstation EN ISO 9001**
with
Surgical Equipment and
Disposables
SIStem(TM)and Phacofragmentation Sold Yes 11% FDA 510(K) K844299*
Odyssey(TM)(2)
Photon(TM)Laser Ocular Phacoemulsification Complete No 0% IDE G940151
Surgery Workstation BFA tips ISO 9001: 1994,
with Surgical Equipment EN ISO 9001
and Disposables(3)
Parts and Services Perimeter, BFA, Complete Yes 8% FDA 510(K) K844299*
Tonometer, ISO 9001:1994,
Topographer, EN ISO 9001**
Ultrasound Workstations,
Systems, Imaging
9
--------------------------
(1) Except for the Photon(TM) Ocular Surgery Workstation, which can only be
sold in countries outside the United States, these products can be sold
in the United States and in foreign countries including but not limited
to Argentina, Australia, Bangladesh, Borneo, Brazil, Canada, China,
Czechoslovakia, Egypt, France, Germany, Greece, Hong Kong, India,
Israel, Italy, Japan, Jordan, Korea, Malaysia, Mexico, New Zealand,
Pakistan, Peru, Poland, Puerto Rico, Russia, Saudi Arabia, Spain, Sri
Lanka, Taiwan, Thailand, Turkey, United Kingdom, and United Arab
Emirates
(2) Due to the lack of recent sales volume, the inventory associated with
the Precisionist Thirty Thousand (TM), the SIStem(TM), and the
Odyssey(TM) has been deemed obsolete and a reserve has been recorded to
offset such inventory.
(3) Due to the lack of recent evidence to support the recoverability of
inventory associated with the Photon(TM), the Company has recorded a
reserve to offset the majority of such inventory on hand.
* FDA 510(K) K844299 represents domestic clearance or approval by U.S.
Food and Drug Administration
** ISO 9001: 1994, EN ISO 9001 represents international approval
*** IDE G940151 represents approval for international distribution only
**** Represents full reimbursement in 22 states and partial reimbursement in
four other states.
As detailed in the table above, except for the Photon(TM) Laser Ocular
Surgery Workstation, which requires additional development and regulatory
approvals, the Company's current products are developed and available for sale
in the footnote (1) of the table. The Company's possible future efforts to
finalize development of the Photon(TM) and obtain the necessary regulatory
approvals would depend on its economic evaluations and adequate funding. If
these efforts were undertaken but proved to be unsuccessful, the impact would
include the costs associated with these efforts and the anticipated future
revenues which the Company would not receive as expected. The Company
anticipates that a majority of the estimated costs for Research and Development
will be used for the enhancement and upgrading of its current products approved
for sale. The Company is unable to provide an estimate of the details of
possible liquidity needs and expected source of funds for possible future
efforts to finalize development of the Photon(TM) and obtain the necessary
regulatory approvals since this estimate would depend on a possible
comprehensive economic evaluation.
Any possible future efforts to complete development of the Photon(TM)
and obtain the necessary regulatory approvals would depend on the Company's
economic evaluations and adequate funding. If these efforts were undertaken but
proved to be unsuccessful, the impact would include the costs associated with
these efforts and the anticipated future revenues that the Company would not
receive as expected. The Company anticipates that a majority of the estimated
costs for research and development will be used for the enhancement and
upgrading of its current products being offered for sale. The Company is unable
to provide a detailed estimate of possible liquidity needs and expected sources
of funds for possible future efforts to complete development of the Photon(TM)
and obtain the necessary regulatory approvals since this estimate would depend
on a comprehensive economic evaluation.
The Company currently purchases components and parts used in its
products from a limited number of key suppliers. The Company's reliance on its
principal suppliers could result in delays associated with redesigning a product
due to an inability to obtain an adequate supply of required components and
parts, and reduced control over pricing, quality and timely delivery. The loss
of any of these principal suppliers or the inability of a supplier to meet
performance and quality specifications, requested quantities or delivery
schedules could cause the Company's revenues to decline. In addition, any
interruption or discontinuance in the supply of components or parts could have
an adverse effect on the Company's business, results of operation and financial
condition. The Company's principal suppliers include Capistrano Labs, US
Ultrasound and Anello.
10
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.
Marketing Organization: The Company markets its products
internationally through a network of dealers and domestically through direct
sales representatives, independent sales representatives, and ophthalmic product
distributors. As of December 31, 2003, the Company had five direct domestic
sales representatives in the United States and 65 foreign dealers. These sales
representatives are assigned exclusive territories and have entered into
contracts with the Company that contain performance quotas. Domestic sales
channels have been expanded to include independent sales representatives and
distributors who began training on its products in August 2003. 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 its products.
Product advertising is intended to be 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
23,238 square foot facility in Salt Lake City. The Company transferred the
manufacturing activities for the Blood Flow Analyzer(TM) to San Diego from
Occular Blood Flow, Ltd. 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 its manufacturing, marketing and
engineering capabilities. The Company manufactures under systems of quality
control and testing, which complies with the Quality System Requirements
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
its financial purchasing capabilities and pricing needs. The Company
manufactures certain accessories and fluidics surgical tubing sets at its
facility in Salt Lake City.
Product Service and Support: Service for the Company's products is
overseen from its Salt Lake City location 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. 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.
11
On July 11, 2002, the Company entered into a Major Account Facilitator
Contract with Peter Kristensen and F. Briton McConkie. Under the terms of the
contract, Messrs. Kristensen and McConkie agreed to serve as intermediators
between the Company and an international agent or customer that would result in
an order for 150 Photon(TM) laser systems in Asia. The contract provides that
upon execution, the Company is to issue 100,000 shares of its common stock to
Messrs. Kristensen and McConkie to cover all expenses associated with the
pursuit of the transaction, and upon presentation of a verified order to us, the
Company has agreed to issue an additional 100,000 shares of common stock to
Messrs. Kristensen and McConkie. Upon completion, and delivery and receipt of
payment in full from the international agent or customer for the 150 Photon(TM)
laser systems, Messrs. Kristensen and McConkie would be issued an additional
480,000 shares of common stock for serving as transaction facilitator. The
Company has issued a total of 100,000 shares of its common stock to Messrs.
Kristensen and McConkie pursuant to the terms of the contract.
Messrs. Kristensen and McConkie have retained Ralph Thompson of Novus
Technologies, a Utah based firm, to assist in the marketing and sales of the
Company's Photon(TM) laser system in Asia. Mr. Thompson, who lived in China for
over 10 years, represents U.S. businesses doing business in China. He currently
makes trips to China on a regular basis on behalf of the businesses he
represents. Although Mr. Thompson continues to represent the Company in the sale
of its Photon(TM) laser system in Asia, he has not been successful to date in
selling its Photon(TM) laser system to any customers in China or other Asian
countries.
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 its
future. In addition to its expanded in-house research and development
capabilities, the Company has enlisted several recognized and respected
consultants and other technical personnel to act in technical and medical
advisory capacities.
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.
Research, development and service expenses (which includes production
and manufacturing support and the service department expenses) decreased by
$1,786,000, or 63%, to $1,033,000 for the twelve months ended December 31, 2003,
from $2,819,000 for the same period in 2002. Pursuant to the asset purchase
agreement with Innovative Optics, Inc., the Company issued 477,000 shares of its
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 in 2002 as
in-process research and development costs related to the blade cost reduction
project. No such expense was recorded in 2003. Consulting fees related to
software development and enhancements increased to $197,000 during 2003 from
$111,000 for the same period in 2002. None of the costs of research and
development activities during 2003 and 2002 was borne directly by customers.
From December 1, 2000 to November 30, 2002, the Company entered into a
series of consulting agreements with Michael B. Limberg, M.D., in which he
agreed to evaluate new technologies and instruments for us. For his services
during that period, the Company issued Dr. Limberg a total of 48,000 shares of
its common stock and warrants to purchase 300,000 shares of common stock at
exercise prices ranging from $4.00 to $6.75 per share.
During the period in which Thomas F. Motter served as the Company's
Chairman and Chief Executive Officer, he formed a clinical advisory board and
met from time to time with the board. Jeffrey F. Poore, who served as the
Company's President and Chief Executive Officer from March 2003 to March 2004,
decided not to utilize the clinical advisory board. Instead, he consulted with
former members of the advisory board on an informal basis. The Company currently
has no agreements with any former members of the clinical advisory board and
none of these former members hold or own any rights to its products or
technologies.
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
12
entrepreneurial enterprises with small market activity, any and all competitors
must be considered to be formidable.
The Cataract Surgical System Industry. 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,
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
is establishing itself and, as yet, does not hold a significant share of the
market. The Company currently recognize Bausch & Lomb, Alcon Laboratories, and
Allergan Medical Optics as its primary competitors in the ultrasound phaco
cataract equipment market.
Laser Equipment Manufacturers. 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 us; 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 accounts 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. Thus, the Company believes that it can compete in
the diagnostic market place based upon the lower price and improved diagnostic
functions of the analyzer.
13
Intellectual Property Protection
The Company's cataract surgical products are proprietary in design,
engineering and performance. Its 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 acquired proprietary intellectual property in the
transaction with Humphrey Systems when the Company 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 P40 UBM Ultrasound Biomicroscope, one of the
ultrasonic products the Company purchased, is subject to a license agreement
dated September 27, 1990, with Sunnybrook Health Science Center. Under the terms
of the license agreement, the Company has the exclusive worldwide rights to
manufacture and sell the UBM biomicroscope, for which the Company is required to
pay a royalty of $150 for each licensed product sold. The license agreement was
automatically terminated by its terms on September 27, 2002, at which time the
Company has a royalty free world-wide license to use and sell the P40 UBM
Ultrasound Biomicroscope. However, the Company has a continuing obligation after
such termination to continue to use and sell the biomicroscope only in the field
of ophthalmology.
The Photon(TM) laser cataract probe is protected under a United States
patent issued to Daniel M. Eichenbaum, M.D. in 1987 and subsequently assigned to
PhotoMed International, Inc. and a Japanese patent issued to the Company in 1997
for the utility and methods of laser ablation, aspiration and irrigation of
tissue through a hand-held probe of a unique design. The United States patent is
due to expire in September 2004.
The Company secured the exclusive worldwide rights to this patent
shortly after its issue, and to the international patents pending, from PhotoMed
by means of a license agreement dated July 7, 1993. The license agreement
provides the Company with the rights to manufacture, distribute and sell a laser
system using the Photon(TM) laser cataract probe and related components to
customers on a world wide basis, for which PhotoMed is to receive a 1% royalty
on all net sales of such systems and related components sold worldwide.
Under the license agreement PhotoMed is entitled to all royalty
payments from net sales at the time of billing to the purchaser or within 30
days of the date of shipment, whichever occurs first. The Company is required
each quarter to prepare a summary of sales and the royalties to which PhotoMed
is entitled to be paid. The sales summary must list the number of surgical
systems and disposable units sold in each country, the dollar value of gross and
net sales, the amount of the royalty to which PhotoMed is entitled, and any
other information requested by PhotoMed from time to time. Under the terms of
the agreement, the Company has agreed to be actively engaged in either research
and development of a saleable product utilizing the patent or in marketing and
selling such a product.
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. The license agreement expires when the United
States patent rights expire in September 2004, but the license agreement shall
be automatically extended or renewed for any term of extension or renewal
awarded for the patent rights. In addition, the Company has the right to
terminate the license agreement at any time after July 7, 2003 upon 90 days
prior written notice to PhotoMed.
PhotoMed and Dr. Eichenbaum brought legal action against the Company on
September 11, 2000 involving an amount of royalties that are allegedly due and
owing to them from the sale of equipment by us. The Company has paid $14,736 to
bring all royalty payments up to date through June 30, 2001. The Company has
been working with PhotoMed and Dr. Eichenbaum to ensure that the royalty
calculations have been correctly made. It is anticipated that once the parties
agree on the correct royalty calculations, the legal action will be dismissed.
However, if the partes are unable to agree on a method for calculating
royalties, there is a risk that PhotoMed and Dr. Eichenbaum might amend the
complaint to request termination of the license agreement and, if successful,
the Company would lose its rights to manufacture or sell the Photon(TM) laser
system.
The Photon(TM) laser cataract probe is also protected under a United
States patent issued to the Company in 2002 for a laser surgical device for the
removal of intraocular tissue including a handpiece and a trap. The patent is
due to expire in August 2019. There are also two pending United States patents
relating to the Photon(TM) laser cataract probe.
The Blood Flow Analyzer(TM) has been granted a patent in the United
Kingdom in 1998 and in the United States in 1999, and has a patent pending in
Japan. These patents relate to pneumatic pressure probes for use in measuring
change in intra-ocular pressure and in measuring pulsatile ocular blood flow.
The United States patent rights expire in January 2019 and the United Kingdom
patent rights expire in November 2015.
The Dicon(TM) Perimeter and the Dicon(TM) Corneal Topographer each have
a U.S. patent with a wide scope of claims. The United States patent for the
Dicon(TM) Perimeter was issued in 1991 and the patent rights expire in March
2010. The United States patent for the Dicon(TM) Corneal Perimeter was issued in
2002 and the patent rights expire in January 2018.
14
The Company's trademarks are important to its business. It is its
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 its key employees, consultants and advisors
are required to enter into a confidentiality agreement with us. Most of its
third-party manufacturers and formulators are also bound by confidentiality
agreements with us.
Regulation
The FDA under the Food, Drug and Cosmetics 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 Food, Drug and Cosmetics
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 Food,
Drug and Cosmetics 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,
pre-marketing notification and adherence to the FDA's Quality System
Requirements 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
pre-marketing 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 pre-marketing notification filing
under Section 510(k) of the Food, Drug and Cosmetics 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 pre- marketing approval, the manufacturer or distributor may seek
FDA Section 510(k) pre-marketing clearance for the device by filing a Section
510(k) pre-marketing notification. The Section 510(k) notification and the claim
of substantial equivalence will likely have to be supported by various types of
data and materials, possibly including clinical testing results, obtained under
an Investigational Device Exemption granted by the FDA. The manufacturer or
distributor may not place the device into interstate commerce until an order is
issued by the FDA granting pre-marketing clearance for the device. There can be
no assurance that the Company will obtain Section 510(k) pre-marketing clearance
for any of the future devices for which the Company seeks such clearance
including the Photon(TM) laser system.
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 pre-marketing approval, and allow the
proposed device to be marketed in the United States. The FDA may determine,
however, that the proposed device is not substantially equivalent, or may
require further information, such as additional test data, before the FDA is
able to make a determination regarding substantial equivalence. A "not
substantially equivalent" determination or a request for additional information
could delay the Company's market introduction of its products and could have a
material adverse effect on its business, operating results and financial
condition.
The alternate method to seek approval is to obtain pre-marketing
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 pre-marketing approval for the proposed device. A pre-marketing
approval application would have to be submitted and be supported by extensive
data, including preclinical and clinical trial data to prove the safety and
efficacy of the device. If human clinical trials of a proposed device are
required and the device presents a significant risk, the manufacturer or the
distributor of the device will have to file an Investigational Device Exemption
application with the FDA prior to commencing human clinical trials. The
Investigational Device Exemption application must be supported by data,
typically including the results of animal and mechanical testing. If the
Investigational Device Exemption 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.
15
An Investigational Device Exemption 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
pre-marketing approval are derived primarily from this portion of the clinical
trial. The applicant may also, upon receipt of the FDA's permission, consolidate
one or more of such portions of the study. Sponsors of clinical trials are
permitted to sell those devices distributed in the course of the study, provided
such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. Although both approval methods may require
clinical testing of the device in question under an approved Investigational
Device Exemption, the pre-marketing approval procedure is more complex and time
consuming.
Upon receipt of the pre-marketing approval application, the FDA makes a
threshold determination whether the application is sufficiently complete to
permit a substantive review. If the FDA determines that the pre-marketing
approval 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 Quality System
Requirements prior to approval of a pre-marketing application. While the FDA has
responded to pre-marketing approval applications within the allotted time
period, pre-marketing approval reviews generally take approximately 12 to 18
months or more from the date of filing to approval. The pre-marketing approval
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 pre-marketing approval have never been approved for marketing.
Any products manufactured or distributed by the Company pursuant to a
premarket clearance notification or pre- marketing approval are or will be
subject to pervasive and continuing regulation by the FDA. The Food, Drug and
Cosmetics Act also requires that the Company's products be manufactured in
registered establishments and in accordance with Quality System Requirements
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 us. 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 its products may be inspected on a
routine basis by both the FDA and individual states for compliance with current
Quality System Requirements 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 the 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 its 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 its common stock.
16
Furthermore, the introduction of the Company's products in foreign
countries may require it 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 pre-marketing
approval, Section 510(k) or approved Investigational Device Exemption from the
FDA is tantamount to approval in those countries. These countries and most
developing countries have simply deferred direct discretion to licensed
practicing surgeons to determine the nature of devices that they will use in
medical procedures. The Company's two ultrasound systems, the Photon(TM) laser
cataract system it is developing and the ocular blood flow analyzer are all
devices, which require FDA approval. Therefore, a significant aspect of the
acceptance of the devices in the market is the Company's effectiveness in
obtaining the necessary approvals. Having an approved Investigational Device
Exemption 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 its 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 Investigational
Device Exemption 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 Investigational Device Exemption 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 Investigational Device Exemption 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 its 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 relating to certain deficiencies in 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 its 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 us, the FDA granted conditional
approval provided that the Company correct certain deficiencies. After providing
several additional submissions to the FDA, the Company received a letter dated
February 13, 2001 from the FDA stating that the deficiencies had been corrected
and the clinical trials could continue.
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 in October 2001 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. On May 7, 2002, the Company
received a letter from the FDA requesting further clinical information. The
Company has generated additional clinical information in response to the letter
and are uncertain if the Company will make a submission to the FDA with the
additional clinical information. Because of the "going concern" status of the
Company, management has focused efforts on those products and activities that
will, in its opinion, achieve the most resource efficient short-term cash flow
to the Company. Its diagnostic products are currently its major focus and the
Photon(TM) and other extensive research and development prospects have been put
on hold pending future evaluation when the Company's financial position
improves. Its focus is not on any specific diagnostic product or products, but
rather on its entire group of diagnostic products.
17
Employees
As of December 31, 2003, the Company had 31 full-time employees. This
number does not include its manufacturer's representatives who are independent
contractors rather than its employees. 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 its employees are a
member of a labor union and the Company has never experienced any business
interruption as a result of any labor disputes.
In December 2001, the Company initiated the first phase of a corporate
downsizing program to reduce its operating expenses. The Company implemented the
second phase of its downsizing program in the second quarter of 2002, by closing
and transferring its manufacturing from its site in San Diego, California to
Salt Lake City, resulting in further reductions in operating expenses. As a
result of the downsizing program and some resignations, the number of its
employees has been reduced by 72% from 112 to 31 employees. The estimated cost
savings from the downsizing program will be in excess of $2,000,000 annually.
The costs of downsizing have included one-time expenses of approximately $43,000
for moving and travel. In addition, the Company incurred additional one-time
expenses of approximately $18,000 for housing accommodations for key employees
working in Salt Lake City. The Company realized a net cost savings from
downsizing of approximately $2,394,000 in 2002.
