As filed with the Securities and Exchange Commission on September 5, 1997
Registration No. 333-________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Sunrise Technologies International, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
77-0148208
(I.R.S. Employer Identification Number)
47265 Fremont Boulevard
Fremont, California 94538
(510) 623-9001
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
The Prentice Hall Corporation
1013 Centre Road
Wilmington, Delaware 19805
(302) 998-0595
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
with copies to:
Don S. Hershman, Esq.
Michelle M. Warner, Esq.
Holleb & Coff
55 East Monroe, Suite 4100
Chicago, Illinois 60603
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]__________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
====================================================================================================================================
Proposed maximum Proposed maximum
Title of each class of securities Amount to be offering price aggregate Amount of
to be registered registered per unit (1) offering price (1) registration fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock......................... 10,342,090 $ 1.4688 $ 15,190,461.79 $ 4,603.17
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<FN>
(1) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended.
The above calculation is based on the average of the reported bid and asked
prices of the common stock on the OTC Bulletin Board on September 3, 1997.
</FN>
</TABLE>
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 5, 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
10,342,090 Shares
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Common Stock
-----------------
The common stock, par value $0.001 per share ("Common Stock"), of Sunrise
Technologies International, Inc., a Delaware corporation ("Sunrise" and,
together with its subsidiaries, the "Company"), offered hereby (the "Offered
Shares") may be sold by certain stockholders, note holders and warrant holders
of Sunrise (collectively, the "Selling Securityholders"). The Company will not
receive any of the proceeds from the sale of the Offered Shares. Information
regarding the Selling Securityholders is set forth herein under the heading
"Selling Securityholders."
The Common Stock currently is traded in the over-the-counter market. Price
information for the Common Stock may be obtained from the OTC Bulletin Board. On
September 3, 1997, the closing price reported on the OTC Bulletin Board was
$1.47 per share. See "Description of Capital Stock -- Price Range of Common
Stock."
ACQUISITION OF THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
Some or all of the Offered Shares may be offered for sale and sold from
time to time by the Selling Securityholders in the over-the-counter market (or
any national securities exchange or interdealer quotation system on which the
Common Stock may then be listed), in privately negotiated transactions (which
may include block transactions) or otherwise. In addition, the Selling
Securityholders may engage in short sales and other transactions in the Common
Stock or derivatives thereof, and may pledge, sell, deliver or otherwise
transfer the Offered Shares in connection therewith. This Prospectus may be used
by the Selling Securityholders or by any broker-dealer who may participate in
sales of the Offered Shares. Participating broker-dealers may act as agents or
principals or both and may receive commissions, discounts or concessions in
connection with sales or other transfers of Offered Shares. See "Selling
Securityholders." Sunrise has agreed to pay the expenses of registering the
Offered Shares on behalf of the Selling Securityholders, other than
broker-dealer commissions, discounts or concessions and any legal fees incurred
by the Selling Securityholders in connection with sales of the Offered Shares.
No person is authorized by the Company or the Selling Securityholders to
give any information or to make any representations other than those contained
in this Prospectus. Neither the delivery of this Prospectus nor any sale made
hereunder shall create any implication that there has not been a change in the
information contained herein since the date hereof.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is ________________, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-2 (together with any
amendments, supplements, exhibits, annexes and schedules thereto, the
"Registration Statement") pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), and the rules and regulations thereunder, with respect
to the Offered Shares. This Prospectus does not include all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements made in
the Prospectus as to the contents of any contract, agreement or other document
referred to in the Registration Statement are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices located
at Seven World Trade Center, Suite 1300, New York, New York 10048, and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material can be obtained by mail from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, reports, proxy
statements and other information that the Company files with the Commission
electronically are contained in the Internet Web site maintained by the
Commission at http://www.sec.gov.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents heretofore filed by the Company with the Commission
pursuant to Section 13(a) or 15(d) of the Exchange Act (File No. 0-17816) are
hereby incorporated herein by reference: (i) annual report on Form 10-K for the
year ended December 31, 1996 (filed April 11, 1997); (ii) quarterly report on
Form 10-Q for the quarter ended March 31, 1997 (filed May 15, 1997); (iii)
current reports on Form 8-K dated March 12, 1997 (filed March 27, 1997), and
June 26, 1997 (filed July 11, 1997); (iv) amendment to the current report on
Form 8-K dated June 26, 1997 (filed August 13, 1997); and (v) quarterly report
on Form 10-Q for the quarter ended June 30, 1997 (filed August 14, 1997).
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is incorporated or deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the foregoing documents incorporated by reference herein (other
than exhibits to any such document unless such exhibits are specifically
incorporated by reference into such document). Requests for such copies should
be directed to the Secretary of Sunrise, 47265 Fremont Boulevard, Fremont,
California 94538; telephone (510) 623-9001.
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, as it may be amended or supplemented, and certain
documents incorporated by reference herein contain or may contain both
statements of historical fact and "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Examples of forward-looking statements include: (i) projections of revenue,
income, earnings, capital expenditures, dividends, capital structure and other
financial items; (ii) statements of the plans and objectives of the Company or
its management; (iii) statements of the future economic performance of the
Company; and (iv) the assumptions underlying statements regarding the Company or
its business. Important factors, risks and uncertainties that could cause actual
results to differ materially from any forward-looking statements ("Cautionary
Statements") are disclosed herein, under the caption "Risk Factors" and
elsewhere, and in certain documents incorporated by reference herein. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information contained elsewhere in this Prospectus.
The Company
The Company develops, manufactures and markets laser systems for
applications in ophthalmology. All of the Company's business activities,
including engineering and development, manufacturing, assembly and testing take
place at the Company's facility in Fremont, California.
Since mid-1992, the Company has focused a significant portion of its
efforts on engineering and development of its holmium laser corneal shaping
product (the "LTK System") for the treatment of refractive errors of the eye,
such as hyperopia (farsightedness) and presbyopia (age-related loss of near
focusing ability). The LTK System, which is based upon patented technology
acquired in the Company's acquisitions of in-process technology from Laser
Biotech, Inc. and Emmetropix Corporation in 1992, currently is undergoing
premarket clinical studies in the United States, as required by the Food and
Drug Administration. Prior to this time the Company was primarily a developer
and manufacturer of dental laser systems. See "Business."
The Company has incurred substantial losses in the past five years, which
have seriously depleted its working capital. Historically, the Company has been
able to raise working capital through private placements of Common Stock and
securities convertible into Common Stock. Private placements of Common Stock
raised approximately $15,296,000 in net proceeds between 1994 and 1996. In the
first quarter of 1997, the Company issued, in a series of private placements, 5%
redeemable convertible notes due 1999 accompanied by warrants to purchase Common
Stock for aggregate net proceeds of approximately $3,743,000.
Sunrise was incorporated in 1987 under the laws of the State of California
and was reincorporated in 1993 under the laws of the State of Delaware. The
principal executive offices of the Company are located at 47265 Fremont
Boulevard, Fremont, California 94538; telephone (510) 623-9001.
Recent Developments
Sale of Dental Business
On June 26, 1997, the Company sold substantially all of its assets
associated with its dental laser, air abrasion and composite curing systems to
Lares Research, a California corporation ("Lares"). At closing, Lares delivered
to the Company $4,000,000 in cash and a promissory note in the amount of
$1,500,000. Prior to the sale of the dental assets, a substantial portion of the
Company's revenues (98% in 1996 and 80% for the first six months of 1997) were
derived from the domestic and international sales of the Company's dental
products. However, operation of the dental business had contributed to the
Company's substantial losses in each of the last five years.
The Company intends to use the net proceeds from the sale of the dental
assets primarily for clinical trials for its ophthalmic products, including the
LTK System.
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Issuance of Convertible Notes
During the first quarter of 1997, the Company issued and sold, without
registration under the Securities Act in a series of private placements (the
"1997 Notes Placement"), an aggregate gross principal amount of $4,100,750 5%
redeemable convertible notes due 1999 (collectively, the "Notes") and
accompanying warrants to purchase Common Stock (collectively, the "Warrants").
An aggregate principal amount of $500,000 of the Notes were issued in
reliance on Regulation S under the Securities Act (the "Regulation S Notes"),
together with Warrants (the "Regulation S Warrants"). The Regulation S Notes are
convertible into Common Stock at a conversion price of $1.00 of Regulation S
Notes for each share of Common Stock. A Regulation S Warrant to purchase one
share of Common Stock, at an exercise price of $1.25, was issued without
additional consideration for each $2.00 of Regulation S Notes purchased. An
aggregate principal amount of $3,600,750 of the Notes were issued in reliance on
Regulation D under the Securities Act to "accredited investors" within the
meaning of Rule 501 thereunder (the "Regulation D Notes"), together with
Warrants (the "Regulation D Warrants"). The Regulation D Notes are convertible
into Common Stock at a conversion price of $0.875 of Regulation D Notes for each
share of Common Stock. A Regulation D Warrant to purchase one share of Common
Stock, at an exercise price of $1.00, was issued without additional
consideration for each $1.75 of Regulation D Notes purchased.
The Notes are convertible at any time prior to maturity, at the option of
the holders thereof, at the respective conversion prices discussed above,
subject to adjustment for any stock dividends, certain distributions, stock
splits or combinations or reclassifications of the Common Stock. The Notes
mature two years from their respective issue dates, and interest on the Notes is
cumulative from the respective issue date at an annual rate of 5%, payable at
maturity or conversion. The Notes are secured by a first lien on all of the
ophthalmic patents and patent applications of the Company. The Warrants may be
exercised at any time within five years from the respective date of their
issuance.
In connection with the 1997 Notes Placement, the Company issued to
Pennsylvania Merchant Group Ltd ("PMG"), the placement agent, warrants (the
"1997 PMG Warrants") to purchase up to 230,756 shares of Common Stock, an amount
equal to 5% of the shares of Common Stock into which the Notes are convertible.
The 1997 PMG Warrants are exercisable at an exercise price of $0.875 per share,
at any time within five years from the date of their issuance.
The Selling Securityholders
The Offered Shares, other than shares underlying the Placement Agent
Warrants (defined below), were acquired by the Selling Securityholders either:
(a) in July and August 1996 pursuant to private placements in the United States
in reliance on Regulation D and outside the United States in reliance on
Regulation S under the Securities Act (the "1996 Equity Placement"); or (b) in
the 1997 Notes Placement. Absent registration under the Securities Act, the
Offered Shares are subject to certain limitations on resale. The Registration
Statement of which this Prospectus forms a part has been filed in satisfaction
of certain registration rights granted by Sunrise to the Selling
Securityholders.
As of the date of this Prospectus, 1,084,977 of the Offered Shares have not
been issued by the Company but may be issued at any time upon exercise by PMG of
certain warrants, including the 1997 PMG Warrants, issued to PMG in connection
with certain transactions between the Company and PMG (collectively, the
"Placement Agent Warrants"). Also, certain of the Offered Shares have not been
issued
4
<PAGE>
by the Company but may be issued at any time upon conversion of Notes or
exercise of the Warrants by certain Selling Securityholders. See "Selling
Securityholders."
Plan of Distribution
The Offered Shares may be offered for sale and sold from time to time by
the Selling Securityholders in the over-the-counter market (or any national
securities exchange or interdealer quotation system on which the Common Stock
may then be listed), in privately negotiated transactions (which may include
block transactions) or otherwise. In addition, the Selling Securityholders may
engage in short sales and other transactions in the Common Stock or derivatives
thereof, and may pledge, sell, deliver or otherwise transfer the Offered Shares
in connection therewith. This Prospectus may be used by the Selling
Securityholders or by any broker-dealer who may participate in sales of the
Offered Shares. Participating broker-dealers may act as agents or principals or
both and may receive commissions, discounts or concessions in connection with
sales or other transfers of the Offered Shares. See "Plan of Distribution."
RISK FACTORS
The following factors should be considered carefully in evaluating an
acquisition of Common Stock.
History of Losses; Profitability Uncertain; Cash Flow Deficits
Since 1992, the Company has incurred substantial losses which have depleted
its working capital and reduced its stockholders' equity. The clinical trials
for its ophthalmic products, including the LTK System, will continue to be a
significant consumer of cash as the revenues from the Company's business are not
expected to be sufficient to cover its operating costs unless and until approval
from the Food and Drug Administration (the "FDA") is obtained to permit domestic
sale of the LTK System. There can be no assurance that FDA approval will be
obtained or when such approval may be obtained, but such approval is not
expected until late 1999 at the earliest.
The negative cash flows of the Company have been funded during 1995 and
1996 by the sale of additional equity. At December 31, 1996, cash and cash
equivalents of the Company was approximately $647,000. The Company's current
operations continue to be cash flow negative, limiting the Company's working
capital resources. Working capital at June 30, 1997, including the net proceeds
from the sale of the dental assets (approximately $3,589,000) and the net
proceeds from the 1997 Notes Placement (approximately $3,743,000), was
approximately $3,532,000. The Company's ability to continue as a going concern
is dependent upon performing profitably or obtaining further financing.
Management currently believes that existing working capital will provide
sufficient funds for the Company's planned operations in 1997 but that it will
be required to raise additional working capital to fund its activities beyond
1997. Any additional equity financing may be dilutive to the Company's
stockholders. No assurance can be given that additional financing will be
available or that, if available, it will be available on terms favorable to the
Company and its stockholders. If funds are not available to satisfy the
Company's operating requirements, the Company may be required to reduce
substantially, or eliminate, certain areas of its product development
activities, limit or suspend its operations in their entirety or, under certain
circumstances, be forced to seek protection from creditors under the Bankruptcy
Act.
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Continuing Losses Expected
The Company expects to report operating losses during 1997 and beyond. The
losses will come primarily from the expenses of the FDA approval process and
underlying clinical trials related to the LTK System. The Company will not have
any domestic revenues from this product line, other than limited sales to
doctors performing clinical trials, unless and until FDA approval is obtained.
The international revenues from the LTK product line are not projected to be
sufficient to cover the cost of the approval process.
Going Concern Report
The Company's independent auditors have included an explanatory paragraph
in its report covering the Company's financial statements for the year ended
December 31, 1996, which paragraph emphasizes substantial doubt as to the
Company's ability to continue as a going concern, based primarily on the
recurring operating losses that have been incurred by the Company. Failure to
return to profitable operations or to obtain other financing could result in a
reorganization or complete liquidation of the Company.
Effects of FDA Approval Requirements and Government Regulation on Marketability
of the Company's Systems
The Company's activities are subject to extensive regulation by the FDA and
similar health authorities in certain foreign countries. The LTK System is
regulated as a Class III medical device by the FDA under the Food, Drug and
Cosmetic Act (the "FDC Act"). Class III medical devices require a Premarket
Approval ("PMA") by the FDA prior to commercial sale in the United States. The
PMA process (and underlying clinical studies) is lengthy, the outcome is
difficult to predict and requires substantial commitments of the Company's
financial resources and management's time and effort. Delays in obtaining or
failure to obtain required regulatory approvals or clearances in the United
States and other countries would postpone or prevent the marketing of the LTK
System and other devices and would impair the Company's ability to generate
funds from operations, which in turn would have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will be able to obtain in a timely manner, if at
all, required PMA in the United States for intended uses of the LTK System, or
for any other devices for which the Company may seek approvals or clearances.
The Company has been issued an Investigational Device Exemption (an "IDE")
by the FDA to permit it to generate data necessary to support a PMA application
for the use and marketing of the LTK System in laser thermal keratoplasty
("LTK") applications for hyperopia (farsightedness). The FDA has advised the
Company that the initial Phase IIa clinical trials conducted by the Company did
not produce enough statistically significant data to enable the FDA to determine
that the treatment algorithms employed in such clinical trials were predictable
or effective for the treatment of hyperopia (farsightedness). On September 5,
1996, the FDA authorized the Company to treat an additional 100 subjects at five
United States locations in a continuation of Phase IIa clinical trials using a
treatment algorithm developed by the Company in the course of the initial Phase
IIa clinical trials and in the course of studies conducted by ophthalmologists
in Mexico, Great Britain and Canada. Enrollment of patients in the continued
clinical trial, which was completed in July 1997, was limited to the treatment
of 40 subjects for the +1 diopter treatment group and 60 subjects for the +2
diopter treatment group. In August 1997, the Company received conditional
approval from the FDA to expand the investigation to include an additional 100
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patients using the same treatment algorithm. Such approval is conditional on the
Company agreeing to continue the investigation at the same five sites previously
approved and at three additional sites that were approved during treatment of
the first 100 patients, as well as adding tests that the Company has already
initiated to evaluate glare and contrast sensitivity.
