SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 (FEE REQUIRED), OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM
____________ TO ____________.
COMMISSION FILE NO. 0-17816
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0148208
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
47257 FREMONT BOULEVARD, FREMONT, CALIFORNIA 94538
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 623-9001
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
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 Rule 405
of Regulation S-K 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-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $35,151,000 as of March 21,
1996 based upon the price on the Over-The-Counter market for that date.
There were 25,280,056 of the Registrant's Common Stock issued and outstanding on
March 21, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, and 13 of Part III incorporate information by reference from
the Proxy Statement for the 1996 Annual Meeting of Stockholders.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Sunrise Technologies International, Inc. (the "Company") develops,
manufactures and markets laser systems for applications in ophthalmology and
dentistry. In addition, the Company has developed, manufactures and markets an
air abrasive cavity preparation system for dentistry (the "MicroPrep(TM)").
Through the end of 1991, the Company was the exclusive developer and
manufacturer of dental laser systems for American Dental Technologies, Inc.
("ADT"), formerly known as American Dental Laser, Inc., and derived
substantially all of its revenues from the sale of the dLase, 300 Dental Laser
system (the "dLase 300 system") to ADT for distribution in the United States and
overseas markets. ADT commenced foreign sales of the dLase 300 system in
December 1988 for the treatment of caries (tooth decay) and soft tissue (such as
gingivectomies). Following the clearance by the United States Food and Drug
Administration ("FDA") to market the product for soft tissue applications, the
Company commenced distributing the product in the United States in May 1990. The
Company filed a Pre-Market Approval application ("PMA") for commercial sales of
the dLase 300 in the United States for treatment of hard tissue in October 1988,
which was not recommended for approval in August, 1990 and again denied in
February 1996. The Company is currently evaluating this development in relation
to its overall marketing of the dental laser.
Since mid-1992, the Company has focused a significant portion of its
efforts on engineering and development of its laser corneal shaping product (the
"LTK system") for the treatment of refractive errors of the eye, such as myopia,
hyperopia and astigmatism. The LTK system is based upon patented technology
acquired in the Company's acquisitions of in-process technology from Laser
Biotech, Inc. and Emmetropix Corporation in 1992. The LTK system was introduced
overseas in the fourth quarter of 1993 for the treatment of hyperopia and
astigmatism. The Company conducted Phase IIa clinical trials of this system for
the treatment of hyperopia in the United States pursuant to an IDE from the
United States Food and Drug Administration ("FDA") through 1994. In February
1995, the Company filed its request with the FDA to commence Phase IIb clinical
trials. In a March 1995 letter, the FDA cited various deficiencies in the
Company's February letter and requested additional information. In December
1995, the Company submitted the requested additional information. In January
1996, the FDA responded to the Company's submittal by requesting current
follow-up data on all Phase IIa patients. In March 1996, the Company provided
the current follow-up data on all Phase IIa patients and expects that it will be
able to expand its study to Phase IIb in the second quarter of 1996. (See
"Products", "Government Regulation", "Patents and Licenses" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations").
In April 1993, the Company commenced development of the MicroPrep, an air
abrasive cavity preparation system, pursuant to a joint development and
exclusive manufacturing agreement with Danville Engineering, Inc. The Company
filed a 510(k) application with the FDA in June 1993, and received FDA market
clearance during the second quarter of 1994. (See "Products" and "Government
Regulation"). Initial shipment of the product began in June 1994. In October
1995, the Company introduced the Associate, a table-top version of the
MicroPrep.
The Company has incurred substantial losses in the past three years which
have seriously depleted its working capital. Sales of its existing dental
products at current levels will not be sufficient to sustain both the existing
business and the continued development and regulatory licensing of additional
products including the LTK system. The Company has been able to raise additional
working capital for all aspects of its business through the private placement of
its common stock. These private placements raised $13,051,000 in 1994 and 1995
in new equity for the Company. The Company is seeking to raise additional
working capital for all aspects of its business. If the Company is unable to
obtain additional working capital, it may be forced to substantially curtail its
activities and could, under certain circumstances, be forced to eliminate or
suspend operations.
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PRODUCTS
DENTAL
SUNLASE DENTAL LASER SYSTEMS
The SunLase series of dental laser systems are portable laser systems
designed to be used in dentistry, without the use of local anesthetic, for hard
tissue applications such as treatment of dental caries (cavities) and
pre-carious dental lesions (the precursor of cavities) and for soft tissue
cutting procedures in the oral cavity.
The Company introduced the SunLase 800 for sales in international markets
during the third quarter of 1992 for hard and soft tissue applications. The
SunLase 800, which was developed using technology from the Company's ophthalmic
and surgical laser technologies, uses a pulsed Nd:YAG with a variable power of
0.3 watts to 8 watts and provides a choice of pulse rates from 10 to 50 pulses
per second. The SunLase 800 incorporates a memory feature that allows the
practitioner the choice of up to eight programmable treatment settings. The
application of solid-state laser technology provides low-cost, efficient and
reliable operations. No special utilities are required and the unit plugs into
any standard electrical outlet.
In March 1993, the Company introduced two new dental laser systems in the
United States market for soft tissue applications--the SunLase 400, a four watt
dental laser system and the SunLase Master, an eight watt dental laser system
with a pulse rate of from 10 pulses per second to 100 pulses per second. The
Company obtained FDA clearance to market these procedures prior to their
introduction.
MICROPREP DENTAL APPLICATIONS
The Company entered into a joint development agreement with Danville
Engineering in April 1993, to develop the MicroPrep, a low cost, compact,
microprocessor-controlled air abrasive unit. Pursuant to the terms of the
agreement, Danville Engineering provides the air-abrasive module for
incorporation into the MicroPrep. In addition, Danville Engineering may act as a
non-exclusive distributor of the product. The MicroPrep uses a high speed air
stream containing small particles which when directed at teeth, have an abrasive
action that can be used to cut enamel and dentin, thereby prepare a cavity for
restorative material. The air abrasive method allows for rapid cutting of the
tooth structure with minimal heat, vibration and pressure, thereby permitting
cavity preparation without the use of local anesthetic in most cases. In cases
where the tooth is hypersensitive, pulpal stimulation can be controlled by
reducing the pressure of abrasive material delivered to the tooth structure.
The MicroPrep Director is approximately suitcase-sized (similar to the
Company's dental laser packaging) and has a built-in compressor which improves
the portability of the system as compared to the competitive product which uses
the dentist's existing compressed air supply. The Director utilizes a standard
115 volt outlet, delivers abrasive at from 80 psi to 120 psi, and operates at
three different pressures, three different abrasive concentrations and also has
a pulsed mode to allow the dentist innumerable variations on delivering abrasive
to the target tooth structure. The Company filed a 510(k) with the FDA in June
1993 and received clearance to market the product in May 1994. Initial product
shipment began in June 1994. In October 1995, the Company introduced the
"Associate," a table-top version of the MicroPrep. The Company recorded nominal
shipments of the Associate in 1995.
OPHTHALMIC
OPHTHALMIC LASER SYSTEM FOR GLAUCOMA
In 1990, the Company developed the gLase 210 ophthalmic system (the "gLase
210 system"), a holmium laser system designed to perform a filtering procedure
for the treatment of glaucoma. Conventional filtering procedures, whereby a
permanent drainage duct is created to relieve the pressure in the eye, is a
difficult surgical procedure and is currently being performed only by a limited
number of glaucoma specialists. The gLase 210 system emits radiation at a
wavelength that is highly absorbed by water, and therefore by all tissues in the
body because water is the main constituent of all body tissues. The goal of a
filtering procedure is to relieve the pressure inside the eye by making a small
hole in the sclera, the strong wall of the eye. The pulsed nature of the holmium
laser combined with the wavelength, provide an effective and efficient way of
creating a hole in the sclera with minimal disturbance to surrounding tissues.
The laser beam is brought to the target inside the eye with a 200 micron fiber
built into a special probe that emits the laser beam at a right angle to the
fiber axis.
The design characteristics and the unique delivery device of the gLase 210
system enables the ophthalmologist
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to perform this procedure on an outpatient basis, thus avoiding the use of an
operating room and the hospitalization sometimes required with traditional
filtering surgery. Foreign sales of the gLase 210 system commenced on a limited
basis during the second quarter of 1990; domestic sales commenced in December
1990 when the Company received FDA clearance to begin commercial sale of the
product line in the United States for the filtering procedure. The gLase 210
system is currently marketed directly and through dealers, distributors and
manufacturer's representatives in the United States and through distributors
internationally. Sales of the gLase 210 system have been limited and never
represented more than 11% of revenues in any year.
CORNEAL SHAPING SYSTEM
In April 1992, the Company acquired Laser Biotech, Inc., a California
corporation ("Laser Biotech"), through a merger of a wholly-owned subsidiary of
the Company with Laser Biotech (the "Merger"). Laser Biotech was founded in 1986
by Bruce J. Sand, M.D., FACS, to research and develop a precision laser
instrument for eye surgery. In connection with the Merger, the Company also
acquired certain patent and patent applications held by Dr. Sand covering a
patented technique for reshaping the cornea using a laser. The technique, called
Laser Thermal Keratoplasty (the "Corneal Shaping System"), alters the shape of
the cornea to correct refractive disorders such as myopia (nearsightedness),
hyperopia (farsightedness) and astigmatism without removing corneal tissue. The
procedure employs a laser to shrink, selectively, the collagen in the cornea,
changing the curvature of the cornea and thereby changing the refractive power
of the eye. By comparison, excimer laser systems for corneal reshaping developed
by Summit Technologies, Inc. and VISX, Inc. remove parts of the cornea to
achieve changes in refraction. Laser Biotech conducted pre-clinical studies to
gain preliminary information on the efficacy and safety of the product, which
resulted in positive indications the Corneal Shaping System can be applied
successfully and safely to correct refractive errors.
In May 1992, the Company acquired substantially all of the in-process
technology of Emmetropix Corporation, a Texas corporation ("Emmetropix"),
including an assignment of certain patent applications and related technology
from an Emmetropix shareholder which the Company believes will be useful in
developing the LTK system.
The Company received an IDE from the FDA to begin Phase I clinical trials
on human subjects in the first quarter of 1992. Phase I trials commenced in June
1992 using a prototype LTK system designed and developed by the Company. The
Company completed Phase I of the clinical work for the LTK system and filed its
results with the FDA in June 1993. In September 1993, the Company received
clearance to begin Phase IIa clinical trials for the treatment of hyperopia and
these clinical trials have commenced. The trials were conducted at Doheny Eye
Institute at USC and Baylor University and completed in November 1994. In
February 1995, the Company filed its request with the FDA to commence Phase IIb
clinical trials. In a March 1995 letter, the FDA cited various deficiencies in
the Company's February letter and requested additional information. In December
1995, the Company submitted the requested additional information. In January
1996, the FDA responded to the Company's submittal by requesting current
follow-up data on all Phase IIa patients. In March 1996, the Company provided
the current follow-up data on all Phase IIa patients and expects that it will be
able to expand its study to Phase IIb in the second quarter of 1996.