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 23,238
square feet of leased office space under a three-year lease that was to 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. In January 2003, the
Company renegotiated a three-year lease with Eden Roc at a monthly rate of
$9,295 plus a $1,859 common area maintenance fee for the year 2003, with rate
increases to $9,574 for 2004 and to $9,861for 2005. Pursuant to the lease, the
Company pays all real estate and personal property taxes and the insurance costs
on the premises.
The Company believes that these facilities are adequate and satisfy its
needs for the foreseeable future.
Item 3. Legal Proceedings
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 its common stock) pursuant to Utah law. The action
is based upon an extension of a written employment agreement. The Company
disputes the amount allegedly owed and intends to vigorously defend against the
action.
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 Merrill Corporation 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. On
August 12, 2003, the court dismissed the action without prejudice.
An action was brought against the Company on September 11, 2000 by
PhotoMed International, Inc. and Daniel M. Eichenbaum, M.D. 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 under a license agreement dated July 7, 1993, with respect to
the sale of certain equipment, plus costs and attorneys' 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 has been working with PhotoMed 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 issue in
dispute concerning the method of calculating royalties is whether royalties
should be paid on returned equipment. Since July 1, 2001, only one Photon(TM)
laser system has been sold and no systems returned. Thus, the amount of
royalties due, according to its calculations, is $600. The Company intends to
make payment of this amount to PhotoMed and Dr. Eichenbaum and, as a result, to
have the legal action dismissed. However, if the parties are unable to agree on
a method for calculating royalties, there is a risk that PhotoMed and Dr.
Eichenbaum might amend their complaint to request termination of the license
agreement and, if successful, the Company would lose its right to manufacture
and sell the Photon(TM) laser system.
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. On August 14, 2003, the Company
agreed to make a $13,650 payment to Danlin Corp. in settlement of the dispute.
The Company has since made the $13,650 payment to Danlin Corp.
18
The Company received a demand letter dated December 30, 2002 from
counsel for Thomas F. Motter, its former Chairman 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 not being given an extended employment
agreement when he terminated the change of control agreement that he had entered
into with us.
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 its officers or
directors whose interests were in conflict with the interest of the
shareholders. The Company believes that Mr. Motter's claims and assertions are
without merit and intends to vigorously defend against any legal action that Mr.
Motter may bring.
On January 24, 2003, 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 (Civil No. DU-0326). The complaint alleges that Dr.
Casebeer entered into a personal services contract with the Company memorialized
by a letter agreement 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 included whether or not Dr. Casebeer fully performed as asserted.
The case has been settled through the issuance of 300,000 additional shares of
its common stock to Dr. Casebeer.
On May 14, 2003, a complaint was filed in the United States District
Court, District of Utah, captioned Richard Meyer, individually and on behalf of
all others similarly suited v. Paradigm Medical Industries, Inc., Thomas Motter,
Mark Miehle and John Hemmer, Case No. 2:03 CV00448TC. The complaint also
indicates that it is a "Class Action Complaint for Violations of Federal
Securities Law and Plaintiffs Demand a Trial by Jury." The Company has retained
legal counsel to review the complaint, which appears to be focused on alleged
false and misleading statements pertaining to the Blood Flow Analyzer(TM) and
concerning a purchase order from Valdespino Associates Enterprises and Westland
Financial Corporation.
More specifically, the complaint alleges that the Company falsely
stated in its Securities and Exchange Commission filings and press releases that
the Company had received authorization to use an insurance reimbursement CPT
code from the CPT Code Research and Development Division of the American Medical
Association in connection with the Blood Flow Analyzer(TM), adding that the CPT
code provides for a reimbursement to doctors of $57.00 per patient for use of
the Blood Flow Analyzer(TM). The complaint also alleges that on July 11, 2002,
the Company issued a press release falsely announcing that the Company had
received a purchase order from Valdespino Associates Enterprises and Westland
Financial Corporation for 200 sets of its entire portfolio of products, with $70
million in systems to be delivered over a two-year period, then another $35
million of orders to be completed in the third year. As a result of these
statements, the complaint contends that the price of the Company's shares of
common stock was artificially inflated during the period from April 25, 2001
through May 14, 2003, and the persons who purchased its common shares during
that period suffered substantial damages. The complaint requests judgment for
unspecified damages, together with interest and attorney's fees.
The Company disputes having issued false and misleading statements
concerning the Blood Flow Analyzer(TM) and a purchase order from Valdespino
Associates Enterprises and Westland Financial Corporation. On April 25, 2001,
the Company issued a press release that stated the Company had received
authorization to use common procedure terminology or CPT code number 92120 for
its Blood Flow Analyzer(TM). This press release was based on a letter the
Company received from the CPT Editorial Research and Development Department of
the American Medical Association authorizing use of common procedure terminology
or CPT code number 92120 for its Blood Flow Analyzer(TM), for reimbursement
purposes for doctors using the device.
Currently, there is reimbursement by insurance payors to doctors using
the Blood Flow Analyzer(TM) in 22 states and partial reimbursement in four other
states. The amount of reimbursement to doctors using the Blood Flow Analyzer(TM)
generally ranges from $56.00 to $76.00 per patient, depending upon the insurance
payor. Insurance payors providing reimbursement for the Blood Flow Analyzer(TM)
have the discretion to increase or reduce the amount of reimbursement. The
Company is endeavoring to obtain reimbursement by insurance payors in other
states where there is currently no reimbursement being made. The Company
believes it has continued to correctly represent in its Securities and Exchange
Commission filings that the Company has received authorization from the CPT
Editorial Research and Development Department of the American Medical
Association to use CPT code number 92120 for its Blood Flow Analyzer(TM), for
reimbursement purposes for doctors using the device.
19
On July 11, 2002, the Company issued a press release that stated it
received a purchase order from Valdespino Associates Enterprises and Westland
Financial Corporation for 200 complete sets of the Company's entire product
portfolio of diagnostic and surgical equipment for Mexican ophthalmic
practitioners, to be followed by a second order of 100 sets of equipment. The
press release was based on a purchase order dated July 10, 2002 that the Company
entered into with Westland Financial Corporation for the sale of 200 complete
sets of the Company's surgical and diagnostic equipment to Mexican ophthalmic
practitioners. The press release also stated that the initial order was for $70
million of the Company's equipment to be filled over a two-year period followed
by the second order of $35 million in equipment to be completed in the third
year. The press release further stated that delivery would be made in traunches
of 25 complete sets of the Company's equipment, beginning in 30 days from the
date of the purchase order.
On September 13, 2002, the board of directors issued a press release
updating the status of its product sales to the Mexican ophthalmic
practitioners. In that press release the board stated that the Company had been
in discussions for the prior nine months with Westland Financial Corporation,
aimed at supplying its medical device products to the Mexican market. In the
past, the Company has had a business relationship with Westland Financial. Upon
investigation, the board of directors had determined that the purchase order
referenced in the July 11, 2002 press release was not of such a nature as to be
enforceable for the purpose of sales or revenue recognition. In addition, the
Company had not sent any shipment of medical products to Mexican ophthalmic
practitioners nor received payment for those products pursuant to those
discussions. The September 13, 2002 press release also stated that discussions
were continuing with Westland Financial Corporation regarding sales and
marketing activities for the Company's medical device products in Mexico, but
the Company could not, at the time, predict or provide any assurance that any
transactions would result.
On June 2, 2003, a complaint was filed in the United States District
Court captioned Michael Marrone v. Paradigm Medical Industries, Inc., Thomas
Motter, Mark Miehle and John Hemmer, Case No. 2:03 CV00513 PGC. On or about June
11, 2003, a complaint was filed in the same United States District Court
captioned Milian v. Paradigm Medical Industries, Inc., Thomas Motter, Mark
Miehle and John Hemmer, Case No. 2:03 CV00617PGC. Both complaints seek class
action status. These cases are substantially similar in nature to the Meyer
case, including the contention that as a result of allegedly false statements
regarding the Blood Flow Analyzer(TM) and the purchase order from Valdespino
Associates Enterprises and Westland Financial Corporation, the price of the
Company's common stock was artificially inflated and the persons who purchased
its common shares during the class period suffered substantial damages. The
cases request judgment for unspecified damages, together with interest and
attorneys' fees. These cases have now been consolidated with the Meyer case into
a single action. The Company believes the consolidated cases are without merit
and intends to vigorously defend and protect its interests in the said cases.
The Company was issued a Directors and Officers Liability and Company
Reimbursement Policy by United States Fire Insurance Company for the period from
July 10, 2002 to July 10, 2003 that contains a $5,000,000 limit of liability,
which is excess of a $250,000 retention. The officers and directors named in the
consolidated cases have requested coverage under the policy. U.S. Fire is
currently investigating whether it may have a right to deny coverage for the
consolidated cases based upon policy terms, conditions and exclusions or to
rescind the policy based upon misrepresentations contained in its application
for insurance.
The Company has not paid any amounts toward satisfaction of any part of
the $250,000 retention that is applicable to the consolidated cases. The Company
has advised U.S. Fire that it cannot pay the $250,000 retention due to its
current financial circumstances. As a consequence, on January 8, 2004, the
Company entered into a non-waiver agreement with U.S. Fire in which U.S. Fire
agreed to fund and advance the Company's retention obligation in consideration
for which the Company has agreed to reimburse U.S. Fire the sum of $5,000 a
month, for a period of six months, with the first of such payments due on
February 15, 2004. Thereafter, commencing on August 15, 2004, the Company is
currently required to reimburse U.S. Fire the sum of $10,000 per month until the
entire amount of $250,000 has been reimbursed to U.S. Fire.
In the event U.S. Fire determines that the Company or the former
officers and directors named in the consolidated cases are not entitled to
coverage under the policy, or that it is entitled to rescind the policy, or
should the Company be declared in default under the non-waiver agreement on
account of its failure to make the monthly payments owed to U.S. Fire for
funding the Company's retention obligation, then the Company agrees to pay U.S.
Fire, on demand, the full amount of all costs advanced by U.S. Fire, except for
those amounts that the Company may have reimbursed to U.S. Fire pursuant to the
monthly payments due under the non-waiver agreement.
The Company will be in default under the non-waiver agreement if it
fails to make any payment due to U.S. Fire thereunder when such payment is due,
or institute proceedings to be adjudicated as bankrupt or insolvent. U.S. Fire's
obligation to advance defense costs under the agreement will terminate in the
event that the $5,000,000 policy limit of liability is exhausted. If U.S. Fire
denies coverage for the consolidated cases under the policy and the Company is
not successful in defending and protecting its interests in the cases, resulting
in a judgment against the Company for substantial damages, the Company would not
be able to pay such liability and, as a result, would be forced to seek
bankruptcy protection.
20
On July 10, 2003, an action was filed in the United States District
Court, District of Utah, by Innovative Optics, Inc. and Barton Dietrich
Investments, L.P. Defendants include us, Thomas Motter, Mark Miehle and John
Hemmer, former officers of the company. The complaint claims that Innovative and
Barton entered into an asset purchase agreement with the Company on January 31,
2002, in which the Company agreed to purchase all the assets of Innovative in
consideration for the issuance of 1,310,000 shares of the Company's common stock
to Innovative. The complaint claims the Company breached the asset purchase
agreement. The complaint also claims that the Company allegedly made false and
misleading statements pertaining to the Blood Flow Analyzer(TM) and concerning a
purchase order from Valdespino Associates Enterprises and Westland Financial
Corporation. The purpose of these statements, according to the complaint, was to
induce Innovative to sell its assets and purchase the shares of the Company's
common stock at artificially inflated prices while simultaneously deceiving
Innovative and Barton into believing that the Company's shares were worth more
than they actually were. The complaint contends that had Innovative and Barton
known the truth they would not have sold Innovative to us, would not have
purchased the Company's stock for the assets of Innovative, or would not have
purchased the stock at the inflated prices that were paid. The complaint further
contends that as a result of the allegedly false statements, Innovative and
Barton suffered substantial damages in an amount to be proven at trial.
The complaint also claims that 491,250 of the shares to be issued to
Innovative in the asset purchase transaction were not issued on a timely basis
and the Company also did not file a registration statement with the Securities
and Exchange Commission within five months of the closing date of the asset
purchase transaction. As a result, the complaint alleges that the value of the
shares of the Company's common stock issued to Innovative in the transaction
declined, and Innovative and Barton suffered damages in an amount to be proven
at trial. The Company filed an answer to the complaint and also filed
counterclaims against Innovative and Barton for breach of contract. The Company
believes the complaint is without merit and intends to vigorously defend and
protect its interests in the action. If the Company is not successful in
defending and protecting its interests in this action, resulting in a judgment
against the Company for substantial damages, and U.S. Fire denies coverage in
the litigation under the Directors and Officers Liability and Company
Reimbursement Policy, the Company would not be able to pay such liability and,
as a result, would be forced to seek bankruptcy protection.
On October 14, 2003, an action was filed in the Third Judicial District
Court, Salt Lake County, State of Utah, captioned Albert Kinzinger, Jr.,
individually and on behalf of all others similarly situated vs. Paradigm Medical
Industries, Inc., Thomas Motter, Mark Miehle, Randall A. Mackey, and John
Hemmer, Case No. 030922608. The complaint also indicates that it is a "Class
Action Complaint for Violations of Utah Securities Laws and Plaintiffs Demand a
Trial by Jury." The Company has retained legal counsel to review the complaint,
which appears to be focused on alleged false or misleading statements pertaining
to the Blood Flow Analyzer(TM). More specifically, the complaint alleges that
the Company falsely stated in Securities and Exchange Commission filings and
press releases that it had received authorization to use an insurance
reimbursement CPT code from the CPT Code Research and Development Division of
the American Medical Association in connection with the Blood Flow Analyzer(TM),
adding that the CPT code provides for a reimbursement to doctors of $57.00 per
patient for the Blood Flow Analyzer(TM).
The purpose of these statements, according to the complaint, was to
induce investors to purchase shares of the Company's Series E preferred stock in
a private placement transaction at artificially inflated prices. The complaint
contends that as a result of these statements, the investors that purchased
shares of its Series E preferred stock in the private offering suffered
substantial damages to be proven at trial. The complaint also alleges that the
Company sold Series E preferred shares without registering the sale of such
shares or obtaining an exemption from registration. The complaint requests
rescission, compensatory damages and treble damages, including interest and
attorneys' fees. The Company filed an answer to the complaint. The Company
believes the complaint is without merit and intends to vigorously defend its
interests in the action. If the Company is not successful in defending and
protecting its interests in the action, resulting in a judgment against it for
substantial damages, and U.S. Fire denies coverage in the litigation under the
Directors and Officers Liability and Company Reimbursement Policy, the Company
would not be able to pay such liability and, as a result, would be forced to
seek bankruptcy protection.
An action was filed on June 20, 2003, in the Third Judicial District
Court, Salt Lake County, State of Utah (Civil No. 030914195) by CitiCorp Vendor
Finance, Inc., formerly known as Copelco Capital, Inc. The complaint claims that
$49,626 plus interest is due for the leasing of two copy machines that were
delivered to its Salt Lake City facilities on or about April of 2000. The action
also seeks an award of attorney's fees and costs incurred in the collection. The
Company disputes the amounts allegedly owed, asserting that the equipment it
returned to the leasing company did not work properly. A responsive pleading has
not yet been filed. The Company is currently engaged in settlement discussions
with CitiCorp.
An action was filed in June, 2003 in the Third Judicial District Court,
Salt Lake County, State of Utah (Civil No. 030914719) by Franklin Funding, Inc.
in which it alleges that the Company had entered into a lease agreement for the
lease of certain equipment for which payment is due. It is claimed that there is
due and owing approximately $89,988 after accruing late fees, interest,
repossession costs, collection costs and attorneys' fees. On August 28, 2003,
the Company agreed to a settlement of the case with Franklin Funding by agreeing
to make 24 monthly payments of $2,300 to Franklin Funding, with the first
monthly payment due on August 29, 2003.
21
The Company received demand letters dated July 18, 2003, September 26,
2003 and November 10, 2003 from counsel for Douglas A. MacLeod, M.D., a
shareholder of the company. In the July 18, 2003 letter, Dr. MacLeod demands
that he and certain entities with which he is involved or controls, namely the
Douglas A. MacLeod, M.D. Profit Sharing Trust, St. Marks' Eye Institute and
Milan Holdings, Ltd., be issued a total of 2,296,667 shares of the Company's
common stock and warrants to purchase 1,192,500 shares of its common stock at an
exercise price of $.25 per share. Dr. MacLeod claims that these common shares
and warrants are owing to him and the related entities under the terms of a
mutual release dated January 16, 2003, which he and the related entities entered
into with us. Dr. MacLeod renewed his request for these additional common shares
and warrants in the September 26, 2003 and November 10, 2003 demand letters. The
Company believes that Dr. MacLeod's claims and assertions are without merit and
that neither he nor the related entities are entitled to any additional shares
of its common stock or any additional warrants under the terms of the mutual
release. The Company intends to vigorously defend against any legal action that
Dr. MacLeod may bring.
On August 3, 2003, a complaint was filed against the Company by Corinne
Powell, a former employee, in the Third Judicial District Court, Salt Lake
County, State of Utah (Civil No. 030918364). Defendants consist of the Company
and Randall A. Mackey, Dr. David M. Silver and Keith D. Ignotz, directors of the
company. The complaint alleges that at the time the Company laid off Ms. Powell
on March 25, 2003, she was owed $2,030 for business expenses, $11,063 for
accrued vacation days, $12,818 for unpaid commissions, the fair market value of
50,000 stock options exercisable at $5.00 per share that she claims she was
prevented from exercising, attorney's fees and a continuing wage penalty under
Utah law. The Company disputes the amounts allegedly owed and intends to
vigorously defend and protect its interests in the action.
On September 10, 2003, an action was filed against the Company by Larry
Hicks in the Third Judicial District Court, Salt Lake County, State of Utah,
(Civil No. 030922220), for payments due under a consulting agreement with us.
The complaint claims that monthly payments of $3,083 are due for the months of
October 2002 to October 2003 under a consulting agreement and, if the agreement
is terminated, for the sum of $110,000 minus whatever the Company has paid Mr.
Hicks prior to such termination, plus costs, attorney's fees and a wage penalty
pursuant to Utah law. The Company disputes the amount allegedly owed and intends
to vigorously defend against such action.
The Company is not a party to any other material legal proceedings
outside the ordinary course of its business or to any other legal proceedings,
which, if adversely determined, would have a material adverse effect on its
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders
during the quarter ended December 31, 2003.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's authorized capital stock consists of 80,000,000 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 seven 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, Series F preferred stock and Series G preferred stock.