The FDA will grant a PMA with respect to a particular procedure performed
with the LTK System only if and when it is satisfied that the use of the device
for that procedure is a safe and effective treatment for the condition
indicated. In granting a PMA, the FDA may restrict the types of patients who may
be treated, thereby limiting the market acceptance of the LTK System. Even if
FDA approval is obtained, a marketed product is subject to continual review.
Later discovery of previously unknown problems or failure to comply with
applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market, in addition to
possible criminal and/or civil proceedings. Modifications to a device that is
the subject of an approved PMA, its labeling, or manufacturing process may
require approval by the FDA of PMA supplements or new PMAs. Supplements to a PMA
often require the submission of the same type of information required for an
initial PMA, except the supplement is generally limited to information needed to
support the proposed change from the product covered by the original PMA. There
can be no assurance the LTK System will be shown to be safe and effective, or
that it will be approved or cleared by the FDA or foreign regulatory bodies, for
the intended uses for which it is being investigated. Modifications could also
be required if the Company is unable to reach a satisfactory licensing
arrangement with the University of Miami on a jointly developed component of the
delivery system. See "-- Patent Concerns" below.
Any products manufactured or distributed by the Company will be subject to
pervasive and continuing regulation by the FDA. The FDC Act also requires the
Company to manufacture its products in registered establishments, in accordance
with the FDA's Good Manufacturing Practices ("GMP") regulations, and to list its
devices with the FDA. Such manufacturing facilities are subject to periodic GMP
inspections by the FDA. GMP regulations impose certain procedural and
documentation requirements with respect to manufacturing and quality assurance
activities. The FDA has proposed changes to the GMP regulations which will
likely increase the cost of compliance with GMP requirements. Labeling and
promotional activities are subject to scrutiny by the FDA and, and in certain
instances, by the Federal Trade Commission.
In addition, the introduction of the Company's products in foreign
countries may require obtaining individual foreign regulatory clearances in
numerous countries. Although the Company's products have been sold in
approximately 15 foreign countries, sales of the LTK System require rigorous
regulatory approvals before being sold in the United States and Japan. There can
be no assurance that the Company will be able to obtain regulatory clearances
for its products in the United States or foreign markets.
Uncertain Market Acceptance of the LTK System
Although the Company has another ophthalmic laser product, the gLase 210,
the Company has and intends to concentrate its efforts primarily on the
development of the LTK System, a holmium laser corneal shaping product, for the
correction of hyperopia (farsightedness) and will be dependent upon the
successful development of that system to generate increased revenues. Use of the
LTK System for LTK has not yet been introduced commercially in the United
States, and there can be no assurance that if approved by the FDA, such system
will be accepted by either the ophthalmic community or the general population as
an alternative to existing methods of treating refractive vision disorders. Many
ophthalmologists may have already invested significant time and resources in
developing expertise in other
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<PAGE>
corrective ophthalmic techniques. Acceptance of LTK may be affected adversely by
its cost, concerns relating to its safety and efficacy, the general resistance
to use of laser products on the eye, the effectiveness of alternative methods of
correcting refractive vision disorders, the lack of long-term follow-up data and
the possibility of unknown side effects. Promotional efforts by suppliers of
products or procedures which are alternatives to the LTK System, including
eyeglasses, contact lenses and laser and non-laser surgical procedures, may also
adversely affect the market acceptance of LTK. The Company's failure to achieve
broad market acceptance of LTK will have a material adverse effect on the
Company's business, financial condition and results of operations.
Safety and Efficacy Concerns; Lack of Long-Term Follow-Up
The Company has developed only limited clinical data to date on the safety
and efficacy of the LTK System in correcting hyperopia (farsightedness), and
related long-term safety and efficacy data. The FDA has not yet determined
whether the LTK System will prove to be safe or effective for the predictable
and reliable treatment of hyperopia (farsightedness) or other common vision
problems. Potential complications and side effects from the use of the LTK
System include mild foreign body sensation, temporary increased light
sensitivity, modest fluctuations in refractive capabilities during healing,
unintended over or under-corrections, regression of effect, and induced
astigmatism. There can be no assurance that long-term safety and efficacy data
when collected will be consistent with the clinical trial results previously
obtained or will demonstrate that the LTK System can be used safely and
successfully to treat hyperopia (farsightedness) in a broad segment of the
population on a long-term basis.
Loss of Dental Revenues
Prior to the sale of the dental assets in June 1997, the Company's revenues
were substantially derived from the sale of its dental laser and air abrasive
products. These sales represented 98% and 80% of the Company's revenues in 1996
and the first six months of 1997, respectively. By selling the dental assets,
the Company has lost a significant source of continued revenue, although the
dental assets had recently been making a negative contribution to the Company's
financial results.
Limited Trading Market; Application of the Penny Stock Rules
On July 8, 1995, the Common Stock was delisted from The Nasdaq Stock Market
because the Company was unable to maintain the requisite standards for continued
listing. Accordingly, trading of the Common Stock is now conducted on an
electronic bulletin board established for securities that do not meet the Nasdaq
listing requirements. As a result, an investor may find it more difficult to
dispose of, or to obtain accurate quotations as to the price of the Common
Stock.
While the Company intends to eventually pursue being relisted on The Nasdaq
Stock Market, the Company's securities are now subject to the Commission's
"penny stock rules" that impose additional sales practice requirements on
brokers-dealers who sell such securities to persons other than established
customers and accredited investors (generally defined as an investor with a net
worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with a spouse). For transactions covered by this rule, the
broker-dealer must make a special suitability determination for the purchaser
and must have received the purchaser's written consent to the transaction prior
to sale. Consequently, the Company's delisting may affect the ability of
broker-dealers to sell the Company's securities. There can be no assurance that
the Company will be successful in being relisted on The Nasdaq Stock Market in
the near future, if at all.
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The Commission has adopted regulations that define "penny stock" to be any
equity security that has a market price (as defined) of less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a disclosure schedule
relating to the penny stock market. The broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
current quotations of the securities and, if the broker-dealer is the sole
market-maker, the monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. As a result of these regulations, an investor
may find it difficult to dispose of Common Stock.
Competition
The vision correction industry is subject to intense competition. The
significant competitive factors in the industry include price, convenience,
success relative to vision correction, acceptance of new technologies, patient
satisfaction and government approval. Patients with hyperopia (farsightedness)
can achieve vision correction with eyeglasses, contact lenses and possibly with
other technologies and surgical techniques currently under development, such as
corneal implants, lens replacement and surgery using different types of lasers.
The success of any competing alternative to LTK for treating hyperopia
(farsightedness) would have a material adverse effect on the Company's business,
financial condition and results of operations. Most of the Company's competitors
have substantially greater financial capabilities for product development and
marketing than the Company, which may enable such competitors to market their
products or procedures to the consumer and to the ophthalmic community in a more
effective manner.
The excimer laser is the dominant laser used for the treatment of
refractive disorders, although it is not currently approved to treat hyperopia
(farsightedness) in the United States or Japan, other than in limited clinical
trials. In the United States, VISX, Inc. ("VISX") and Summit Technologies, Inc.
("Summit") are the leading manufacturers of excimer refractive surgical systems.
While the Company believes the LTK process offers several distinct advantages
over the use of excimer lasers for treating hyperopia (farsightedness),
including ease of use and decreased invasiveness, both VISX and Summit have
significantly greater financial resources than the Company and have received FDA
approval for their respective excimer laser products for treating myopia
(nearsightedness). In addition, certain of the Company's competitors, including
Summit, have developed LTK devices for the treatment of hyperopia
(farsightedness). The Company believes its LTK System is superior to those of
its competitors and that Summit's holmium laser system may violate certain of
the Company's patents. None of the Company's competitors is currently engaged in
United States clinical trials to approve their LTK devices for treating
hyperopia (farsightedness). Although neither the VISX and Summit excimer laser
products nor the Summit LTK devices are currently approved for treating
hyperopia (farsightedness) in the United States and Summit discontinued its
clinical trials for treating hyperopia (farsightedness) with its holmium laser
system in 1996, any alternative treatment offered by VISX or Summit will have a
competitive advantage because of the name recognition being created by the
current promotion of excimer laser product for correcting myopia
(nearsightedness) using lasers and the fact that VISX and Summit have been able
to establish a base of customers that are currently using their products. See
"Business -- Vision Correction Market."
9
<PAGE>
Patent Concerns
Although the Company believes it holds all of the United States process
patents for the use of holmium lasers in cornea shaping, foreign process patents
and United States and foreign apparatus patents relating to shaping the cornea
with holmium lasers have been issued to others. An apparatus patent, generally,
is a patent on a machine or device. A process patent is a patent on a method of
treating material to produce a particular result or product, or on a new use of
an apparatus, a product or composition. The Company believes it is not
infringing on any patents held by others, however, if patents held by others
were adjudged valid and interpreted broadly in an adversarial proceeding, they
could be deemed to cover one or more aspects of the Company's holmium laser
corneal shaping systems or use of such systems to perform LTK or other
procedures. There can be no assurance that the Company will not be subject to
one or more claims for patent infringement, that the Company would prevail in
any such action or that its patents will afford protection against competitors
with similar technology.
In the event the LTK System is adjudged to infringe a patent in a
particular market, the Company and its customers may be enjoined from making,
selling, and using such system in such market or be required to obtain a
royalty-bearing license, if available, on acceptable terms. Alternatively, in
the event a license is not offered or available, the Company might be required
to redesign those aspects of the LTK System held to infringe so as to avoid
infringement. Any redesign could delay reintroduction of the Company's products
into certain markets, or may be so significant as to be impractical. If redesign
efforts were impractical, the Company could be prevented from manufacturing and
selling the infringing products, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
In addition, the Company has attempted to negotiate with the University of
Miami to reach agreement regarding the non-exclusive use of a component of the
delivery system used in the LTK System which was jointly developed by the
Company and the University. The Company believes that it will be able to make
reasonable arrangements with the University. If, however, the Company is unable
to conclude negotiations with the University successfully, the University may
seek to prohibit the manufacture, sale and use of the delivery system presently
configured in the LTK System. If the Company is forced to redesign the LTK
System, such redesign efforts could be time consuming, expensive and prolong FDA
review.
SELECTED FINANCIAL INFORMATION
The statement of operations data set forth below with respect to the fiscal
years ended December 31, 1994, 1995 and 1996 and the balance sheet data at
December 31, 1995 and 1996 are derived from, and are qualified by reference to
the Company's audited financial statements included elsewhere in this Prospectus
and should be read in conjunction with those financial statements and the notes
thereto. The statement of operations data for the years ended December 31, 1992
and 1993 and the balance sheet data at December 31, 1992, 1993 and 1994 are
derived from audited financial statements not included in this Prospectus. The
statement of operations data for the six months ended June 30, 1996 and 1997 and
the balance sheet data at June 30, 1997 are derived from unaudited financial
statements. The unaudited financial statements have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for such periods.
The results of
10
<PAGE>
operations for the six months ended June 30, 1997 are not necessarily indicative
of results to be expected for the full fiscal year.
The Company's independent auditors have included an explanatory paragraph
in their report covering the Company's financial statements for the year ended
December 31, 1996, which paragraph emphasizes substantial doubt as to the
Company's ability to continue as a going concern, based primarily on the
recurring operating losses that have been incurred by the Company. Failure to
return to profitable operations or to obtain other financing could result in a
reorganization or complete liquidation of the Company.
11
<PAGE>
<TABLE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
Six Months Ended
Fiscal Year Ended December 31, June 30,
1992 1993 1994 1995 1996 1996 1997
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT
OF OPERATIONS DATA:
Net revenues ..................... $ 8,550 $ 11,860 $ 7,578 $ 5,294 $ 5,654 $ 2,560 $ 2,463
Gross profit ..................... 3,604 5,009 1,340 1,637 1,638 522 504
Purchase of in-process
technology ..................... 8,466 -- -- -- -- -- --
Income (loss) from
operations ..................... (13,337) (6,452) (6,917) (4,187) (6,020) (3,025) (3,380)
Income tax expense
(benefit) ...................... (1,612) 232 -- -- -- -- --
Net income (loss) ................ (11,640) (6,624) (6,910) (4,130) (5,968) (2,992) (2,551)
Net income (loss)
per share (1) .................. (1.44) (0.74) (0.68) (0.28) (0.23) (0.12) (0.09)
Weighted average shares
outstanding (1) ................ 8,111 8,955 10,129 14,935 26,414 25,355 27,879
</TABLE>
<TABLE>
<CAPTION>
June
December 31, 30,
1992 1993 1994 1995 1996 1997
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE
SHEET DATA:
Working capital ................... $ 7,877 $ 1,965 $ 1,101 $ 4,541 $ 1,073 $ 3,532
Total assets ...................... 10,339 5,511 3,822 6,689 3,741 5,616
Redeemable convertible
notes ........................... -- -- -- -- -- 3,658
Other long-term debt .............. 79 18 -- -- -- --
Stockholders' equity
(deficit) ....................... 9,038 2,708 1,357 4,745 1,272 (64)
<FN>
- ---------------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements.
</FN>
</TABLE>
12
<PAGE>
BUSINESS
The Company develops, manufactures and markets laser and other systems for
applications in ophthalmology.
Ophthalmic Products
Corneal Shaping System (the LTK System)
In April 1992, Sunrise acquired Laser Biotech, Inc., a California
corporation ("Laser Biotech"), through a merger of a wholly-owned subsidiary of
Sunrise 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 the LTK
technique for reshaping the cornea using a holmium laser. The LTK technique
alters the shape of the cornea to correct refractive disorders such as hyperopia
(farsightedness) and presbyopia (age-related loss of near focusing ability)
without removing corneal tissue. The procedure employs a laser to selectively
shrink 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 and VISX 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 that the LTK System could 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 LTK System incorporates a holmium laser source 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 LTK System, which allows for easy alignment on a patient's
eye, delivers eight simultaneous laser beams disposed in a circle of varying
diameters for two seconds or less exposure to complete the treatment. The LTK
procedure typically is performed on the area of the eye that is outside the
central visual zone, leaving the central cornea untouched.
The Company received an IDE from the FDA to begin Phase I clinical trials
of the LTK System 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 (farsightedness). 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 March 1995, the FDA cited various deficiencies in the Company's
February letter and requested additional information which the Company submitted
in December 1995. 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. On
September 5, 1996, the FDA authorized the Company to treat an additional 100
subjects at five United States locations in a continuation of Phase IIa clinical
trials using a treatment algorithm
13
<PAGE>
developed by the Company in the course of the initial Phase IIa clinical trials
and in the course of studies conducted by ophthalmologists in Mexico, Great
Britain and Canada. Enrollment of patients in the continued clinical trial,
which was completed in July 1997, was limited to the treatment of 40 subjects
for the +1 diopter treatment group and 60 subjects for the +2 diopter treatment
group. The LTK System has been found to be most effective for the treatment of
patients in these groups, which covers the majority of those requiring treatment
for hyperopia (farsightedness). In August 1997, the Company received conditional
approval from the FDA to expand the investigation to include an additional 100
patients using the same treatment algorithm. Such approval is conditioned on the
Company agreeing to continue the investigation at the same five sites previously
approved and at three additional sites that were approved during treatment of
the first 100 patients, as well as adding tests and forms of analyses that the
Company has already initiated to evaluate glare and contrast sensitivity.
Clinical trials of the LTK System were initiated outside the United States
in early 1993 and are ongoing. The Company has obtained FDA export clearance to
market the LTK System in most European countries, Turkey, Saudi Arabia, Canada,
Mexico, Brazil, 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 LTK
System overseas in December 1993, primarily in Europe, for the treatment of
hyperopia (farsightedness). To date, international sales of the LTK System have
been limited, as the Company has elected to focus its limited financial
resources on completion of United States clinical trials rather than on the high
start-up costs associated with such international sales.
There can be no assurance that the FDA will approve the results of
continued clinical trials, that the PMA will be approved or that the Company
will successfully develop or market the LTK System.
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 to perform this procedure on an outpatient
basis, thus sometimes avoiding the use of an operating room and 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, as the product
14
<PAGE>
has not proven to be superior to other glaucoma treatments, and never
represented more than 11% of the Company's revenues in any year.
Sale of the Dental Business
The Company began as a developer and manufacturer of dental laser systems.