In addition, clinical trials were initiated outside the United States in
early 1993 and are ongoing. The Company has obtained FDA export clearance to
market the Corneal Shaping System in most European countries, Turkey, Saudi
Arabia, Canada, Mexico, Brazil, Japan, China, Korea, Hong Kong, the Bahamas, and
other countries, although such sales are subject to the individual regulatory
authority of each country. Following regulatory approvals, the Company commenced
marketing the Corneal Shaping System overseas, primarily in Europe, for the
treatment of hyperopia and astigmatism in December 1993. Some preliminary
experiments have been done on myopia.
The LTK system incorporates the the Sun 1000, a modified gLase 210 system
as the laser source into a delivery system that is built into a standard
slit-lamp to perform the LTK procedure. A slit-lamp is a binocular microscope
used regularly by ophthalmologists to examine an eye binocularly under high
magnification. The Corneal Shaping System delivers eight simultaneous laser
beams disposed in a circle of varying diameter. This system allows for easy
alignment on the patient's eye and the delivery of a two second exposure for the
treatment. To date, international sales of the Corneal Shaping System have been
limited and below expectations. Revenue in the United States cannot be expected
before 1999 at the earliest.
There can be no assurance the Company will successfully develop or market
the Corneal Shaping System, the FDA will approve the results of continued
clinical trials, or the PMA will be approved which will result in the Company
marketing the product in the future. (See "Government Regulation" and "Marketing
and Sales").
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GOVERNMENT REGULATION
The Company's products are subject to significant government regulation in
the United States and other countries. In order to test clinically, produce and
market products for human diagnostic and therapeutic use, the Company must
comply with mandatory procedures and safety standards established by the FDA and
comparable state and foreign regulatory agencies. Typically, such standards
require products be approved by the government agency as safe and effective for
their intended use before being marketed for human applications. The clearance
process is expensive and time consuming, and no assurance can be given that any
agency will grant clearance for the sale of the Company's products for routine
clinical applications or the time the clearance process will require will not be
extensive.
No clinical testing of the Company's products on humans may be undertaken
without first obtaining an IDE from the FDA. To date, sales of the Company's
dental and ophthalmic laser systems in the United States for clinical testing on
humans have been pursuant to approved IDE's.
There are two principal methods by which FDA regulated products may be
marketed in the United States. One method is an FDA premarket notification
filing under Section 510(k) of the Food, Drug and Cosmetics Act. Applicants
under the 510(k) procedure must demonstrate the device for which clearance is
sought is substantially equivalent to devices on the market before May 1976. The
review period for a 510(k) Application is 90 days from the date of filing the
application. Applications filed pursuant to 510(k) are often subject to
questions and requests for clarification that often extend the review period
beyond 90 days. Marketing of the product must be deferred until written
clearance is received from the FDA. In some instances, an IDE is required for
clinical trials for a 510(k) notification.
The alternate method, where section 510(k) is not available, is to obtain
premarket approval ("PMA") from the FDA. Under the PMA procedure, the applicant
must obtain an IDE before beginning the substantial clinical testing required to
determine the safety, efficacy and potential hazards of the products. The
preparation of a PMA application is significantly more complex and time
consuming than the 510(k) Application. The review period under a PMA application
is 180 days from the date of filing. The FDA often responds with requests for
additional information or clinical reports that can extend the review period
substantially beyond 180 days.
The FDA also imposes various requirements on manufacturers and sellers of
products under its jurisdiction, such as labeling, manufacturing practices,
record keeping and reporting requirements. The FDA also may require postmarket
testing and surveillance programs to monitor a product's effects. All of the
Company's products will require filing of an IDE, and a 510(k), or PMA. There
can be no assurance the appropriate approvals from the FDA will be granted for
the Company's products, the process to obtain such approvals will not be
excessively expensive or lengthy or the Company will have sufficient funds to
pursue such approvals. The failure to receive requisite approvals for the
Company's products or processes, when and if developed, or significant delays in
obtaining such approvals, would prevent the Company from commercializing its
products as anticipated and would have a materially adverse effect on the
business of the Company.
The Company is also subject to regulation under the Radiation Control for
Health and Safety Act administered by the FDA which requires laser manufacturers
to file new product and annual reports; to maintain quality control, product
testing and sales records; to incorporate certain design and operating features
in lasers sold to end-users and to certify and label each laser sold to an
end-user as belonging to one of four classes, based on the level of radiation
from the laser that is accessible to users. Various warning labels must be
affixed and certain protective devices installed, depending on the class of the
product. The CDRH (Center for Devices and Radiological Health) is empowered to
seek fines and other remedies for violations of the regulatory requirements.
Foreign sales of the Company's dental and ophthalmic laser systems are
subject in each case to clearance by the FDA for export to the recipient
country. Regulatory requirements vary widely among the countries, from
electrical approvals to clinical applications similar to the PMA application
filed with the FDA for sales in the United States. There can be no assurance the
Company will be successful in obtaining such approvals for its products in the
future.
MARKETING AND SALES
Through 1992, substantially all of the Company's revenues were derived from
sales of dental laser systems to ADT.
The Company's strategy is to market its products through established
medical or dental equipment distributors
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overseas. In the United States, the Company sells its dental products through a
small direct sales force coupled with distributors and dealers where
appropriate. In 1990, the Company completed development and obtained regulatory
clearance to market the gLase 210 system for sclerostomy. A modified gLase 210
system is used together with the LTK device to produce the Sunrise Corneal
Shaping System to treat hyperopia. Sales of this system will be more
significant.
In September 1992, the Company commenced sale of the SunLase 800
internationally through distributors for hard and soft tissue applications.
Following settlement of its dispute with ADT in February 1993, the Company
expanded its network of established international distributors for sale of its
dental laser systems and commenced marketing dental laser systems in the United
States for soft tissue applications.
To date, the Company has established relationships with distributors in
Japan, Middle East countries, Korea, Taiwan, Hong Kong, the Netherlands,
Belgium, Italy, Spain, Turkey, Germany, the Scandinavian countries, Switzerland,
Great Britain, Canada, Mexico and Argentina for sale of the ophthalmic systems.
Unlike ophthalmology where lasers have been used for many years, the
introduction of laser systems for dental applications represents a significant
innovative treatment method. The ultimate success of the Company in penetrating
the dental market is dependent upon a well-trained and educated direct sales
distributor organization. The Company believes dental trade shows as well as
local dental organization trade meetings also represent an important opportunity
to provide dentists with an understanding of the application of the Company's
products to their practice and the dental market currently lacks the educational
programs necessary to provide the practitioner with an understanding of the
benefits of the Company's products not only to the patient but to their
practice. Furthermore, the Company's initial marketing efforts indicate dentists
have been confused by the variety of lasers offered for dental applications and
the market for dental lasers may not expand significantly until FDA approval for
hard tissue applications has been obtained. This marketing program will require
significant effort and expenses in order to establish a market presence in the
United States.
For ophthalmic and medical applications, the extent and nature of the
Company's marketing efforts are determined by a number of factors, including the
number of specialists in the area and the characteristics of the laser
applications. The ophthalmic market for the gLase 210 has been impacted by
reimbursement pricing pressures, the continued need for publication of long term
follow-up data, and increased educational requirements on the part of the
practitioner regarding follow-up requirements and patient monitoring. The
Company markets its ophthalmic products through distributors. The establishment
of a successful distributor network requires providing the distributors with the
sales instruments (brochures, clinical data, research papers, educational
videos). Such marketing efforts are expected to include presentations at
conventions and trade shows, customer training by Company personnel and
sponsorship of teaching seminars, clinical presentations, and research by
others. The Company also hires additional marketing and sales consultants from
time to time to assist in the introduction of its products.
There can be no assurance the Company can effectively market its existing
and planned new products.
ENGINEERING AND DEVELOPMENT
The Company's success will depend substantially upon its ability to
develop, produce and market innovative new products.
For the years ended December 31, 1993, 1994, and 1995, the Company expended
$2,170,000 (excluding acquired in-process research and development), $1,5610,000
and $503,000, respectively, on engineering and development, relating to dental
and ophthalmic lasers, and MicroPrep as well as research on a variety of medical
and dental applications. The Company continues to explore several other types of
lasers with varying characteristics in order to find the optimal interactions
with tissues in specific medical and dental applications. Clinical testing and
sale of the Company's products are subject to obtaining applicable regulatory
approvals, of which there can be no assurance. The Company's research and
development activities are conducted in house as well as by outside sources,
including consultants and universities.
The laser industry is characterized by extensive research and rapid
technological change. Development by others of new or improved products,
processes or technologies may make product development by the Company obsolete
or less competitive. The Company will be required to devote continuing efforts
and funds to further developments and enhancements for its existing products and
for its research and development of new technologies and products. There can be
no assurance the Company will be able to successfully adapt its operations to
evolving markets and technologies and fund the development of new medical
products to achieve possible technological advantages.
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PRODUCTION
The Company manufactures its dental and ophthalmic lasers and MicroPrep
systems from parts, components and subassemblies obtained from a number of
unaffiliated suppliers, and the Company designs the software incorporated into a
microprocessor purchased from an unaffiliated third party. Engineering and
development, prototype production, and all manufacturing, assembly and testing
activities take place at its Fremont, California facility. Although all the
parts and components used by the Company are available from multiple sources,
several are currently being purchased from only one source to obtain volume
discounts. Lack of availability of certain components could require minor
redesign of the products resulting in production delays.
In late 1993, the Company realigned its production structure through a
reduction in production manpower to more accurately reflect short term demand as
well as the realignment of responsibilities.
The Company's dental laser systems, ophthalmic laser systems, and the
MicroPrep products have been designed in a modular fashion to facilitate the
assembly process. The Company intends to utilize modular design and construction
concepts in connection with its future products.
The Company will require additional engineering and manufacturing staffing
as new products are introduced into the marketplace.
POTENTIAL LIABILITY
The testing and use of human healthcare products entail an inherent risk of
physical injury to patients and resultant product liability or malpractice
litigation. While the Company has obtained product liability coverage in the
amount of $5,000,000 with an umbrella policy for an additional $5,000,000, such
coverage is limited, and there can be no assurance such coverage will be
sufficient to protect it from all risks to which it may be subject. Those costs
of defending a product liability or malpractice action could have a material
adverse impact on the Company, even if the Company were to ultimately prevail.