The Company's common stock and Class A warrants trade on the OTC
Bulletin Board under the respective symbols of "PMED.OB" and "PMEDW.OB." Prior
to July 22, 1996, there was no public market for the common stock. From July 22,
1996 to June 25, 2003, its common stock and Class A warrants were listed on the
Nasdaq SmallCap Market. Since June 25, 2003, its common stock and Class A
warrants have traded on the OTC Bulletin Board. As of April 12, 2004, the
closing sale prices of the common stock and Class A warrants were $.16 per share
and $.03 per warrant, respectively. The following are the high and low sale
prices for the common stock and Class A warrants by quarter as reported by
Nasdaq from January 1, 2000 to June 25, 2003 and by the OTC Bulletin Board since
June 25, 2003.
22
Common Stock Class A Warrants
Price Range Price Range
Period (Calendar Year) High Low High Low
---- --- ---- ---
2000
First Quarter.................... 14.50 6.88 6.50 2.63
Second Quarter................... 10.50 4.19 3.63 1.19
Third Quarter.................... 6.19 3.38 2.00 .50
Fourth Quarter................... 4.94 1.31 1.25 .50
2001
First Quarter.................... 4.13 1.50 1.00 .19
Second Quarter................... 3.50 1.61 .74 .19
Third Quarter.................... 2.75 1.86 .45 .16
Fourth Quarter................... 3.08 1.94 .39 .17
2002
First Quarter.................... 3.31 2.21 .38 .19
Second Quarter................... 1.91 .60 .32 .05
Third Quarter.................... 1.50 .16 .20 .08
Fourth Quarter................... .30 .13 .10 .01
2003
First Quarter.................... .42 .14 .12 .01
Second Quarter................... .74 .14 .44 .01
Third Quarter.................... .42 .18 .18 .01
Fourth Quarter .................. .24 .15 .10 .02
2004
First Quarter ................... .21 .11 .04 .01
The Company's Series A preferred stock, Series B preferred stock,
Series C preferred stock, Series D preferred stock, Series E preferred stock,
Series F preferred stock and Series G preferred stock are not publicly traded.
As of March 31, 2004, there were 717 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, 52
record holders of Series F preferred stock, and two record holders of Series G
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, Series F preferred stock and Series G preferred stock before
it can pay any cash dividend to holders of its common stock. Dividends paid in
cash pursuant to outstanding shares of its Series A, Series B, Series C, Series
D, Series E, Series F and Series G preferred stock are only payable from its
surplus earnings, 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 its proposed business and operations. Any
payment of cash dividends in the future on the common stock will be dependent
upon its 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 its 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 preferred 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 its current view respecting future events and 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.
Critical Accounting Policies
Revenue Recognition. The Company recognizes revenue in compliance with
Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements (SAB
101), as revised by Staff Accounting Bulletin No. 104, Revenue Recognition (SAB
104). SAB 101 and SAB 104 detail four criteria that must exist before revenue is
recognized:
1. Persuasive evidence of an arrangement exits. Prior to shipment of
product, the Company required a signed purchase order and, depending upon the
customer, a down payment toward the final invoiced price or full payment in
advance with certain international product distributors.
23
2. Delivery and performance have occurred. Unless the purchase order
requires specific installation or customer acceptance, the Company recognizes
revenue when the product ships. If the purchase order requires specific
installation or customer acceptance, the Company recognizes revenue when such
installation or acceptance has occurred. Title to the product passes to its
customer upon shipment. This revenue recognition policy does not differ among
its various different product lines. The Company guarantees the functionality of
its product. If its product does not function as marketed when received by the
customer, the Company either makes the necessary repairs on site or has the
product shipped to the Company for the repair work. Once the product has been
repaired and retested for functionality, it is re- shipped to the customer. The
Company provides warranties that generally extend for one year from the date of
sale. Such warranties cover the necessary parts and labor to repair the product
as well as any shipping costs that may be required. The Company maintains a
reserve for estimated warranty costs based on its historical experience and
management's current expectations.
3. The sales price is fixed or determinable. The purchase order
received from the customer includes the agreed- upon sales price. The Company
does not accept customer orders, and therefore do not recognize revenue, until
the sales price is fixed.
4. Collectibility is reasonably assured. With limited exceptions, the
Company requires down payments on product prior to shipment. In some cases the
Company requires payment in full prior to shipment. The Company also performs
credit checks on new customers and ongoing credit checks on existing customers.
The Company maintains an allowance for doubtful accounts receivable based on
historical experience and management's current expectations.
Recoverability of Inventory. Since its inception, the Company has
purchased several complete lines of inventory. In some circumstances the Company
has been able to utilize certain items acquired and others remain unused. On a
quarterly basis, the Company attempts to identify inventory items that have
shown relatively no movement or very slow movement. Generally, if an item has
shown little or no movement for over a year, it is determined not to be
recoverable and a reserve is established for that item. In addition, if the
Company identifies products that have become obsolete due to product upgrades or
enhancements, a reserve is established for such products. The Company intends to
make efforts to sell these items at significantly discounted prices. If items
are sold, the cash received would be recorded as revenue, but there would be no
cost of sales on such items due to the reserve that has been recorded. At the
time of sale, the inventory would be reduced for the item sold and the
corresponding inventory reserve would also be reduced.
Recoverability of Goodwill and Other Intangible Assets. The Company's
intangible assets consist of goodwill, product and technology rights,
engineering and design costs, and patent costs. Intangibles with a determined
life are amortized on a straight-line basis over their determined useful life
and are also evaluated for potential impairment if events or circumstances
indicate that the carrying amount may not be recoverable. Intangibles with an
indefinite life, such as goodwill, are not amortized but are tested for
impairment on an annual basis or when events and circumstances indicate that the
asset may be impaired. Impairment tests include comparing the fair value of a
reporting unit with its carrying net book value, including goodwill. To date,
the Company's determination of the fair value of the reporting unit has been
based on the estimated future cash flows of that reporting unit.
Allowance for Doubtful Accounts. The Company records an allowance for
doubtful accounts to offset estimated uncollectible accounts receivable. Bad
debt expense associated with the increases in the allowance for doubtful
accounts is recorded as part of general and administrative expense. The
Company's accounting policy generally is to record an allowance for receivables
over 90 days past due unless there is significant evidence to support that the
receivable is collectible.
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 is engaged in the design, development, manufacture and sale
of high technology diagnostic and surgical eye care products. Given the "going
concern" status of the Company, management has focused efforts on those products
and activities that will, in its opinion, achieve the most resource efficient
short-term cash flow. As seen in the results for the twelve months ended
December 31, 2003, diagnostic products have been the major focus and the
Photon(TM) and other extensive research and development projects have been put
on hold pending future evaluation when the Company's financial position
improves. The Company does not focus on a specific diagnostic product or
products but, instead, on this entire diagnostic product group. During the
twelve months ended December 31, 2003, management made certain adjustments to
the financial statements, including an increase in the reserve for obsolete or
estimated non- recoverable inventory of $484,000, consisting of an increase in
the reserve of $403,000, offset by a decrease of $887,000 due to the sale of the
SIStem and Odyssey product lines which were fully reserved. The Company also
recorded a net increase in the allowance for doubtful accounts receivable of
$123,000, impairment of intangibles of $150,000, and increases in accruals to
settle outstanding disputes in the amount of $446,000. Although management
believes these adjustments are sufficient, it will continue to monitor and
evaluate its financial position and the recoverability of its assets.
24
The Company's ultrasound diagnostic products include a P55 pachymetric
analyzer, a P37 Ultrasound A/B Scan, a P40 Ultrasound BioMicroscope and a P45
Plus UBM Ultrasound BioMicroscope, the technology for which was acquired from
Humphrey Systems in 1998. The Company introduced the P45 Plus in the fall of
2000, which combines the A/B Scan, and the biomicroscope into one instrument. In
addition, the Company markets its Blood Flow Analyzer(TM) acquired in the
purchase of Ocular Blood Flow Ltd. in June 2000. Other diagnostic products are
the Dicon(TM) LD400 Auto Perimeter and the Dicon(TM) CT200e Corneal Topographer,
which were acquired in the acquisition of Vismed d/b/a Dicon in June 2000. The
Company purchased the inventory, design and production rights of the SIStem(TM)
, the Odyssey and the Surgetrol 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 materials and finished goods inventory to bring the
manufacturing of this product in-house. During the fourth quarter of 2003, the
Company sold all inventory and rights associated with the SIStem(TM) and
Odyssey(TM) for $125,000. This transaction resulted in sales of $125,000 with $0
cost of sales because a reserve for obsolete inventory had been recorded on all
SIStem and Odyssey inventory.
Because of the "going concern" status of the Company, management has
focused efforts on those products and activities that will, in its opinion,
achieve the most resource efficient short-term cash flow to the company. As
reflected in the results for the fiscal year ended December 31, 2003, diagnostic
products are currently its major focus and the Photon(TM) and other extensive
research and development projects have been put on hold pending future
evaluation when the financial position of the company improves. Due to the lack
of current evidence to support recoverability, the Company has recorded an
inventory reserve to offset the inventory associated with the Precisionist
Thirty Thousand(TM) and the Photon(TM) as well as other certain inventory items
that are estimated to be non-recoverable due to the lack of significant turnover
of such items in recent periods.. The Company does not focus on a specific
diagnostic product or products but, instead, on this entire product group.
Activities for the twelve months ended December 31, 2003 included sales
of the Company's products and related accessories and disposable products. In
March 2003, the Company named a new President and Chief Executive Officer,
Jeffrey F. Poore. The Company named a new Vice President of Sales and Marketing,
Raymond P.C. Cannefax, during the first quarter of 2003 and a new Vice President
of Finance and Chief Financial Officer, Gregory C. Hill, during the second
quarter of 2003. Mr. Hill resigned as Vice President of Finance and Chief
Financial Officer on December 5, 2003. John Y. Yoon was appointed as President
and Chief Executive Officer on March 18, 2004, to replace Mr. Poore. On March
23, 2004, the Company named as new Vice President of Operations and Chief
Operating Officer, Aziz A. Mohabbat.
On May 7, 2002, the Company received a letter from the FDA requesting
further clinical information regarding the Photon. 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 efforts to educate the payors 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 2001, the Company received written authorization from the CPT
Editorial Research and Development Department of the American Medical
Association to use a common procedure terminology or CPT code number 92120 for
its Blood Flow Analyzer(TM), for reimbursement purposes for doctors using the
device. However, certain insurance payors have elected not to reimburse doctors
using the Blood Flow Analyzer(TM). The Company believes the reasons why
insurance payors initially elected not to reimburse doctors using the CPT code
were the relatively high volume of claims that began to be submitted under CPT
code number 92120 compared to the limited volume of claims previously submitted
under this code, and the time consumed by the Blood Flow Analyzer(TM) test,
which some payors may have believed was less than what is allowed under CPT code
number 92120. This trend began shortly after insurance payors were presented
with reimbursement requests under this code, and the Company believes these
reasons were the basis for the initiation of non-payment.
The impact of this nonpayment by certain payors on the Company's future
operations is a lower volume of sales, particularly in those states where
reimbursement is not yet approved or is delayed. Currently, there is
reimbursement by insurance payors in 22 states and partial reimbursement in four
other states. As insurance payors have the prerogative whether to provide
reimbursement to doctors using the Blood Flow Analyzer(TM), the Company is
continuing to work with insurance payors in states where there is no
reimbursement to doctors using the CPT code to demonstrate the value of the
instrument. However, some insurance payors are currently not providing
reimbursement to doctors where a regional or state administrator of Medicare has
elected not to provide Medicare coverage for the Blood Flow Analyzer(TM). The
Company is continuing to work with the regional and state administrators of
Medicare who have denied Medicare coverage for the Blood Flow Analyzer(TM) to
demonstrate the value of the instrument.
There were a number of factors that contributed to the decrease in
sales of the Blood Flow Analyzer (TM) and other products. September 11, 2001,
the ensuing Afghanistan conflict, and the Iraq war had a significant impact on
the Company's international sales. The U.S. recessionary economic trend has
impacted its domestic sales. Additionally, the Company restructured its sales
25
organization and sales channels by decreasing its direct sales force who are
full-time employees from 10 direct sales employees on January 1, 2003, to five
direct sales employees on December 31, 2003. The dependent sales force was
reduced because the Company does not have sufficient revenues to justify the
larger direct sales force. One of the challenges for fiscal 2004 will be the
judicious reconstruction of the sales force in anticipation of increased sales.
The Company is projecting an increase in revenues in 2004, however there can be
no assurance that this will occur.
The Company intends to increase its efforts to sell its diagnostic
products through independent sales representatives and ophthalmic equipment
distributors, which are paid commissions only for their sales. As of December
31, 2003, the Company had two independent sales representatives and two
ophthalmic equipment distributors in the United States and 26 ophthalmic and
medical product distributors outside the United States. The Company hopes to
benefit from these recently hired sales representatives and distributors in the
United States as they gain familiarity, through training, of its diagnostic
products. Due to concerns over the budget and the effectiveness of trade shows,
the Company exhibited at only three trade shows during 2003. The Company
monitors trade show attendance to determine the extent to which it will exhibit
at future trade shows.
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 cost of the consolidation was
approximately $80,000.
In January 2002, the Company purchased certain assets and lease
obligations of Innovative Optics, Inc. 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 its 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.
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 on 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 the
Company continues to search for an alternative source of blades. Because the
Company determined that it could not manufacture the blades to support its
customer base at an economical cost, in accordance with Statement of Financial
Accounting Standards 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, in which the
Company acquired 2,663,254, or 19.9%, of its outstanding shares and warrants to
purchase 1,200,000 shares of its common stock at $2.50 per share for a period of
two years, in exchange for the issuance of 736,945 shares of the Company's
common stock to International Bio-Immune Systems, the lending of 300,000 shares
of the Company's common stock to International Bio-Immune Systems, and the
payment of certain expenses through the issuance of an aggregate of 94,000
shares of the Company's common stock to International Bio-Immune Systems and its
counsel. The issuance of 736,945 shares was valued based on the market price of
the Company's common stock on the date of the transaction and resulted in an
investment in International Bio-Immune Systems, 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.
International Bio-Immune Systems is a privately held biotechnology
based, cancer diagnostic and immunotherapy company, located in Great Neck, New
York, 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). International Bio-Immune Systems 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 FDA has not approved such
products, 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 in 2002.
26
The tragic events of September 11, 2001, the Afghanistan conflict and
the Iraq war combined with a recessionary trend in the economy have had a
negative effect on its sales. International attendance at the trade shows
following September 11, 2001, and through 2003 were 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 us, but the Company believes
that the Company has suffered some negative impact due to September 11, 2001,
the Afghanistan conflict, the Iraq war 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, 2003, Compared to Fiscal Year Ended
December 31, 2002
Net sales decreased by $2,309,000, or 43%, to $3,059,000 for the twelve
months ended December 31, 2003, from $5,368,000 for the comparable period in
2002. Sales of the Company's diagnostic products and related accessories were
$2,484,000, or 81% of total revenues, during the twelve months of 2003 compared
with $4,015,000, or 75% of total revenues, for the comparable period of 2002.
Sales of surgical products and related accessories totaled $324,000, or 11% of
total revenues, for the twelve months of the current year in comparison with
$556,000, or 10%, of total revenues in the comparable period of 2002. Surgical
product sales for 2003 include the sale of the SIStem and Odyssey product lines
for $125,000. In 2003, sales of the P40 and P45 UBM Ultrasound Biomicroscope and
related accessories were $615,000, or 20% of total revenues, compared to
$1,303,000, or 24% of total revenues, in the same period of 2002. Sales from the
Blood Flow Analyzer(TM) and related accessories decreased by $121,000 to
$499,000, or 16% of total revenues, during the year ended December 31, 2003
compared with $620,000, or 12% of total revenues, in the same period of last
year. During the twelve months of 2003, sales from other ultrasonic products and
related accessories totaled $191,000, or 6% of total revenues, compared with
$464,000, or 9% of total revenues, in the same period last year. Sales of the
perimeter and corneal topographer and related accessories generated $1,100,000,
or 36% of total revenues, in 2003 compared with $1,487,000, or 28% of total
revenues, during the same period of 2002.
There were a number of material reasons that contributed to the
decrease in sales during the twelve months ended December 31, 2003, compared to
the same period of 2002. Along with generally weak economic conditions in the
United States, the Company initiated the restructuring of its management
structure, its sales organization and the development of new sales channels
during the twelve months ended December 31, 2003. During the first three months
of 2003, the Company reduced its direct sales force from 10 representatives to
five representatives, and during the remainder of 2003, there were only five
direct sales representatives compared to 10 direct sales representatives during
the comparable period of 2002. International sales were impacted by weakness in
the economies of the large industrial countries and by the residual impact of
the Afghanistan situation, which had a negative impact on sales to the Middle
East, Pakistan, India and other countries in that region.
The decrease in sales of the P40 and P45 Plus Ultrasound Biomicroscope
as well as other products were the direct result of the restructuring of the
sales and marketing organization. With respect to the decrease in sales of the
Biomicroscope, there has not been an increase in price, competition remains
similar to what it has been previously, and there are no other particular
factors of which the Company is aware. This restructuring has significantly
reduced the sales expenses and funds dedicated to marketing. In addition, the
sales channels have been altered to include distributor and independent sale
representatives instead of relying more on a direct sales force. Domestic and
international sales have also decreased as a result of the global financial
markets declines beginning in 2000 and the adverse impact of the events of
September 11, 2001.
Other reasons for the decrease in sales were the uncertainties
resulting from its efforts to reduce costs and constraints on availability of
funds that reduced the Company's ability to upgrade and enhance its products and
pursue further regulatory approvals for its products. Additionally, changes in
the exchange rate between these periods have generally made its products more
expensive to some customers outside of the United States. The Company's
objective is to focus its sales efforts on the products with the highest
potential for sales and strong margins.
Gross profit for the year ended December 31, 2003 was 32% of total
revenues, compared to 22% for the same period in 2002. Cost of goods sold for
the year ended December 31, 2003 was $2,086,000 as compared to $4,210,000 for
the same period in 2002, a reduction of $2,124,000. Cost of goods sold for the
year ended December 31, 2003 included an increase in the reserve for obsolete or
estimated non-recoverable inventory of $403,000. Cost of goods sold for 2002
included an increase in the reserve for obsolete or estimated non-recoverable
inventory of $1,755,000. Since its inception, the Company has purchased several
complete lines of inventory. While its initial intention was to utilize the
substantial majority of inventory acquired in the manufacture of its products,
in some circumstances the Company has been unable to utilize certain items
acquired.
On a quarterly basis, the Company attempts to identify inventory items
that have shown relatively no movement or very slow movement. Generally, if an
item has shown little or no movement for over a year, it is determined not to be
recoverable and a reserve is established for that item. In addition, if the
Company identifies products that have become obsolete due to product upgrades or
27
enhancements, a reserve is established for such products. Such analysis resulted
in material increases in the reserve for obsolete or estimated non-recoverable
inventory in 2003 and 2002. There can be no assurance that the Company will not
identify further obsolete inventory due to significant declines in sales of
certain products or technological advances of products in the future. The
Company intends to make efforts to sell these items at significantly discounted
prices. If items are sold, the cash received would be recorded as revenue, but
there would be no cost of sales on such items due to the reserve that has been
recorded. At the time of sale, the inventory would be reduced for the item sold
and the corresponding inventory reserve would also be reduced. The Company does
not expect the sales of these items to be significant in the future. During
2003, the Company sold all inventory, rights, and technology related to the
SIStem and Odyssey product lines for $125,000. All of the inventory sold in this
transaction had previously been fully reserved. Therefore, upon the sale, the
Company reduced inventory by $887,000 for the original book value of the
inventory, reduced the reserve for $887,000, and recorded revenue for the cash
received of $125,000.