On June 26, 1997, the Company completed the sale of substantially all of its
assets associated with its dental laser, air abrasion and composite curing
systems to Lares in exchange for $4,000,000 in cash and a promissory note in the
amount of $1,500,000, with two installments due in three and four years,
respectively. The net proceeds of this sale are being used to conduct the
clinical trials for the Company's ophthalmic products, including the LTK System.
Prior to the sale, a substantial portion of the Company's revenues (98% in 1996
and 80% in the first six months of 1997) were derived from domestic and
international sales of the Company's dental products. However, operation of the
dental business had caused the Company to incur substantial losses in each of
the last five years of operations and were forecast to continue to show losses,
as a result of the steady decline in demand and market saturation for such
products.
The Vision Correction Market
Products and procedures that correct vision impairment resulting from
refractive errors of the eye constitute one of the largest medical markets
worldwide. In the United States, approximately 150 million people use eyewear
(glasses or contact lenses) to correct refractive errors. In 1994, United States
consumers spent approximately $14 billion for such purchases. Outside the United
States, at least 300 million additional people use eyewear to correct refractive
errors. The vision correction industry is subject to intense competition. The
significant competitive factors in the industry include price, convenience,
success relative to vision correction, acceptance of new technologies, patient
satisfaction and government approval.
Many eyewear users with myopia (nearsightedness) have sought refractive
surgery procedures, such as radial keratotomy and photo refractive keratectomy
("PRK"), as an alternative to eyewear. PRK has been used in an estimated
1,000,000 procedures worldwide, with over 150,000 of such procedures performed
in the United States. In PRK, an excimer laser is used to remove, irreversibly,
tissue within the optical zone to reshape the cornea. The excimer laser is the
dominant laser used for the treatment of refractive disorders, although it is
not currently approved to treat hyperopia (farsightedness) in the United States
or Japan, other than in limited clinical trials. In the United States, VISX and
Summit are the leading manufacturers of excimer refractive surgical systems.
Both VISX and Summit have received FDA approval for their respective excimer
laser products for treating myopia (nearsightedness).
In addition to the use of eyeglasses and contact lenses, patients with
hyperopia (farsightedness) may be able to achieve vision correction with other
technologies and surgical techniques currently under development, such as
corneal implants, lens replacement and surgery using different types of lasers.
The Company believes the LTK process offers several distinct advantages over the
use of excimer lasers for treating hyperopia (farsightedness), including ease of
use and decreased invasiveness. In contrast to radial keratotomy and PRK
procedures, there is no surgical trauma or major inconvenience with the LTK
process. Certain of the Company's competitors, including Summit, have developed
LTK devices for the treatment of hyperopia (farsightedness). These companies
produce a contact-mode holmium laser system equipped with a hand-held probe that
delivers laser energy to a single spot on the cornea during each application.
The physician must move the probe sequentially from spot to spot in order to
produce treatment patterns. Since laser energy is not delivered simultaneously
and in a non-contact fashion to form
15
<PAGE>
a ring of spots as it is with the LTK System developed by the Company, the
cornea is changed less consistently during treatment, which may lead to
irregular induced astigmatism. Management of the Company believes that the
contact-mode treatment of its competitors' devices will not be embraced by
physicians. Further, based on discussions with its patent counsel, the Company
believes that Summit's holmium laser system may violate certain of the Company's
patents. None of the Company's competitors is currently engaged in United States
clinical trials to approve their holmium laser devices for the treatment of
hyperopia (farsightedness).
Although neither the VISX and Summit excimer laser products nor the Summit
LTK devices are currently approved for treating hyperopia (farsightedness) in
the United States and Summit discontinued its clinical trials for treating
hyperopia (farsightedness) with its holmium laser system in 1996, any
alternative treatment offered by VISX or Summit will have a competitive
advantage because of the name recognition being created by the current promotion
of excimer laser products in PRK procedures and the fact that VISX and Summit
have been able to establish a base of customers that are currently using their
products. In addition, most of the Company's competitors, including VISX and
Summit, have substantially greater financial capabilities for product
development and marketing than the Company, which may enable such competitors to
market their products or procedures to the consumer and to the ophthalmic
community in a more effective manner. The success of any competing alternative
to LTK for treating hyperopia (farsightedness) would have a material adverse
effect on the Company's business, financial condition and results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
For the Year Ended December 31, 1996
Overview
The Company has incurred substantial losses in the past five years which
have seriously depleted its working capital. Sales of its existing dental
products at current levels were not expected to be sufficient to sustain both
the existing business and the continued development and regulatory licensing of
additional products including the LTK System. Historically, 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
approximately $15,546,000 in gross proceeds (approximately $15,296,000 in net
proceeds) between 1994 and 1996 in new equity for the Company. Pursuant to the
1997 Notes Placement, consisting of two-year convertible notes and warrants, the
Company raised approximately $3,743,000 in net proceeds.
On March 12, 1997 the Company announced that it had entered into an
agreement for the sale of the dental assets to Lares, a privately held company
located in Chico, California. See "-- For the Six Months Ended June 30, 1997"
below.
Since its inception, the Company has generated revenues from the
manufacture and sale of laser systems for applications in the dental and medical
fields. In 1994, the Company introduced an air abrasive cavity preparation
system for the dental market. After an initial period of commercial success,
laser product sales decreased steadily from a high of approximately $20,000,000
in 1991 to approximately $2,000,000 in 1996. During 1996, the FDA Dental
Advisory Panel voted to reject the Company's
16
<PAGE>
application for the utilization of its dental laser products for hard tissue
application, which further limited the potential market for these products. The
Company did not anticipate significant increases in revenues from existing laser
products in 1997.
In 1992, the Company acquired patented technology covering the use of a
holmium laser to reshape the cornea, which the Company believes will be useful
in the treatment of hyperopia (farsightedness), presbyopia (age-related near
focusing ability) and surgical overcorrection from PRK. The Company filed its
IDE with the FDA in 1992 and commenced Phase I clinical trials in that year. The
FDA approval process is expected to continue through at least 1999 with the cost
of clinical studies increasing as the number of sites and patients increases
during the period. Although the Company has had limited sales of its LTK System
outside the United States, significant revenues cannot be expected unless and
until FDA approval is obtained to market the system in the United States.
The following table sets forth certain operations data as a percentage of
net revenue for the periods indicated.
Year Ended December 31,
1996 1995 1994
---- ---- ----
Net revenues .................................. 100% 100% 100%
Cost of revenues .............................. 71 69 82
---- ---- ----
Gross profits ................................. 29 31 18
---- ---- ----
Other costs and expenses:
Engineering and development .......... 23 23 20
Sales, marketing and regulatory ...... 64 43 50
General and administration ........... 48 44 39
---- ---- ----
Total other costs and expenses ................ 135 110 109
---- ---- ----
Loss from operations .......................... (106) (79) (91)
Interest income, net of expense ............... 1 1 --
---- ---- ----
Loss before taxes on income ................... (105) (78) (91)
Income tax expense (benefit) .................. -- -- --
---- ---- ----
Net Loss ...................................... (105%) (78%) (91%)
==== ==== ====
Revenues
The Company's revenues have historically been comprised primarily of sales
related to its dental products (98% in 1996, 76% in 1995 and 79% in 1994).
Revenues fell from $7,578,000 in 1994 to $5,294,000 in 1995, a decrease of
approximately 30%. The decrease is attributable to reduced demand for the
Company's dental laser products, which was partially offset by sales of the
Company's dental air abrasive products, first shipped in mid-1994. The Company
had achieved significant sales of dental laser products in Germany in 1994.
These sales levels in Germany were not achieved in later periods. During 1995,
the Company terminated its relationship with its exclusive distributor in
Germany. Sales of the Company's ophthalmic products, primarily non-United States
sales of the LTK System, were also lower in 1995 than 1994. Non-dental sales
represented 21% of revenue in 1994, 24% in 1995 and 2% in 1996.
Revenues increased from $5,294,000 in 1995 to $5,654,000 in 1996, an
increase of approximately 7%. Sales of dental laser systems during 1996
increased slightly from prior levels. Sales of ophthalmic products were
insignificant in 1996 as the Company concentrated its limited resources on
17
<PAGE>
its FDA clinical studies rather than overseas marketing. Significant increases
in sales of the Company's air abrasive products during 1996 more than offset the
decrease in sales of its ophthalmic products. The introduction of the MicroPrep
Associate in the first quarter of 1996 provided the impetus for the increase in
sales of the air abrasive product line.
Gross Profits
Gross profit margins were 18%, 31% and 29% in 1994, 1995 and 1996,
respectively. The 1995 improvement in gross profit, when compared to 1994, is
attributed to introduction of the cost-reduced MicroPrep Director, increased
pricing though direct distribution and improved manufacturing efficiencies.
Gross profit margins decreased in 1996 to 29% primarily as a result of
increased sales of dental products through distributors and the decrease in
sales of the LTK System which carries a higher gross margin than dental
products.
Engineering and Development
Engineering and development expenses were $1,561,000, $1,218,000 and
$1,326,000 for the years ended 1994, 1995 and 1996, respectively. Engineering
and development expenses decreased by $343,000 in 1995, due primarily to
completion of development of the MicroPrep product.
Engineering and development increased by $108,000 in 1996 compared to 1995
due primarily to development costs associated with the CureStar curing system, a
dental product introduced in the first quarter of 1997.
Sales, Marketing and Regulatory
Sales, marketing and regulatory expenses were $3,763,000, $2,277,000 and
$3,632,000 for the years ended 1994, 1995 and 1996, respectively.
The Company currently markets its ophthalmic lasers and marketed its dental
products through a small 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 13 direct sales employees at the end of 1995, and three at the
end of 1996.
Sales, marketing and regulatory expenses decreased to $2,277,000 in 1995,
approximately a 39% 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.
Sales, marketing and regulatory expenses increased in 1996 over 1995 by 60%
due primarily to incremental costs associated with the development of a direct
sales force late in 1995, the launch of the MicroPrep Associate in the first
quarter of 1996 and costs associated with the expansion of the Phase IIa FDA
ophthalmic clinical studies and FDA review of the Company's PMA submitted for
use of its dental lasers for hard tissue applications.
18
<PAGE>
General and Administrative
General and administrative expenses were $2,933,000, $2,329,000 and
$2,700,000 for the years ended 1994, 1995 and 1996, 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. General and administrative expenses decreased
to $2,329,000 in 1995, approximately a 21% reduction from the 1994 level, due
primarily to reduction in legal and accounting fees associated with litigation.
General and administrative expenses in 1996 increased 16% compared to 1995
primarily as a result of costs associated with the proposed acquisition of
EyeSys Technologies, which acquisition was never consummated, and the
development of a new management team for the ophthalmic business.
Income taxes
At December 31, 1996 and 1995, 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, 1996, the Company had federal net operating loss
carry-forwards of approximately $24,600,000. 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 $6,910,000, $4,130,000 and $5,968,000 in
1994, 1995 and 1996, respectively.
The net loss in 1994 was due principally to a severe drop in laser sales in
both the domestic and international marketplace and a decrease in foreign sales
of dental lasers. Somewhat offsetting these reductions were the initial sales of
the MicroPrep and 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 reductions totaled $2,433,000 in 1995 when
compared to 1994, the reductions did not offset the low level of sales volume.
The net loss in 1996 was due primarily to increased selling, marketing and
product development costs required to grow the business. A new sales, marketing
and regulatory team was hired to focus on sales of the LTK System outside the
United States and FDA clinical trials were expanded, along with expansion of
clinical research, to further advance the technology.
19
<PAGE>
Liquidity and Capital Resources
As of December 31, 1996 the Company had $647,000 in cash and cash
equivalents. The Company's operating activities used $5,297,000 in cash during
1996. This was funded from the reduction of cash and $2,495,000 net proceeds
received from a common stock private placement in August 1996.
Working capital amounted to $4,541,000 at December 31, 1995 and decreased
to $1,073,000 at December 31, 1996. The overall reduction in working capital is
consistent with the current year loss and fund raising activity.
The Company's current operations continue to be cash flow negative, further
straining the Company's working capital resources. The level of product sales
was not sufficient to provide enough cash to pursue the Company's dental
business and support ongoing development and regulatory approval of the LTK
System. Management's plans included selling the Company's dental assets and the
field of use rights related to its dental business. Subsequent to the sale,
which occurred on June 26, 1997, the Company is now focussing on further
developing and seeking regulatory approval of its ophthalmic related products.
Although dental related sales represented the majority of historical sales (98%
in 1996, 76% in 1995 and 79% in 1994), the dental business had recently become
unprofitable and was contributing negatively to the Company's cash flow.
Management's strategic plan is to use the proceeds from the sale of the dental
assets and the 1997 Notes Placement to further develop the ophthalmic products,
specifically the LTK System. There can be no assurance that the LTK System will
receive regulatory approval and that the Company will be successful in
developing, manufacturing and making the LTK System or other ophthalmic related
products. In February and March 1997, the Company completed private placements
of 5% convertible notes due 1999 (convertible into common stock) and warrants to
purchase common stock, for aggregate net proceeds of approximately $3,743,000.
See "-- For the Six Months Ended June 30, 1997" below.
See "Risk Factors -- History of Losses; Profitability Uncertain; Cash Flow
Deficit," "-- Continuing Losses Expected" and "-- Going Concern Report."
For the Six Months Ended June 30, 1997
Financial Condition
As of June 30, 1997, the Company had $4,129,000 in cash and cash
equivalents. The Company's operating activities used $4,040,000 in the six
months ended June 30, 1997 and used $5,297,000 in cash during fiscal 1996. A
substantial portion of the 1996 and 1997 losses was funded by a series of
private placements of the Company's common stock in 1996, for aggregate net
proceeds of approximately $2,495,000 (collectively, the "1996 Stock
Placements"), and the 1997 Notes Placement, for aggregate net proceeds of
approximately $3,743,000.
The Company's current operations continue to be cash flow negative,
limiting the Company's working capital resources. Working capital at June 30,
1997, including the net proceeds from the sale of the Dental Assets
(approximately $3,589,000), amounted to approximately $3,532,000. At December
31, 1996, working capital amounted to approximately $1,073,000. The Company's
ability to continue as a going concern is dependent upon performing profitably
or obtaining further financing. Management
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believes existing working capital will provide sufficient funds for the
Company's planned operations in 1997.
The Company's independent auditors have included an explanatory paragraph
in their report covering the Company's financial statements for the year ended
December 31, 1996, which paragraph emphasizes substantial doubt as to the
Company's ability to continue as a going concern, based primarily on the
recurring operating losses that have been incurred by the Company. Failure to
return to profitable operations or to obtain other financing could result in a
reorganization or complete liquidation of the Company.
Results of Operations
Revenues of $1,454,000 and $2,463,000 for the three and six month periods
ended June 30, 1997 represent a 40% increase and 4% decrease, respectively, from
revenues of $1,039,000 and $2,560,000 for the same periods in 1996. These
results are due to higher sales of ophthalmic products in 1997 offset by a
decline in demand for the Company's dental laser products. For the three and six
month periods ended June 30, 1997 sales of dental laser and air abrasive
products accounted for 76% and 80%, respectively, of total revenue.
Gross profits as a percentage of revenue increased to 31% for the three
month period ended June 30, 1997 from approximately 14% for the same period in
1996. This increase is due primarily to an increase in the proportion of sales
of ophthalmic products, at higher gross margins, and to favorable pricing on
dental laser products. Gross profits as a percentage of revenue were 20% for the
six month period ended June 30, 1997, essentially unchanged from the same period
in 1996.
Engineering and development expenses totaled $262,000 and $535,000 for the
three and six month periods ended June 30, 1997 compared to $283,000 and
$625,000 for the same periods of 1996. Such expenses were higher in 1996 due
primarily to one-time costs, including consulting costs, associated with the
CureStar composite curing system, a dental product introduced in the first
quarter of 1997.
Sales, marketing and regulatory costs were $784,000 and $1,443,000 for the
three and six month periods, respectively, ended June 30, 1997 compared to
$769,000 and $1,716,000 for the same periods of 1996. The increase for the three
month period is due primarily to increased marketing and regulatory spending for
the ophthalmic products offset by reduced marketing for dental products. The
decrease for the six month period is due primarily to higher costs in the first
quarter of 1996 incurred in connection with the launch of the Associate(R), a
dental, air-abrasive product.