PATENTS AND LICENSES
Pursuant to the ADT Agreements, the Company assisted ADT and its founders
in the preparation of several patent applications, which have been filed in the
United States Patent and Trademark Office and in certain countries in Europe.
From these applications, several patents have been issued and have been assigned
to ADT. Pursuant to the terms of its settlement with ADT in February 1993, the
Company obtained a royalty bearing non-exclusive, worldwide license under ADT's
patents and patent applications covering the manufacture, sale or use of dental
laser products. There can be no assurance any additional patents will be issued
or any such patents will afford protection or benefit to the Company.
The Company has two issued patents on its gLase 210 ophthalmic product.
In the acquisition of Laser Biotech, the Company acquired a United States
patent and pending United States and foreign patent applications previously
licensed to Laser Biotech by Dr. Bruce Sand, its founder. The issued patent
covers a method for using a laser to shrink collagen in the body. Since the
acquisition, two more patents filed by Dr. Sand have been allowed, and have been
assigned to the Company. In the Emmetropix acquisition, the Company acquired
three United States patent applications as well as foreign patent applications
previously licensed to Emmetropix, which the Company believes will be useful in
developing its laser thermal keratoplasty product. In addition, the Company has
filed a patent application covering the corneal shaping system it developed to
make use of the LTK procedure.
COMPETITION
The medical and dental laser and equipment industries are generally subject
to intense competition and are characterized by rapid technological change. The
Company's products will compete with conventional treatment methods, as well as
with products marketed by other medical and dental laser equipment
manufacturers, most of which have significantly greater financial resources than
the Company. While the Company believes its compact products, which can be used
in the doctor's office, offer better treatment characteristics than currently
available systems and offer comparable treatment at lower cost, there can be no
assurance the Company will be successful in marketing its dental and ophthalmic
products.
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DENTISTRY
Since 1990, the Company's dental laser systems have been marketed in the
United States for soft tissue applications and overseas for both hard and soft
tissue applications. Soft tissue applications include gingivectomies, gum
contouring and minor surgical cuts such as frenectomies. The Company believes
its system, which employs a lightweight contact probe, offers advantages over
traditional surgical methods in that it allows the dentist to perform such
procedures with minimal bleeding and without anesthesia in most cases. The
Company currently competes with ADT among others with respect to its dental
laser systems.
In recent periods, competition in the dental laser industry has increased
significantly, as various dental laser systems have been introduced into the
market, primarily for soft tissue applications. These include pulsed and
continuous wave Nd:YAG, carbon dioxide and argon lasers. The introduction of
these systems has to some extent generated confusion and delays among end-users,
who must sort through various claims and complex technologies prior to
purchasing a dental laser system. There are several other competitors marketing
dental laser systems for soft tissue applications including ADT. The Company's
products also compete with established methods of treating caries, primarily the
dentist's drill, certain chemical solutions and with CO2 laser systems currently
marketed for other dental procedures. There are no laser systems currently
marketed in the United States for hard tissue applications and the Company
believes the market for its dental laser systems may be minimal until FDA
clearance to market for such application can be obtained.
The Company's products will be required to compete with respect to price, ease
of use and rapid effective treatment. There can be no assurance other companies
will not introduce new products that compete with the Company.
The Company currently markets the MicroPrep, an abrasive-action cavity
preparation unit that competes with ADT's KCP 2000.
OPHTHALMOLOGY
The laser market in ophthalmology is extremely competitive, due to a
relatively wide acceptance of ophthalmic laser products by the physicians. There
are currently a number of manufacturers of ophthalmic laser systems, including
the Medical Division of Coherent, Inc. ("Coherent"), which produces laser
systems for a number of ophthalmic applications and which possesses
substantially greater financial and other resources than the Company. In the
Company's opinion, Coherent is the dominant competitor in the ophthalmic market.
The Company has developed the gLase 210 system for ophthalmic procedures, (i.e.
sclerostomy, etc.) which it believes are not performed efficiently by most laser
products currently available. The Company believes its gLase 210 product offers
better treatment characteristics than these competing products due to its less
invasive nature of treatment. There are a number of other laser approaches in
filtering surgery including a hot sapphire tip using a continuous wave Nd:YAG by
Surgical Laser Technologies and a pulsed dye laser that requires the
introduction of a dye into the sclera by Candela.
Use of the holmium laser for LTK will compete with or supplement existing
treatments for refractive disorders, including eyeglasses, contact lenses, other
refractive surgeries (such as radial keratotomy) and other technologies
currently under development, such as corneal implants and surgery involving
other laser techniques. The industry is characterized by extensive research and
rapid technological change. Newer technologies could be developed with better
performance for refractive surgery than LTK. The significant competitive factors
in the industry will include price, convenience, success relative to vision
correction, acceptance of new technologies and patient satisfaction.
Aside from using eyeglasses and contact lenses, refractive errors are
currently being treated by a surgical approach called Radial Keratotomy ("RK").
This procedure makes a number of long radial cuts over 90% through the cornea.
This leads to a scarred healing response resulting in a modification of the
corneal curvature.
Currently, the dominant laser approach for the treatment of myopic
refractive disorders is the use of the excimer laser. In the United States,
VISX, Incorporated ("VISX") and Summit Technology, Inc. ("Summit") are the
leading manufacturers of excimer refractive surgical systems. The Company
believes the LTK process for the treatment of hyperoptic refractive disorders
offers several distinct advantages over the use of excimer lasers, including
ease of use and less invasiveness. Both VISX and Summit have significantly
greater financial resources than the Company. In October 1995, both Summit and
Visx announced that the FDA had approved their PMA applications to commercially
market and sell their eximer laser systems in the U.S. for correctional myopic
refractive disorders only. It is unclear what effect this development will have
on the Company's business.
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Summit has also developed a system utilizing a "dual laser" approach, where
an excimer laser is used for the treatment of myopia and holmium laser is used
to treat hyperopia. Summit's use of the holmium laser differs from the Company's
in several ways, including being hand held rather than projected by an optical
system. Based on discussions with its patent counsel, the Company believes
Summit's holmium system may violate certain of its U.S. and foreign patents. The
European companies Lasertec International, Gmbh and Technomed Technology offer a
holmium laser system with contact probe similar to the Summit approach.
The Company believes the potential use of the process of shrinking collagen
is more attractive than competitive methods because it can address all
refractive errors with minimal damage to the cornea. There can be no assurance,
however, the method can be reduced to practice using a reliable laser system or
the Company will receive regulatory approvals or successfully market such a
product.
BACKLOG
On December 31, 1995 the Company had a backlog of approximately $750,000.
WARRANTY AND SERVICE
The Company provides a limited warranty on its dental laser systems. This
warranty is limited to 12 months from date of shipment by the Company. The
Company provides services to systems out of warranty in the United States. The
Company's laser products include microprocessors and software that perform self
checks upon startup and during operation. In addition, the systems feature
software that allows service personnel to perform diagnostic checks in the
field. The Company currently provides support services by telephone to customers
with operational and service problems and makes necessary repairs at its plant
or at the laser site. To date, actual costs incurred related to warranty work
have been minimal.
The Company provides similar warranties and support services to end-users
concerning its direct sales of the gLase ophthalmic laser systems; however, in
the case of sales by the distributors, all product service will be provided by
the distributor.
EMPLOYEES
At December 31, 1995 the Company had 53 full-time employees (including its
executive officers); 16 in manufacturing, 5 in engineering and development, 25
in marketing, sales and regulatory, and 7 in administration.
The Company is primarily dependent upon its engineering and development
employees and consultants for the development and improvement of current and
proposed products. The Company's future success will depend in a large part upon
its ability to attract and retain highly qualified scientific and management
personnel.
The Company believes its future success will depend in part on its ability
to continue to train and retain highly skilled technical, marketing and
management personnel. None of the Company's employees are represented by a labor
organization. The Company maintains various benefit plans and experiences good
employee relations.
EXPORT SALES
In 1995, approximately 69% of the Company's revenues were international as
compared to approximately 68% in 1994.
CAUTIONARY STATEMENTS-RISK FACTORS
In the interest of providing the Company's shareholders and potential
investors with certain Company information, including management's assessment of
the Company's future potential, certain statements set forth herein contain or
are based on projections of revenue, income, earnings per share and other
financial items or relate to management's future plans and objectives or to the
Company's future economic performance. Such statements are "forward-looking
statements" within the meaning of Section 27A(I) of the Securities Act of 1933,
as amended, and in Section 21E(I) of the Securities Exchange Act of 1934, as
amended.
Although any forward-looking statements contained herein or otherwise
expressed by or on behalf of the Company are, to the knowledge and in the
judgment of the officers and directors of the Company, expected to prove true
and to come to pass, management is not able to predict the future with absolute
certainty. Accordingly,
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<PAGE>
shareholders and potential investors are hereby cautioned that certain events or
circumstances could cause actual results to differ materially from those
projected or predicted. In addition, forward-looking statements are based on
management's knowledge and judgment as of the date hereof, and the Company does
not intend to update any forward-looking statements to reflect events occurring
or circumstances existing hereafter.
In particular, the Company believes the following facts could impact
forward-looking statements made herein or in future written or oral releases and
by hindsight, prove such statements to be overly optimistic and unachievable.
HISTORY OF LOSSES; PROFITABILITY UNCERTAIN; CASH FLOW DEFICITS
Since the first quarter of 1992, the Company has incurred substantial
losses which have depleted its working capital and reduced its stockholders'
equity. The losses initially resulted from a significant decline in revenue
caused by a substantial decrease in sales to ADT of the Company's dLase 300
system, a product which the Company developed and manufactured on an exclusive
basis for ADT and from which the Company derived substantially all of its
revenues through 1992. While the Company has since taken measurements to lower
its operating expenses, it has been unable to sufficiently increase sales of its
other dental and ophthalmic products to return to profitability. The Company has
consistently produced negative operating cash flows since the end of 1991 and
operating cash flows are forecasted to remain negative through at least the
third quarter of 1996. The Company's negative cash flows have been largely
funded by proceeds received from prior private offerings. To the extent the
Company is unable to meet its financial forecasts, it is highly likely that all
of the proceeds from the prior equity offerings would be used to fund continued
negative operating cash flows and the Company would be forced to issue
additional equity securities in order to continue operating. No assurance can be
given that such additional financing will be available or that, if available, it
will be available on terms favorable to the Company or its stockholders. If the
Company is unable to return to profitable operations and adequate funds are not
available to satisfy its short-term and long-term operating requirements
necessary to sustain the Company's continued operations, the Company may be
required to reduce substantially, or eliminate, certain areas of its product
development activities, or limit its operations in their entirety.