Marketing and selling expenses decreased by $1,875,000, or 67%, to
$920,000 in 2003, from $2,795,000 in 2002 due primarily to the lower headcounts
of sales persons and travel related and associated sales expenses.
General and administrative expenses decreased by $1,256,000, or 34%, to
$2,446,000 in 2003, from $3,702,000 in 2002, reflecting the results of the
Company's efforts to reduce costs, specifically costs associated with
maintaining two manufacturing facilities and consulting costs. As noted above,
in April 2002, the Company announced the closure of its San Diego facility in
anticipation of the termination of the lease for that location. All operations
associated with the San Diego facility 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 cost
of the consolidation was approximately $80,000. The Company believes that the
annual cost savings of the closure of the San Diego facility are approximately
$2 million. Administrative salaries and wages decreased from approximately
$786,000 in 2002 to approximately $321,000 in 2003. Depreciation and
amortization expense, which includes amortization of leasehold improvements,
decreased by approximately $305,000, or 49%, to $319,000 in 2003 compared to the
same period of last year. General and administrative expenses for 2003, included
$123,000 for additions to the allowance for doubtful accounts and increases in
accruals of $443,000 to settle outstanding disputes.
In addition, general and administrative expense for the twelve months
ended December 31, 2003, included $259,000 for 1,562,000 shares of common stock
issued to settle potential litigation. 1,262,000 common shares were issued to
six investors due to a dispute arising from a private offering that was
completed on January 22, 2003. The Company agreed to issue the shares to the
investors in the offering at $.25 per share rather than $.50 per share, the
original offering price (or an additional 1,262,000 shares) to resolve a dispute
with the investors concerning certain statements made by a former officer in
connection with the sale of said shares. The additional 300,000 shares were
issued to settle an outstanding dispute with a consultant regarding services
performed by such consultant.
Research, development and service expenses decreased by $1,786,000, or
63%, to $1,033,000 in 2003, from $2,819,000 in 2002. This decrease was mainly
due to the issuance of common stock to Innovative Optics in the fourth quarter
of 2002, which was valued at $630,000 and expensed as in-process research and
development costs. Expenses associated with the development of new products
during the twelve months of 2003 decreased compared to the same period in 2002
as a consequence of the Company's efforts to reduce costs and focus on products
that are fully developed and have the highest potential for sales and strong
margins.
Impairment of assets was $150,000 in 2003, compared to $2,961,000 in
2002. The impairment expense for 2003 was due to a reduction in the value of
certain intangible assets based on their currently estimated fair value. The
impairment expense for 2002 was due to an evaluation by the Company of its
intangible assets, namely goodwill and patents, rights, and trade name acquired
from Innovative Optics, resulting in a charge of $1,949,000 as a write down of
the goodwill and other intangibles. The remaining impairment charge of
$1,012,000 was a result of the write-off of the investment in IBS of $879,000
and other assets of $133,000.
Other income and (expense) increased by $451,000 to income of $415,000
in 2003, from expense of $(36,000) for the same period in 2002. During 2003,
interest income was $3,000 compared with $10,000 during 2002. During 2003, the
Company recorded a gain of $436,000 on discounted settlements of accounts
payable and obligations. The Company had a $22,000 reduction in interest expense
to $(24,000) in 2003, from $(46,000) in 2002 due to a decrease in interest
expense related to capital leases.
Liquidity and Capital Resources
The Company used $707,000 cash in operating activities for the twelve
months ended December 31, 2003, compared to $2,782,000 for the twelve months
ended December 31, 2002. The reduction in cash used by operating activities for
the twelve months of 2003 was primarily attributable to reduced operating costs,
including the closure of the San Diego facility, as well as other savings
resulting from its ongoing efforts to substantially reduce costs and management
of its current assets and current liabilities. The Company used $2,000 from
investing activities for the twelve months ended December 31, 2003, compared to
cash used of $229,000 in the same period in 2002. Cash used in investing
28
activities in the twelve months of 2002 was primarily due to the cash paid in
the acquisition of certain assets of Innovative Optics and capital equipment.
Net cash provided by financing activities was $647,000 for the twelve months
ended December 31, 2003 versus $503,000 in the same period in 2002. During the
twelve months ended December 31, 2003, the Company raised approximately $84,000
through a $20,000,000 equity line of credit and $700,000 through private
placements from the sale of the Company's common stock and Series G preferred
stock and warrants. However, the equity line of credit is not currently
available as a source of equity because a registration statement is not
currently effective registering the shares issuable under the equity line of
credit. 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
funding will be available on terms acceptable to the Company in the future.
The Company will continue to seek funding to meet its working capital
requirements through collaborative arrangements and strategic alliances,
additional public offerings and private placements of its securities, and bank
borrowings. The Company is uncertain whether or not the combination of existing
working capital and benefits from sales of its products will be sufficient to
assure continued operations through December 31, 2004. As of December 31, 2003,
the Company had accounts payable of $706,000, a significant portion of which is
over 90 days past due. The Company has contacted many of the vendors or
companies that have significant amounts of payables past due in an effort to
delay payment, renegotiate a reduced settlement payment, or establish a
longer-term payment plan. While someompanies have been willing to renegotiate
the outstanding amounts, others have demanded payment in full. Under certain
conditions, including but not limited to judgments rendered against the Company
in a court of law, a group of creditors could force it into bankruptcy due to
its inability to pay the liabilities arising out of such judgments at that time.
In addition to the accounts payable noted above, the Company also has
noncancellable capital lease obligations and operating lease obligations that
require the payment of approximately $187,000 in 2004, $172,000 in 2005, and
$14,000 in 2006.
The Company has taken numerous steps to reduce costs and increase
operating efficiencies. These steps consist of the following:
1. The Company closed its San Diego facility. In so doing, numerous
manufacturing, accounting and management responsibilities were consolidated. In
addition, such closure resulted in significant headcount reductions as well as
savings in rent and other overhead costs.
2. The Company has significantly reduced the use of consultants, which
has resulted in a large decrease to these expenses.
3. The Company has reduced its direct sales force to five
representatives, which has resulted in less payroll, travel and other selling
expenses.
Because the Company has significantly fewer sales representatives, its
ability to generate sales has been reduced.
At December 31, 2003, the Company had net operating loss carryforwards
of approximately $44,000,000 and research and development tax credit
carryforwards of approximately $34,000. These loss carryforwards are available
to offset future taxable income, if any, and have begun to expire in 2001 and
extend for twenty years. The Company's ability to use net operating loss
carryforwards to offset future income is dependant upon certain limitations as a
result of the pooling transaction with Vismed and the tax laws in effect at the
time of the loss carryforwards can be utilized. The Tax Reform Act of 1986
significantly limits the annual amount that can be utilized for certain of these
loss carryforwards as a result of change of ownership.
As of December 31, 2003, the Company had raised approximately
$1,584,000 through a $20,000,000 equity line of credit under an investment
banking arrangement. As of December 31, 2003, approximately $18,416,000 was
available under the equity line of credit. However, the equity line of credit
expired by its terms on December 8, 2003, but the Company is currently in the
process of renewing the agreement. Moreover, the equity line of credit is
currently unavailable as a source of equity because there is currently no
registration statement that is effective registering the shares of its common
stock that may be sold under the equity line of credit. 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 funding will be available
on terms acceptable to the Company in the future. The Company will continue to
seek funding to meet its working capital requirements through collaborative
arrangements and strategic alliances, additional public offerings and/or private
placements of its securities or bank borrowings. The Company is uncertain
whether or not the combination of existing working capital and benefits from
sales of its products will be sufficient to assure its operations through
December 31, 2003.
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 27% of total outstanding receivables as of
December 31, 2002 and 40% as of December 31, 2003. Much of the increase in the
allowance relates to outstanding receivable balances pertaining to 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 and has instituted changes that
29
require more payments at the time of sale via letters of credit and not on a
credit term basis. The Company intends to continue its efforts to reduce the
allowance as a percentage of accounts receivable. While the allowance as a
percentage of accounts receivable has grown, it is mainly a result of the
significant decline in sales. The total amount of the allowance has increased
from $347,000 at December 31, 2002, to $470,000 at December 31, 2003. The
majority of the receivables included in the allowance for doubtful accounts are
a result of sales before the Company implemented the various changes to improve
the collectibility of its receivables. During 2002, the Company had a net
recovery of receivables previously allowed for of $23,000 and during the twelve
months ended December 31, 2003, the Company added a net of $123,000 to the
allowance for doubtful accounts. The Company believes that by requiring a large
portion of payment prior to shipment, it has greatly improved the collectibility
of its receivables.
The Company carried an allowance for obsolete or estimated
non-recoverable inventory of $1,642,000 at December 31, 2003, and $2,126,000 as
of December 31, 2002, or approximately 62% and 45% of total inventory,
respectively. This inventory reserve was increased by $403,000 in the twelve
months of 2003 and $1,755,000 during 2002 mainly due to the decline in sales and
the discontinuance of the microkeratome purchased from Innovative Optics in
2002, however the increase in 2003 was offset by a decrease of $887,000 due to
the sale of inventory that was fully reserved. 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 has 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 the Photon(TM) 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.
On a quarterly basis, the Company attempts to identify inventory items
that have shown relatively no movement or very slow movement. Generally, if an
item has shown little or no movement for over a year, it is determined not to be
recoverable and a reserve is established for that item. In addition, if the
Company identifies products that have become obsolete due to product upgrades or
enhancements, a reserve is established for such products. The Company intends to
make efforts to sell these items at significantly discounted prices. If items
are sold, the cash received would be recorded as revenue, but there would be no
cost of sales on such items due to the reserve that has been recorded. At the
time of sale, the inventory would be reduced for the item sold and the
corresponding inventory reserve would also be reduced. During the fourth quarter
of 2003, the Company sold all inventory and rights associated with the Phaco
SIStem(TM) and Odyssey(TM) for $125,000. Because the full amount of inventory
related to the SIStem(TM) and Odyssey(TM) had been fully reserved, no cost of
sales were recorded in connection with this sale, thus resulting in gross profit
equal to the sales price of $125,000. The Company does not expect the sales of
these items, if any, to be significant in the future.
At this time, the Company's Photon(TM) Laser Ocular Surgery Workstation
requires additional development and regulatory approvals. Any possible future
efforts to complete development of the Photon(TM) and obtain the necessary
regulatory approvals would depend on the Company obtaining adequate funding. The
Company estimates that the liquidity needed to complete development of the
Photon(TM) and obtain the necessary regulatory approvals to be approximately
$225,000.
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 it experienced unfavorable
profit reductions due to currency exchange fluctuations or inflation with its
foreign customers. All sales transactions to date have been denominated in U.S.
Dollars.
Impact of New Accounting Pronouncements
In November 2002, the EITF reached a consensus on Issue No.00-21,
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides
guidance on how to account for certain arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue
No. 00-21 did not have a material impact on operating results or financial
condition of the Company as the Company followed the provisions of Statement of
Position ("SOP") 97-2, Software Revenue Recognition, as modified by SOP 98-9,
Modification of SOP 97-2 with Respect to Certain Transactions, which provide
guidance for revenue recognition of arrangements with multiple deliverables.
In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R")
(revised December 2003), Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 ("ARB 51"), which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity though means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (FIN
46), which was issued in January 2003. Before concluding that it is appropriate
to apply ARB 51 voting interest consolidation model to an entity, an enterprise
must first determine that the entity is not a variable interest entity (VIE). As
of the effective date of FIN 46R, an enterprise must evaluate its involvement
with all entities or legal structures created before February 1, 2003, to
determine whether consolidation requirements of FIN 46R apply to those entities.
There is no grandfathering of existing entities. Public companies must apply
either FIN 46 or FIN 46R immediately to entities created after January 31, 2003
and no later than the end of the first reporting period that ends after December
15, 2004. The adoption of FIN 46 had no effect on the Company's consolidated
financial position, results of operations or cash flows.
30
In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS 133,
Accounting for Derivatives and Hedging Activities. SFAS 149 is generally
effective for derivative instruments, including derivative instruments embedded
in certain contracts, entered into or modified after June 30, 2003. The adoption
of SFAS 149 did not have a material impact on the operating results or financial
condition of the Company.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
clarifies the accounting for certain financial instruments with characteristics
of both liabilities and equity and requires that those instruments be classified
as liabilities in statements of financial position. Previously, many of those
financial instruments were classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. On November 7, 2003, FASB Staff Position 150-3 was issued, which
indefinitely deferred the effective date of SFAS 150 for certain mandatory
redeemable non-controlling interests. As the Company does not have any of these
financial instruments, the adoption of SFAS 150 did not have any impact on the
Company's consolidated financial statements. In December 2003, the Securities
and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition. SAB 104 revises or rescinds portions of the interpretive
guidance included in Topic 13 of the codification of staff accounting bulletins
in order to make this interpretive guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and regulations.
The adoption of SAB 104 did not have a material effect on the Company's results
of operations or financial position.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company has no activities in derivative financial or commodity
instruments. The Company's exposure to market risks (i.e., interest rate risk,
foreign currency exchange rate risk and equity price risk) through other
financial instruments, including cash equivalents, accounts receivable and lines
of credit, is not material.
31
Item 8. Financial Statements and Supplementary Data
PARADIGM MEDICAL INDUSTRIES, INC.
Financial Statements
December 31, 2003 and 2002
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, 2003, and the related statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 2003 and
2002. 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, 2003, and the results of its operations and its cash
flows for the years ended December 31, 2003 and 2002, 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 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.
/s/TANNER + CO.
Salt Lake City, Utah
March 5, 2004
F-2
PARADIGM MEDICAL INDUSTRIES, INC.
Balance Sheet
December 31, 2003
--------------------------------------------------------------------------------
Assets
------
Current assets:
Cash $ 132,000
Receivables, net 708,000
Inventories, net 1,003,000
Prepaid and other current assets 141,000
----------------
Total current assets 1,984,000
Intangibles, net 682,000
Property and equipment, net 256,000
----------------
Total $ 2,922,000
----------------
--------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 706,000
Accrued liabilities 1,419,000
Current portion of capital lease obligations 56,000
----------------
Total current liabilities 2,181,000
----------------
Capital lease obligations, net of current
portion 61,000
----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock $.001 par value,
5,000,000 shares authorized,
2,006,770 shares issued and
outstanding (aggregate liquidation
preference of $1,106,000) 2,000
Common stock, $.001 par value, 80,000,000
shares authorized, 25,372,794, shares
issued and outstanding 25,000
Additional paid-in capital 57,470,000
Accumulated deficit (56,817,000)
----------------
Total stockholders' equity 680,000
----------------
Total liabilities and stockholders' equity $ 2,922,000
----------------
--------------------------------------------------------------------------------
See accompanying notes to financial statements. F-3
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Operations
Years Ended December 31,
-------------------------------------------------------------------------------------------
2003 2002
--------------------------------------
Sales $ 3,059,000 $ 5,368,000
Cost of sales 2,086,000 4,210,000
--------------------------------------
Gross profit 973,000 1,158,000
--------------------------------------
Operating expenses:
General and administrative 2,446,000 3,702,000
Marketing and selling 920,000 2,795,000
Research, development and service 1,033,000 2,819,000
Impairment of assets 150,000 2,961,000
--------------------------------------
Operating loss (3,576,000) (11,119,000)
Other income (expense):
Interest income 3,000 10,000
Interest expense (24,000) (46,000)
Gain on settlement of liabilities 436,000 -
--------------------------------------
Total other income (expense) 415,000 (36,000)
--------------------------------------
Loss before provision for income taxes (3,161,000) (11,155,000)
Provision for income taxes - -
--------------------------------------
Net loss $ (3,161,000) $ (11,155,000)
Beneficial conversion feature on Series G
preferred stock (217,000) -
Deemed dividend from Series G preferred
detachable warrants (53,000) -
--------------------------------------
Net loss applicable to common shareholders $ (3,431,000) $ (11,155,000)
--------------------------------------
Loss per common share - basic and diluted $ (0.14) $ (0.63)
--------------------------------------
Weighted average common shares - basic and diluted 24,058,000 17,736,000
--------------------------------------
-------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-4
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Stockholders' Equity
Years Ended December 31, 2003 and 2002
-----------------------------------------------------------------------------------------------------------------------------
Preferred Additional Stock
Stock Common Stock Paid-in Subscription Accumulated
(see note 9) Shares Amount Capital Receivable Deficit
----------------------------------------------------------------------------------
Balance, January 1, 2002 $ - 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)
Conversion of preferred stock - 115,998 - - - -
Issuance of common stock for:
Cash - 1,658,032 2,000 428,000 - -
Settlement of litigation - 1,562,000 1,000 258,000 - -
Commission on sale of common stock - 82,526 - - - -
Issuance of stock options and warrants for:
Services - - - 35,000 - -
Issuance of Series G preferred stock for:
Cash 2,000 - - 268,000 - -
Write off of subscription receivable - - - (294,000) 294,000
Net loss - - - - - (3,161,000)
----------------------------------------------------------------------------------
Balance, December 31, 2003 $ 2,000 25,372,794 $ 25,000 $ 57,470,000 $ - $ (56,817,000)
----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-5
PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Cash Flows
Years Ended December 31,
-------------------------------------------------------------------------------------------------------------
2003 2002
----------------------------------
Cash flows from operating activities:
Net loss $ (3,161,000) $ (11,155,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 319,000 624,000
Issuance of common stock for services - 183,000
Issuance of common stock for in process research and development - 630,000
Issuance of stock option/warrant for services 35,000 -
Issuance of Series G preferred stock for services - -
Common stock issued for settlement of litigation 259,000 34,000
Allowance for (recovery of) bad debt expense 123,000 (23,000)
Provision for losses on inventory 403,000 1,755,000
Impairment of intangibles and investment 150,000 2,961,000
(Gain) on settlement of liabilities (436,000) -
(Increase) decrease in:
Receivables 113,000 1,473,000
Inventories 1,243,000 952,000
Prepaid and other assets (44,000) 255,000
Increase (decrease) in:
Accounts payable 53,000 (313,000)
Accrued liabilities 236,000 (158,000)
----------------------------------
Net cash used in operating activities (707,000) (2,782,000)
----------------------------------
Cash flows from investing activities:
Purchase of property and equipment (2,000) (28,000)
Increase in intangibles - (103,000)
Proceeds from the disposal of assets - 2,000
Net cash paid in acquisition - (100,000)
----------------------------------
Net cash used in investing activities (2,000) (229,000)
----------------------------------
Cash flows from financing activities:
Proceeds from issuance of Series G preferred stock 270,000 -
Principal payments on capital lease obligations (53,000) (59,000)
Proceeds from the issuance of common stock, including
exercise of common stock warrants and options 430,000 562,000
----------------------------------
Net cash provided by financing activities 647,000 503,000
----------------------------------
Net change in cash (62,000) (2,508,000)
Cash, beginning of year 194,000 2,702,000
----------------------------------
Cash, end of year $ 132,000 $ 194,000
----------------------------------
-------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-6
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------
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 blood flow
analyzer, a pachymeter, an A-Scan, an A/B Scan,
ultrasound biomicroscopes, a perimeter, and a corneal
topographer.