General and administrative expenses were $1,200,000 and $1,906,000 for the
three and six month periods, respectively, of 1997 compared to $640,000 and
$1,206,000 for the same periods of 1996, primarily as a result of changes in the
Company's management team including charges related to the separation and
release of certain executive officers and directors.
Gain on sale of dental assets for the periods ended June 30, 1997 of
$1,740,000 results from $4,000,000 cash proceeds from the sale less cost of
assets sold and the ADT transfer fee, transaction fees and other costs of
approximately $762,000. The Company intends to recognize gain on the remaining
$1,500,000 of the purchase price evidenced by Lares' promissory note (the "Lares
Note") as cash is collected on the Lares Note, less additional transfer fees
payable to ADT when the first installment of the Lares Note is received by the
Company.
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<PAGE>
Interest expense for the three and six month periods ended June 30, 1997 of
$131,000 and $943,000, respectively, represents primarily non-cash deemed
interest associated with the issuance of the Notes.
Net loss for the three and six month periods ended June 30, 1997 of
$163,000 and $2,551,000, respectively, is due primarily to the decreased demand
for the Company's dental products and non-cash interest expense of $943,000
associated with the 1997 Notes Placement, offset by the gain on the sale of the
dental assets in June.
On June 26, 1997, the Company completed the sale of the dental assets.
Since this transaction occurred at the end of the quarter, there was no material
impact on revenues or loss from operations resulting from the sale of the dental
assets. The gain of $1,740,000, as described above, resulted in a decrease in
loss per share of $.06 for the three month period ended June 30, 1997.
PRO FORMA FINANCIAL STATEMENTS
Unaudited Comparative Per Share Data
The following table sets forth: (1) the historical net loss per share and
the historical book value per share of the Common Stock; and (2) the unaudited
pro forma net loss per share and the unaudited pro forma book value per share
after giving effect to the sale of the dental assets on a retroactive basis
excluding the gain (if any) from the sale for pro forma net loss per share and
recognizing the initial cash payment of $4,000,000 for the pro forma book value
per share. The information presented in the table should be read in conjunction
with the unaudited pro forma condensed financial statements, the Company's
historical consolidated financial statements and unaudited interim consolidated
financial statements and the notes thereto appearing elsewhere herein or
incorporated by reference. No cash dividends have been declared by the Company.
Historical Pro Forma
Net Loss Per Share
Fiscal year ended December 31, 1996 $ 0.23 $ 0.17
Six months ended June 30, 1997 0.09 0.09
Book Value Per Share At
December 31, 1996 0.05 N/A
June 30, 1997 (0.00) (0.00)
1. The Company's historical net loss per share represents amounts for
the year ended December 31, 1996 and six months ended June 30, 1997.
2. The Company's historical book value per share is calculated by
dividing stockholders' equity by the number of shares of Common Stock
outstanding at the end of the period (27,868,613 shares at December 31, 1996;
27,886,247 shares at June 30, 1997). Pro forma book value per share is computed
by dividing pro forma stockholders' equity by the number of shares of Common
Stock outstanding at the end of the period.
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<PAGE>
3. The unaudited pro forma net loss per share is based on the weighted
average number of shares of Common Stock outstanding during the period
(26,414,218 shares for the year ended December 31, 1996; 27,879,000 shares for
the six months ended June 30, 1997).
4. The unaudited pro forma book value per share is based on an
estimated ADT Transfer Fee of $275,000. In no event does the Company expect the
ADT Transfer Fee to exceed $358,000. If the ADT Transfer Fee were $358,000, the
unaudited pro forma book value per share would be $0.10 at December 31, 1996 and
($0.01) at June 30, 1997.
Unaudited Pro Forma Condensed Financial Statements
The following unaudited pro forma condensed financial statements represent
the transaction in which the Company sold the assets associated with its dental
laser, air abrasive and composite curing systems, substantially under the terms
of an asset purchase agreement dated March 25, 1997 (the "Asset Purchase
Agreement"), to Lares, an unaffiliated corporation. The sale was consummated on
June 26, 1997.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the sale had been consummated as presented in the
accompanying unaudited pro forma condensed financial information nor is it
necessarily indicative of future operating results or financial position.
The unaudited pro forma condensed financial information should be read in
conjunction with the accompanying note and the historical financial statements,
including the notes thereto, of the Company.
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<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1996
(In thousands, except per share data)
Sunrise Less
Technologies Sunrise Sunrise
International, Dental Ophthalmic
Inc. Business Business
-------- -------- --------
(a) (b) (c)
Net revenues $ 5,654 $ 5,514 $ 140
Cost of revenues 4,016 3,900 116
-------- -------- --------
Gross profit 1,638 1,614 24
Other costs and expenses:
Engineering and development 1,326 470 856
Sales, marketing and regulatory 3,632 2,765 867
General and administrative 2,700 -- 2,700
-------- -------- --------
Total other costs and expenses 7,658 3,235 4,423
-------- -------- --------
Net loss from operations (6,020) (1,621) (4,399)
Net interest income 52 31 21
-------- -------- --------
Net loss $ (5,968) $ (1,590) $ (4,378)
======== ======== ========
Net loss per share $ (0.23) $ (0.17)
======== ========
Shares used in calculation of net loss per
share 26,414 26,414
======== ========
(a) Represents historical Sunrise financial statements, including dental assets
to be sold.
(b) Represents historical Sunrise dental assets to be sold, exclusive of any
gain realized on the sale.
(c) Represents historical Sunrise, net of dental assets to be sold, exclusive
of any gain realized on the sale.
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<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Six Months Ended June 30, 1997
(In thousands, except per share data)
Sunrise
Technologies Less
International, Sunrise
Inc., Dental
including Business
gain on sale and Sunrise
of dental related Ophthalmic
assets gain Business
-------- -------- --------
(a) (b) (c)
Net revenues $ 2,463 $ 1,968 $ 495
Cost of revenues 1,959 1,738 221
-------- -------- --------
Gross profit 504 230 274
Other costs and expenses:
Engineering and development 535 220 315
Sales, marketing and regulatory 1,443 746 697
General and administrative 1,906 1,018 888
-------- -------- --------
Total other costs and expenses 3,884 1,985 1,899
-------- -------- --------
Net loss from operations (3,380) (1,755) (1,625)
Gain on sale of dental assets 1,740 1,740 --
Net interest income 32 10 22
Net interest expense, including
non-cash interest expense associated
with the issuance of redeemable, convertible
notes (943) (3) (940)
-------- -------- --------
Net loss $ (2,551) $ (8) $ (2,543)
======== ======== ========
Net loss per share $ (0.09) $ (0.09)
======== ========
Shares used in calculation of net loss per
share 27,879 27,879
======== ========
(a) Represents historical Sunrise financial statements, including dental
business sold.
(b) Represents historical Sunrise dental business sold, including gain related
to the sale.
(c) Represents historical Sunrise, net of dental business sold, exclusive of
gain realized on the sale.
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<PAGE>
NOTE TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
Year Ended December 31, 1996 and Six Months Ended June 30, 1997
The pro forma condensed financial statements give effect to the following
pro forma adjustments:
On June 26, 1997, Sunrise Technologies International, Inc. (the "Company")
sold the assets associated with its dental laser, air abrasive and composite
curing systems (the "Dental Assets"), substantially under the terms of the Asset
Purchase Agreement dated March 25, 1997, to Lares Research ("Lares"), an
unaffiliated corporation.
Under the terms of the Asset Purchase Agreement, the Company transferred to
Lares all of the Dental Assets except for cash and accounts receivable. All
liabilities of the dental operations were retained by the Company except for
certain obligations relating to royalties and a supply contract. At closing,
Lares paid the Company $4,000,000 in cash and delivered a promissory note in the
principal amount of $1,500,000 (the "Lares Note"), which bears interest at 8%.
Under the Lares Note, $1,000,000 is payable on the third anniversary of the
closing, and $500,000 is payable on the fourth anniversary of the closing. The
Lares Note is subordinate in right of payment to Lares' obligations to its bank
(the "Bank"). Lares has agreed that so long as the Lares Note is outstanding its
aggregate obligations to the Bank will not exceed $4,750,000. Although the
Company anticipates collecting interest and principal on the Lares Note, due to
subordination of the Lares Note to Lares' Bank, collection is not reasonably
assured and the Company intends to recognize proceeds from the sale and interest
on the Lares Note as cash is received.
After completing the sale of the Dental Assets the Company paid to ADT a
transfer fee of $275,000. In addition, on collection of the Lares Note principal
the Company will pay to ADT an additional transfer fee of ten percent of cash
collected on the $1,000,000 first installment of the Lares Note. This liability
has not been recognized in the unaudited pro forma condensed financial
statements given that collection of the first installment of the Lares Note is
not reasonably assured.
The Company's revenues were substantially derived from the sale of its
dental laser and air abrasive products. These sales represented 98% and 80% of
the Company's revenues in 1996 and the first six months of 1997, respectively.
Four million dollars of the purchase price, paid in cash, is being used by the
Company to fund its ophthalmic activities; however, by selling the Dental
Assets, the Company loses a significant source of continued revenue.
The unaudited pro forma condensed balance sheet column "Sunrise Net of
Dental Assets to be Sold" reflects the initial cash proceeds of the sale. No
profit from the sale has been reflected in the unaudited pro forma condensed
statements of operations due to the nonrecurring nature of this transaction.
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<PAGE>
MANAGEMENT
The following persons serve as the current executive officers and directors
of Sunrise:
NAME AGE POSITION
- ------------------------------------------------------------------------------
C. Russell Trenary, III 40 President and Chief Executive Officer and
Director
Timothy A. Marcotte 40 Vice President, Finance and Chief Financial
Officer
Jeannie G. Cecka 34 Vice President, Clinical and Regulatory Affairs
Paul M. Malin 44 Vice President, Sales and Marketing
Robert Haddad 50 Vice President, Operations and Product
Development
Joseph D. Koenig 67 Chairman of the Board and Director
Ronald A. Slocum 57 Director
Mr. Trenary was appointed the Chief Executive Officer of the Company in
June 1997. In November 1996, Mr. Trenary was appointed President and Chief
Operating Officer of the Company and was also appointed to the Board of
Directors of the Company as a Class III director. Mr. Trenary was appointed
President and Chief Operating Officer of Laser Biotech, Inc., a wholly owned
subsidiary of the Company, in April 1996. From 1995 until the time he joined the
Company, Mr. Trenary served as Senior Vice President of Sales and Marketing for
Vidamed, Inc. Prior to 1995, Mr. Trenary served in various positions with
Allergan, Inc., most recently as Senior Vice President, General Manager of AMO
Surgical Products, an ophthalmic business. Mr. Trenary has an M.B.A. degree from
Michigan State University and a B.S. degree from Miami University.
Mr. Marcotte was appointed Vice President, Finance and Chief Financial
Officer of the Company in August 1997. From December 1996 to August 1997, Mr.
Marcotte was Vice President and Chief Financial Officer of InfoGain Corporation,
an information technology consulting firm. From June 1996 to December 1996, Mr.
Marcotte was the Vice President and Chief Financial Officer of IRIDEX
Corporation, a medical device manufacturer of ophthalmic laser products. From
May 1995 to June 1996, Mr. Marcotte served as the Executive Vice President of
Finance and Operations and Chief Financial Officer and Secretary for Now
Software, Inc., a desktop software developer, and from May 1993 to May 1995, he
served as Vice President of Finance and Operations and Chief Financial Officer
at the same company. From January 1992 to May 1993, Mr. Marcotte was the
Corporate Controller at Central Point Software Incorporated, a desktop software
developer. Mr. Marcotte has an M.B.A. degree and a B.S. degree from the
University of Michigan.
Ms. Cecka was appointed Vice President, Clinical and Regulatory Affairs of
the Company in July 1996. From March 1995 to April 1996, Ms. Cecka was Director
of Clinical and Regulatory Affairs at MedAcoustics, Inc. From September 1992 to
February 1995, Ms. Cecka was Manager of Clinical Research for Baxter Novacor, a
developer and marketer of left ventricular assist devices. Prior to September
1992, Ms. Cecka spent seven years at Allergan, Inc. holding positions ranging
from Manager, Clinical Affairs
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to Director, Worldwide Clinical Research. Ms. Cecka has an M.B.A. degree from
Pepperdine University and a B.S. degree from UC Irvine.
Mr. Malin was appointed Vice President, Sales and Marketing, of the Company
in May 1996. Prior to joining the Company, Mr. Malin was the Director of
Marketing at IRIDEX Corporation, a medical device manufacturer of ophthalmic
laser products from July 1995 to May 1996. From October 1983 to July 1995, Mr.
Malin held various senior sales and marketing positions at Allergan, Inc. Mr.
Malin has an M.B.A. from Pepperdine University and a B.A. degree from Washington
and Lee University.
Mr. Haddad joined the Company in March 1997 as Vice President, Operations
and Product Development. From April 1992 to March 1997 Mr. Haddad was Vice
President, Operations, of IRIDEX Corporation, a medical device manufacturer of
ophthalmic laser products. Mr. Haddad has an M.B.A. degree from Sacramento State
University and a B.S. degree from California State Polytechnic University.
Mr. Koenig was appointed to the board of directors of the Company in
December 1994. Mr. Koenig had also served as a director of the Company from
August 1991 through January 1994. He has been a consultant for Koenig
Associates, a management consulting firm, since October 1984. Mr. Koenig is also
a director of Ancot Corporation, Hench Controls Corporation and Cardiac
Mariners. Mr. Koenig has a B.S. degree in Electrical Engineering from the
University of Illinois.
Mr. Slocum was appointed to the board of directors of the Company in
December 1994. From 1991 until his retirement in 1996, Mr. Slocum had been
employed by Bank of America Idaho, most recently as President, Chief Executive
Officer and Chairman of the Board. Mr. Slocum is also a Director of Bank of
America Oregon. Mr. Slocum has a B.S. degree in Business Management from San
Diego University.
DESCRIPTION OF CAPITAL STOCK
The current authorized capitalization of Sunrise consists of 75,000,000
shares of Common Stock and 2,000,000 shares of Preferred Stock, par value $0.001
per share ("Preferred Stock"). As of September 3, 1997, there were 27,898,647
issued and outstanding shares of Common Stock. No shares of Preferred Stock have
been issued or reserved for issuance by the board of directors of the Company
(the "Board").
The following summary of the terms of the Company's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
terms set forth in the Company's Certificate of Incorporation, as amended to
date (the "Sunrise Certificate").
Common Stock
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders of the Company. Stockholders do not have
cumulative voting rights. In the event of a liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share equally and
ratably in any assets remaining after the payment of all debts and liabilities
of the Company, subject to the prior rights, if any, of the holders of Preferred
Stock. Holders of Common Stock do not have preemptive or other subscription or
conversion rights. Common Stock is not subject to redemption and the outstanding
shares, including the Offered Shares, are fully paid and nonassessable.
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<PAGE>
Preferred Stock
Preferred Stock may be issued from time to time in one or more series, as
determined by the Board. The directors may fix or alter from time to time the
designation, powers, preferences and rights of the shares of each series of
Preferred Stock, provided that the directors may alter the qualifications,
limitations or restrictions of any series of Preferred Stock only prior to the
issuance of any shares of such series. The directors may also establish from
time to time the number of shares constituting any series of Preferred Stock.
The directors may increase or decrease the number of shares subsequent to the
issuance of shares of a series, so long as the directors do not decrease the
number of authorized shares of a series below the number of shares of such
series then outstanding.
As of the date hereof, the Board has not designated any series of Preferred
Stock.
Price Range of Common Stock
As of September 3, 1997, there were 697 holders of record of the Common
Stock. Price information for Common Stock may be obtained from the OTC Bulletin
Board. The table below sets forth the reported high and low bid quotations of
the Common Stock as reported on the OTC Bulletin Board for the periods
indicated.
HIGH ASK (1) LOW BID (1)
------------ -----------
1995
First Quarter ....................... $ 1.97 $ 0.69
Second Quarter ...................... $ 1.25 $ 0.56
Third Quarter ....................... $ 2.37 $ 0.50
Fourth Quarter ...................... $ 2.44 $ 0.94
1996
First Quarter ....................... $ 1.44 $ 1.34
Second Quarter ...................... $ 2.31 $ 1.13
Third Quarter ....................... $ 2.00 $ 0.88
Fourth Quarter ...................... $ 2.13 $ 0.81
1997
First Quarter ....................... $ 1.72 $ 0.75
Second Quarter ...................... $ 1.41 $ 0.94
Third Quarter (to September 3) ...... $ 1.56 $ 1.45
(1) Bid and ask prices are quoted on the OTC Bulletin Board in increments of
1/32. Certain of the bid and ask prices set forth in this table have
been rounded to the nearest cent.