SALES OF AIR ABRASIVE PRODUCTS
The Company commenced shipments of its air abrasive system for cavity
preparation during 1994 and expanded its line to include a lower cost system
designed to be affordable in any general dental office. The Company's ability to
operate its dental business on a profitable basis depends primarily on future
sales of these systems. As a result of the decision in 1995 to replace the
entire dental distribution structure with a direct sales force and new
distributors and start-up production problems, sales of the air abrasive systems
during the past six months have been significantly below expectations. There are
no assurances that the future sales of air abrasive products will be sufficient
to enable the dental business to be profitable.
PATENT LITIGATION
The Company has been accused by American Dental Technologies ("ADT") of
infringing on its patents covering air abrasion systems for dental use. A trial
in the primary patent claims is scheduled for February 1997. Unless the ADT
claims are settled, the Company anticipates significant legal costs on this
matter throughout 1996 and beyond. An unsuccessful defense of ADT's patent
claims could result in limitations on the sale of the Company's systems and the
requirement to pay significant royalties, either of which would have a material
adverse impact on the Company's financial condition and results of operation.
REGULATORY MATTERS-FDA APPROVAL OF LTK SYSTEMS
The Company anticipates it will receive FDA approval to enter Phase IIb
studies of its LTK system during the second or third quarter of 1996, and to
enter Phase III studies in 1997, and hopes to complete the process by the end of
1998. Any significant change in the anticipated approval process will delay the
earliest possible date of FDA approval and will likely increase the costs of
pursuing approval. This could significantly increase the Company's budgeted
costs for the 1996-1998 time period.
ITEM 2. FACILITIES
The Company leases 26,000 square feet for all its business activities
including executive offices as well as engineering and development,
manufacturing, assembly and testing activities in Fremont, California at a
rental of
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approximately $24,000 per month, including expenses. The lease expires in
January 1997.
ITEM 3. LEGAL PROCEEDINGS
AMERICAN DENTAL TECHNOLOGIES, INC. V.SUNRISE TECHNOLOGIES
INTERNATIONAL, INC.
On October 18, 1993, the Company filed an action against American Dental
Technologies, Inc. ("ADT"), formerly American Dental Laser, Inc., in Alameda
County Superior Court (Case No. H-172132-2). The complaint asserts a cause of
action for breach of contract and seeks compensatory damages in excess of
$900,000, as well as attorneys' fees and costs. The case arises from a dispute
between the parties regarding their rights and obligations under the terms of
the settlement agreement that terminated their manufacturing/distribution
relationship for dental products. On or about December 27, 1993, ADT filed a
general answer to the complaint denying all material allegations thereof and
asserting various affirmative defenses. In addition, ADT filed a cross-complaint
against the Company asserting causes of action for breach of contract, fraud,
unfair competition, unfair trade practices, interference with contract and
prospective economic advantage, indemnity, and injunctive and declaratory
relief. The Company filed its answer to the cross-complaint on January 31, 1994,
generally denying all the allegations thereof and asserting various affirmative
defenses. This matter was brought to trial in July 1995, resulting in a jury
verdict in the Company's favor on July 28, 1995. Subsequently, on November 14,
1995, ADT deposited with the court a cashier's check in the amount of $1,410,267
and filed an appeal of the jury verdict, which is presently pending.
SUNRISE TECHNOLOGIES INTERNATIONAL, INC AND DANVILLE ENGINEERING, INC. V.
AMERICAN DENTAL TECHNOLOGIES, INC.
On May 2, 1994, the Company and Danville Engineering, Inc. filed two
separate actions against ADT in the U.S. District Court for the Northern
District of California seeking a declaration of invalidity and non-infringement
of five patents related to air-abrasive dental technology (Case Nos. C94 1512
EFL and C94 1513 EFL). The patents at issue are either owned or exclusively
licensed by ADT. ADT acknowledged the patents in Case Number 941512 EFL did not
cover Sunrise products. Accordingly, this action was dismissed. ADT brought a
motion to dismiss both complaints for lack of subject matter jurisdiction, which
was denied on July 7, 1994. ADT answered the complaints on October 12, 1994. The
answers assert numerous affirmative defenses, as well as a counterclaim that the
Company and Danville have infringed one of ADT's patents by the manufacture,
sale or use of the MicroPrep. The counterclaim seeks damages, injunctive relief,
attorneys' fees, costs, and a declaration of validity and infringement. ADT also
seeks a declaration of validity for the remaining patents. Discovery is
currently pending. The Company believes it has meritorious defenses to the
cross-complaint.
AMERICAN DENTAL TECHNOLOGIES, INC. V. SUNRISE TECHNOLOGIES INTERNATIONAL,
INC. ET AL.
On October 14, 1994, ADT filed an action against the Company and several of
its distributors in the U.S. District Court for the Eastern District of
Michigan, alleging infringement of a newly-issued patent assigned to ADT, which
covers technology and uses related to air-abrasive dental products (Case No.
94-74170). This action appears to involve substantially the same issues as the
actions filed by the Company in the Northern District of California, but is
based on a patent which has not issued at the time the Company filed its claims.
On December 16, 1994, the Company filed a motion to dismiss this action as to
one of the distributor defendants and to transfer the remainder of the case to
California for consolidation with the California declaratory relief actions
filed by the Company against ADT. The Company's motion was granted on May 30,
1995. The case was transferred and has been consolidated with Case Number
94-1513. Discovery is currently pending. The Company vigorously denies the
plaintiff's allegations and believes it has meritorious defenses to this claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
NOT APPLICABLE
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock was first traded under the symbol "SNRS" on May
12, 1989 on the National Association of Securities Dealers Automated Quotation
("NASDAQ") system, the principal trading market for the Company's securities.
The Company began trading on NASD/NMS on May 7, 1991. Effective July 10, 1995,
the Company's common stock was removed from NASDAQ's quotation system for
failure to meet minimum listing qualifications. Subsequent to that date, the
Company's common stock has traded "Over-the-Counter." The table below sets forth
the high and low sales price for the Company's Common Stock as reported on the
NASDAQ system for each quarterly period through June 1995. The sales prices for
the two quarters ending September 30, and December 31, 1995 and at March 21,
1996 were obtained from an over-the-counter quotation service.
PRICES FOR COMMON STOCK
Period Ended Low Bid High Bid
---------------------- ---------------- -----------------
March 31, 1994 $4.25 $6.50
June 30, 1994 $4.25 $6.25
September 30, 1994 $1.63 $4.50
December 31, 1994 $1.13 $3.00
March 31, 1995 $0.69 $1.97
June 30, 1995 $0.56 $1.25
September 30, 1995 $0.50 $2.37
December 31, 1995 $0.94 $2.44
March 21, 1996 $1.34 $1.44
Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down, or commission and may not necessarily
represent actual transactions.
The Company has approximately 9,000 stockholders of record of its Common
stock as of March 21, 1996.
The Company has approximately 14 warrant holders of record for its warrants
as of March 21, 1996
No cash dividends have been paid on the Common Stock. For the foreseeable
future, it is anticipated earnings, if any, will be used to finance the growth
of the Company and cash dividends will not be paid to stockholders.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
The following table summarizes certain selected financial data derived from the
audited financial statements for the years ended December 31, 1991, 1992, 1993,
1994 and 1995.
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
-------------------------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $20,337 $8,550 $11,860 $7,578 $5,294
Gross profit 11,333 3,604 5,009 1,340 1,637
Purchase of in-process ---- 8,466 ---- ---- ----
technology
Operating costs and expenses 5,295 16,941 11,461 8,257 5,824
Income(loss) from operations 6,038 (13,337) (6,452) (6,917) (4,187)
Income tax expense (benefit) 2,176 (1,612) 232 ---- ----
Net income (loss) 3,986 (11,640) (6,624) (6,910) (4,130)
Net income (loss) per share 0.52 (1.44) (0.74) (0.68) (0.28)
Shares used in calculation of 7,693 8,111 8,955 10,129 14,935
net income (loss) per share
Total assets 12,596 10,339 5,511 3,822 6,689
Long term obligations 98 79 18 ---- ----
Total stockholders' equity 9,608 9,038 2,708 1,357 4,745
Working capital 8,545 7,877 1,965 1,101 4,541
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company has incurred substantial losses in the past three years which
have seriously depleted its working capital. Sales of its existing dental
products at current levels will not be sufficient to sustain both the existing
business and the continued development and regulatory licensing of additional
products including the LTK system. The Company has been able to raise additional
working capital for all aspects of its business through the private placement of
its common stock. These private placements raised $13,051,000 in 1994 and 1995
in new equity for the Company. The Company is seeking to raise additional
working capital for all aspects of its business. If the Company is unable to
obtain additional working capital, it may be forced to substantially curtail its
activities and could, under certain circumstances, be forced to eliminate or
suspend operations.
Since its inception, the Company has been engaged in the design,
development, manufacture and sale of laser systems for applications in medicine
and dentistry. The Company's first commercial product, the dLase 300 dental
laser system, was developed pursuant to a series of development, manufacturing
and marketing agreements with American Dental Technologies, Inc. ("ADT")
formerly known as American Dental Laser, Inc.. Pursuant to the agreements with
ADT, the Company had exclusive manufacturing rights to this product and ADT had
exclusive distribution rights and owns the technology rights including related
patent rights. ADT commenced foreign sales of the dLase 300 in December 1988
and, following clearance from the Food and Drug Administration ("FDA") to market
the product for soft tissue applications, commenced U.S. distribution at the end
of the second quarter of 1990. The Company filed a Pre-Market Approval
application ("PMA") with the FDA for treatment of pre-carious lesions in October
1988, which was denied in August 1990, and commenced additional clinical trials
for this application in
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<PAGE>
1991 after conferring with the FDA with respect to a new protocol. In the first
quarter of 1993, the Company received FDA approval to expand the clinical
studies to add more patients, an additional research site, and include the
treatment of 2o caries. The Company filed a new PMA during 1994. In February
1996 the FDA's dental products advisory board voted not to recommend pre-market
approval of the Company's dental laser for hard tissue applications. The Company
is currently evaluating this development in relation to the overall marketing of
the dental laser and whether it shoud continue to pursue FDA approval for hard
tissue.
Commencing in late 1990, the Company completed development of two new
holmium laser systems, the gLase 210 and sLase 210, and obtained U.S. and
certain foreign regulatory approvals for filtering and thermal sclerostomy
procedures for treatment of glaucoma, percutaneous disc compression procedures
for minimally invasive back surgery, as well as general and orthopedic surgical
procedures.