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, 2003, 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. The Company performed such impairment test on
its intangible assets as of January 1, 2002. At that
date, the Company's intangible assets consisted of
product and technology rights with a net book value of
approximately $297,000, engineering and design costs
with a net book value of approximately $86,000, patents
with a net book value of approximately $98,000, and
purchase price in excess of net assets acquired (or
goodwill) with a net book value of approximately
$679,000. The Company's initial impairment test
performed on January 1, 2002 consisted of a cash flow
analysis based on estimated future revenues and directly
related costs of products directly associated with the
intangible assets. Based on such cash flow projections,
the initial impairment test did not result in any
impairment of the intangibles. As disclosed in Note 3,
during 2002 the Company acquired the asset of Innovative
Optics, Inc. The acquisition originally resulted in
goodwill and identifiable intangible assets of
$1,949,000. However, due to the Company's inability to
cost effectively develop and manufacture the products
acquired, an estimate of future cash flows shows that
all of the assets acquired, including goodwill and
identifiable intangible assets, were impaired as of
December 31, 2002. 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. The Company reviews 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.
--------------------------------------------------------------------------------
F-8
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Intangible Assets - Continued
and Significant Such conditions may include an economic downturn in a
Accounting geographic market or a change in the assessment of
Policies future operations. Goodwill is not amortized. The
Continued Company performs 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.
Evaluation of Other Long-Lived Assets
The Company evaluates the carrying value of the
unamortized balances of other long-lived assets to
determine whether any impairment of these assets has
occurred or whether any revision to the related
amortization periods should be made. This evaluation is
based on management's projections of the undiscounted
future cash flows associated with each asset. If
management's evaluation were to indicate that the
carrying values of these assets were impaired, such
impairment would be recognized by a write down of the
applicable asset.
Income Taxes
Deferred income taxes are provided in amounts sufficient
to give effect to temporary differences between
financial and tax reporting, principally related to net
operating loss carryforwards, depreciation, impairment
of intangible assets, stock compensation expense, and
accrued liabilities.
--------------------------------------------------------------------------------
F-9
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Stock - Based Compensation
and Significant For stock options and warrants granted to employees the
Accounting Company employs the footnote disclosure provisions of
Policies Statement of Financial Accounting Standards (SFAS) No.
Continued 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.
Stock options and warrants granted to non-employees for
services are accounted for in accordance with SFAS 123
which requires expense recognition based on the fair
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,
-------------------------------
2003 2002
-------------------------------
Net loss applicable to common shareholders-
as reported $ (3,431,000) $ (11,155,000)
Deduct: total stock-based employee
compen-sation determined under fair value
based method for all awards, net of related (595,000) (618,000)
tax effects
-------------------------------
Net loss applicable to common shareholders-
pro forma $ (4,026,000) $ (11,773,000)
-------------------------------
Earnings per share:
Basic and diluted - as reported $ (.14) $ (.63)
-------------------------------
Basic and diluted - pro forma $ (.17) $ (.66)
-------------------------------
--------------------------------------------------------------------------------
F-10
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Stock - Based Compensation - Continued
and Significant The fair value of each option grant is estimated at the
Accounting date of grant using the Black-Scholes option pricing
Policies model with the following assumptions:
Continued
December 31,
----------------------------------------
2003 2002
----------------------------------------
Expected dividend yield $ - $ -
Expected stock price
volatility 110% - 117% 102%-103%
Risk-free interest rate 4% 4%
Expected life of options 2-7 years 2-7 years
The weighted average fair value of options granted
during 2003 and 2002 are $0.16 and $1.25, respectively.
Earnings Per Share
The computation of basic earnings per common share is
based on the weighted average number of shares
outstanding during each year.
The computation of diluted earnings per common share is
based on the weighted average number of shares
outstanding during the year plus the common stock
equivalents, which would arise from the exercise of
stock options and warrants outstanding using the
treasury stock method and the average market price per
share during the year. Options and warrants to purchase
6,036,439 and 5,151,557 shares of common stock at prices
ranging from $0.16 to $12.98 per share were outstanding
at December 31, 2003 and 2002, 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).
--------------------------------------------------------------------------------
F-11
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Research and Development
and Significant Costs incurred in connection with research and
Accounting development activities are expensed as incurred. These
Policies costs consist of direct and indirect costs associated
Continued with specific projects as well as fees paid to various
entities that perform certain research on behalf of the
Company.
Concentration of Risk
The market for ophthalmic lasers is subject to rapid
technological change, including advances in laser and
other technologies and the potential development of
alternative surgical techniques or new pharmaceutical
products. Development by others of new or improved
products, processes or technologies may make products
developed by the Company obsolete or less competitive.
The Company's high technology product line requires the
Company to deal with suppliers and subcontractors
supplying highly specialized parts, operating highly
sophisticated and narrow tolerance equipment and
performing highly technical calculations and tasks.
Although there are a limited number of suppliers and
manufacturers that meet the standards required of a
regulated medical device, management believes that other
suppliers and manufacturers could provide similar
components and services.
The nature of the Company's business exposes it to risk
from product liability claims. The Company maintains
product liability insurance providing coverage up to $1
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, 2003 and 2002, no
single customer represented more than 10 percent of
total net sales.
--------------------------------------------------------------------------------
F-12
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Concentration of Risk - Continued
and Significant Accounts receivable are due from medical distributors,
Accounting surgery centers, hospitals, optometrists and
Policies ophthalmologists located throughout the U.S. and a
Continued number of foreign countries. The receivables are
generally due within thirty days for domestic customers
with extended terms offered for some international
customers. The Company maintains an allowance for
estimated potentially uncollectible amounts.
Warranty
The Company provides product warranties on the sale of
certain products that generally extend for one year from
the date of sale. The Company maintains a reserve for
estimated warranty costs based on historical experience
and management's best estimates.
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 2002 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 concernbasis, 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 its 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.
In addition, the Company has taken significant steps to
reduce costs and increase operating efficiencies.
Specifically, during the second quarter of 2002, the
Company closed its San Diego facility. In so doing,
numerous manufacturing, accounting and management
responsibilities were consolidated. In addition, such
closure resulted in significant headcount reductions as
well as savings in rent and other overhead costs. The
Company has also significantly reduced the use of
consultants, which has resulted in a large decrease in
expenses, and reduced the direct sales force to five
representatives, which has resulted in less payroll,
travel and other selling expenses. Although these cost
savings have significantly reduced the Company's losses
and ongoing cash flow needs, if the Company is unable to
obtain equity or debt financing, it may be unable to
continue development of its products and may be required
to substantially curtail or cease 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 Innovative Optics, Inc. - Continued
Continued As consideration for the purchase of certain assets of
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 limited to
patents, inventory, work in process and finished goods
relating to the Innovatome(TM), a microkeratome, and
microkeratome blades. Of the 1,272,825 shares of the
Company's common stock issued to Innovative Optics at
closing, one-half the number of these shares, or 636,412
shares, 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 Innovative Optics, Inc. - Continued
Continued Despite best efforts, the Company was unable to
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 in 2002.
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 Innovative Optics, Inc. - Continued
Continued The Company determined that it could not manufacture the
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 it was anticipated that 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 in 2002. In 2003,
due to the decline in value of the Company's common
stock and the Company's inability to collect the
subscription receivable, the Company wrote-off the
subscription receivable of $294,000 against additional
paid-in capital.
--------------------------------------------------------------------------------
F-17
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
4. Detail of
Certain
Balance
Sheet
Accounts
Receivables:
Trade receivables $ 1,178,000
Allowance for Doubtful accounts (470,000)
------------------
$ 708,000
------------------
Inventories:
Finished goods $ 703,000
Raw materials 1,942,000
Reserve for obsolescence (1,642,000)
------------------
$ 1,003,000
------------------
Accrued liabilities:
Payroll and employee benefits $ 540,000
Warranty and return allowance 413,000
Customer deposits 207,000
Consulting and other 108,000
Deferred revenue 90,000
Royalties 61,000
------------------
$ 1,419,000
------------------
5. Intangible Intangible assets consist of the following at December
Assets 31, 2003:
Goodwill $ 799,000
Product and technology rights 700,000
Engineering and design costs 482,000
Patents 92,000
------------------
2,073,000
Accumulated amortization (1,391,000)
------------------
Net intangible assets $ 682,000
------------------
Amortization expense for the years ended December 31,
2003 and 2002 was $79,000 and $248,000, respectively.
--------------------------------------------------------------------------------
F-18
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
5. Intangible During the year ended December 31, 2003, the Company
Assets evaluated the carrying value of its unissued patent
Continued costs and product and technology rights for
recoverability. This analysis, based on the estimated
future cash flows associated with such assets, resulted
in an impairment expense of $81,000 and $69,000 related
to patents and product and technology rights,
respectively.
6. Property and Property and equipment consists of the following:
Equipment
Office equipment $ 750,000
Computer equipment 658,000
Automobile 53,000
Furniture and fixtures 264,000
Leasehold improvements 166,000
-----------------
1,891,000
Accumulated depreciation and
amortization (1,635,000)
-----------------
$ 256,000
-----------------
7. Lease During the years ended December 31, 2003 and 2002, 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 (177,000)
------------------
$ 114,000
------------------
Amortization expense on assets under capital leases
during the years ended December 31, 2003 and 2002 was
$56,000 and $46,000, respectively.
--------------------------------------------------------------------------------
F-19
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. Lease Capital lease obligations have imputed interest rates of
Obligations approximately 7% to 22%. The leases are secured by
Continued equipment. Future minimum payments on the capital lease
obligations are as follows:
2004 $ 72,000
2005 54,000
2006 14,000
-----------------
140,000
Less amount representing interest (33,000)
-----------------
Present value of future minimum lease payments 117,000
Less current portion (56,000)
-----------------
Long-term portion $ 61,000
-----------------
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, 2003 are approximately as follows:
Year Ending December 31, Amount
------------------
2004 $ 115,000
2005 118,000
------------------
Total future minimum
rental payments $ 233,000
------------------
Rent expense related to noncancelable operating leases
was approximately $159,000 and $437,000 for the years
ended December 31, 2003 and 2002, respectively.
--------------------------------------------------------------------------------
F-20
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. 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,
-----------------------------------
2003 2002
-----------------------------------
Income tax benefit at
statutory rate $ 1,170,000 $ 4,127,000
Expiration of research and
development tax credit
carryforwards - (25,000)
Meals and entertainment (7,000) (33,000)
Other 2,000 1,000
Change in valuation allowance (1,165,000) (4,070,000)
-----------------------------------
$ - $ -
-----------------------------------
Deferred tax assets (liabilities) are comprised of the
following:
Net operating loss carryforward $ 16,384,000
Depreciation, amortization, and impairment 883,000
Allowance and reserves 1,122,000
Impairment of investment in IBS 325,000
Research and development tax credit
carryforwards 34,000
-----------------
18,748,000
Valuation allowance (18,748,000)
-----------------
$ -
-----------------
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-21
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Income At December 31, 2003, the Company had net operating loss
Taxes carryforwards of approximately $44 million and research
Continued and development tax credit carryforwards of
approximately $34,000. These carryforwards are available
to offset future taxable income and expire in 2004
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.
9. 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, 2003 was $6,000.
3. The shares are convertible at the option of the
holder at any time into common shares, based on an
initial conversion rate of one share of Series A
Preferred Stock for 1.2 common shares.
4. The holders of the shares have no voting rights.
--------------------------------------------------------------------------------
F-22
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Capital 5. The Company may, at its option, redeem all of the
Stock then outstanding shares of the Series A Preferred
Continued 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, 2003
was $36,000.
3. The shares are convertible at the option of the
holder at any time into common shares, based on an
initial conversion rate of one share of Series B
Preferred Stock for 1.2 common shares.
4. The holders of the shares have no voting rights.
5. The Company may, at its option, redeem all of the
then outstanding share of the Series B Preferred
Stock at a price of $4.50 per share, plus accrued
and unpaid dividends related to the fiscal year in
which such redemption occurs.
--------------------------------------------------------------------------------
F-23
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Capital Series C Preferred Stock
Stock In January 1998, the Company authorized the issuance of
Continued a total of 30,000 shares of Series C Preferred Stock,
$.001 par value, $100 stated value. As of December 31,
2003 there were no Series C Preferred Stock issued and
outstanding. 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 was 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-24
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. 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, 2003 was $9,000.
3. Each share was 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-25
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. 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, 2003 was $100,000.
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-26
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Capital Series E Preferred Stock - Continued
Stock
Continued 4. The holders of the shares have no voting rights.
5. The holders of the shares also were issued
warrants to purchase shares of common stock equal
to 1,000 warrants for every 200 shares purchased
at an exercise price of $4.00 per share. Each
warrant is exercisable until May 23, 2006.
Series F Preferred Stock
In August 2001, the Company authorized the issuance of a
total of 50,000 shares of Series F Preferred Stock $.001
par value, $100 stated value. The Series F Preferred
Stock has the following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of 8% per share per annum of
the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in
dividend payments from one year are not carried
forward to the next year.
2. Upon the liquidation of the Company, the holders
of the Series F Preferred Stock are entitled to
receive an amount per share equal to the greater
of (a) the amount they would have received had
they converted the shares into Common Stock
immediately prior to such liquidation plus all
declared but unpaid dividends; or (b) the stated
value, subject to adjustment. Total liquidation
preference at December 31, 2003 was $460,000.
--------------------------------------------------------------------------------
F-27
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Capital Series F Preferred Stock - Continued
Stock
Continued 3. Each share is convertible, at the option of the
holder at any time until January 1, 2005, into
approximately 53.33 shares of Common Stock at an
initial conversion price, subject to adjustment
for stock splits, stock dividends and certain
combination or recapitalization of the common
stock, equal to $1.875 per share of common stock.
The Series F Preferred Stock shall be converted
into Common Stock subject to adjustment (a) on
January 1, 2005 or (b) upon 30 days written notice
by the Company to the holders of the Shares, at
any time after (i) the 30-day anniversary of the
registration statement on which the shares of
Common Stock issuable upon conversion of the
Series F Preferred Stock were registered and (ii)
the average closing price of the Common Stock for
the 20-day period immediately prior to the date on
which notice of redemption is given by the Company
to the holders of the Series F Preferred Stock is
at least $3.50 per share. The Company in 2001
recorded $1,105,000 as a beneficial conversion
feature related to the differences in the
conversion price of the preferred stock to common
stock.
4. The holders of the shares have no voting rights.
Series G Preferred Stock
In August 2003, the Company authorized the issuance of a
total of 2,000,000 shares of Series G Preferred Stock
$.001 par value, $1.00 stated value. The Series G
Preferred Stock has the following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of 7% per share per annum of
the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in
dividend payments from one year are not carried
forward to the next year.
--------------------------------------------------------------------------------
F-28
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Capital 2. Upon the liquidation of the Company, the holders
Stock of the Series G Preferred Stock are entitled to
Continued 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 of $.25 per share plus declared but unpaid
dividends. Total liquidation preference at
December 31, 2003 was $495,000.
3. Each share is convertible, at the option of the
holder at any time until August 1, 2005, into 1
share of common stock at an initial conversion
price, subject to adjustment for dividends, equal
to one share of common stock for each share of
Series G Preferred Stock. The Series G Preferred
Stock shall be converted into common stock subject
to adjustment (a) on August 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 G Preferred Stock were
registered and (ii) the average closing price of
the common stock for the 15-day period immediately
prior to the date in which notice of redemption is
given by the Company to the holders of the Series
G Preferred Stock is at least $.50 per share.
4. The holders of the shares have no voting rights.
--------------------------------------------------------------------------------
F-29
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Capital The following table summarizes preferred stock activity
Stock during the years ended December 31, 2003 and 2002:
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, 2002 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 -
Issuance of Series
G preferred stock
for cash - - - - - - - - - - - -
Issuance of Series
G preferred stock
for commissions - - - - - - - - - - - -
Conversion of
preferred stock - - - - - - - - (500) - (1,675) -
------------------------------------------------------------------------------------------------------------
Balance at December
31, 2003 5,627 $ - 8,986 $ - - $ - 5,000 $ - 1,000 $ - 4,597 $ -
------------------------------------------------------------------------------------------------------------
Authorized 500,000 - 500,000 - 30,000 - 1,140,000 - 50,000 - 50,000 -
------------------------------------------------------------------------------------------------------------
Liquidation
preference - $ 6,000 $36,000 $ - $9,000 $ 100,000 $ 460,000
------------------------------------------------------------------------------------------------------------
Series G
Shares Amount
--------------------------
Balance at January
1, 2002 - $ -
Conversion of
preferred stock - -
-------------------------
Balance at December
31, 2002 - -
Issuance of Series
G preferred stock
for cash 1,764,706 2,000
Issuance of Series
G preferred stock
for commissions 216,854 -
Conversion of
preferred stock - -
-------------------------
Balance at December
31, 2003 1,981,560 $ 2,000
-------------------------
Authorized 2,000,000 -
------------------------
Liquidation
preference $ 495,000
--------------------------
--------------------------------------------------------------------------------
F-30
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Stock Option The Company has a Stock Option Plan (the Option
Plan and Plan), which reserves shares of the Company's
Warrants authorized but unissued common stock for the
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 3,700,000 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.
Options were issued to employees and directors of
the Company during 2003 for 2,145,000 shares of
common stock with vesting periods ranging from 3 to
7 years. The exercise price of the options ranges
from $0.16 to $0.25
The Company granted the following options and
warrants to non-employees during the year ended
December 31, 2003:
o Warrants to purchase 200,000 shares of
common stock at an exercise price of $0.16
per share in return for consulting
services.
o Warrants to investors to purchase 422,633
shares of common stock at an exercise price
of $0.75.
o In connection with the Series G Preferred
Stock offering, the Company issued warrants
to purchase, in aggregate 382,353 shares of
common stock at exercise prices ranging
from $0.25 to $0.50.
--------------------------------------------------------------------------------
F-31
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Stock Option During 2002, in connection with the Innovative
Plan and Optics acquisition (see note 3), Plan and the
Warrants Company granted warrants to purchase 250,000 shares
Continued of common stock at an Warrants exercise price of
$5.00 per share. These warrants were nonforfeitable,
vested Continued 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.