On September 3, 1997, the closing price of the Common Stock as reported on
the OTC Bulletin Board was $1.47 per share. The over-the-counter market
quotations provided herein may reflect inter-
29
<PAGE>
dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
Dividends
In the past three years, the Company has not declared or paid any cash
dividend on the Common Stock. The Company currently intends to retain any and
all future earnings to finance its business. Accordingly, the Company does not
anticipate paying cash or other dividends on the Common Stock in the foreseeable
future.
Delaware Law and Certain Charter and Bylaw Provisions
The Sunrise Certificate contains the following special provisions that may
delay, defer or prevent a change in control of the Company:
The Board of Directors is divided into three classes, with members serving
three-year terms ending in successive years. An objective of the classified
Board is to facilitate continuity and stability of the Company's management and
policies, since a majority of the Directors at any given time will have prior
experience as Directors of the Company. However, classification also makes it
more difficult for the stockholders to change a majority of the Board of
Directors. It would take at least two annual meetings to elect a majority of the
Board of Directors, unless the Sunrise Certificate was amended to eliminate
provisions for a classified Board of Directors.
The Sunrise Certificate also provides that Directors may only be removed
with cause by the vote of the holders of a majority of the voting power of the
outstanding voting stock of the Company. In addition, the Sunrise Certificate
provides that the Board of Directors may, from time to time, fix the number of
Directors constituting the Board of Directors and fill vacancies on the Board of
Directors.
The Sunrise Certificate authorizes the Board of Directors to fix or alter
from time to time the designation, powers, preferences and rights of the
Preferred Stock of each series and the qualifications, limitations or
restrictions of any unissued series of Preferred Stock, and to establish the
number of shares constituting any such series.
The Company is subject to the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "Delaware Law"). In general,
Section 203 prohibits certain publicly-held Delaware corporations from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person or entity
became an interested stockholder, unless the business combination is approved in
a prescribed manner or certain other exceptions apply. For purposes of Section
203, a "business combination" is defined broadly to include mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person or entity who, together with affiliates and associates, owns, or within
the three immediately preceding years of a business combination did own, 15% or
more of the corporation's outstanding voting stock.
In accordance with the Sunrise Certificate, for nominations for the Board
of Directors or for other business to properly brought by a stockholder before
an annual meeting of stockholders, the stockholder must first have given timely
notice thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice generally must be delivered not less than 60 days nor more
than 90 days prior to
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<PAGE>
the annual meeting. The notice must contain, among other things, certain
information about the stockholder delivering the notice and as applicable,
background about the nominee or a description of the proposed business to be
brought before the meeting.
The Sunrise Certificate and the Bylaws provide that no action is permitted
to be taken by the stockholders of the Company by written consent. Special
meetings may be called only by the Board of Directors, the Chairman of the Board
or the Chief Executive Officer of the Company. These provisions could have the
effect of delaying until the next annual stockholders' meeting stockholder
actions which are favored by the holders of a majority of the outstanding voting
securities of the Company. These provisions may also discourage another person
or entity from making a tender offer for the Common Stock, because such person
or entity, even if it acquired a majority of the outstanding voting securities
of the Company, would be able to take action as a stockholder (such as electing
new Directors or approving a merger) only at a duly called stockholders'
meeting, and not by written consent.
The Delaware Law provides generally that the affirmative vote of a majority
of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. The affirmative vote of the holders of at least sixty-six and
two-thirds percent (66 2/3%) of the outstanding voting stock of the Company is
required to: (a) alter, amend or adopt new Bylaws; and (b) to alter, amend or
repeal Article V, VI or VII of the Sunrise Certificate. Such stockholder vote
would be in addition to any separate class vote that might in the future be
required pursuant to the terms of any Preferred Stock that might be outstanding
at the time any such amendments are submitted to stockholders.
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Common Stock
as of September 3, 1997 by certain members of management and by all executive
officers and directors of the Company, as a group. The Company is not aware of
any person who beneficially owns more than 5% of the outstanding Common Stock.
Beneficial Ownership (1)
Number of Percent of
Shares Shares
C. Russell Trenary, III (2) .......................... 290,917 1.0
Timothy A. Marcotte (3) .............................. 6,250 *
Paul M. Malin (4) .................................... 28,259 *
Jeannie G. Cecka (5) ................................. 25,412 *
Robert Haddad ........................................ 30,000 *
Joseph D. Koenig (6) ................................. 32,429 *
Ronald A. Slocum (7) ................................. 42,429 *
All executive officers and directors as a group
(7 persons) ........................................ 455,696 1.6
(1) Based on information provided by each of the identified officers and
directors.
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(2) Includes 289,404 shares that Mr. Trenary does not currently own, but which
he has the right to acquire within 60 days of September 3, 1997, pursuant
to outstanding options granted under the Company's stock option plan
("Options").
(3) Consists of shares that Mr. Marcotte does not currently own, but which he
has the right to acquire within 60 days of September 3, 1997, pursuant to
Options.
(4) Includes 27,083 shares that Mr. Malin does not currently own, but which he
has the right to acquire within 60 days of September 3, 1997, pursuant to
Options.
(5) Includes 20,312 shares that Ms. Cecka does not currently own, but which she
has the right to acquire within 60 days of September 3, 1997 pursuant to
Options.
(6) Consists of shares that Mr. Koenig does not currently own, but which he has
the right to acquire within 60 days of September 3, 1997, pursuant to
Options.
(7) Includes 32,429 shares that Mr. Slocum does not currently own, but which he
has the right to acquire within 60 days of September 3, 1997, pursuant to
Options.
SELLING SECURITYHOLDERS
The Offered Shares, other than shares underlying Placement Agent Warrants,
were acquired by the Selling Securityholders either: (a) in the 1996 Equity
Placement; or (b) in the 1997 Notes Placement. Absent registration under the
Securities Act, the Offered Shares are subject to certain limitations on resale.
The Registration Statement of which this Prospectus forms a part has been filed
in satisfaction of certain registration rights granted by the Company to the
Selling Securityholders.
Certain of the Selling Securityholders, PMG and M.J. Meehan & Co., are or
are affiliated with members of the National Association of Securities Dealers,
Inc. ("NASD"). PMG has engaged from time to time, and in the future PMG and/or
M.J. Meehan & Co. and/or their respective affiliates may engage, in
market-making activities with respect to the Common Stock. PMG, M.J. Meehan &
Co. and their respective affiliates have engaged from time to time, and in the
future may engage, in purchase and sale transactions involving Common Stock,
including transactions with other NASD member firms. The Selling
Securityholders, including PMG and M.J. Meehan & Co., and any participating
broker or dealer may be deemed to be "underwriters" within the meaning of the
Securities Act. Any commissions, discounts or concessions and any gain realized
by a person deemed to be an underwriter may be deemed to be underwriting
compensation to such person. From time to time since 1994, PMG has provided
financial advisor and investment banking services to the Company pursuant to
engagement and other agreements (the "PMG Agreements"). Under the PMG
Agreements, Sunrise has agreed to indemnify PMG and certain of its affiliates
and employees from and against certain losses and liabilities.
<TABLE>
The following table assumes that each of the Selling Securityholders will
sell all of the Offered Shares set forth opposite such Selling Securityholder's
name. However, one or more of the Selling Securityholders may sell only a
portion or may sell none of the Offered Shares set forth opposite such Selling
Securityholder's name.
32
<PAGE>
<CAPTION>
Number
of
Shares
Common Shares Held of
Beneficially Owned Prior Record to Common Shares Beneficially
to the Offering (1) be Sold in Owned After the Offering (1)
the
Offering
------------------------------------- ---------------------------------------
Number of Percent Number of Percent
Shares of Class Shares of Class
<S> <C> <C> <C> <C> <C>
1996 Equity Placement:
Robert L. Cahill, Jr.................. 145,000 * 60,000 85,000 *
Joseph D. Casey....................... 20,000 * 20,000 0 --
Donald S. Chapman..................... 1,270,588 (2) 4.6 320,588 800,000 2.9
Faith S. Chapman...................... 1,270,588 (3) 4.6 150,000 800,000 (4) 2.9
Paul Ernest........................... 42,353 * 42,353 0 --
Mark P. Ettinger, Trustee of
the Mark P. Ettinger
Revocable Trust dated
February 1, 1995...................... 185,500 (5) * 55,000 130,500 *
Joseph E. Gallo, Trustee
F/B/O Stephanie A. Gallo
1987 Non-Exempt Family
Trust U/ART IV
December 16, 1987..................... 493,722 (6) 1.8 313,725 179,997 *
Jospeh E. Gallo, Trustee
F/B/O Ernest J. Gallo 1987
Non-Exempt Family Trust
U/ART IV December 16, 1987............ 493,727 (7) 1.8 313,725 180,002 *
Joseph E. Gallo, Trustee
F/B/O Joseph C. Gallo 1987
Non-Exempt Family Trust
U/ART IV December 16, 1987............ 493,726 (8) 1.8 313,725 180,001 *
Russell H. Harbaugh Jr.,
Trustee for Brett Alan
Tritsch Trust DTD
October 12, 1981...................... 20,000 (9) * 20,000 0 --
Russell H. Harbaugh Jr.,
Trustee for Robert Christian
Tritsch Trust DTD
October 12, 1981...................... 20,000 (9) * 20,000 0 --
Russell H. Harbaugh Jr.,
Trustee for Shane Drue
Tritsch Trust DTD
October 12, 1981...................... 20,000 (9) * 20,000 0 --
33
<PAGE>
Russell H. Harbaugh Jr.,
Trustee for Tanni Maria
Tritsch Trust DTD
October 12, 1981...................... 20,000 (9) * 20,000 0 --
Russell H. Harbaugh Jr.,
Trustee for Todd Charles
Tritsch Trust DTD
October 12, 1981...................... 20,000 (9) * 20,000 0 --
Russell H. Harbaugh Jr.,
Trustee for Brett Alan
Tritsch Trust DTD
December 20, 1984..................... 20,000 (9) * 20,000 0 --
Russell H. Harbaugh Jr.,
Trustee for Robert Christian
Tritsch Trust DTD
December 20, 1984..................... 10,000 (9) * 10,000 0 --
Russell H. Harbaugh Jr.,
Trustee for Shane Drue
Tritsch Trust DTD
December 20, 1984..................... 10,000 (9) * 10,000 0 --
Russell H. Harbaugh Jr.,
Trustee for Tanni Maria
Tritsch Trust DTD
December 20, 1984..................... 20,000 (9) * 20,000 0 --
Russell H. Harbaugh Jr.,
Trustee for Todd Charles
Tritsch Trust DTD
December 20, 1984..................... 20,000 (9) * 20,000 0 --
Russell H. Harbaugh Jr.,
Trustee for Steven Andrew
Oxley Trust DTD
December 9, 1985...................... 10,000 (9) * 10,000 0 --
R.B. Jowell........................... 50,000 * 50,000 0 --
Charles C. Killin, Trustee
for Thomas E. Oxley Trust
DTD September 3, 1952................. 100,000 (10) * 100,000 0 --
34
<PAGE>
Charles C. Killin, Trustee
for Mary Jane Tritsch Trust
DTD September 3, 1952................. 100,000 (10) * 100,000 0 --
M.J. Meehan & Co...................... 176,471 * 176,471 0 --
Stephen Michael Oxley................. 20,000 * 20,000 0 --
Michael Patipa........................ 100,000 * 50,000 50,000 *
Harry Wallaesa........................ 48,824 * 18,824 30,000 *
Helen Wilkes.......................... 40,000 * 40,000 0 --
1997 Notes Placement:
David C. Brown........................ 171,428 * 171,428 0 __
Richard C. Goodwin.................... 171,428 * 171,428 0 --
Dr. Donald Sanders
IRA
Oppenheimer & Company, Inc.,
Custodian
Account No. 320-15187................. 857,142 3.1 857,142 0 --
IRA Account for Charles Russell
Trenary, UTA Charles Schwab &
Company, Inc., IRA Rollover dated
2/15/95, Account No. 891 39413........ 68,571 * 68,571 0 __
Jeffrey Meloche....................... 85,713 * 85,713 0 --
Joseph Meloche........................ 85,713 * 85,713 0 --
Paul R. Yoder, Jr..................... 85,713 * 85,713 0 --
Donald, Lufkin & Jenrette Securities
Corporation, Custodian
F/B/O Frank J. Campbell III
Account No. 698-101714................ 61,500 * 61,500 0 --
EDJ Limited........................... 90,000 * 90,000 0 --
Amir L. Ecker......................... 150,000 * 150,000 0 --
35
<PAGE>
Donald, Lufkin & Jenrette Securities
Corporation, Custodian
F/B/O Amir L. Ecker
Account No. 698-103058................ 105,000 * 105,000 0 --
FMS Profit Sharing.................... 171,428 * 171,428 0 --
Gregory A. Frankenfield
and Carol G. Frankenfield,
JTWROS................................ 12,000 * 12,000 0 --
Harvey Kahn........................... 222,000 * 222,000 0 --
Clifford J. Kalista, Jr. and
Phyllis D. Kalista - JT............... 90,000 * 90,000 0 --
Mary Losty............................ 81,000 * 81,000 0 --
Salomon Melgen........................ 514,286 1.8 514,286 0 --
Daniel J. O'Connor.................... 85,713 * 85,713 0 --
Porter Partners, L.P.................. 423,000 1.5 423,000 0 --
The Charles Post Charitable
Remainder Trust....................... 342,858 1.2 342,858 0 --
Donaldson, Lufkin &
Jenrette Securities
Corporation, Custodian
F/B/O John A. Retzlaff
Account No. 698-708245................ 188,571 * 188,571 0 --
Donaldson, Lufkin &
Jenrette Securities
Corporation, Custodian
F/B/O Leonid Roytman
Account No. 698-705175................ 75,000 * 75,000 0 --
Dr. Donald Sanders
IRA
Oppenheimer & Company, Inc.,
Custodian
Acct. No. 320-15167................... 205,713 * 205,713 0 --
Perry D. Snavely, Jr.................. 90,000 * 90,000 0 --
Carolyn Wittenbraker.................. 37,500 * 37,500 0 --
36
<PAGE>
Lawton Chiles and
Rhea Chiles........................... 171,428 * 171,428 0 --
William M. Aden....................... 171,428 * 171,428 0 --
Alan B. Aker and
Ann G. Kasten-Aker,
JTWROS................................ 428,571 1.5 428,571 0 --
Jerre Minor Freeman, M.D.............. 171,428 * 171,428 0 --
J.L. Gayton........................... 42,857 42,857
Johnnie L. Gayton
UTA Charles Schwab &
Co. Inc.
IRA Contributory Dtd
1/20/83............................... 85,713 * 85,713 0 --
Manus C. Kraff, M.D................... 428,571 1.5 428,571 0 --
Scott McQueen......................... 30,000 * 30,000 0 --
Post Eye Center PC
401k Plan U/A dtd 1-01-89
CT Post, Jr. TTEE..................... 171,429 * 171,429 0 --
Coutts (Jersey) Limited
- -JY798967............................. 750,000 2.7 750,000 0 --
Pennsylvania Merchant Group Ltd....... 1,084,977 3.9 1,084,977 0 --
<FN>
* Less than one percent.
(1) Determined as of June 30, 1997.
(2) Includes 150,000 shares held of record by Faith S. Chapman, all of which
are Offered Shares.
(3) Includes 1,120,588 shares held of record by Donald S. Chapman, 320,588 of
which are Offered Shares.
(4) Includes 800,000 shares held of record by Donald S. Chapman.
37
<PAGE>
(5) Includes 19,000 shares held in a joint tenant account with Scott Ettinger
and 20,000 shares held in a joint tenant account with Susan Ettinger. Scott
Ettinger and Susan Ettinger are members of the immediate family of Mark P.
Ettinger, trustee of this Selling Securityholder.
(6) Includes 113,330 shares held of record by Joseph E. Gallo, Trustee, FBO
Stephanie A. Gallo Family Trust, dated August 17, 1990; and 66,667 shares
held of record by Stephanie A. Gallo, Trustee of the Stephanie A. Gallo
Grantor Trust, dated December 14, 1993. Does not include shares held of
record by Joseph E. Gallo as trustee for other trusts.