In the first half of 1992, the Company completed the acquisitions of
in-process technology from Laser Biotech, Inc. ("Laser Biotech") and Emmetropix
Corporation ("Emmetropix"), which together had patents, patent applications and
other proprietary technology relating to Laser Thermal Keratoplasty ("LTK"), a
technique for reshaping the cornea using a laser, which the Company believes
will be useful in the treatment of myopia, hyperopia, and astigmatism. Phase I
clinical trials using a prototype system commenced in mid-1992 pursuant to an
Investigational Device Exemption ("IDE") from the FDA. The results of Phase I
were filed with the FDA in the summer of 1993 and permission was granted by the
FDA to commence Phase IIa in the fourth quarter of 1993. The Company completed
Phase IIa clinical trials of the LTK system for hyperopia in the United States
in November 1994. In February 1995, the Company filed its request with the FDA
to commence Phase IIb clinical trials. In a March 1995 letter, the FDA cited
various deficiencies in the Company's February letter and requested additional
information. In December 1995, the Company submitted the requested additional
information. In January 1996, the FDA responded to the Company's submittal by
requesting current follow-up data on all Phase IIa patients. In March 1996, the
Company provided the current follow-up data on all Phase IIa patients and
expects that it will be able to expand its study to Phase IIb. in the second
quarter of 1996. The Company does not expect it will receive FDA approval of the
LTK system for several years.
In April, 1993 the Company entered into an agreement with Danville
Engineering to develop an air abrasive unit for cavity preparation by dentists
(the "MicroPrep"). A 510(k) was filed with the FDA in July, 1993. The Company
received FDA clearance to commence commercial sale of the product in the United
States on May 3, 1994.
The Company expects some of its products will require filing of a 510(k)
application or a PMA with the FDA prior to marketing in the United States. In
the past, the Company has encountered significant delays with respect to its PMA
filing with the FDA for hard tissue dental applications and has been required to
perform additional clinical studies to support such application There can be no
assurance the Company's applications to the FDA, when filed, will ultimately
receive marketing approval or will be approved in a timely manner, the FDA will
not request additional information or where a 510(k) application is filed, the
FDA will not require the Company to file a PMA for such products.
Through 1991, revenues increased dramatically, and a substantial portion of
the Company's revenues were derived from sales of the dLase 300 to ADT,
accounting for approximately 90% and 79% of revenues in 1990 and 1991,
respectively. Furthermore, since all dental products were marketed through ADT,
the Company did not have significant sales and marketing expenses until 1991
when the Company began marketing the gLase 210. In early 1992, ADT withdrew
earlier forecasts and advised the Company that orders for 1992 would be
significantly reduced. The Company terminated its development and domestic
distribution agreements with ADT, and ADT filed for arbitration regarding
termination of the agreements as well as ownership of several new lasers
developed by the Company in late 1991 and 1992. In the third quarter of 1992,
the Company commenced sale of the SunLase 800, an eight-watt dental laser
system, in Europe through established dental laser distributors. The arbitration
was settled in February 1993, and, pursuant to the terms of settlement, both
parties have equal rights to the eight-watt system developed by the Company. The
Company was free to develop, manufacture and market dental lasers for its own
account and has obtained royalty bearing licenses under ADT's patents for this
purpose. The Company also relinquished its rights to exclusively manufacture the
dLase 300 for ADT or develop or manufacture future dental products for ADT. The
Company currently markets the SunLase 800 and SunLase 400, a four watt dental
laser system, overseas through established dental distributors. In late February
1993, the Company introduced the SunLase and SunLase Master, a four-watt and
eight-watt system, respectively, for sale in the United States.
On August 31, 1994, the Company sold certain assets associated with its
surgical laser business to David Hennings, an individual, in exchange for
275,000 shares of the Company's common stock held by Mr. Hennings and a note
receivable of $48,000. The Company also granted royalty-bearing licenses to
certain patents owned by the
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<PAGE>
Company. Up until the time of the transaction, Mr Hennings was an employee and
officer of the Company. Subsequent to the transaction Mr Hennings also resigned
his position on the Company's board of directors. The loss in disposition of
these assets, which was facilitated through the formation of a new subsidiary,
was not significant.
As a result of termination of the ADT business relationship and competition
in the dental industry, sales of the Company's dental laser products decreased
from a high of $20 million in 1991, to less than $4 million in 1994. Revenues
from the sale of dental laser products were expected to stabilize or slightly
increase in 1995. However, the termination of the representation of the product
line by the Company's German distributor adversely affected 1995 revenues. Sales
of the MicroPrep, a non-laser dental product, which commenced in mid-1994, (see
"Business") are becoming a more important part of the Company's total revenues.
The Company does not expect any other products to contribute significantly to
sales in 1996, and its results are highly dependent on the sale of these
products. Significant revenues from sales of the LTK system cannot be
anticipated until and unless U.S. regulatory approvals are obtained, a process
which is expected to take no less than three additional years.
The following table sets forth certain operations data as a percentage of
net revenue for the periods indicated.
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
Net Revenues 100% 100% 100%
Cost of revenues 69 82 58
Gross profits 31 18 42
Other costs and expenses:
Engineering and development 9 20 18
Sales, marketing and regulatory 57 50 48
General and Administration 44 39 30
-- -- --
Total other costs and expenses 110 109 96
Loss from operations (79) (91) (54)
Interest income, net of expense 1 --- 0
Loss before taxes on income (78) (91) (54)
Income tax expense (benefit) --- --- 2
----- ------ -----
Net Loss (78%) (91)% (56)%
===== ====== =====
REVENUES
1993 revenues of $11,860,000 reflect a full year of sales activity in the
international market place for the SunLase 800 and introduction of the LTK
product internationally in December 1993. Revenues decreased to $7,578,000 in
1994, approximately a 36% reduction from the 1993 levels. All product lines
suffered volume decreases in 1994 when compared to 1993 with the exception of
the newly introduced MicroPrep. The Company exited the surgical products market
upon the sale of its surgical laser operation business to David R. Hennings, a
co-founder and director of the Company. The sale was consummated in the third
quarter of 1994. The MicroPrep, an air abrasive cavity preparation system showed
strong initial customer acceptance in both the domestic and international market
places following its June 1994 introduction. Revenues decreased to $5,294,000 in
1995, approximately a 30% reduction from the 1994 levels. Substantially all of
this decrease is attributed to the dental laser product line which experienced a
revenue reduction in excess of 50%. The decrease is principally related to the
German market where the Company's exclusive distributor discontinued its
representation of the product line. The Company's MicroPrep and Corneal Shaping
System product lines maintained 1994 volume levels. Another factor influencing
the Company's drop in revenue was its decision in July 1995 to rely less upon
its domestic distributors and develop its own direct sales force. Although this
strategic change should provide the Company with better control over its future
sales, the short term impact (during the last half of 1995) adversely affected
sales because of
14
<PAGE>
the training costs and learning curve for the new sales organization.
In 1993, approximately 95% of the Company's dental laser sales were to
international customers with very little market penetration in the United
States. Although domestic laser sales increased in 1994, the Company experienced
a 48% drop in total worldwide dental laser sales. The Company's marketing and
sales efforts indicate dentists have been confused by the variety of lasers
offered for dental applications and the market for dental lasers may not expand
significantly until FDA approval for hard tissue applications has been obtained
(see "Competition"-"Dentistry"). The Company believes university based
educational programs coupled with clinical support may allow the dental market
to become viable at some future date. This marketing program will require
significant effort and expenses in order to establish a market presence in the
United States.
For those international sales not made in United States dollars, the
Company, when appropriate, engages in foreign currency management to minimize
the impact of foreign exchange fluctuations.
GROSS PROFIT
Gross profit margins were 42%, 18% and 31% in 1993, 1994 and 1995
respectively. The major factors contributing to the significant reduction in
gross profit margins in 1994 from the 1993 levels include lower revenues of the
Company's high margin laser products, under utilization of manufacturing
capacity due to decreased product shipments and increased product costs
associated with the MicroPrep product line. The 1995 improvement in gross profit
margin, when compared to 1994, is attributed to introduction of the cost reduced
MicroPrep Director, price increases for dental lasers and the Corneal Shaping
System (CSS) being a greater precentage of total Company revenues. The CSS
product line has a higher gross profit margin than the Company's blended profit
margin. Underutilization of manufacturing capacity continues to adversely affect
gross profit margins.
ENGINEERING AND DEVELOPMENT
Engineering and development expenses were $2,170,000, $1,561,000 and
$503,000 for the years ended 1993, 1994, and 1995, respectively. Engineering and
development expenses decreased to $503,000 in 1995, approximately a 68%
reduction from the 1994 level. This reduction is principally due to the effect
of the sale of the surgical products line (see "Overview").
SALES, MARKETING AND REGULATORY
Sales, Marketing and Regulatory expenses were $5,686,000, $3,763,000, and
$2,992,000 for the years ended 1993, 1994, and 1995 respectively.
The Company currently markets its ophthalmic lasers and dental products
through a direct sales organization working with dealers, distributors and
manufacturer's representatives in the United States. Distribution for all
products internationally is handled through distributors.
The Company had five direct sales employees at the end of 1993 and 1994,
and thirteen at the end of 1995. During the first quarter of 1993, the Company
began to aggressively pursue relationships with foreign distributors to market
the SunLase dental laser systems, resulting in increased sales and marketing
expenses. Increased spending for the United States market commenced during the
second quarter of 1993 with the development of brochures, attendance at trade
shows and discussions with United States distributors. 1994 sales, marketing,
and regulatory expenses decreased 34% from the 1993 levels. This reduction is
due primarily to reduced sales commissions resulting from drop in revenues and
curtailment of advertising and promotional expenditures. Sales, Marketing and
Regulatory expenses decreased to $2,992,000 in 1995, approximately a 20%
reduction from the 1994 level. This reduction is principally due to the lower
international sales and marketing costs including commissions, as a result of
decreased revenues in Germany.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $3,605,000, $2,933,000 and
$2,329,000 for the years ended 1993, 1994, and 1995 respectively.
The Company's general and administrative expenses consist primarily of
product liability and officer and director liability insurance premiums;
accounting, legal and other fees related to financial transactions, patent and
general corporate matters, and litigation as well as provisions for the
Company's allowance for bad debts. Expenses
15
<PAGE>
associated with the arbitration of the ADT contract dispute and continued legal
expenses associated with ADT legal actions in Federal and state courts in
Michigan and California resulted in substantial legal fees in all three years.
The Company implemented a reduction in workforce in December 1993 which resulted
in a charge of approximately $175,000. The Company's expansion of the foreign
distribution network resulted in a significant increase in the 1993 allowance
for bad debts as compared with prior periods when substantially all sales were
made to domestic customers. The Company anticipates on-going legal actions with
ADT will result in continued high levels of legal expenses in 1996. The major
factors accounting for the decrease in general and administrative expenses in
1994 from 1993 were lower salaries and related benefits, reduction in the
provision for doubtful accounts and an increase in currency exchange gains.
General and Administrative expenses decreased to $2,329,000 in 1995,
approximately a 20% reduction from the 1994 level.