A schedule of the options and warrants is as
follows:
Number of Exercise
------------------------------ Price Per
Options Warrants Share
------------------------------------------------
Outstanding at
January 1, 2002 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 - 5.00
-----------------------------------------------
Outstanding at
December 31, 2002 2,486,535 2,565,022 2.00 - 12.98
Granted 2,150,000 1,404,986 0.16 - 0.25
Exercised - - -
Expired - (1,162,025) 5.06 - 8.12
Forfeited (1,008,079) - 0.21 - 6.00
-----------------------------------------------
Outstanding at
December 31, 2003 3,628,456 2,807,983 $ 0.16 - 12.98
------------------------------------------------
--------------------------------------------------------------------------------
F-32
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Stock Option The following table summarizes information about
Plan and stock options and warrants outstanding at
Warrants December 31, 2003:
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
--------------------------------------------------- ------------------------
$ 0.16 - 0.75 3,474,986 4.23 $ 0.25 2,661,653 $ 0.32
2.00 - 5.00 2,660,570 2.89 3.32 2,599,154 3.75
6.00 - 8.13 275,000 1.46 3.27 275,000 6.55
12.98 25,883 N/A 12.98 25,883 12.98
--------------------------------------------------- ------------------------
$ 0.16 - 12.98 6,436,439 3.5 $ 1.71 5,561,689 $ 2.29
--------------------------------------------------- ------------------------
11. Related Party Thomas F. Motter, former Chairman of the Board and
Transactions 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 had concluded
that the monthly rate of $2,500 represents the fair
market rate for leasing the residential property.
The Company paid $2,500 and $14,000 in rent during
2003 and 2002. This agreement was terminated on
January 31, 2003.
The Company entered into a consulting agreement with
a former executive officer of the Company commencing
in September 2002 and ending February 2003. The
Company paid approximately $1,000 and $15,000 under
this agreement during 2003 and 2002, respectively,
and had an accrual of approximately $14,000 and
$5,000 as of December 31, 2003 and 2002,
respectively.
--------------------------------------------------------------------------------
F-33
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
11. Related Party A law firm, of which the chairman of the board of
Transactions directors of the Company is a shareholder, has
Continued rendered legal services to the Company. The Company
paid this firm $97,000 and $167,000, for the years
ended December 31, 2003 and 2002, respectively. As
of December 31, 2003, the Company owed this firm
$136,000, which is included in accounts payable.
12. Supplemental During the year ended December 31, 2003, the
Cash Flow Company:
Information
o Granted 200,000 warrants for consulting
services, which is recorded as an increase
to general and administrative expense and
additional paid-in capital of $35,000.
o Issued 1,562,000 shares of common stock,
valued at $258,000 based on the trading
prices on the date of issuance, as
settlement of potential litigation. This
amount is included in general and
administrative expenses and additional
paid-in capital.
o Incurred an obligation of approximately
$46,000 for the settlement of accrued
liabilities of approximately $83,000 and
recorded a corresponding gain of $37,000.
o Reduced subscription receivable and
additional paid-in capital for $294,000.
--------------------------------------------------------------------------------
F-34
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
12. Supplemental During the year ended December 31, 2002, the
Cash Flow Company:
Information
Continued o Acquired certain assets of Innovative
Optics, Inc. 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
----------------
o 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.
Actual amounts paid for interest and income taxes
are as follows:
Years Ended
December 31,
--------------------------------
2003 2002
--------------------------------
Interest $ 24,000 $ 46,000
--------------------------------
Income taxes $ - $ -
--------------------------------
--------------------------------------------------------------------------------
F-35
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
13. Export Total sales include export sales by major geographic
Sales area as follows:
Years Ended
----------------------------------------------
December 31,
----------------------------------------------
Geographic Area 2003 2002
----------------------------------------------
Far East $ 272,000 $ 1,171,000
South America 9,000 308,000
Middle East 228,000 337,000
Europe 363,000 505,000
Canada 62,000 121,000
Mexico 9,000 61,000
----------------------------------------------
$ 943,000 $ 2,503,000
----------------------------------------------
14. Savings Plan In November 1996, the Company established a 401(k)
Retirement Savings Plan for the Company's officers
and employees. The Plan provisions include
eligibility after six months of service, a three
year vesting provision and matching contributions at
the Company's discretion. During the years ended
December 31, 2003 and 2002, the Company contributed
approximately $1,000 and $64,000 to the Plan,
respectively.
15. Connitments Consulting Agreements During the year ended December
and 31, 1999 the Company entered a consulting agreement
Contingencies 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 required monthly payments of $6,000
through June 2003. As of December 31, 2003, this
agreement was settled in conjunction with the
royalty agreement for the Blood Flow Analyzer (see
Royalty Agreements in Note 15).
--------------------------------------------------------------------------------
F-36
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments Litigation An action was brought against the Company
and in March 2000 by George Wiseman, a former employee,
Contingencies in the Third District Court of Salt Lake County,
Continued State of Utah. The complaint alleges that the
Company owes Mr. Wiseman 6,370 shares of common
stock plus costs, attorney's fees and a wage penalty
(equal to 1,960 additional shares of our common
stock) pursuant to Utah law. The action is based
upon an extension of a written employment agreement.
We dispute the amount allegedly owed and intend to
vigorously defend against the action.
An action was brought against us on March 7, 2000 in
the Third District Court of Salt Lake County, State
of Utah, by the Merrill Corporation that alleges
that we owe the Merrill Corporation 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. We filed
an answer to the complaint. On August 12, 2003, the
court dismissed the action without prejudice.
An action was brought against us on September 11,
2000 by PhotoMed International, Inc. and Daniel M.
Eichenbaum, M.D. 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
under a license agreement dated July 7, 1993, with
respect to the sale of certain equipment, plus costs
and attorneys' fees. Discovery has taken place and
we have paid royalties of $14,736 to bring all
payments up to date through June 30, 2001. We have
been working with PhotoMed 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.
--------------------------------------------------------------------------------
F-37
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments Litigation - Continued It is anticipated that once
and the parties can agree on the correct calculations on
Contingencies the royalties, the legal action will be dismissed.
Continued The issue in dispute concerning the method of
calculating royalties is whether royalties should be
paid on returned equipment. Since July 1, 2001, only
one Photon(TM) laser system has been sold and no
systems returned. Thus, the amount of royalties due,
according to our calculations, is $600. We intend to
make payment of this amount to PhotoMed and Dr.
Eichenbaum and, as a result, to have the legal
action dismissed. However, if the parties are unable
to agree on a method for calculating royalties,
there is a risk that PhotoMed and Dr. Eichenbaum
might amend their complaint to request termination
of the license agreement and, if successful, we
would lose our right to manufacture and sell the
Photon(TM) laser system.
We 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. Our records show that we 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 us because they had
never been ordered. On August 14, 2003, we agreed to
make a $13,650 payment to Danlin Corp. in settlement
of the dispute. We have since made the $13,650
payment to Danlin Corp.
We received a demand letter dated December 30, 2002
from counsel for Thomas F. Motter, our former
Chairman 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 us by not being
given an extended employment agreement when he
terminated the change of control agreement that he
had entered into with us.
--------------------------------------------------------------------------------
F-38
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments Litigation - Continued Mr. Motter is further
and claiming payment for accrued vacation time during
Contingencies the 13 years he had been employed by the Company,
Continued 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
us 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 our officers
or directors whose interests were in conflict with
the interest of the shareholders. We believe that
Mr. Motter's claims and assertions are without merit
and intend to vigorously defend against any legal
action that Mr. Motter may bring.
On January 24, 2003, an action was brought by Dr.
John Charles Casebeer against us in the Montana
Second Judicial District Court, Silver Bow County,
State of Montana (Civil No. DU-0326). The complaint
alleges that Dr. Casebeer entered into a personal
services contract with us 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, we 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, we 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 us in
early November 2002. We recently filed its answer in
defense of the action. Issues include whether or not
Dr. Casebeer fully performed as asserted. The case
has been settled through the issuance of 300,000
additional shares of our common stock to Dr.
Casebeer.
--------------------------------------------------------------------------------
F-39
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments Litigation - Continued On May 14, 2003, a complaint
and was filed in the United States District Court,
Contingencies District of Utah, captioned Richard Meyer,
Continued individually and on behalf of all others similarly
suited v. Paradigm Medical Industries, Inc., Thomas
Motter, Mark Miehle and John Hemmer, Case No. 2:03
CV00448TC. The complaint also indicates that it is a
"Class Action Complaint for Violations of Federal
Securities Law and Plaintiffs Demand a Trial by
Jury." We have retained legal counsel to review the
complaint, which appears to be focused on alleged
false and misleading statements pertaining to the
Blood Flow Analyzer(TM) and concerning a purchase
order from Valdespino Associates Enterprises and
Westland Financial Corporation.
More specifically, the complaint alleges that we
falsely stated in our Securities and Exchange
Commission filings and press releases that we had
received authorization to use an insurance
reimbursement CPT code from the CPT Code Research
and Development Division of the American Medical
Association in connection with the Blood Flow
Analyzer(TM), adding that the CPT code provides for
a reimbursement to doctors of $57.00 per patient for
use of the Blood Flow Analyzer(TM). The complaint
also alleges that on July 11, 2002, we issued a
press release falsely announcing that we had
received a purchase order from Valdespino Associates
Enterprises and Westland Financial Corporation for
200 sets of our entire portfolio of products, with
$70 million in systems to be delivered over a
two-year period, then another $35 million of orders
to be completed in the third year. As a result of
these statements, the complaint contends that the
price of our shares of common stock was artificially
inflated during the period from April 25, 2001
through May 14, 2003, and the persons who purchased
our common shares during that period suffered
substantial damages. The complaint requests judgment
for unspecified damages, together with interest and
attorney's fees.
--------------------------------------------------------------------------------
F-40
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments Litigation - Continued We dispute having issued
and false and misleading statements concerning the Blood
Contingencies Analyzer(TM) and a purchase order from Valdespino
Continued Associates Enterprises and Westland Financial
Corporation. On April 25, 2001, we issued a press
release that stated we had received authorization to
use common procedure terminology or CPT code number
92120 for our Blood Flow Analyzer(TM). This press
release was based on a letter we received from the
CPT Editorial Research and Development Department of
the American Medical Association authorizing use of
common procedure terminology or CPT code number
92120 for our Blood Flow Analyzer(TM), for
reimbursement purposes for doctors using the device.
Currently, there is reimbursement by insurance
payors to doctors using the Blood Flow Analyzer(TM)
in 22 states and partial reimbursement in four other
states. The amount of reimbursement to doctors using
the Blood Flow Analyzer(TM) generally ranges from
$56.00 to $76.00 per patient, depending upon the
insurance payor. Insurance payors providing
reimbursement for the Blood Flow Analyzer(TM) have
the discretion to increase or reduce the amount of
reimbursement. We are endeavoring to obtain
reimbursement by insurance payors in other states
where there is currently no reimbursement being
made. We believe we have continued to correctly
represent in our Securities and Exchange Commission
filings that we have received authorization from the
CPT Editorial Research and Development Department of
the American Medical Association to use CPT code
number 92120 for our Blood Flow Analyzer(TM), for
reimbursement purposes for doctors using the device.
--------------------------------------------------------------------------------
F-41
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments Litigation - Continued On July 11, 2002, we issued a
and press release that stated we received a purchase
Contingencies order from Valdespino Associates Enterprises and
Continued Westland Financial Corporation for 200 complete sets
of our entire product portfolio of diagnostic and
surgical equipment for Mexican ophthalmic
practitioners, to be followed by a second order of
100 sets of equipment. The press release was based
on a purchase order dated July 10, 2002 that we
entered into with Westland Financial Corporation for
the sale of 200 complete sets of our surgical and
diagnostic equipment to Mexican ophthalmic
practitioners. The press release also stated that
the initial order was for $70 million of our
equipment to be filled over a two-year period
followed by the second order of $35 million in
equipment to be completed in the third year. The
press release further stated that delivery would be
made in traunches of 25 complete sets of our
equipment, beginning in 30 days from the date of the
purchase order.
On September 13, 2002, the board of directors issued
a press release updating the status of our product
sales to the Mexican ophthalmic practitioners. In
that press release the board stated that we had been
in discussions for the prior nine months with
Westland Financial Corporation, aimed at supplying
our medical device products to the Mexican market.
In the past, we have had a business relationship
with Westland Financial. Upon investigation, the
board of directors had determined that the purchase
order referenced in the July 11, 2002 press release
was not of such a nature as to be enforceable for
the purpose of sales or revenue recognition. In
addition, we had not sent any shipment of medical
products to Mexican ophthalmic practitioners nor
received payment for those products pursuant to
those discussions. The September 13, 2002 press
release also stated that discussions were continuing
with Westland Financial Corporation regarding sales
and marketing activities for our medical device
products in Mexico, but we could not, at the time,
predict or provide any assurance that any
transactions would result.
--------------------------------------------------------------------------------
F-42
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments Litigation - Continued On June 2, 2003, a complaint
and was filed in the United States District Court
Contingencies captioned Michael Marrone v. Paradigm Medical
Continued Industries, Inc., Thomas Motter, Mark Miehle and
John Hemmer, Case No. 2:03 CV00513 PGC. On or about
June 11, 2003, a complaint was filed in the same
United States District Court captioned Milian v.
Paradigm Medical Industries, Inc., Thomas Motter,
Mark Miehle and John Hemmer, Case No. 2:03
CV00617PGC. Both complaints seek class action
status. These cases are substantially similar in
nature to the Meyer case, including the contention
that as a result of allegedly false statements
regarding the Blood Flow Analyzer(TM) and the
purchase order from Valdespino Associates
Enterprises and Westland Financial Corporation, the
price of our common stock was artificially inflated
and the persons who purchased our common shares
during the class period suffered substantial
damages. The cases request judgment for unspecified
damages, together with interest and attorneys' fees.
These cases have now been consolidated with the
Meyer case into a single action. We believe the
consolidated cases are without merit and intend to
vigorously defend and protect our interests in the
said cases.
We were issued a Directors and Officers Liability
and Company Reimbursement Policy by United States
Fire Insurance Company for the period from July 10,
2002 to July 10, 2003 that contains a $5,000,000
limit of liability, which is excess of a $250,000
retention. The officers and directors named in the
consolidated cases have requested coverage under the
policy. U.S. Fire is currently investigating whether
it may have a right to deny coverage for the
consolidated cases based upon policy terms,
conditions and exclusions or to rescind the policy
based upon misrepresentations contained in our
application for insurance.
--------------------------------------------------------------------------------
F-43
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments Litigation - Continued We have not paid any amounts
and toward satisfaction of any part of the $250,000
Contingencies retention that is applicable to the consolidated
Continued cases. We have advised U.S. Fire that we cannot pay
the $250,000 retention due to our current financial
circumstances. As a consequence, on January 8, 2004,
we entered into a non-waiver agreement with U.S.
Fire in which U.S. Fire agreed to fund and advance
our retention obligation in consideration for which
we have agreed to reimburse U.S. Fire the sum of
$5,000 a month, for a period of six months, with the
first of such payments due on February 15, 2004.
Thereafter, commencing on August 15, 2004, we are
currently required to reimburse U.S. Fire the sum of
$10,000 per month until the entire amount of
$250,000 has been reimbursed to U.S. Fire.
In the event U.S. Fire determines that we or the
former officers and directors named in the
consolidated cases are not entitled to coverage
under the policy, or that it is entitled to rescind
the policy, or should we be declared in default
under the non-waiver agreement, then we agree to pay
U.S. Fire, on demand, the full amount of all costs
advanced by U.S. Fire, except for those amounts that
we may have reimbursed to U.S. Fire pursuant to the
monthly payments due under the non-waiver agreement.
We will be in default under the non-waiver agreement
if we fail to make any payment due to U.S. Fire
thereunder when such payment is due, or institute
proceedings to be adjudicated as bankrupt or
insolvent. U.S. Fire's obligation to advance defense
costs under the agreement will terminate in the
event that the $5,000,000 policy limit of liability
is exhausted. If U.S. Fire denies coverage for the
consolidated cases under the policy and we are not
successful in defending and protecting our interests
in the cases, resulting in a judgment against us for
substantial damages, we would not be able to pay
such liability and, as a result, would be forced to
seek bankruptcy protection.
--------------------------------------------------------------------------------
F-44
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments Litigation - Continued On July 10, 2003, an action
and was filed in the United States District Court,
Contingencies District of Utah, by Innovative Optics, Inc. and
Continued Barton Dietrich Investments, L.P. Defendants include
us, Thomas Motter, Mark Miehle and John Hemmer,
former officers of the company. The complaint claims
that Innovative and Barton entered into an asset
purchase agreement with us on January 31, 2002, in
which we agreed to purchase all the assets of
Innovative in consideration for the issuance of
1,310,000 shares of the Company's common stock to
Innovative. The complaint claims we breached the
asset purchase agreement. The complaint also claims
that we allegedly made false and misleading
statements pertaining to the Blood Flow Analyzer(TM)
and concerning a purchase order from Valdespino
Associates Enterprises and Westland Financial
Corporation. The purpose of these statements,
according to the complaint, was to induce Innovative
to sell its assets and purchase the shares of our
common stock at artificially inflated prices while
simultaneously deceiving Innovative and Barton into
believing that the Company's shares were worth more
than they actually were. Had Innovative and Barton
known the truth, the complaint contends, they would
not have sold Innovative to us, would not have
purchased our stock for the assets of Innovative, or
would not have purchased the stock at the inflated
prices that were paid. The complaint further
contends that as a result of these statements,
Innovative and Barton suffered substantial damages
in an amount to be proven at trial.
The complaint also claims that 491,250 of the shares
to be issued to Innovative in the asset purchase
transaction were not issued on a timely basis and we
also did not file a registration statement with the
Securities and Exchange Commission within five
months of the closing date of the asset purchase
transaction. As a result, the complaint alleges that
the value of the shares of our common stock issued
to Innovative in the transaction declined, and
Innovative and Barton suffered damages in an amount
to be proven at trial. We filed an answer to the
complaint and also filed counterclaims against
Innovative and Barton for breach of contract. We
believe the complaint is without merit and intend to
vigorously defend and protect our interests in the
action.
--------------------------------------------------------------------------------
F-45
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments Litigation - Continued If we are not successful in
and defending and protecting our interests in this
Contingencies action, resulting in a judgment against us for
Continued substantial damages, and U.S. Fire denies coverage
in the litigation under the Directors and Officers
Liability and Company Reimbursement Policy, we would
not be able to pay such liability and, as a result,
would be forced to seek bankruptcy protection.
On October 14, 2003, an action was filed in the
Third Judicial District Court, Salt Lake County,
State of Utah, captioned Albert Kinzinger, Jr.,
individually and on behalf of all others similarly
situated vs. Paradigm Medical Industries, Inc.,
Thomas Motter, Mark Miehle, Randall A. Mackey, and
John Hemmer, Case No. 030922608. The complaint also
indicates that it is a "Class Action Complaint for
Violations of Utah Securities Laws and Plaintiffs
Demand a Trial by Jury." We have retained legal
counsel to review the complaint, which appears to be
focused on alleged false or misleading statements
pertaining to the Blood Flow Analyzer(TM). More
specifically, the complaint alleges that we falsely
stated in Securities and Exchange Commission filings
and press releases that we had received
authorization to use an insurance reimbursement CPT
code from the CPT Code Research and Development
Division of the American Medical Association in
connection with the Blood Flow Analyzer(TM), adding
that the CPT code provides for a reimbursement to
doctors of $57.00 per patient for the Blood Flow
Analyzer(TM).