(7) Includes 113,335 shares held of record by Joseph E. Gallo, Trustee, FBO
Ernest J. Gallo Family Trust, dated December 16, 1991 and 66,667 shares
held of record by Ernest J. Gallo, Trustee of the Ernest J. Gallo Grantor
Trust, dated December 14, 1993. Does not include shares held of record by
Joseph E. Gallo as trustee for other trusts.
(8) Includes 113,335 shares held of record by Joseph E. Gallo, Trustee, FBO
Joseph C. Gallo Family Trust, dated December 22, 1994 and 66,666 shares
held of record by Joseph C. Gallo, Trustee of the Joseph C. Gallo Grantor
Trust, dated April 28, 1994. Does not include shares held of record by
Joseph E. Gallo as trustee for other trusts.
(9) Does not include shares held of record by Russell H. Harbaugh Jr. as
trustee for other trusts.
(10) Does not include shares held of record by Charles C. Killin as trustee for
other trusts.
(11) Consists solely of shares underlying the Placement Agent Warrants.
</FN>
</TABLE>
PLAN OF DISTRIBUTION
Some or all of the Offered Shares may be offered for sale and sold from
time to time by the Selling Securityholders in the over-the-counter market (or
any national securities exchange or interdealer quotation system on which the
Common Stock may then be listed), in privately negotiated transactions (which
may include block transactions) or otherwise. In addition, the Selling
Securityholders may engage in short sales and other transactions in the Common
Stock or derivatives thereof, and may pledge, sell, deliver or otherwise
transfer the Offered Shares in connection therewith. This Prospectus may be used
by the Selling Securityholders or by any broker-dealer who may participate in
sales of the Offered Shares. Participating broker-dealers may act as agents or
principals or both and may receive commissions, discounts or concessions in
connection with sales or other transfers of Offered Shares. The Company has not
entered into any agreements or arrangements relating to the sale of the Offered
Shares.
The Company has agreed to pay the expenses of registering the Offered
Shares on behalf of the Selling Securityholders, other than broker-dealer
commissions, discounts or concessions and any legal fees incurred by the Selling
Securityholders in connection with sales of the Offered Shares. The Company and
the Selling Securityholders have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
38
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Offered
Shares by the Selling Securityholders.
EXPERTS
The consolidated financial statements of Sunrise at December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996,
appearing in this Prospectus and Registration Statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Offered Shares
will be passed upon for the Company by Holleb & Coff, Chicago, Illinois.
39
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Page
Report of Ernst & Young LLP, Independent Auditors...........................F-2
Consolidated Balance Sheets as of December 31, 1995
and 1996.............................................................F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1994, 1995 and 1996...............................F-4
Consolidated Statements of Stockholders' Equity
for the Three Years ended December 31, 1996..........................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996.....................................F-6
Notes to Consolidated Financial Statements..................................F-7
Schedule II Valuation and Qualifying Accounts...............................F-15
Condensed Consolidated Statements of Operations --
Three and Six Months ended June 30, 1997 and
1996 (unaudited).....................................................F-16
Condensed Consolidated Balance Sheets -- June 30, 1997
(unaudited) and December 31, 1996....................................F-17
Condensed Consolidated Statements of Cash Flows --
Six Months ended June 30, 1997 and 1996 (unaudited)..................F-18
Notes to Condensed Consolidated Financial Statements........................F-19
F-1
<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 sheets of Sunrise
Technologies International, Inc. as of December 31, 1996 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, 1996. 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 schedule 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, 1996 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, 1996, 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, presents 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.
/s/ Ernst & Young LLP
-----------------------
Ernst & Young LLP
Palo Alto, California
March 10, 1997
F-2
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Consolidated Balance Sheets
December 31,
1996 1995
-----------------------
(In thousands)
-----------------------
Assets
Current assets:
Cash and cash equivalents $ 647 $ 3,514
Accounts receivable, net of allowance of
$ 140,000 and $25,000 in 1996 and 1995 472 1,048
Inventories 2,135 1,666
Prepaid expenses 288 257
-----------------------
Total current assets 3,542 6,485
Property and equipment, net 199 204
-----------------------
Total assets $ 3,741 $ 6,689
=======================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,586 $ 1,097
Accrued payroll and related expenses 209 181
Accrued warranty 199 324
Other accrued expenses 475 342
-----------------------
Total current liabilities 2,469 1,944
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, 27,868,613 and 25,279,716 shares
issued and outstanding at December 31, 1996
and 1995, respectively 28 25
Additional paid-in-capital 31,688 29,196
Accumulated deficit (30,444) (24,476)
-----------------------
Total stockholders' equity 1,272 4,745
-----------------------
Total liabilities and stockholders' equity $ 3,741 $ 6,689
=======================
See accompanying notes.
F-3
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Consolidated Statements of Operations
Years ended December 31,
1996 1995 1994
---------------------------------
(In thousands, except per share amounts)
Net revenues $ 5,654 $ 5,294 $ 7,578
Cost of revenues 4,016 3,657 6,238
---------------------------------
Gross profit 1,638 1,637 1,340
---------------------------------
Other costs and expenses:
Engineering and development 1,326 1,218 1,561
Sales, marketing and regulatory 3,632 2,277 3,763
General and administrative 2,700 2,329 2,933
---------------------------------
Total other costs and expenses 7,658 5,824 8,257
---------------------------------
Loss from operations (6,020) (4,187) (6,917)
Interest income, net of expense 52 57 7
---------------------------------
Net loss $ (5,968) $ (4,130) $ (6,910)
=================================
Net loss per share $ (0.23) $ (0.28) $ (0.68)
=================================
Shares used in calculation of net loss per
share 26,414 14,935 10,129
=================================
See accompanying notes.
F-4
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Consolidated Statement of Stockholders' Equity
Three Years ended December 31, 1996
<CAPTION>
Common Stock Additional Total
----------------------- Paid-In Treasury Accumulated Stockholders'
Shares Amount Capital Stock Deficit Equity
---------------------------------------------------------------------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 9,008,293 $ 9 $16,135 $ -- $(13,436) $ 2,708
Sale of common stock, net of offering costs 1,250,000 1 5,507 -- -- 5,508
Exercise of warrants and options 200,993 -- 670 -- -- 670
Treasury stock acquired through sale of
surgical laser business -- -- -- (619) -- (619)
Net loss -- -- -- -- (6,910) (6,910)
---------------------------------------------------------------------------
Balance at December 31, 1994 10,459,286 10 22,312 (619) (20,346) 1,357
Sale of common stock, net of offering costs 15,100,000 15 7,528 -- -- 7,543
Cancellation of treasury stock (275,000) -- (619) 619 -- --
Other (4,570) -- (25) -- -- (25)
Net Loss -- -- -- -- (4,130) (4,130)
---------------------------------------------------------------------------
Balance at December 31, 1995 25,279,716 25 29,196 -- (24,476) 4,745
Sale of common stock, net of offering costs 2,333,412 3 2,242 -- -- 2,245
Exercise of warrants and options 243,252 -- 243 -- -- 243
Other 12,233 -- 7 -- -- 7
Net Loss -- -- -- -- (5,968) (5,968)
---------------------------------------------------------------------------
Balance at December 31, 1996 27,868,613 $ 28 $31,688 $ -- $(30,444) $ 1,272
===========================================================================
<FN>
See accompanying notes.
</FN>
</TABLE>
F-5
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
Increase (decrease) in cash and cash equivalents
Years ended December 31,
1996 1995 1994
-------------------------------
(In thousands)
Cash flows from operating activities
Net $(5,968) $(4,130) $(6,910)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 438 102 469
Provision for doubtful accounts 115 25 --
Changes in assets and liabilities:
Accounts receivable 461 (303) 777
Inventories (837) 289 (68)
Prepaid expenses (31) 25 (69)
Accounts payable 489 (278) (1,091)
Accrued payroll and related expenses 28 31 68
Accrued warranty (125) -- 181
Other accrued expenses 133 (256) 571
-------------------------------
Total adjustments 671 (365) 838
-------------------------------
Net cash used in operating activities (5,297) (4,495) (6,072)
Cash flows from investing activities
Purchase of property and equipment (65) (50) (22)
-------------------------------
Net cash used in investing activities (65) (50) (22)
-------------------------------
Cash flows from financing activities
Payment on capital lease obligations -- (18) (61)
Issuance of common stock, net of offering costs 2,495 7,518 6,178
-------------------------------
Net cash provided by financing activities 2,495 7,500 6,117
-------------------------------
Net increase (decrease) in cash and equivalents (2,867) 2,955 23
Cash and cash equivalents at beginning of period 3,514 559 536
-------------------------------
Cash and cash equivalents at end of period $ 647 $ 3,514 $ 559
===============================
See accompanying notes.
F-6
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
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. Certain reclassifications have been made to prior
year amounts in order to conform to the current presentation.
The Company has incurred significant losses for the last several years and
at December 31, 1996 has an accumulated deficit of $30,444,000. The accompanying
financial statements have been prepared assuming the Company will continue as a
going concern. The Company's ability to continue as a going concern is dependent
upon performing profitably or obtaining further financing. Management's plans
include selling assets and field of use rights related to its dental operations.
If successful in selling the dental assets the company will focus on further
developing and seeking regulatory approval of its ophthalmic related products.
Such approval may take several years. Although dental related sales have
represented the majority of historical sales (98% in 1996, 76% in 1995 and 79%
in 1994), management's strategic plan is to use the proceeds from the sale of
the dental assets and debenture offering in March of 1997 to further develop the
ophthalmic products, specifically the Sunrise Corneal Shaping System. There can
be no assurance that the Company will successfully consummate the sale of the
dental assets, which is subject to stockholder approval. There can also be no
assurance that the Corneal Shaping System will receive regulatory approval and
the Company will be successful in developing, manufacturing, and marketing the
Corneal Shaping System or other ophthalmic related products.
In March 1997 the Company completed a private placement consisting of
two-year convertible notes and warrants resulting in net proceeds of
approximately $3.7 million. Management believes the net proceeds from the
convertible debenture offering and cash from the expected sale of the dental
assets will provide sufficient funds for the Company's planned operations for
1997. Should the sale of the dental assets not be successfully completed the
Company may need to seek additional debt or equity financing. There can be no
assurance that such financing, if necessary, will be available, in which case
management may need to curtail or suspend certain or all operations.
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 16%, 21% and 57% of revenues in 1996, 1995 and 1994 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.
F-7
<PAGE>
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 Form 10-K for 1996,
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.
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 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,
1996 and 1995, 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:
1996 1995
--------------------------------
(In thousands)
Raw materials $1,180 $909
Work-in-process 299 237
Finished goods 656 520
--------------------------------
$2,135 $1,666
================================
Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method for financial
F-8
<PAGE>
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:
1996 1995
------------------------------
(In thousands)
Machinery and equipment $1,644 $1,412
Computer Equipment 611 599
Furniture and fixtures 207 207
Leasehold improvements 392 167
------------------------------
2,854 2,385
Less accumulated depreciation and (2,655) (2,181)
amortization
------------------------------
$199 $204
==============================
Net Loss Per Share
Net loss per share for the years ended December 31, 1996, 1995 and 1994 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 anti-dilutive effect.
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.
Export Sales
The Company had export sales by region as follows:
1996 1995 1994
-----------------------------------------------
(In thousands)
Europe (primarily
Germany and Belgium) $1,036 $1,948 $4,291
Pacific Rim
(primarily Japan
and Korea) 1,602 1,192 139
Canada ---- 248 393
Other ---- 282 363
-----------------------------------------------
Total $2,638 $3,670 $5,186
================================================
F-9
<PAGE>
2. Taxes on Income
As of December 31, 1996, the Company had federal and state net operating
loss carryforwards of approximately $24,600,000 and $11,000,000, respectively.
The federal net operating loss carryforwards will expire at various dates
beginning on 2007 through 2011. The state net operating loss carryforwards will
expire at various dates through 2001.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes.
Significant components of the Company's deferred tax assets as of December
31 are as follows:
1996 1995
---------------------------------
(In thousands)
Deferred tax assets:
Net operating loss carry-forwards $9,000 $7,175
Research credits (expire 2007-2011) 600 642
Other 600 949
---------------------------------
Total deferred tax assets 10,200 8,766
Valuation allowance for deferred tax assets (10,200) (8,766)
---------------------------------
Net deferred tax assets $ ---- $ ----
=================================
Because of the Company's lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $1,928,000 during the year ended December 31, 1995.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change provisions of the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
3. Commitments and Contingencies
Leases
The Company leases certain of its facilities and equipment under a
non-cancelable operating lease. Rent expense was $299,000, $281,000 and $279,000
in 1996, 1995 and 1994, respectively.
Future minimum lease payments under the lease are $255,000 in 1997 and
$21,000 in 1998.
Litigation Settlements
In July 1996, the Company settled all of its outstanding litigation with
ADT. The material terms of the settlement are as follows:
(a) The Company waived its rights to collect a judgment for $940,000
obtained against ADT in a prior case, which had been subject to an
appeal by ADT.
(b) The Company obtained a non-exclusive license to certain ADT patents
covering air abrasion systems used in dental applications.
(c) The Company will pay ADT a royalty of 7% on all air abrasion products
shipped after December 31, 1996.
F-10
<PAGE>
(d) If the Company sells its dental air abrasion assets before July 1998,
it must pay to ADT a transfer fee on the amount received for the air
abrasion assets.
4. Stockholders' Equity
Common Stock
As of December 31, 1996, there remains 38,340 outstanding 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 conjunction with a 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.
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 per share and they are exercisable at any time
before February 8, 1999.
In June 1995, the Company completed a private placement of 2,100,000 shares
of common stock.
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 per share and they are exercisable at
any time before September 6, 2000.
In August 1996, the Company completed a private placement of 2,334,000
shares of common stock. In connection with the private placement, the placement
agent received a warrant to purchase 116,721 shares of common stock. The
exercise price for these warrants is $1.06 per share and they are exercisable at
any time between August 7, 1997 and August 7, 2001.
As of December 31, 1996, there were warrants outstanding to purchase
917,561 shares of common stock.
Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("FAS 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation is recognized.
In 1988, the Company adopted the 1988 Stock Option Plan (the "Plan") under
which employees, directors and consultants may be granted incentive or
non-statutory 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. Non-statutory 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.
F-11
<PAGE>
<TABLE>
The following table summarizes the Company's stock option activity and
related information for the three years ended December 31, 1996:
<CAPTION>
Outstanding Options
------------------------------------------------------------
Shares
Available For Share
Grant Shares Price
<S> <C> <C> <C>
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
Shares reserved ---- ---- ----
Granted (1,816,000) 1,816,000 $1.11*
Exercised ---- (243,252) $1.00*
Canceled 389,474 (389,474) $1.44*
------------------------------------------------------------
Balance, December 31, 1996 256,999 2,487,438 $1.03*
============================================================
<FN>
* Represents the weighted average exercise price for the applicable options.
</FN>
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
Options Outstanding and Exercisable
-------------------------------------------------------
Weighted
Average Weighted
Number Remaining Average
Outstanding Contractual Exercise
Life Price
(Years)
$0.75 - $1.00 748,604 4.0 $1.00
$1.01 - $1.25 1,695,834 3.8 $1.05
$1.26 - $1.50 38,000 1.0 $1.49
$1.51 - $1.75 5,000 1.0 $1.63
-------------------------------------------------------
2,487,438 3.8 $1.03
=======================================================
As of December 31, 1996 and 1995, options to purchase 680,248 and 472,840
shares respectively were
F-12
<PAGE>
exercisable. In 1995, 1,058,331 options to purchase shares were reissued at
$1.00 per share under an option exchange program. During 1994 options
outstanding were canceled and reissued under an option exchange program.
Pro forma information regarding net loss and net loss per share is required
by FAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using the Black-Scholes
pricing model with the following weighted-average assumptions for 1996 and 1995,
respectively: risk-free interest rates of 5.7% and 5.6%; no dividend yield;
volatility factors of the expected market price of the Company's common stock of
0.955; and expected life of the options of 4.8 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
For the Years Ending
December 31,
1996 1995
--------------------------------------
(In thousands, except per share amounts)
Pro forma net loss $6,390 $4,220
Pro forma net loss per share $0.24 $0.28
The weighted average grant date fair value of options granted during 1996
and 1995 were $0.74 and $0.89 respectively.
Because FAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until fiscal
1997. The effects on pro forma disclosures of applying FAS 123 are not likely to
be representative of the effects on pro forma disclosures in future years.