Although legal expenses, both general corporate and litigation, remain at
high levels they are much lower than in 1994 and principally account for the
lower spending level.
INCOME TAXES
In 1993, a provision of $232,000 was made to write-off deferred tax assets
which had been recorded in previous years. At December 31, 1995 and 1994, all
deferred tax assets computed in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" have been fully
offset by a valuation allowance.
As of December 31, 1995, the Company had federal net operating loss
carry-forwards of approximately $18,800,000. The ownership provisions of the
Internal Revenue Code of 1986 would limit the utilization of the carry-forwards
should there be a substantial change in the Company's ownership.
NET LOSS
The Company reported losses of $6,624,000, $6,910,000 and $4,130,000 in
1993, 1994, and 1995 respectively.
The net loss in 1993 was due primarily to increased sales and marketing
expenses associated with the Company's efforts to establish relationships with
dental laser distributors in the United States, expenses associated with the
development of MicroPrep, clinical work on the LTK system, sales launch of the
LTK system internationally in late 1993, legal expenses associated with ADT
litigation and the stockholders class action suit settlement, and an increase in
the reserve for bad debts.
The net loss in 1994 was due principally to a severe drop in ophthalmic
laser sales in both the domestic and international market place and a decrease
in foreign sales of dental lasers. Somewhat offsetting these reductions were the
initial sales of the MicroPrep, the Company's air abrasive product introduced in
June 1994, and the across the board reductions in operating expenses.
The net loss in 1995 was due principally to the continued low level of
sales, excess manufacturing capacity and the Company's need to maintain the
basic sales, marketing, regulatory and corporate infrastructure. Although
across-the-board operating expense reduction totaled $2,433,000 in 1995 when
compared to 1994, the reductions do not offset the low level of sales volume.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995 the Company had $3,514,000 in cash and cash
equivalents. The Company's operating activities used $4,495,000 in cash during
1995. A substantial portion of the 1995 loss was funded by the $7.5 million net
proceeds received from the completion of private placements of 15,100,000 shares
of the Company's common stock at prices ranging from $0.50 to $0.625 per share
in June and September, 1995.
Working capital amounted to $1,101,000 at December 31, 1994 and increased
to $4,541,000 at December 31, 1995. Working capital, including the proceeds from
the private placement, was used to fund the Company's 1995 loss and pay down its
Accounts Payable.
The Company's current operations continue to be cash flow negative, further
straining the Company's working capital resources. The level of current product
sales is not sufficient to provide enough cash to pursue the dental business and
support ongoing development and regulatory approval of the LTK system. In order
to continue its current level of operations, it will be necessary for the
Company to obtain additional working capital resources, whether from debt or
equity sources. If the Company is unable to obtain additional working capital
resources from
16
<PAGE>
the placement of debt or equity instruments or the sale of some of its assets,
it may be necessary for the Company to curtail or suspend operations.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated balance sheets at December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity and cash flow for
each of the three years ended December 31, 1995, 1994 and 1993 and the notes
thereto appear beginning at page 21.
ITEM 9: CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This section entitled "Directors And Executive Officers" located in the
Registrant's Proxy Statement to be filed not later than April 30, 1996 ("Proxy
Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
This section entitled "Executive Compensation" in the Registrant's Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This section entitled "Security Ownership of Certain Beneficial Owner's and
Management" in the Registrant's Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This section entitled "Certain Relationships and Related Transactions" in
the Registrant's Proxy Statement is incorporated herein by reference.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)
<TABLE>
<CAPTION>
<S> <C>
1. FINANCIAL STATEMENTS
The following documents are filed as part of this report:
Page in this
Annual Report on
Form 10K
--------
Report of Ernst & Young LLP, Independent Auditors 20
Consolidated Statements of Operations* 22
Consolidated Balance Sheets - December 31, 1994 and 1995 21
Consolidated Statement of Stockholders' Equity* 23
Consolidated Statements of Cash Flows* 24
Notes to Consolidated Financial Statements 25
*For the years ended December 31, 1995, 1994, 1993
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules are filed as part of this report:
Schedule II - Valuation and qualifying accounts 33
All other schedules have been omitted as they are not required, not
applicable, or the required information is included in the financial
statements or notes thereto.
3. EXHIBITS
EXHIBIT NUMBER EXHIBIT
11.1 Statement re Computation of Per-Share Loss (see page 34).
21.1 Subsidiaries of the Registrant.1
22.1 Power of Attorney (see page 36).
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 35).
REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1995.
<FN>
1 Incorporated by reference to identically numbered exhibits filed in response
to Item 14 "Exhibits" of Registrant's Report on Form 10-K, as amended, for
the fiscal year ended December 31, 1992.
</FN>
</TABLE>
19
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
We have audited the accompanying consolidated balance sheet of Sunrise
Technologies International, Inc. as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sunrise Technologies International, Inc. at December 31, 1994 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that Sunrise Technologies International, Inc. will continue as a going
concern. As more fully described in Note 1, the Company has incurred recurring
operating losses. This condition raises 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 1. The consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
PALO ALTO, CALIFORNIA
MARCH 1, 1996
20
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Consolidated Balance Sheets
<CAPTION>
December 31,
1995 1994
------------------------------------
(In thousands)
<S> <C> <C>
ASSETS
Current assets: $3,514 $559
Cash and cash equivalents
Accounts receivable, net of allowance of $25,000
and $450,000 in 1995 and 1994 1,048 770
Inventories 1,666 1,955
Prepaid expenses 257 282
------------------------------------
Total current assets 6,485 3,566
Property and equipment, net 204 256
------------------------------------
Total assets $6,689 $3,822
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $1,097 $1,375
Accrued payroll and related expenses 181 150
Accrued warranty 324 324
Current portion of capital lease obligations ---- 18
Other accrued expenses 342 598
------------------------------------
Total current liabilities 1,944 2,465
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value; 2,000,000 shares
authorized, none issued or outstanding
Common stock, $0.001 par value; 40,000,000 shares
authorized, 25,280,056 and 10,459,286 shares issued 25 10
and outstanding at December 31, 1995 and 1994, respectively
Additional paid-in-capital 29,196 22,312
Less treasury stock at cost, 275,000 shares
at December 31, 1994 ---- (619)
Accumulated deficit (24,476) (20,346)
------------------------------------
Total stockholders' equity 4,745 1,357
------------------------------------
Total liabilities and stockholders' equity $6,689 $3,822
====================================
<FN>
See accompanying notes.
</FN>
</TABLE>
21
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Consolidated Statements of Operations
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994 1993
-----------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net revenues $5,294 $7,578 $11,860
Cost of revenues 3,657 6,238 6,851
-----------------------------------------------------
Gross profit 1,637 1,340 5,009
Other costs and expenses:
Engineering and development 503 1,561 2,170
Sales, marketing and regulatory 2,992 3,763 5,686
General and administrative 2,329 2,933 3,605
-----------------------------------------------------
Total other costs and expenses 5,824 8,257 11,461
-----------------------------------------------------
Loss from operations (4,187) (6,917) (6,452)
Interest income, net of expense 57 7 60
-----------------------------------------------------
Loss before taxes on income (4,130) (6,910) (6,392)
Income tax expense (benefit) ---- ---- 232
-----------------------------------------------------
Net loss $(4,130) $(6,910) $(6,624)
=====================================================
Net loss per share $(0.28) $(0.68) $(0.74)
=====================================================
Shares used in calculation of net loss per share 14,935 10,129 8,955
=====================================================
<FN>
See accompanying notes.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1995
<CAPTION>
Additional
Paid-In
Common Capital
Stock
----------------------------------
Shares Amount
------------------------------------------------------
(In thousands, except share amounts)
<S> <C> <C> <C>
Balance at December 31, 1992 8,907,209 $15,850 ----
Recapitalization in the State of Delaware ---- (15,841) 15,841
Exercise of warrants and options 101,084 294
Net loss ---- ----
------------------------------------------------------
Balance at December 31, 1993 9,008,293 9 16,135
Sale of common stock, net of offering costs 1,250,000 1 5,507
Exercise of warrants and options 200,993 ---- 670
Treasury stock acquired through sale of
surgical laser business ---- ---- ----
Net loss ---- ---- ----
------------------------------------------------------
Balance at December 31, 1994 10,459,286 10 22,312
Sale of common stock, net of offering costs 15,100,000 15 7,528
Cancellation of treasury stock (275,000) ---- (619)
Other (4,570) ---- (25)
Net Loss ---- ---- ----
------------------------------------------------------
Balance at December 31, 1995 25,280,056 $25 $29,196
------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Retained
Earnings Total
(Accumulated Shareholders'
Treasury Stock Deficit) Equity
------------------------------------------
(In thousands, except share amounts)
------------------------------------------
<S>
<C> <C> <C>
Balance at December 31, 1992 ---- $(6,812) $9,038
Recapitalization in the State of Delaware ---- ---- ----
Exercise of warrants and options ---- ---- 294
Net loss ---- (6,624) (6,624)
-----------------------------------------
Balance at December 31, 1993 ---- (13,436) 2,708
Sale of common stock, net of offering cost s ---- ---- 5,508
Exercise of warrants and options ---- ---- 670
Treasury stock acquired through sale of
surgical laser business (619) ---- (619)
Net loss ---- (6,910) (6,910)
-----------------------------------------
Balance at December 31, 1994 (619) (20,346)
1,357
Sale of common stock, net of offering cost s ---- ---- 7,543
Cancellation of treasury stock 619 ---- ----
Other ---- ---- (25)
Balance at December 31, 1995 ---- (4,130) (4,130)
-----------------------------------------
$---- $(24,476) 4,745
-----------------------------------------
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<CAPTION>
Years ended December 31,
1995 1994 1993
-----------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (4,130) $(6,910) $(6,624)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 102 469 871
Provision for doubtful accounts 25 ---- 845
Changes in assets and liabilities:
Accounts receivable (303) 777 237
Inventories 289 (68) 685
Prepaid taxes and other 25 (69) 855
Accounts payable (278) (1,091) 1,789
Accrued payroll and related expenses 31 68 (13)
Accrued warranty ---- 181 38
Other accrued expenses (256) 571 (241)
-----------------------------------------------------
Total adjustments (365) 838 5,066
-----------------------------------------------------
Net cash used in operating activities (4,495) (6,072) (1,558)
-----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (50) (22) (384)
Sale of short-term investments ---- ---- 958
-----------------------------------------------------
Net cash (used in) provided by
investing activities (50) (22) 574
-----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on capital lease obligations (18) (61) (79)
Issuance of common stock, net of offering costs 7,518 6,178 293
-----------------------------------------------------
Net cash provided by financing activities 7,500 6,117 214
-----------------------------------------------------
Net increase (decrease) in cash and equivalents 2,955 23 (770)
Cash and cash equivalents at beginning of period 559 536 1,306
-----------------------------------------------------
Cash and cash equivalents at end of period $3,514 $559 $536
=====================================================
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
Sunrise Technologies International, Inc. (the "Company") develops,
manufactures and markets laser systems and other products for applications in
ophthalmology and dentistry. The Company was organized as a California
corporation in March 1987 and was reincorporated in Delaware in June 1993 as
Sunrise Technologies International, Inc. The Company continues to do business
under the name Sunrise Technologies, Inc.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after elimination of all material intercompany
balances and transactions.