--------------------------------------------------------------------------------
F-46
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments Litigation - Continued The purpose of these
and statements, according to the complaint, was to
Contingencies induce investors to purchase shares of our Series E
Continued preferred stock in a private placement transaction
at artificially inflated prices. The complaint
contends that as a result of these statements, the
investors that purchased shares of our Series E
preferred stock in the private offering suffered
substantial damages to be proven at trial. The
complaint also alleges that we sold Series E
preferred shares without registering the sale of
such shares or obtaining an exemption from
registration. The complaint requests rescission,
compensatory damages and treble damages, including
interest and attorneys' fees. We filed an answer to
the complaint. We believe the complaint is without
merit and intend to vigorously defend our interests
in the action. If we are not successful in defending
and protecting our interests in the action,
resulting in a judgment against us for substantial
damages, and U.S. Fire denies coverage in the
litigation under the Directors and Officers
Liability and Company Reimbursement Policy, we would
not be able to pay such liability and, as a result,
would be forced to seek bankruptcy protection.
An action was filed on June 20, 2003, in the Third
Judicial District Court, Salt Lake County, State of
Utah (Civil No. 030914195) by CitiCorp Vendor
Finance, Inc., formerly known as Copelco Capital,
Inc. The complaint claims that $49,626 plus interest
is due for the leasing of two copy machines that
were delivered to our Salt Lake City facilities on
or about April of 2000. The action also seeks an
award of attorney's fees and costs incurred in the
collection. We dispute the amounts allegedly owed,
asserting that the equipment we returned to the
leasing company did not work properly. A responsive
pleading has not yet been filed. We are currently
engaged in settlement discussions with CitiCorp.
An action was filed in June, 2003 in the Third
Judicial District Court, Salt Lake County, State of
Utah (Civil No. 030914719) by Franklin Funding, Inc.
in which it alleges that we had entered into a lease
agreement for the lease of certain equipment for
which payment is due. It is claimed that there is
due and owing approximately $89,988 after accruing
late fees, interest, repossession costs, collection
costs and attorneys' fees. On August 28, 2003, we
agreed to a settlement of the case with Franklin
Funding by agreeing to make 24 monthly payments of
$2,300 to Franklin Funding, with the first monthly
payment due on August 29, 2003.
--------------------------------------------------------------------------------
F-47
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments Litigation - Continued We received demand letters
and dated July 18, 2003, September 26, 2003 and November
Contingencies 10, 2003 from counsel for Douglas A. MacLeod, M.D.,
Continued a shareholder of the company. In the July 18, 2003
letter, Dr. MacLeod demands that he and certain
entities with which he is involved or controls,
namely the Douglas A. MacLeod, M.D. Profit Sharing
Trust, St. Marks' Eye Institute and Milan Holdings,
Ltd., be issued a total of 2,296,667 shares of our
common stock and warrants to purchase 1,192,500
shares of our common stock at an exercise price of
$.25 per share. Dr. MacLeod claims that these common
shares and warrants are owing to him and the related
entities under the terms of a mutual release dated
January 16, 2003, which he and the related entities
entered into with us. Dr. MacLeod renewed his
request for these additional common shares and
warrants in the September 26, 2003 and November 10,
2003 demand letters. We believe that Dr. MacLeod's
claims and assertions are without merit and that
neither he nor the related entities are entitled to
any additional shares of our common stock or any
additional warrants under the terms of the mutual
release. We intend to vigorously defend against any
legal action that Dr. MacLeod may bring.
On August 3, 2003, a complaint was filed against us
by Corinne Powell, a former employee, in the Third
Judicial District Court, Salt Lake County, State of
Utah (Civil No. 030918364). Defendants consist of
the Company and Randall A. Mackey, Dr. David M.
Silver and Keith D. Ignotz, directors of the
company. The complaint alleges that at the time we
laid off Ms. Powell on March 25, 2003, she was owed
$2,030 for business expenses, $11,063 for accrued
vacation days, $12,818 for unpaid commissions, the
fair market value of 50,000 stock options
exercisable at $5.00 per share that she claims she
was prevented from exercising, attorney's fees and a
continuing wage penalty under Utah law. We dispute
the amounts allegedly owed and intend to vigorously
defend and protect our interests in the action.
--------------------------------------------------------------------------------
F-48
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments and Litigation - Continued On September 10, 2003, an
and action was filed against us by Larry Hicks in the
Contingencies Third Judicial District Court, Salt Lake County,
Continued State of Utah, (Civil No. 030922220), for payments
due under a consulting agreement with us. The
complaint claims that monthly payments of $3,083 are
due for the months of October 2002 to October 2003
under a consulting agreement and, if the agreement
is terminated, for the sum of $110,000 minus
whatever we have paid Mr. Hicks prior to such
termination, plus costs, attorney's fees and a wage
penalty pursuant to Utah law. We dispute the amount
allegedly owed and intend to vigorously defend
against such action.
We are 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 our financial condition or results of
operations.
The Company may become or is subject to other
investigations, claims or lawsuits ensuing out of
conduct of its business, including those related to
environmental safety and health, product liability,
commercial transactions etc. The Company is
currently not aware of any other such items, which
it believes could have a material adverse effect on
the financial statements.
Royalty Agreements
The Company had a royalty agreement with the
president of OBF. The agreement provided for the
payment of 10% royalty of the net sales related to
the Blood Flow Analyzer.
During 2003, a settlement was reached with the
president of OBF whereby the royalty payments were
forfeited and no longer are an obligation of the
Company. The over-accrued amount of $147,000 was
reversed during 2003 to reflect the settlement
agreement.
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
expires when the United States patent rights expire
in September 2004. Through December 31, 2003, no
significant royalties have been paid under this
agreement.
--------------------------------------------------------------------------------
F-49
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments Royalty Agreements - Continued The Company has a
and royalty agreement with another company that
Contingencies developed a promotional CD for the Company. Through
Continued 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 is
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.
16. Fair Value The Company's financial instruments consist of cash,
of Financial receivables, payables, and notes payable. The
Instruments carrying amount of cash, receivables and payables
approximates fair value because of the short-term
nature of these items. The carrying amount of the
notes payable approximates fair value as the
individual borrowings bear interest at market
interest rates.
17. Recent In November 2002, the EITF reached a consensus on
Accounting Issue No.00-21, Revenue Arrangements with Multiple
Pronouncements Deliverables. EITF Issue No. 00-21 provides guidance
on how to account for certain arrangements that
involve the delivery or performance of multiple
products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to
revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF
Issue No. 00-21 did not have a material impact on
operating results or financial condition of the
Company as the Company followed the provisions of
Statement of Position ("SOP") 97-2, Software Revenue
Recognition, as modified by SOP 98-9, Modification
of SOP 97-2 with Respect to Certain Transactions,
which provide guidance for revenue recognition of
arrangements with multiple deliverables.
--------------------------------------------------------------------------------
F-50
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
17. Recent In December 2003, the FASB issued Interpretation No.
Accounting 46 ("FIN 46R") (revised December 2003),
Pronouncements Consolidation of Variable Interest Entities, an
Continued Interpretation of Accounting Research Bulletin No.
51 ("ARB 51"), which addresses how a business
enterprise should evaluate whether it has a
controlling interest in an entity though means other
than voting rights and accordingly should
consolidate the entity. FIN 46R replaces FASB
Interpretation No. 46 (FIN 46), which was issued in
January 2003. Before concluding that it is
appropriate to apply ARB 51 voting interest
consolidation model to an entity, an enterprise must
first determine that the entity is not a variable
interest entity (VIE). As of the effective date of
FIN 46R, an enterprise must evaluate its involvement
with all entities or legal structures created before
February 1, 2003, to determine whether consolidation
requirements of FIN 46R apply to those entities.
There is no grandfathering of existing entities.
Public companies must apply either FIN 46 or FIN 46R
immediately to entities created after January 31,
2003 and no later than the end of the first
reporting period that ends after December 15, 2004.
The adoption of FIN 46 had no effect on the
Company's consolidated financial position, results
of operations or cash flows.
In April 2003, FASB issued SFAS No. 149, Amendment
of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS 149 amends and clarifies
accounting for derivative instruments, including
certain derivative instruments embedded in other
contracts and for hedging activities under SFAS 133,
Accounting for Derivatives and Hedging Activities.
SFAS 149 is generally effective for derivative
instruments, including derivative instruments
embedded in certain contracts, entered into or
modified after June 30, 2003. The adoption of SFAS
149 did not have a material impact on the operating
results or financial condition of the Company.
--------------------------------------------------------------------------------
F-51
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
17. Recent In May 2003, the FASB issued SFAS 150, Accounting
Accounting for Certain Financial Instruments with
Pronouncements Characteristics of Both Liabilities and Equity. SFAS
Continued 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities
and equity and requires that those instruments be
classified as liabilities in statements of financial
position. Previously, many of those financial
instruments were classified as equity. SFAS 150 is
effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim
period beginning after June 15, 2003. On November 7,
2003, FASB Staff Position 150-3 was issued, which
indefinitely deferred the effective date of SFAS 150
for certain mandatory redeemable non-controlling
interests. As the Company does not have any of these
financial instruments, the adoption of SFAS 150 did
not have any impact on the Company's consolidated
financial statements.
In December 2003, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin
(SAB) No. 104, Revenue Recognition. SAB 104 revises
or rescinds portions of the interpretive guidance
included in Topic 13 of the codification of staff
accounting bulletins in order to make this
interpretive guidance consistent with current
authoritative accounting and auditing guidance and
SEC rules and regulations. The adoption of SAB 104
did not have a material effect on the Company's
results of operations or financial position.
--------------------------------------------------------------------------------
F-52
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures - Based on their
evaluations as of December 31, 2003, 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-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the 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 over financial reporting 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.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
As of March 31, 2004, the Company's executive officers and directors,
their ages and their positions are set forth below:
Name Age Position
---- --- --------
John Y. Yoon 40 President and Chief Executive Officer
Aziz A. Mohabbat 44 Vice President of Operations and Chief
Operating Officer
Randall A. Mackey, Esq. 58 Chairman of the Board, Secretary and
Director
David M. Silver, PhD. 62 Director
Keith D. Ignotz 56 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.
John Y. Yoon has served as the Company's President and Chief Executive
Officer since March 19, 2004. From June 2003 to March 19, 2004, Mr. Yoon served
as Senior Director of Marketing, Enterprise Voice Solutions Division of 3Com
Corporation. From 1997 to June 2003, he served as Senior Director of Product
Management and Director of Product Management of 3Com Corporation. During the
period from 1996 to 1997, Mr. Yoon was Director of Strategic Planning and
Product Development of US Robotics. During the period from 1993 to 1996, he
served as Manager of Marketing and Strategic Planning, Senior Director of
Product Management and Management of Product Development for Ericsson, Inc. From
1990 to 1993, Mr. Yoon was Manager of Public Service Marketing and Product Line
Manager Mobile Radios for Ericsson, Inc. During the period from 1986 to 1988, he
was Product Planner of Business and Industrial Trucking and Marketing Research
Analyst for General Electric Mobile Communications. Mr. Yoon received a B.A.
degree in Economics from Harvard College in 1985 and an M.B.A. degree from Duke
University in 1992.
Aziz A. Mohabbat has served as Chief Operating Officer of the Company
since March 23, 2004 and from August 2002 to March 2003, and as Vice President
of Operations since March 23, 2004 and from 2001 to March 2003. From 2000 to
2001, he served as Managing Director of the San Diego Division of the Company
and from 1999 to 2000 as its Regulatory Affairs and Quality Assurance Manager.
From March 2003 to March 2004, Mr. Mohabbat served as Division Manager of the
Medical Division of TUV Rheilland of North America, a medical products safety
and compliance services company. From 1997 to 1999, he served as Operations and
Regulatory Affairs and Quality Assurance Manager of Codan U.S., a subsidiary of
Codan GmbH, a manufacturer of disposable sterile and non-sterile medical
devices. Prior to 1989, Mr. Mohabbat held various management and bioengineering
positions in the medical laboratory and diagnostics field in the Eye Care Clinic
of the University Hospital-Eppendorf and the General Hospital of Barmbek in
Hamburg, Germany. Mr. Mohabbat received a B.S. degree in Medical Laboratory
Technology in 1986 from St. George Hospital College in Hamburg, Germany. He is a
member of the American Society for Quality Assurance.
32
Randall A. Mackey, Esq. has been the Company's Chairman of the Board
since August 20, 2002, and a director since January 2000. He had served as a
director of the Company from November 1995 to September 1998. Mr. Mackey has
been President of the Salt Lake City law firm of Mackey Price & Thompson 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 the Harvard Business School in 1970, a J.D.
degree from Columbia Law School in 1975 and a B.C.L. degree from Oxford
University in 1977. Mr. Mackey has also served as Chairman of the Board from
June 2001 to May 2003, and as a director from 1998 to May 2003 of Cimetrix,
Incorporated, a software development company. Mr. Mackey has additionally served
as Chairman of the Board from July 2000 to July 2003 and as a trustee from 1993
to July 2003 of Salt Lake Community College.
David M. Silver, Ph.D. has been a director 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 has been a director since 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 and as a member of the American Marketing Association of
the American Association of Diabetes Education.
Appointment of New President and Chief Executive Officer
On March 18, 2004, John Y. Yoon was appointed as the Company's
President and Chief Executive Officer, replacing Jeffrey F. Poore who had served
in those positions from March 19, 2003 to March 18, 2004.
Appointment of New Chief Operating Officer
On March 23, 2004, Aziz A. Mohabbat was appointed as the Company's Vice
President of Operations and Chief Operating Officer, replacing David I.
Cullumber who had served as Chief Operating Officer since November 6, 2003. Mr.
Mohabbat had previously served as the Company's Chief Operating Officer from
August 2002 to March 2003, and as Vice President of Operations from 2001 to
March 2003.
Board Meetings and Committees
The Board of Directors held a total of six meetings during the fiscal
year ended December 31, 2003. No director attended fewer than 75% of all
meetings of the Board of Directors during the 2003 fiscal year. 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 one time during
the fiscal year. The Audit Committee is primarily responsible for reviewing the
services performed by its independent public accountants and internal audit
department and evaluating its 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 one time during the fiscal year. The
Compensation Committee is primarily responsible for reviewing compensation of
executive officers and overseeing the granting of stock options.
Pursuant to Item 406 of Regulation S-K under the Securities Exchange
Act of 1934, the Company has not yet adopted a code of ethics that applies to
its principle executive officer, principal financial officer, controller or
persons performing similar functions. The Company is still in the process of
studying this issue and intends to adopt a code of ethics in the near future.
The Company's Board of Directors has determined that Keith D. Ignotz,
who currently serves as a director of the Company as well as a member of the
Company's audit committee, is an independent audit committee financial expert.
33
Item 11. Executive Compensation
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, and other executive officers whose salary and
bonus for all services in all capacities exceed $100,000 for the fiscal years
ended December 31, 2003, 2002 and 2001.
Summary Compensation Table
Annual Compensation Long Term Compensation
Awards Payouts
Other Securities
Annual Restricted Underlying Long-term All Other
Name and Compen- Stock Options/ Incentive Compensa-
Principal Position Year Salary$ Bonus($) sation($)(6) Awards($) SARs(#) Payouts($) tion($)
------------------ ---- ------- -------- ------------ --------- ------- ---------- ---------
Jeffrey F. Poore 2003(1) $136,015 0 0 0 1,000,000(6) 0 0
Former President
and Chief
Executive Officer
David I. 2003(1) $ 22,312 0 $16,616(7) 0 150,000(8) 0 0
Cullumber,
Former Chief
Operating Officer
and Chief
Technical Officer
Gregory C. Hill 2003(1) $ 34,000 0 0 0 0 0 0
Former Vice
President of
Finance and
Chief Financial
Officer
Thomas F. Motter 2002(2) $187,483(9) 0 0 0 0 0 $19,750(4)(5)
Former Chairman 2001(3) $200,000 $ 22,380(10) 0 0 925,000(11) 0 $ 6,000(4)
of the Board and
Chief Executive 0
Officer
Mark R. Miehle 2002(2) $134,202 0 0 0 55,000(12) 0 $18,000(4)(14)
Former President 2001(3) $150,000 0 0 0 110,000(13) 0 $ 6,000(4)
and Chief
Operating Officer
Aziz A. 2003(1) $ 24,219 0 0 0 0 0 0
Mohabbat 2002(2) $126,878 0 0 0 0 0 0
Vice President of
Operations(15)
Heber C. 2003(1) $ 36,855 0 0 0 150,000(17) 0 0
Maughan 2002(2) $114,416 0 0 0 0 0 0
Former Chief 2001(3) $ 27,500 0 0 0 30,000(18) 0 0
Financial
Officer(16)
--------------------
(1) For the fiscal year ended December 31, 2003
(2) For the fiscal year ended December 31, 2002
(3) For the fiscal year ended December 31, 2001
(4) The amounts under "All Other Compensation" for 2003, 2002 and 2001
include payments related to the operation of automobiles and/or
automobiles and insurance by the named executives.
34
(5) The amounts under "All Other Compensation" for 2002 include payments
related to the residential housing accommodations for its employees,
living outside of Utah while they were working at its corporate
headquarters in Salt Lake City, leased from Mr. Motter at $2,500 per
month.
(6) On March 19, 2003, its board of directors granted Mr. Poore options to
purchase 1,000,000 shares of its common stock at an exercise price of
$.16 per share.
(7) The Company paid A-Mech Engineering, Inc. a total of $16,616 for
consulting services during 2003. From 1982 to August 2003, Mr.
Cullumber served as President of A-Mech Engineering, Inc.
(8) On November 6, 2003, its board of directors granted Mr. Cullumber
options to purchase 150,000 shares of its common stock at an exercise
price of $.21 per share.
(9) Although Mr. Motter resigned as Chairman and Chief Executive Officer on
August 30, 2002, he continued to receive his salary under the terms of
his employment agreement through December 16, 2002.
(10) The Company awarded Mr. Motter a cash bonus in June 2001.
(11) On September 11, 2001, the Company granted Mr. Motter options to
purchase 925,000 shares of its common stock at an exercise price of
$2.75 per share.
(12) On January 29, 2002, the Company's Board of Directors granted Mr.
Miehle options to purchase the 55,000 shares of its common stock at an
exercise price of $2.75 per share.
(13) On September 11, 2001, the Company's Board of Directors granted Mr.
Miehle options to purchase 110,000 shares of its common stock at an
exercise price of $2.75 per share.
(14) On September 3, 2002, the Company entered into a consulting agreement
with Mr. Miehle in which the Company is required to pay him monthly
consulting fees of $5,000 over a period of six months. The Company paid
him a total of $15,000 for consulting services during the months of
September, October and November of 2002.