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.
There were 40,656 and 34,689 shares issued under the plan as of December 31,
1996 and 1995, respectively.
F-13
<PAGE>
5. Supplemental Statement of Cash Flows Information
1996 1995 1994
--------------------------------------
(In thousands)
Cash received during the year for:
Interest 52 ---- ----
6. Events Subsequent to Date of Auditor's Report (Unaudited)
On March 25, 1997, the Company signed an agreement to sell its dental
assets to Lares Research. Consideration for the sale will be $4.0 million in
cash on completion, $1.0 million in an 8% interest bearing note receivable three
years from the date of closing and $0.5 million in an 8% interest bearing
promissory note four years from the date of closing. This transaction is subject
to stockholder approval and other conditions.
F-14
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning Costs and End
of Period Expenses Deductions Other(A) of Period
---------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
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
Year ended December 31, 1996
Reserves and allowances deducted from assets accounts:
Allowance for uncollectible accounts $25 $115 ---- $---- $140
Allowance for inventory $468 $---- $(118) $---- $350
<FN>
(A) Amounts relate to valuation allowance assigned to disposed assets.
</FN>
</TABLE>
F-15
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations
(unaudited)
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Net revenues $ 1,454 $ 1,039 $ 2,463 $ 2,560
Cost of revenues 1,001 898 1,959 2,038
-------- -------- -------- --------
Gross Profit 453 141 504 522
Other costs and expenses:
Engineering and development 262 283 535 625
Sales, marketing and regulatory 784 769 1,443 1,716
General and administrative 1,200 640 1,906 1,206
-------- -------- -------- --------
Total other costs and expenses 2,246 1,692 3,884 3,547
-------- -------- -------- --------
Loss from operations (1,793) (1,551) (3,380) (3,025)
Gain on sale of dental assets 1,740 -- 1,740 --
Interest income 21 2 32 39
Interest expense, including non-cash interest
associated with redeemable convertible notes (131) -- (943) (6)
-------- -------- -------- --------
Net loss $ (163) $ (1,549) $ (2,551) $ (2,992)
======== ======== ======== ========
Net loss per share $ (0.01) $ (0.06) $ (0.09) $ (0.12)
======== ======== ======== ========
Shares used in calculation of net loss per share 27,886 25,395 27,879 25,355
======== ======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-16
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(unaudited)
June 30, December 31,
1997 1996
-------- --------
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 4,129 $ 647
Accounts receivable, net of allowance 750 472
Inventories 555 2,135
Prepaid expenses 120 288
-------- --------
Total current assets 5,554 3,542
Property and equipment, net 62 199
-------- --------
Total assets $ 5,616 $ 3,741
======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 700 $ 1,586
Accrued payroll and related expenses 481 209
Accrued warranty 199 199
Other accrued expenses 642 475
-------- --------
Total current liabilities 2,022 2,469
Redeemable convertible notes 3,658 --
Commitments and contingencies -- --
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value, 2,000,000 shares
authorized, none issued or outstanding -- --
Common Stock, $.001 par value, 75,000,000 shares
authorized, 27,886,247 and 27,868,613 shares
issued and outstanding at June 30, 1997 and
December 31, 1996 respectively 28 28
Additional paid-in capital 32,903 31,688
Accumulated deficit (32,995) (30,444)
-------- --------
Total stockholders' equity (deficit) (64) 1,272
-------- --------
Total liabilities and stockholders' equity (deficit) $ 5,616 $ 3,741
======== ========
NOTE: The consolidated balance sheet at December 31, 1996 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See accompanying notes.
F-17
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(unaudited)
Six months ended June 30,
1997 1996
-------- --------
(In thousands)
Cash flows for operating activities:
Net loss $(2,551) $(2,992)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 94 23
Provision for doubtful accounts 30 30
Gain on sale of dental assets (1,740) --
Non-cash interest expense 863 --
Changes in assets and liabilities:
Accounts receivable (308) 271
Inventories 202 (633)
Prepaid expenses 168 107
Accounts payable (1,137) (228)
Accrued payroll and related expenses 272 82
Other accrued expenses 67 (20)
------- -------
Total adjustments (1,489) (368)
------- -------
Net cash used in operating activites (4,040) (3,360)
------- -------
Cash flows from investing activities:
Purchase of property and equipment -- (21)
------- -------
Net cash used in investing activites -- (21)
------- -------
Cash flows from financing activities:
Issuance of common stock, net of offering costs 190 186
Issuance of redeemable convertible notes, net of
issuance costs 3,743 --
Proceeds from sale of dental assets 4,000 --
Costs associated with sale of dental assets (411)
------- -------
Net cash provided by financing activities 7,522 186
------- -------
Net increase (decrease) in cash and cash equivalents 3,482 (3,195)
Cash and cash equivalents at beginning of period 647 3,514
------- -------
Cash and cash equivalents at end of period $ 4,129 $ 319
======= =======
See accompanying notes.
F-18
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 1997
1. Basis of Presentation
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries after elimination of all material
intercompany balances and transactions. Certain reclassifications have been made
to prior year amounts in order to conform to the current presentation.
The condensed consolidated financial data for the periods ended June 30,
1997 and 1996 are unaudited, but include all adjustments (consisting only of
normal recurring adjustments) that the management of Sunrise Technologies
International, Inc. believes to be necessary for fair presentation of the
periods presented. Interim results are not necessarily indicative of results for
the full year. The financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1996 included in
the Company's annual report on Form 10-K filed with the Securities and Exchange
Commission.
The Company has incurred significant losses for the last several years and
at June 30, 1997 has an accumulated deficit of approximately $32,995,000. The
accompanying condensed financial statements have been prepared assuming the
Company will continue as a going concern. Although the Company's management
believes existing working capital will provide sufficient funds for the
Company's planned operations through 1997, the Company's long term ability to
continue as a going concern is dependent upon performing profitably or obtaining
further financing. Management recognizes the need for additional cash infusion
and is pursuing various options which include debt or equity financing. There
can be no assurance that such financing, if necessary, will be available, in
which case management may need to curtail or suspend certain or all operations.
The preparation of unaudited financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. Net Loss per Share
Net loss per share for the periods ended June 30, 1997 and 1996 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.
In February, 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and restate all prior
periods. Under the new requirements for calculating basic earnings per share,
the dilutive effect of stock options will not be included. The computed basic
earnings per share will not be different from the primary earnings per share for
the periods ended June 30, 1997 and June 30, 1996.
3. 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.
4. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consisted of the following on the dates indicated:
June 30, December 31,
1997 1996
------- ------------
(In thousands)
Raw materials $ 359 $1,180
Work-in-process 160 299
Finished goods 36 656
------ ------
$ 555 $2,135
====== ======
5. Income Taxes
Due to the Company's losses from operations, all deferred tax assets, which
primarily result from net operating loss carry forwards, have been offset in
full by a valuation allowance in accordance with SFAS No. 109.
6. Issuance of Redeemable Convertible Notes
In February and March 1997, the Company completed a series of private
placements (collectively, the "1997 Notes Placement") of 5% redeemable
convertible notes due 1999 (convertible into common stock) (the "Notes") and
warrants to purchase common stock (the "Warrants"). The total face amount of the
Notes is approximately $4,100,000, and net proceeds aggregated approximately
$3,700,000. In accordance with recent Securities and Exchange Commission
Division of Corporation Finance guidance, the Company has recorded a premium of
approximately $769,000 associated with the conversion feature of the Notes as
additional interest associated with the Notes and paid-in capital. Because the
Notes are immediately convertible at the holders' option, the entire amount has
been recorded as interest expense upon issuance of the Notes. The Company has
recorded the Notes net of debt offering costs of approximately $358,000 and the
value associated with the Warrants of approximately $256,000, which will be
amortized as interest expense over the period that the Notes are outstanding.
7. Sale of Dental Assets
In June 1997, the Company completed the sale of the Company's assets
associated with its dental laser, air abrasive and composite curing systems (the
"Dental Assets") to Lares Research. The purchase price paid for the Dental
Assets was $5,500,000, consisting of $4,000,000 in cash paid at closing and
$1,500,000 in the form of a promissory note, with two installments due in three
and four years, respectively (the "Lares Note"). Although the Company
anticipates collecting interest and principal on the Lares Note, due to
subordination of the Lares Note to Lares' Bank, collection is not reasonably
assured and the Company intends to recognize proceeds from the sale and interest
on the Note as cash is received. On collection of the Lares Note principal the
Company will pay to American Dental Technologies ("ADT") an additional transfer
fee of ten percent of cash collected on the $1,000,000 first installment of the
Lares Note. The gain on sale of the Dental Assets is comprised as follows:
In thousands
Cash proceeds from sale of dental assets $ 4,000
Less: Inventory and equipment sold (1,498)
ADT transfer fee (275)
Transaction fees (237)
Other costs (250)
-------
Gain on sale of dental assets $ 1,740
=======
F-19
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made hereby, and if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Selling Securityholders. This Prospectus does not
constitute an offer to sell or the solicitation of any offer to buy any security
other than the shares of Common Stock offered by this Prospectus, nor does it
constitute an offer to sell or a solicitation of any offer to buy the shares of
Common Stock by anyone in any jurisdiction in which such offer or solicitation
is not authorized, or in which the person making such offer or solicitation is
not qualified to do so, or to any person to whom it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus, nor any sale
made hereunder shall, under any circumstances, create any implication that there
has not been a change in the facts set forth in this Prospectus or in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
Page
Available Information..................................................1
Incorporation of Certain Information
by Reference.........................................................1
Disclosure Regarding Forward-Looking
Statements...........................................................2
Prospectus Summary.....................................................3
Risk Factors...........................................................5
Selected Financial Information........................................10
Business..............................................................13
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................16
Pro Forma Financial Statements........................................22
Management............................................................27
Description of Capital Stock..........................................28
Share Ownership by Principal Stockholders and
Management..........................................................31
Selling Securityholders...............................................32
Plan of Distribution..................................................38
Use of Proceeds.......................................................39
Experts...............................................................39
Legal Matters.........................................................39
Index to Consolidated Financial Statements...........................F-1
10,342,090 Shares
SUNRISE TECHNOLOGIES
INTERNATIONAL, INC.
Common Stock
PROSPECTUS
__________________, 1997
PART II
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company and the Selling
Securityholders in connection with the sale of the Common Stock being
registered. All amounts are estimates except the registration fee.
Amount to be Paid
SEC Registration Fee .................................... $ 4,603
Printing ................................................ *
Legal Fees and Expenses ................................. *
Accounting Fees and Expenses ............................ *
Blue Sky Fees and Expenses .............................. *
Transfer Agent and Registrar Fees ....................... *
Miscellaneous ........................................... ------------
Total .............................................. *
* To be supplied by Amendment.
Item 15. Indemnification of Directors and Officers
Section 102(b)(7) of the General Corporation Law of the State of Delaware
(the "Delaware Law") grants corporations the right to limit or eliminate the
personal liability of their directors in certain circumstances in accordance
with provisions therein set forth. The Sunrise Certificate contains a provision
eliminating director liability to Sunrise and its stockholders for monetary
damages for breach of fiduciary duty as a director. The provision does not,
however, eliminate or limit the personal liability of a director: (i) for any
breach of such director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) under the Delaware statutory
provision making directors personally liable, for improper payment of dividends
or improper stock purchases or redemptions; or (iv) for any transaction from
which the director derived an improper personal benefit. This provision offers
persons who serve on the Company's Board protection against awards of monetary
damages resulting from breaches of their duty of care (except as indicated
above). As a result of this provision, the ability of the Company or a
stockholder thereof to successfully prosecute an action against a director for a
breach of his duty of care is limited. However, the provision does not affect
the availability of equitable remedies such as an injunction or rescission based
upon a director's breach of his duty of care. The Commission has taken the
position that the provision will have no effect on claims arising under federal
securities laws.
Section 145 of the Delaware Law grants corporations the right to indemnify
their directors, officers, employees and agents in accordance with the
provisions therein set forth. The Company's Bylaws provide that the corporation
shall, subject to limited exceptions, indemnify its directors and executive
officers to the fullest extent not prohibited by the Delaware Law. The Company's
Bylaws provide further that the Company shall have the power to indemnify its
other officers, employees and other agents as set forth in the Delaware Law.
Such indemnification rights include reimbursement for expenses incurred by such
II-1
<PAGE>
director, executive officer, other officer, employee or agent in advance of the
final disposition of such proceeding in accordance with the applicable
provisions of the Delaware Law.
The Company has entered into agreements with certain of its directors and
officers pursuant to which the Company has agreed to indemnify such directors
and officers to the fullest extent permitted under applicable law. In addition,
the Company has purchased insurance containing customary terms and conditions as
permitted by law on behalf of its directors and officers, which may cover
liabilities under the Securities Act of 1933, as amended (the "Securities Act").
Item 16. Exhibits
Exhibit Description
5 Opinion regarding legality
5.1 Opinion of Holleb & Coff as to the legality of the Offered Shares
being registered*
10 Material Contracts
10.1 Lease Agreement with Bayside Spinnaker Partners III, as lessor, for
the lease of facilities at 47527 Fremont Boulevard, Fremont,
California, dated July 16, 1991. (1)
10.2 Patent License Agreement between Sunrise and Patlex Corporation
dated January 1, 1990. (2)
10.3 Agreement between Sunrise and the University of Miami, Department
of Ophthalmology, dated October 28, 1991. (1)
10.4 Joint Development and Exclusive Manufacturing Agreement dated April
17, 1993 between Sunrise and Danville Engineering, Inc. (3)
10.5 Settlement Agreement between Sunrise and American Dental Laser,
Inc., dated February 4, 1993 (confidential treatment has previously
been granted for portions of this exhibit). (4)
10.6 License Agreement between Sunrise and American Dental Laser, Inc.,
dated February 4, 1993 (confidential treatment has previously been
granted for portions of this exhibit). (4)
10.7 Settlement Agreement between Sunrise and American Dental
Technologies, dated July 30, 1996. (5)
10.8 Form of Indemnification Agreement between Sunrise and each of its
officers and directors. (2)
10.9 1988 Stock Option Plan, as amended. (2)
II-2
<PAGE>
10.10 Employment Agreement entered into between Sunrise and Joseph W.
Shaffer, dated April 5, 1989. (2)
10.11 Form of 1992 Private Placement Warrant. (4)
10.12 Form of Placement Agent Warrant. (4)
10.13 Form of U.S. Note and Warrant Purchase Agreement entered into by
Sunrise and the signatories thereto, relating to the 1997 Notes
Offering. (7)
10.14 Form of Offshore Note and Warrant Purchase Agreement entered into
by Sunrise and the signatories thereto, relating to the 1997 Notes
Offering. (7)
10.15 Asset Purchase Agreement between the Company and Lares Research,
providing for the sale of the Company's Dental Business. (7)
10.16 1997 Stock Option Plan.
11 Statement re Computation of Per Share Earnings
11.1 Statement re Computation of Per Share Loss. (7)
23 Consents
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Holleb & Coff*
24 Power of Attorney (included on signature page)
- -----------------
* To be filed by Amendment.
(1) Incorporated by reference from Sunrise's Annual Report on Form 10-K for the
year ended December 31, 1991 (File No. 0-17816).
(2) Incorporated by reference from Sunrise's Registration Statement on Form
S-1, as amended (File No. 33-36768).
(3) Incorporated by reference from Sunrise's Annual Report on Form 10-K for the
year ended December 31, 1994 (File No. 0-17816).
(4) Incorporated by reference from Sunrise's Annual Report on Form 10-K for the
year ended December 31, 1992 (File No. 0-17816).
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(5) Incorporated by reference from Sunrise's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 (File No. 0-17816).
(6) Incorporated by reference from Sunrise's Annual Report on Form 10-K for the
year ended December 31, 1995 (File No. 0-17816).
(7) Incorporated by reference from Sunrise's Annual Report on Form 10-K for the
year ended December 31, 1996 (File No. 0-17816).
Item 17. Undertakings
Pursuant to Item 512(a) of Regulation S-K
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sale are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Pursuant to Item 512(h) of Regulation S-K
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or
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otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Fremont, state of California, on September 5, 1997.
Sunrise Technologies International, Inc.