The Company has incurred significant losses for the last several years and
at December 31, 1995 has an accumulated deficit of $24,476,000. The accompanying
financial statements have been prepared assuming the Company will continue as a
going concern. The Company's long term ability to continue as a going concern is
dependent upon returning to profitable operations. Management's plans include
increasing sales through increased direct sales and marketing efforts on
existing products and pursuing timely regulatory approval for certain products
under development. Management also recognizes the need for infusion of cash
during the fiscal year 1996 and is actively pursuing various options including
securing additional equity financing.
INDUSTRY SEGMENT AND CONCENTRATION OF RISK
The Company, which operates in a single industry segment, designs,
manufactures, markets and services medical laser and air abrasive systems. The
Company sells its products to customers in the medical industries globally. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company maintains reserves for potential credit
losses and such losses have been within management's expectations. One customer
accounted for 21%, 57% and 53% of revenues in 1995, 1994 and 1993 respectively.
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash investments and trade
receivables. The Company invests its excess cash in deposits with major banks,
in U.S. Treasury and U.S. Agency obligations.
CONCENTRATION OF OTHER RISKS
The Company's operating results each quarter are subject to various
uncertainties as discussed in the Company's Annual Report on 10-K for 1995,
including uncertainties related to the composition, timing and size of orders
from the shipments to major customers, variations in product mix and variations
in product cost and competitive pressures.
One of the more significant risks potentially affecting the Company's
operating results is the fact that a substantial portion of the Company's net
revenues in each quarter generally result from shipments during the latter part
of the quarter. Because the Company establishes its operating expense level
based on expected revenue, if anticipated shipments in any quarter do not occur
as expected, gross profits may be adversely affected. For these and other
reasons, the Company may not learn of shortfalls in revenues, margins or other
financial results until later in a quarter. Any such shortfall could have an
immediate and significant adverse effect on the trading price of the Company's
common stock.
Inventories: Most components used in the Company's air abrasive and laser
systems are purchased from outside sources. Certain components in the air
abrasive systems are currently purchased from a single supplier. The failure of
such supplier to meet its commitment on schedule could have a material adverse
effect on the Company. If the sole source supplier were to go out of business or
otherwise become unable to meet its supply commitments, the process of locating
and qualifying alternate sources could require up to several months during which
time the Company's production could be delayed. Such delays could adversely
affect the Company's business and financial results.
International Operations: Sunrise's international business is an important
contributor to the Company's net revenues and gross profits. Substantially all
of Sunrise's international sales are denominated in the U.S. dollar and an
increase in the value of the U.S. dollar relative to foreign currencies could
make products sold internationally less
25
<PAGE>
an increase in the value of the U.S. dollar relative to foreign currencies could
make products sold internationally less competitive. The Company does not have
any overseas offices.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash consists of cash on deposit with banks and highly liquid investments
with a maturity from the date of purchase of 90 days or less. As of December 31,
1995 and 1994, the Company did not hold any investments in debt or equity
securities.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventory at December 31, consists of:
1995 1994
------------------------------------
(In thousands)
Raw materials $909 $1,262
Work-in-process 237 377
Finished goods 520 316
------------------------------------
$1,666 $1,955
====================================
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the
straight-line method for financial reporting over estimated useful lives of two
to five years. Assets under capitalized leases are amortized over the shorter of
the term of the lease or their useful lives, and such amortization is included
with depreciation expense. Property and equipment at December 31, consists of:
1995 1994
------------------------------------
(In thousands)
Machinery and equipment $1,412 $1,458
Computer Equipment 599 503
Furniture and fixtures 207 207
Leasehold improvements 167 167
------------------------------------
2,385 2,335
Less accumulated depreciation and (2,181) (2,079)
amortization
------------------------------------
$204 $256
====================================
NET LOSS PER SHARE
Net loss per share for the years ended December 31, 1995, 1994 and 1993 is
based solely on weighted average shares of common stock outstanding during the
period. Common equivalent shares have not been considered in the computation
since their inclusion would have an antidilutive effect.
26
<PAGE>
REVENUE RECOGNITION
Revenues are recognized at time of shipment. A provision for the estimated
future cost of warranty is made at the time a sale is recorded.
CONCENTRATION OF CREDIT RISK, SIGNIFICANT CUSTOMERS AND EXPORT SALES
The Company performs on-going credit analysis of its customers. The Company
maintains reserves for potential credit losses and such losses have been within
management's expectations. One customer accounted for 21%, 57% and 53% of
revenues in 1995, 1994 and 1993 respectively.
The Company had export sales by region as follows:
1995 1994 1993
---------------- ----------------- ---------------
(In thousands)
Europe $1,948 $4,291 $7,400
Pacific Rim 1,192 139 1,363
Canada 248 393 82
Other 282 363 1,354
---------------- ----------------- ---------------
TOTAL $3,670 $5,186 $10,199
================ ================= ===============
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation," which is effective for the
Company's December 31, 1996 financial statements. Statement 123 allows companies
to either account for stock-based compensation under the new provisions of
Statement 123 or under the provisions of APB 25, but requires pro forma
disclosure in the footnotes to the financial statements as if the measurement
provisions of Statement 123 had been adopted. The Company intends to continue
accounting for its stock-based compensation in accordance with the provisions of
APB 25. As such, the adoption of Statement 123 will not impact the financial
position or the results of operations of the Company.
2. TAXES ON INCOME
Effective January 1, 1993, the Company changed its method of accounting for
income taxes to the liability method required by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). As
permitted under the new standard, prior years' financial statements have not
been restated. The cumulative effect of adopting SFAS 109 was not material.
27
<PAGE>
The provision for income taxes for each of the three years ended December
31, consists of:
1995 1994 1993
----------------- ---------------- ----------------
(In thousands)
Federal:
Current ---- ---- ----
Deferred (prepaid) ---- ---- 232
----------------- ---------------- ----------------
---- ---- 232
State:
Current ---- ---- ----
----------------- ---------------- ----------------
$ ---- $ ---- $232
================= ================ ================
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rates to income before income taxes. The source
and tax effect of the differences is as follows:
1995 1994 1993
----------- ---------------- ----------------
(In thousands)
Statutory Rate (35)% (35)% (35)%
Purchase of ---- ---- ----
in-process
technology
Foreign sales corporation ---- ---- ----
Other ---- ---- ----
NOL's not benefited 35% 35% 35%
which have been
reserved
Increase in valuation ---- ---- 4%
reserve
----------- ---------------- ----------------
---- ---- 4%
=========== ================ ================
28
<PAGE>
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities for 1995 and 1994 are as follows:
1995 1994
-------------- -------------------
(In thousands)
Deferred tax assets:
Net Operating Loss Carryforwards $7,175 $5,168
Research Credits (expire 2005-2009) 642 577
Inventory valuation adjustment 188 206
Bad Debt Reserve 10 181
Other 751 706
-------------- -------------------
Total deferred tax asset 8,766 6,838
Valuation allowance for deferred tax assets (8,766) (6,838)
-------------- -------------------
Net deferred tax assets $ ---- $ ----
============== ===================
As of December 31, 1995, the Company had federal and state net operating
loss carryforwards of approximately $18,800,000 and $8,400,000 respectively. The
change in the Company's valuation allowance from 1993 to 1994 was an increase of
$2,601,000. The net operating loss and credit carryforwards will expire at
various dates through 2010 if not utilized.
The ownership change provisions of the Internal Revenue Code of 1986
and similar state provisions would limit utilization of the carryforwards should
there be a substantial change in the Company's ownership. The annual limitation
may result in the expiration of net operating losses and credits before
utilization.
3. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leased certain equipment under noncancellable capital leases.
The cost of assets under capital leases as of December 31, 1994 was
approximately $236,000 and accumulated amortization applied to assets under
capital leases was $236,000 and $231,000 at December 31, 1995 and in 1994
respectively. The Company leases certain of its facilities and equipment under a
noncancellable operating lease. Rent expense was $281,000, $279,000 and $271,000
in 1995, 1994 and 1993, respectively.
The following is a schedule by year of future minimum lease payments at
December 31, 1995:
Operating
Leases
---------------
(In thousands)
Year ending December 31,
1996 $245
1997 24
---
Total minimum payments required $269
====
CONTINGENCIES
29
<PAGE>
AMERICAN DENTAL TECHNOLOGIES, INC. V. SUNRISE TECHNOLOGIES
INTERNATIONAL, INC.
In October 1993, the Company filed an action against American Dental
Technologies, Inc., formerly American Dental Laser, Inc., in Alameda County
Superior Court. The complaint asserts a cause of action for breach of contract
and seeks compensatory damages in excess of $900,000, as well as attorneys' fees
and costs. The case arises from a dispute between the parties regarding their
rights and obligations under the terms of the settlement agreement that
terminated their manufacturing/distribution relationship for dental products. In
December 27, 1993, ADT filed a general answer to the complaint denying all
material allegations thereof and asserting various affirmative defenses. In
addition, ADT filed a cross-complaint against the Company asserting causes of
action for breach of contract, fraud, unfair competition, unfair trade
practices, interference with contract and prospective economic advantage,
indemnity, and injunctive and declaratory relief. The Company filed its answer
to the cross-complaint in January 1994, generally denying all the allegations
thereof and asserting various affirmative defenses. This matter was brought to
trial in July 1995, resulting in a jury verdict in the Company's favor on July
28, 1995. Subsequently, on November 14, 1995, ADT deposited with the court a
cashier's check in the amount of $1,410,267 and filed an appeal of the jury
verdict, which is presently pending. Such amount has not been recorded on the
Company's book pending outcome of the appeal. The Company believes the outcome
of this legal proceeding will not have a material adverse effect on the
financial position, results of operations or liquidity of the Company.
SUNRISE TECHNOLOGIES INTERNATIONAL, INC AND DANVILLE ENGINEERING, INC. V.
AMERICAN DENTAL TECHNOLOGIES, INC.