(15) Mr. Mohabbat was named as Interim Chief Operating Officer on August 30,
2002. He was not an officer in prior years.
(16) Mr. Maughan was named as Interim Chief Executive Officer on August 30,
2002. He was appointed Vice President of Finance, Treasurer and Chief
Financial Officer on October 1, 2001.
(17) On May 13, 2003, the Company's Board of Directors granted Mr. Maughan
options to purchase 150,000 shares of its common stock at an exercise
price of $.16 per share.
(18) On October 1, 2001, the Company's Board of Directors granted options
Mr. Maughan options to purchase 30,000 shares of its common stock at an
exercise price of $2.75 per share.
Options
The following table sets forth information regarding stock options
granted during the fiscal year ended December 31, 2003, to each named executive
officer.
Option Grants in Last Fiscal Year
Individual Grants
Percentage of
Number of Total
Securities Options Exercise
Underlying Granted to Price
Options Employees in Per Share Expiration
Name Granted (#) Fiscal Year(%) ($/Sh) Date
---- ----------- -------------- ------ ----
Jeffrey F. Poore.............1,000,000(1) 56.3% $.16 3/19/08
David I. Cullumber........... 150,000(2) 8.5% $.21 11/6/08
Gregory C. Hill.............. 0 -- -- --
Heber C. Maughan............. 150,000(3) 8.5% $.16 5/13/08
Aziz A. Mohabbat............. 0 -- -- -
(1) Options for 800,000 shares vested on March 19, 2003, options for an
additional 100,000 shares vest on March 19, 2004, and options for the
remaining 100,000 shares vest on March 19, 2005.
(2) Options vest in three equal annual installments, beginning on November
6, 2003. (3) Options vest in three equal annual installments, beginning
on May 13, 2003.
The following table sets forth information regarding unexercised
options to acquire shares of the Company's common stock held as of December 31,
2003, by each named executive officer.
35
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 2003(#) at December 31, 2003($)
----------------------- -----------------------
Shares Acquired Value
Name on Exercise Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
Jeffrey F. Poore.......... 0 0 800,000 200,000 0 0
David I. Cullumber........ 0 0 50,000 100,000 0 0
Gregory C. Hill........... 0 0 0 0 0 0
Heber C. Maughan............ 0 0 50,000 100,000 0 0
Aziz A. Mohabbat............ 0 0 0 0 0 0
Director Compensation
On July 11, 2003, 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 its common stock at an exercise price of $.25 per share. In
addition, outside directors are also reimbursed for their expenses in attending
board and committee meetings. Directors are not precluded from serving the
Company in any other capacity and receiving compensation therefore. The options
were not issued at a discount to the then market price.
Employee 401(k) Plan
In October 1996, the Company's board of directors adopted a 401(k)
Retirement Savings Plan. Under the terms of the 401(k) plan, effective as of
November 1, 1996, the Company may make discretionary employer matching
contributions to its employees who choose to participate in the plan. The plan
allows the board to determine the amount of the contribution at the beginning of
each year. The Board adopted a contribution formula specifying that such
discretionary employer matching contributions would equal 100% of the
participating employee's contribution to the plan up to a maximum discretionary
employee contribution of 3% of a participating employee's compensation, as
defined by the plan. All persons who have completed at least six months' service
with the Company and satisfy other plan requirements are eligible to participate
in the plan.
1995 Stock Option Plan
The Company adopted a 1995 Stock Option Plan, for the officers,
employees, directors and consultants of its company on November 7, 1995. The
plan authorized the granting of stock options to purchase an aggregate of not
more than 300,000 shares of its common stock. On February 16, 1996, options for
substantially all 300,000 shares were granted. On June 9, 1997, its 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, its 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, its 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, its shareholders approved an amendment to the
1995 plan to increase the number of shares of common stock reserved for issuance
thereunder from 1,700,000 shares to 2,700,000 shares. On June 13, 2003, its
shareholders approved an amendment to the plan to increase the member of shares
of common stock reserved for issuance thereunder from 2,700,000 shares to
3,700,000 shares.
The compensation committee administers the 1995 Stock Option 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. Options granted under the plan may be either incentive stock options,
as such term is defined in the Internal Revenue Code, or non-incentive stock
options. Incentive stock options may only be granted to persons who are
employees. Non-incentive stock options may be granted to any person, including,
but not limited to, its employees, independent agents, consultants as the
compensation committee believes has contributed, or will contribute, to its
success as the compensation committee believes has contributed, or will
contribute, to its success. The compensation committee determines the exercise
price of options granted under the 1995 Stock Option Plan, provided that, in the
case of incentive stock options, such price is not less than 100% (110% in the
case of incentive stock options granted to holders of 10% of voting power of its
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 incentive stock options become
exercisable for the first time in any year cannot exceed $100,000.
The term of each option shall not be more than ten years (five years in
the case of incentive stock options granted to holders of 10% of the voting
power of its stock) from the date of grant. The Board of Directors has a right
to amend, suspend or terminate the 1995 Stock Option Plan at any time; provided,
however, that unless ratified by its shareholders, no amendment or change in the
plan will be effective that would increase the total number of shares that 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.
36
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
employment agreement requires Mr. Motter to devote substantially all of his
working time as the Company's Chairman and Chief Executive Officer, 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 employment agreement provides for
the payment of an initial base salary of $135,000, effective as of January 1,
1998. The employment agreement also provides for salary increases and bonuses as
shall be determined at the discretion of the Board of Directors. Effective as of
October 1, 1999, the Board of Directors approved an increase in Mr. Motter's
annual base salary to $160,000, and effective as of July 1, 2000, the board
approved an increase in his annual base salary to $200,000, which remained in
effect during 2002. Mr. Motter resigned as Chairman and Chief Executive Officer
on August 30, 2002. He continued to receive his salary under the terms of the
employment agreement through December 16, 2002.
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
employment agreement required Mr. Miehle to devote substantially all of his
working time as the Company's President and Chief Operating Officer, 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 employment 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 employment 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 the employment
agreement with 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.
The Company entered into an employment agreement with Jeffrey F. Poore,
which commenced on March 19, 2003 and expires on March 19, 2006. The employment
agreement requires Mr. Poore to devote substantially all of his working time as
the Company's President and Chief Executive Officer, provided that he may be
terminated for "cause" (as provided in the agreement) and prohibits him from
competing with the Company for two years following the termination of his
employment agreement. The employment agreement provides for the payment of an
initial base salary of $175,000, effective as of March 19, 2003. The employment
agreement also provides for salary increases and bonuses as shall be determined
at the discretion of the Board of Directors. The employment agreement further
provides for the issuance of stock options to purchase 1,000,000 shares of the
Company's common stock at $.16 per share, of which options to purchase 800,000
shares of common stock shall vest on March 19, 2003, options for an additional
100,000 shares of common stock shall vest on March 19, 2004, and options for an
additional 100,000 shares of common stock shall vest on March 19, 2005.
The Company entered into an employment agreement with John Y. Yoon,
which commenced on March 18, 2004 and expires on March 18, 2007. The employment
agreement requires Mr. Yoon to devote substantially all of his working time as
the Company's President and Chief Executive Officer, providing that he may be
terminated for "cause" (as provided in the agreement) and prohibits him from
competing with the Company for two years following the termination of his
employment agreement. The employment agreement provides for the payment of an
initial base salary of $175,000, effective as of April 1, 2004. The employment
agreement also provides for salary increases and bonuses as shall be determined
at the discretion of the Board of Directors. The employment agreement further
provides for the issuance of stock options to purchase 1,000,000 shares of the
Company's common stock at $.13 per share. The options vest in 36 equal monthly
installments of 27,778 shares, beginning on April 30, 2004 until such shares are
vested.
In the event of a change of control of the Company, then all
outstanding stock options granted to Mr. Yoon shall be immediately vested. A
change of control shall be deemed to have occurred if (i) a tender offer shall
be made and consummated for the ownership of more than 25% of the Company's
outstanding shares; (ii) the Company shall be merged or consolidated with
another corporation and, as a result, less than 25% of the outstanding common
shares of the surviving corporation shall be owned in the aggregate by the
Company's former shareholders, as the same shall have listed prior to such
merger or consolidation; (iii) the Company shall sell all or substantially all
of its assets to another corporation that is not a wholly-owned subsidiary or
affiliate; (iv) as a result of any contested election for the Board of
Directors, or any tender or exchange offer, merger of business combination or
sale of assets, the persons who were directors of the Company before such a
transaction shall cease to constitute a majority of the Board of Directors; or
(v) a person other than an officer or director of the Company shall acquire more
than 20% of the outstanding shares of common stock of the Company.
Severance Agreement
On August 30, 2002, the Board of Directors terminated the employment
agreement with Mark R. Miehle who had been serving as its President and Chief
Operating Officer. Under the terms of the termination of Mr. Miehle's employment
agreement, the stock options issued to him on April 19, 2000 to purchase 150,000
shares of its common stock at $6.00 per share, on September 11, 2001 to purchase
110,000 shares of its common stock at $2.75 per share, and on January 28, 2002
to purchase 55,000 shares of its common stock at $2.75 per share were fully
vested as of the date of such termination and continue to be exercisable for a
period of one year following the termination of a consulting agreement, at which
time such options would expire.
The termination of the employment agreement also required the Company
to enter into a consulting agreement with Mr. Miehle. Under the terms of the
consulting agreement, Mr. Miehle is to provide consulting services to the
Company for a period of six months for a fee of $5,000 per month. The consulting
agreement is to be automatically renewed for an additional six months at a fee
of $3,000 per month unless the Company deliver written notice to Miehle at least
30 days prior to the end of the initial six month term that the Company will not
renew the agreement. The Company paid Mr. Miehle a total of $15,000 under the
consulting agreement for consulting services during the months of September,
October and November of 2002. The Company also provided written notice to Mr.
Miehle more than 30 days prior to the end of the initial six month term of the
consulting agreement of its intention not to renew the agreement.
37
Consulting Agreement
On April 3, 2003, the Company entered into a consultant agreement with
Kinexsys Corporation ("Kinexsys"). Under the terms of the agreement, Kinexsys
through its Senior Partner, Timothy R. Forstrom, is to prepare a capital markets
plan and a corporate positioning and communications plan for the Company, for
which Kinexsys is to receive warrants to purchase up to 200,000 shares of the
Company's common stock at an exercise price of $.16 per share. The capital
markets plan is to include a detailed analysis of the Company's capital market
structure in relation to current investors, market trends and projected equity
movements, and recommendations on capital management strategies. The corporate
positioning and communications plan is to include a corporate positioning matrix
for markets, analysts, customers and partners, and a communications plan. The
agreement is for a one-year term but may be renewed at the option of both
parties.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to
beneficial ownership of the Company's common stock as of December 31, 2003 for
(i) each executive officer (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)
502 South M Street
Tacoma Washington 98405 2,538,451 10.0%
John Y. Yoon - *
Jeffrey F. Poore(3) 800,000 3.1%
Dr. David M. Silver(4) 741,166 2.9%
Randall A. Mackey(4) 725,000 2.8%
Keith D. Ignotz(5) 454,560 1.8%
David I. Cullumber 50,000 *
Gregory C. Hill - *
Heber C. Maughan(6) 50,000 *
Aziz A. Mohabbat - *
Executive officers and directors
as a group (eight persons) 2,820,726 11.1%
-----------------
*Less than 1%.
(1) Unless otherwise indicated, the address of each listed stockholder is
c/o Paradigm Medical Industries, Inc., 2355 South 1070 West, Salt Lake
City, Utah, 84119.
(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 800,000 shares of common stock granted to
Dr. Poore that are currently exercisable or will become exercisable
within 60 days of December 31, 2003.
(4) Includes options to purchase 725,000 shares of common stock granted to
each of Dr. Silver and Mr. Mackey that are currently exercisable or
will become exercisable within 60 days of December 31, 2003.
(5) Includes options to purchase 453,851 shares of common stock granted to
Mr. Ignotz that are currently exercisable or will become exercisable
within 60 days of December 31, 2003.
(6) Includes options to purchase 50,000 shares of common stock granted to
Mr. Maughan that are currently exercisable or will become exercisable
within 60 days of December 31, 2003.
Item 13. 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 and will be on terms no less
favorable to the Company than those that could be obtained from unaffiliated
parties.
Thomas F. Motter, the Company's former Chairman of the Board and Chief
Executive Officer, leased his former residence to the Company for $2,500 per
month. The primary use of the residential property was for housing
accommodations for its employees living outside of Utah while they were working
at its corporate headquarters in Salt Lake City. The Company paid $2,500 and
$14,000 in rent during 2003 and 2002, respectively. This agreement was
terminated on January 31, 2003.
The Company entered into a consulting agreement with Mark R. Miehle,
the its former president and chief operating officer 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 $1,000 and $15,000 under this agreement during 2003 and 2002,
respectively, and had an accrual of $5,000 as of December 31, 2002.
38
Randall A. Mackey, a director 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 in connection with various corporate matters.
Legal fees and expenses paid to Mackey Price & Thompson for the fiscal years
ended December 31, 2003 and 2002, totaled $97,000 and $167,000, respectively. As
of December 31, 2003, the Company owed this firm $136,000, which is included in
accounts payable.
PART IV
Item 14. Principal Accountant Fees and Services
Fees for the 2003 annual audit of the financial statements and related
quarterly review services were approximately $51,000. Fees in 2003 related to
the review of registration statements and assistance in responding to SEC
comments were approximately $14,000. Fees in 2003 for edgarization of filings
were approximately $8,000. Fees in 2003 for tax return preparation were
approximately $10,000. Other fees in 2003 for meetings and other consultation
were approximately $3,000.
Fees for the 2002 annual audit of the financial statements and related
quarterly review services were approximately $43,000. Fees in 2002 related to
the review of registration statements, private placement memorandums, proxy
statements, other SEC filings, and assistance in responding to SEC comments were
approximately $20,000. Fees in 2002 for edgarization of filings were
approximately $9,000. Other fees in 2002 for meetings and other consultation
were approximately $2,000.
Item 15. 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.
Exhibit
No. Document Description
------- --------------------
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(10)
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 Specimen Series C Convertible Preferred Stock Certificate(4)
4.8 Certificate of the Designations, Powers, Preferences and Rights of the
Series C Convertible Preferred Stock(4)
4.9 Specimen Series D Convertible Preferred Stock Certificate (6)
4.10 Certificate of the Designations, Powers, Preferences and Rights of the
Series D Convertible Preferred Stock (7)
4.11 Warrant to Purchase Common Stock with Cyndel & Co. (6)
4.12 Warrant to Purchase Common Stock with R.F. Lafferty & Co., Inc. (6)
4.13 Warrant to Purchase Common Stock with Dr. Michael B. Limberg (7)
4.14 Warrant to Purchase Common Stock with John W. Hemmer (7)
4.15 Stock Purchase Warrant with Triton West Group, Inc.(9)
4.16 Warrant to Purchase Common Stock with KSH Investment Group, Inc.(9)
4.17 Warrant to Purchase Common Stock with Consulting for Strategic Growth,
Ltd.(9)
4.18 Certificate of Designations, Powers, Preferences and Rights of the
Series G Convertible Preferred Stock (14)
5.1 Opinion of Mackey Price & Thompson
10.1 Exclusive Patent License Agreement with PhotoMed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 1995 Stock Option Plan (1)
10.4 Employment Agreement with Thomas F. Motter (5)
10.5 Stock Purchase Agreement with Ocular Blood Flow, Ltd. and Malcolm
Redman (7)
10.6 Consulting Agreement with Malcolm Redman (7)
10.7 Royalty Agreement with Malcolm Redman (7)
10.8 Registration Rights with Malcolm Redman (7)
10.9 Employment Agreement with Mark R. Miehle (8)
10.10 Agreements with Steven J. Bayern and Patrick M. Kolenik (8)
10.11 Private Equity Line of Credit Agreement with Triton West Group, Inc.
(9)
10.12 Asset Purchase Agreement with Innovative Optics, Inc. and Barton
Dietrich Investments, L.P.(10)
10.13 Escrow Agreement with Innovative Optics, Inc., Barton Dietrich
Investments, L.P. (10)
10.14 Assignment and Assumption Agreement with Innovative Optics, Inc.(10)
10.15 General Assignment and Bill of Sale with Innovative Optics, Inc.(10)
10.16 Non-Competition and Confidentiality Agreement with Mario F. Barton(10)
10.17 Termination of Employment Agreement with Mark R. Miehle(12)
10.18 Consulting Agreement with Mark R. Miehle(12)
39
10.19 Employment Agreement with Jeffrey F. Poore (13)
10.20 License Agreement with Sunnybrook Health Science Center(15)
10.21 Major Account Facilitator Contract(15)
10.22 Mutual Release with Douglas A. MacLeod, M.D. and Others(15)
10.23 Purchase Agreement with American Optisurgical, Inc.(15)
10.24 Purchase Order with Westland Financial Corporation(16)
10.25 Non-Waiver Agreement with United States Fire Insurance Company(16)
10.26 Employment Agreement with John Y. Yoon(17)
10.27 Consulting Agreement with Dr. John Charles Casebeer
10.28 Consulting Agreement with Kinexsys Corporation
31.1 Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 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.
(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 Report on Form 10-QSB, as filed on
November 12, 1998.
(6) Incorporated by reference from Registration Statement on Form SB-2, as
filed on April 29, 1999.
(7) Incorporated by reference from Report on Form 10-QSB, as filed on
August 16, 2000.
(8) Incorporated by reference from Report on Form 10-QSB, as filed on
November 1, 2000.
(9) Incorporated by reference from Report on Form 10-KSB, as filed on April
16, 2001.
(10) Incorporated by reference from Current Report on Form 8-K, as filed on
March 5, 2002.
(11) Incorporated by reference from Amendment No. 1 to Registration
Statement on Form S-3, as filed on March 20, 2002.
(12) Incorporated by reference from Report on Form 10-QSB, as filed on
November 18, 2002.
(13) Incorporated by reference from Registration Statement on Form SB-2, as
filed on July 7, 2003.
(14) Incorporated by reference from Report on Form 10-QSB, as filed on
November 14, 2003.
(15) Incorporated by reference from Amendment No. 2 to Registration
Statement on Form SB-2, as filed on December 15, 2003.
(16) Incorporated by reference from Amendment No. 3 to Registration
Statement on Form SB-2, as filed on February 27, 2004.
(17) Incorporated by reference from Current Report on Form 8-K, as filed on
March 23, 2004.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 2003.
40
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, 2004 By: /s/John Y. Yoon
-------------------------------------
John Y. Yoon,
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, 2004
---------------------- Secretary
Randall A. Mackey
/s/David M. Silver Director April 14, 2004
----------------------
David M. Silver, Ph.D.
/s/Keith D. Ignotz Director April 14, 2004
----------------------
Keith D. Ignotz
/s/John Y. Yoon President and Chief Executive April 14, 2004
---------------------- Officer(Principal Executive
John Y. Yoon Officer)
/s/Luis A. Mostacero Controller (Principal Financial April 14, 2004
---------------------- and Accounting Officer)
Luis A. Mostacero
41