In May 1994, the Company and Danville Engineering, Inc. filed two separate
actions against ADT in the U.S. District Court for the Northern District of
California seeking a declaration of invalidity and non-infringement of five
patents related to air-abrasive dental technology. The patents at issue are
either owned or exclusively licensed by ADT. ADT acknowledged the patents in one
of the cases and did not cover Sunrise products. Accordingly, this action was
dismissed. ADT brought a motion to dismiss both complaints for lack of subject
matter jurisdiction, which was denied on July 7, 1994. ADT answered the
complaints on October 12, 1994. The answers assert numerous affirmative
defenses, as well as a counterclaim that the Company and Danville have infringed
one of ADT's patents by the manufacture, sale or use of the MicroPrep. The
counterclaim seeks damages, injunctive relief, attorneys' fees, costs, and a
declaration of validity and infringement. ADT also seeks a declaration of
validity for the remaining patents. Discovery is currently pending. The Company
believes it has meritorious defenses to the cross-complaint. The Company
believes the outcome of this legal proceeding will not have a material adverse
effect on the financial position, results of operations or liquidity of the
Company.
AMERICAN DENTAL TECHNOLOGIES, INC. V. SUNRISE TECHNOLOGIES INTERNATIONAL,
INC. ET AL.
In October 1994, ADT filed an action against the Company and several of its
distributors in the U.S. District Court for the Eastern District of Michigan,
alleging infringement of a newly-issued patent assigned to ADT, which covers
technology and uses related to air-abrasive dental products. This action appears
to involve substantially the same issues as the actions filed by the Company in
the Northern District of California, but is based on a patent which has not
issued at the time the Company filed its claims. In December 1994, the Company
filed a motion to dismiss this action as to one of the distributor defendants
and to transfer the remainder of the case to California for consolidation with
the California declaratory relief actions filed by the Company against ADT. The
Company's motion was granted in May 1995. The case was transferred and has been
consolidated. Discovery is currently pending. The Company vigorously denies the
plaintiffs allegations and believes it has meritorious defenses to this claim.
The Company believes the outcome of this legal proceeding will not have a
material adverse effect on the financial position, results of operations or
liquidity of the Company.
30
<PAGE>
4. STOCKHOLDERS' EQUITY
COMMON STOCK
As of December 31, 1995, there remains 38,340 warrants to purchase common
stock which were issued in connection with the acquisition of Laser Biotech,
Inc. in April 1992. The exercise prices of these warrants range from $3.70 to
$9.26 per share.
In September 1995, the Company completed a private placement of 13,000,000
shares of common stock. In connection with the private placement, the placement
agent received a warrant to purchase 675,000 shares of common stock. The
exercise price for these warrants is $0.55 and they are excercisable at any time
before September 6, 2000.
In June 1995, the Company completed a private placement of 2,100,000 shares
of common stock.
In February 1994, the Company completed a private placement of 1,250,000
shares of common stock. In connection with the private placement, the placement
agent received a warrant to purchase 62,500 shares of common stock. The exercise
price for these warrants is $6.00 and they are exercisable at any time before
February 8, 1999. In conjunction with the 1992 private placement, the placement
agent received a warrant to purchase 25,000 shares of common stock for $8.05 per
share. The warrant is exercisable at any time prior to August 28, 1997 and is
not redeemable by the Company.
As of December 31, 1995, there were warrants outstanding to purchase
800,840 shares of common stock.
STOCK OPTION PLAN
In 1988, the Company adopted the 1988 Stock Option Plan (the "Plan") under
which employees, directors and consultants may be granted incentive or
nonstatutory stock options. Under the Plan, incentive stock options must be
granted at an exercise price of not less than the fair market value of the
common stock at the date of grant, except that options granted to shareholders
owning greater than 10 percent of the total voting power of all classes of stock
of the Company must have an exercise price of not less than 110 percent of the
fair market value at the date of grant. Nonstatutory options must be at least 85
percent of fair market value at the date of grant. Options granted generally
provide that 25 percent of the shares subject thereto become exercisable one
year after the date of grant and 1/36 of the remaining shares subject to the
option become exercisable each month thereafter. The Plan expires in 1998.
31
<PAGE>
Information with respect to Plan activity is as follows:
Outstanding Options
-----------------------------------
Shares
Available Share
For Grant Shares Price
------------ ----------------------------------
Balance, December 31, 1993 415,350 771,900 $0.75 - $8.50
Shares reserved 440,000 ---- ----
Granted (1,168,214) 1,168,214 $2.00
Exercised ---- (189,561) $0.75 - $5.63
Canceled 582,339 (582,339) $1.25 - $8.50
------------ -------------
Balance, December 31, 1994 269,475 1,168,214 $0.75 - $2.00
Shares reserved 1,550,000
Granted (1,633,331) 1,633,331 $0.97 - $2.50
Exercised ---- ---- ----
Canceled 1,497,381 (1,497,381) $1.00
------------ -------------
Balance, December 31, 1995 1,683,525 1,304,164 $0.75 - $2.50
============ =============
As of December 31, 1995 and 1994, options to purchase 472,840 and 555,119
shares respectively were exercisable. In 1995, 1,058,331 options to purchase
shares were reissued at $1.00 per share prices under an option exchange program.
During 1994 options outstanding were cancelled and reissued under an option
exchange program.
EMPLOYEE STOCK PURCHASE PLAN
In June 1992, the Company adopted the 1992 Employee Stock Purchase Plan
under which 200,000 shares have been reserved for issuance. Eligible employees
may purchase common stock at 85 percent of the lower of the closing price of the
stock on the offering date or the exercise date determined by the Board of
Directors. Purchases are limited to 10 percent of each employee's compensation.
As of December 31, 1995 and 1994, 34,689 shares had been issued under the plan.
5. SALE OF ASSETS
On August 31, 1994, the Company sold certain assets associated with its
surgical laser business to David Hennings, an individual, in exchange for
275,000 shares of the Company's common stock held by Mr. Hennings and a note
receivable of $48,000. The Company also granted royalty-bearing licenses to
certain patents owned by the Company. Up until the time of the transaction, Mr.
Hennings was an employee and officer of the Company. Subsequent to the
transaction, Mr Hennings also resigned his position on the Company's board of
directors. The loss in disposition of these assets, which was facilitated
through the formation of a new subsidiary, was not significant.
32
<PAGE>
6. SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
1995 1994 1993
--------- ------------- ------------
(In thousands)
CASH PAID (REFUNDED) DURING THE YEAR FOR:
Interest ---- ---- $60
Income taxes ---- ---- $(826)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
1995 1994 1993
--------- ------------- ------------
(In thousands)
Acquisition of equipment pursuant to
capital gains lease obligations ---- ---- $8
33
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
<TABLE>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Balance at
of Period Expenses End
Deductions Other(A) of Period
----------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Reserves and allowances deducted
from assets accounts:
Allowance for uncollectible accounts $135 $846 $ ---- $ ---- $981
Allowance for inventory $349 $537 $ ---- $ ---- $886
Year ended December 31, 1994
Reserves and allowances deducted
from assets accounts:
Allowance for uncollectible accounts $981 $ ---- $ ---- $(531) $450
Allowance for inventory $886 $ ---- $ ---- $(373) $513
Year ended December 31, 1995
Reserves and allowances deducted
from assets accounts:
Allowance for uncollectible accounts $450 $25 $(450) $---- $25
Allowance for inventory $513 $250 $(295) $---- $468
<FN>
(A)Amounts relate to valuation allowance assigned to disposed assets as
discussed in Note 5 to the Consolidated Financial Statements.
</FN>
</TABLE>
34
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF PER SHARE LOSS
Weighted average shares:
Years Ended December 31,
---------------------------------
1995 1994 1993
PRIMARY:
Common stock 14,935,468 10,129,283 8,955,292
Warrants and stock options ---- ---- ----
---------- ---------- ---------
Weighted average common and common
equivalent shares outstanding 14,935,468 10,129,283 8,955,292
========== ========== =========
FULLY DILUTED:
Common stock 14,935,468 10,129,283 8,955,292
Warrants and stock options ---- ---- ----
---------- ---------- ---------
Weighted average common and common
equivalent shares outstanding 14,935,468 10,129,283 8,955,292
========== ========== =========
Fully diluted earnings per share are not presented on the face of the
Consolidated Statement of Operations since they are not materially different
than primary earnings per share.
35
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-3, No. 33-53450) and in the related Prospectus, and in the
Registration Statement (Form S-8, No. 33-53466) pertaining to the 1988 Stock
Option Plan and in the Registration Statement (Form S-8, No. 33-53448)
pertaining to the 1992 Employee Stock Purchase Plan of Sunrise Technologies
International, Inc. of our report dated March 1, 1996 with respect to the
consolidated financial statements and schedule of Sunrise Technologies
International, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1995.
ERNST & YOUNG LLP
PALO ALTO, CALIFORNIA
MARCH 1, 1996
36
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of Fremont, State of
California, on the 24th day of March, 1995.
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
By: /s/ David W. Light
----------------------------------------------
President and Chief Executive Officer
POWER OF ATTORNEY
Each of the officers and directors of Sunrise Technologies International,
Inc. whose signature appears below hereby constitutes and appoints David W.
Light and Joseph W. Shaffer, and each of them, their true and lawful
attorneys-in-fact and agents, with full power and substitution, each with power
to act alone, to sign and execute on behalf of the undersigned any amendment or
amendments to this Report on Form 10-K, and to perform any acts necessary to be
done in order to file such amendment, and each of the undersigned does hereby
ratify and confirm all that such attorneys-in-fact and agents, or their or his
substitutes, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ David W. Light President and Chief Executive Officer March 28, 1996
------------------------
/s/ Joseph W.Shaffer Vice President and Director March 28, 1996
-----------------------
/s/ Martin D. Meeker Vice President, Finance and March 28, 1996
----------------------- Chief Financial Officer (Principal
Financial and Accounting Officer)
Director March 28, 1996
/s/ Harold F. Enright
-----------------------
/s/ Joseph D. Koenig Director March 28, 1996
-----------------------
/s/ Ronald A. Slocum Director March 28, 1996
-----------------------
</TABLE>
37
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> Form 10K
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,574
<SECURITIES> 0
<RECEIVABLES> 1,048
<ALLOWANCES> 0
<INVENTORY> 1,666
<CURRENT-ASSETS> 6,485
<PP&E> 2,385
<DEPRECIATION> (2,181)
<TOTAL-ASSETS> 6,689
<CURRENT-LIABILITIES> 1,944
<BONDS> 0
<COMMON> 25
0
0
<OTHER-SE> 4,720
<TOTAL-LIABILITY-AND-EQUITY> 6,689
<SALES> 5,254
<TOTAL-REVENUES> 5,254
<CGS> 3,657
<TOTAL-COSTS> 5,824
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (57)
<INCOME-PRETAX> (4,130)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,130)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,130)
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.00
</TABLE>