By: /s/ C. Russell Trenary, III
-------------------------------------
C. Russell Trenary, III
President and Chief Executive
Officer
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<PAGE>
POWERS OF ATTORNEY
Each person whose signature appears below hereby appoints C. Russell
Trenary and Timothy A. Marcotte, and each of them severally, acting alone and
without the other, his true and lawful attorney-in-fact with authority to
execute in the name of each such person, and to file with the Securities and
Exchange Commission, together with any exhibits thereto and other documents
therewith, any and all amendments (including without limitation post-effective
amendments) to this registration statement, and to sign any registration
statement for the same offering covered by this registration statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act,
necessary or advisable to enable the registrant to comply with the Securities
Act and any rules, regulations and requirements of the Securities and Exchange
Commission in respect thereof, which amendments may make such changes in this
registration statement as the aforesaid attorney-in-fact deems appropriate.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
September 5, 1997 /s/ C. Russell Trenary, III
- ----------------- ------------------------------------------
Date C. Russell Trenary, III
President, Chief Executive Officer and
Director
(Principal Executive Officer)
September 5, 1997 /s/ Timothy A. Marcotte
- ----------------- ------------------------------------------
Date Timothy A. Marcotte
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
September 5, 1997 /s/ Joseph D. Koenig
- ----------------- ------------------------------------------
Date Joseph D. Koenig
Chairman of the Board and Director
September 5, 1997 /s/ Ronald A. Slocum
- ----------------- ------------------------------------------
Date Ronald A. Slocum
Director
II-7
SUNRISE TECHNOLOGIES, INC.
1997 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business.
Options granted hereunder may be either Incentive Stock Options or
Nonstatutory Stock Options, at the discretion of the Board and as reflected in
the terms of the written option agreement.
2. Definitions. As used herein, the following definitions shall apply:
"Applicable Laws" shall mean the legal requirements relating to the
administration of stock incentive plans, if any, under applicable provisions
of federal securities laws, state corporate and securities laws, the Code,
and the rules of any applicable stock exchange or national market system.
"Board" shall mean the Committee, if one has been appointed, or the Board
of Directors of the Company, if no Committee is appointed.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Committee appointed by the Board of Directors
in accordance with Section 4 of the Plan, if one is appointed.
"Common Stock" shall mean the Common Stock of the Company.
"Company" shall mean Sunrise Technologies International, Inc., a Delaware
corporation.
"Consultant" shall mean any person who is engaged by the Company or any
Parent or Subsidiary to render consulting services and is compensated for
such consulting services, and any director of the Company whether or not
compensated for such services.
"Continuous Status as an Employee or Consultant" shall mean the absence of
any interruption or termination of service as an Employee or Consultant.
Continuous Status as an Employee or Consultant shall not be considered
interpreted in the case of sick leave, military leave, or any other leave of
absence approved by the Board; provided that such leave is for a period of
not more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute.
"Covered Employee" shall mean an Employee who is, or in the opinion of the
Board may become, a "covered employee" under Section 162(m)(3) of the Code at
the time of the grant of an Option.
"Employee" shall mean any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
"Incentive Stock Option" shall mean an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
"Nonstatutory Stock Option" shall mean an Option not intended to qualify
as an Incentive Stock Option.
"Option" shall mean a stock option granted pursuant to the Plan.
"Optioned Stock" shall mean the Common Stock subject to an Option.
"Optionee" shall mean an Employee or Consultant who receives an Option.
"Parent" shall mean a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
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"Performance-Based Compensation" shall mean compensation qualifying as
"performance-based compensation" under Section 162(m) of the Code.
"Plan" shall mean this 1997 Stock Option Plan.
"Share" shall mean a share of the Common Stock, as adjusted in accordance
with Section 11 of the Plan.
"Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of the
Plan, the maximum aggregate number of shares which may be issued under Options
granted under the Plan is three million five hundred thousand (3,500,000) shares
of Common Stock. The Shares may be authorized, but unissued, or reacquired
Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan. Notwithstanding any other provision of the Plan, shares
issued under the Plan and later repurchased by the Company shall not become
available for future grant or sale under the Plan.
4. Composition of Administrator.
(a) Multiple Administrative Bodies. If permitted by the Applicable Laws,
the Plan may (but need not) be administered by different administrative
bodies with respect to Covered Employees (in connection with
Performance-Based Compensation), directors, officers who are not directors
and Consultants and Employees who are neither directors nor officers.
(b) Administration with respect to Directors and Officers. With respect to
grants of Options to Employees or Consultants who are also officers or
directors of the Company, the Plan shall be administered by (A) the Board, if
the Board may administer the Plan in compliance with the Applicable Laws, or
(B) a Committee designated by the Board to administer the Plan, which
Committee shall be constituted in such a manner as to satisfy the Applicable
Laws.
(c) Administration with respect to Other Persons. With respect to grants
of Options to Employees or Consultants who are neither directors nor officers
of the Company, the Plan shall be administered by (A) the Board or (B) a
Committee designated by the Board, which Committee shall be constituted in
such a manner as to satisfy the Applicable Laws.
(d) Administration With Respect To Covered Employees. Notwithstanding the
foregoing, grants of Options to any Covered Employee intended to qualify as
Performance-Based Compensation shall be made only by a Committee (or
subcommittee of a Committee) which is composed solely of two or more
Directors eligible under the Code to serve on a committee making grants
qualifying as Performance-Based Compensation. In the case of such grants to
Covered Employees, references to the "Board" shall be deemed to be references
to such Committee or subcommittee.
(e) General. Once a Committee has been appointed pursuant to subsection
(b), (c) or (d) of this Section 4, such Committee shall continue to serve in
its designated capacity until otherwise directed by the Board. From time to
time the Board may increase the size of any Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new
members in substitution therefor, fill vacancies (however caused) and remove
all members of a Committee and thereafter directly administer the Plan, all
to the extent permitted by the Applicable Laws.
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5. Eligibility.
(a) Nonstatutory Stock Options may be granted only to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if he is otherwise
eligible, be granted an additional Option or Options.
(b) The maximum aggregate number of Shares with respect to which Options
may be granted to any Employee in any fiscal year of the Company shall be one
million (1,000,000) Shares. The foregoing limitation shall be adjusted
proportionately in connection with any change in the Company's capitalization
pursuant to Section 11, below. This Section 5(b) is intended to comply with
the requirements for the award of Performance-Based Compensation applicable
to stock options and shall be construed in accordance with the requirements
of Section 162(m) of the Code and the regulations thereunder.
(c) No Incentive Stock Option may be granted to an Employee which, when
aggregated with all other incentive stock options granted to such Employee by
the Company or any Parent or Subsidiary, would result in Shares having an
aggregate fair market value (determined for each Share as of the date of
grant of the Option covering such Share) in excess of $100,000 becoming first
available for purchase upon exercise of one or more incentive stock options
during any calendar year.
(d) Section 5(c) of the Plan shall apply only to an Incentive Stock Option
evidenced by an "Incentive Stock Option Agreement" which sets forth the
intention of the Company and the Optionee that such Option shall qualify as
an incentive stock option. Section 5(c) of the Plan shall not apply to any
Option evidenced by a "Nonstatutory Stock Option Agreement" which sets forth
the intention of the Company and the Optionee that such Option shall be a
Nonstatutory Stock Option.
(e) The Plan shall not confer upon any Optionee any right with respect to
continuation of employment or consulting relationship with the Company, nor
shall it interfere in any way with his right or the Company's right to
terminate his employment or consulting relationship at any time, with or
without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to occur of
its adoption by the Board of Directors or its approval by the shareholders of
the Company as described in Section 17 of the Plan. It shall continue in effect
for a term of ten (10) years unless sooner terminated under Section 13 of the
Plan.
7. Term of Option. The term of each Incentive Stock Option shall be ten (10)
years from the date of grant thereof or such shorter term as may be provided in
the Incentive Stock Option Agreement. The term of each Nonstatutory Stock Option
shall be ten (10) years from the date of grant thereof or such shorter term as
may be provided in the Nonstatutory Stock Option Agreement. However, in the case
of an Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than ten percent (10) of the voting power of all classes
of stock of the Company or any Parent or Subsidiary, (a) if the Option is an
Incentive Stock Option, the term of the Option shall be five (5) years from the
date of grant thereof or such shorter term as may be provided in the Incentive
Stock Option Agreement, or (b) if the Option is a Nonstatutory Stock Option, the
term of the Option shall be five (5) years from the date of grant thereof or
such shorter term as may be provided in the Nonstatutory Stock Option Agreement.
8. Exercise Price and Consideration.
(a) The per Share exercise price for the Shares to be issued pursuant to
exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than
110% of the fair market value per Share on the date of grant.
(B) granted to any Employee, the per Share exercise price shall be no
less than 100% of the fair market value per Share on the date of grant.
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(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the grant of such Option, owns
stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the per Share
exercise price shall be no less than 110% of the fair market value per Share
on the date of the grant.
(B) granted to any person, other than a Covered Employee, the per Share
exercise price shall be no less than 85% of the fair market value per Share
on the date of grant as determined by the Board.
(C) granted to any Covered Employee, the per Share exercise price shall be
no less than the fair market value per Share on the date of grant as
determined by the Board.
(b) The fair market value shall be determined by the Board in its
discretion; provided, however, that where there is a public market for the
Common Stock, the fair market value per Share shall be the bid price (or the
closing price per share if the Common Stock is listed on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") National
Market System) of the Common Stock for the date of grant, as reported in the
Wall Street Journal (or, if not so reported, as otherwise reported by the
NASDAQ System) or, in the event the Common Stock is listed on stock exchange,
the fair market value per Share shall be the closing price on such exchange
on the date of grant of the Option, as reported in the Wall Street Journal.
(c) The consideration to be paid for the Shares to be issued upon exercise
of an Option, including the method of payment, shall be determined by the
Board and may consist entirely of cash, check, promissory note, other Shares
of Common Stock which (i) either have been owned by the Optionee for more
than six (6) months on the date of surrender or were not acquired, directly
or indirectly, from the Company, and (ii) have a fair market value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised, or any combination of such methods of
payment, or such other consideration and method of payment for the issuance
of Shares to the extent permitted under Sections 408 and 409 of the
California General Corporation Law. In making its determination as to the
type of consideration to accept, the Board shall consider if acceptance of
such consideration may be reasonably expected to benefit the Company (Section
315(b) of the California General Corporation Law).
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of
the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(c) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Company shall issue
(or cause to be issued) such stock certificate promptly upon exercise of the
Option. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the stock certificate is issued, except
as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
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(b) Termination of Status as an Employee or Consultant. In the event of
termination of an Optionee's Continuous Status as an Employee or Consultant
(as the case may be), such Optionee may, but only within thirty (30) days (or
such other period of time, not exceeding three (3) months in the case of an
Incentive Stock Option or six (6) months in the case of a Nonstatutory Stock
Option, as is determined by the Board, with such determination in the case of
an Incentive Stock Option being made at the time of grant of the Option)
after the date of such termination (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement),
exercise his Option to the extent that he was entitled to exercise it at the
date of such termination. To the extent that he was not entitled to exercise
the Option at the date of such termination, or if he does not exercise such
Option (which he was entitled to exercise) within the time specified herein,
the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of Section 9(b)
above, in the event of termination of an Optionee's Continuous Status as an
Employee or Consultant as a result of his total and permanent disability (as
defined in Section 22(e)(3) of the Code), he may, but only within six (6)
months (or such other period of time not exceeding twelve (12) months as is
determined by the Board, with such determination in the case of an Incentive
Stock Option being made at the time of grant of the Option) from the date of
such termination (but in no event later than the date of expiration of the
term of such Option as set forth in the Option Agreement), exercise his
Option to the extent he was entitled to exercise it at the date of such
termination. To the extent that he was not entitled to exercise the Option at
the date of termination, or if he does not exercise such Option (which he was
entitled to exercise) within the time specified herein, the Option shall
terminate.
(d) Death of Optionee. In the event of the death of an Optionee:
(i) during the term of the Option who is at the time of his death an
Employee or Consultant of the Company and who shall have been in
Continuous Status as an Employee or Consultant since the date of grant of
the Option, the Option may be exercised, at any time within twelve (12)
months following the date of death (but in no event later than the date of
expiration of the term of such Option as set forth in the Option
Agreement), by the Optionee's estate or by a person who acquired the right
to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that would have accrued had the Optionee
continued living and remained in Continuous Status as an Employee or
Consultant twelve (12) months after the date of death, subject to the
limitation set forth in Section 5(b); or
(ii) within thirty (30) days (or such other period of time not
exceeding three (3) months as is determined by the Board, with such
determination in the case of an Incentive Stock Option being made at the
time of grant of the Option) after the termination of Continuous Status as
an Employee or Consultant, the Option may be exercised, at any time within
six (6) months following the date of death (but in no event later than the
date of expiration of the term of such Option as set forth in the Option
Agreement), by the Optionee's estate or by a person who acquired the right
to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of termination.
10. Transferability of Options.
(a) Incentive Stock Options. Incentive Stock Options may not be sold,
pledged, assigned, hypothecated, transferred or disposed of in any manner
other than by will or by the laws of descent and distribution or pursuant to
a qualified domestic relations order as defined by the Code or Title I of the
Employee Retirement Income Security Act, or the rules thereunder. The
designation of a beneficiary by an Optionee does not constitute a transfer.
An Incentive Stock Option may be exercised, during the lifetime of the
Optionee, only by the Optionee or a transferee permitted by this Section
10(a).
(b) Nonstatutory Stock Options. Nonstatutory Stock Options may permit
transfer of all or a portion of the Option by such Optionee to (i) the
spouse, children or grandchildren of the Optionee ("Immediate Family
Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate
Family Members, or (iii) a partnership in which such Immediate Family Members
are the only
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partners, provided that (x) there may be no consideration for any such
transfer, (y) the stock option agreement pursuant to which such Nonstatutory
Stock Options are granted must be approved by the Committee, and must
expressly provide for transferability in a manner consistent with this
Section, and (z) subsequent transfers of transferred options shall be
prohibited except those in accordance with Section 10(a). Following transfer,
any such Options shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer, provided that
for purposes of Section 8(c) hereof the term "Optionee" shall be deemed to
refer to the transferee. The events of termination of employment of Section 9
hereof shall continue to be applied with respect to the original Optionee,
following which the options shall be exercisable by the transferee only to
the extent, and for the periods specified at Sections 9(b), (c) and (d).
11. Adjustments Upon Changes in Capitalization or Merger.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have
yet been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock
covered by each such outstanding Option, shall be proportionately adjusted
for any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion
of any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock
subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, the Option will terminate immediately prior to
the consummation of such proposed action, unless otherwise provided by the
Board. The Board may, in the exercise of its sole discretion in such
instances, declare that any Option shall terminate as of a date fixed by the
Board and give each Optionee the right to exercise his Option as to all or
any part of the Optioned Stock, including Shares as to which the Option would
not otherwise be exercisable.
(c) Merger or Asset Sale. In the event of the proposed sale of
substantially all of the assets of the Company or a merger of the Company, in
which the Company is not the surviving entity:
(i) Options. Each Option shall be assumed or an equivalent option shall
be substituted by such successor corporation (including as a "Successor"
any purchaser of substantially all of the assets of the Company) or a
parent or subsidiary of such successor corporation. In the event that the
successor corporation or a parent or subsidiary of such successor
corporation does not agree to assume the Option or to substitute an
equivalent option, the Board shall, as soon as practicable prior to the
effective date of such transaction, provide for the Optionee to have the
right to exercise the Option as to all of the Optioned Stock, including
Shares that would not otherwise be exercisable. In such event the Board
shall notify the Optionee as soon as practicable prior to the effective
date of such transaction that the Option shall be fully exercisable for a
period of ten (10) days from the date of such notice, and the Option shall
terminate upon the expiration of such period. For the purposes of this
paragraph, the Option shall be considered assumed if following the merger,
the option confers the right to purchase, for each Share of Optioned Stock
subject to the Option immediately prior to the merger, the consideration
(whether stock, cash or other securities or property) received in the
merger by holders of Common Stock for each Share held on the effective
date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided,
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however, that if such consideration received in the merger was not solely
common stock of the successor corporation or Parent, the Board may, with
the consent of the successor corporation, provide for the consideration
received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor
corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger.
(ii) Shares Subject to Repurchase Option. Any Shares subject to a
repurchase option of the Company shall be exchanged for the consideration
(whether stock, cash or other securities or property) received in the
merger or asset sale by the holders of Common Stock for each Share held on
the effective date of the transaction, as described in the preceding
paragraph. If the Optionee receives shares of stock of the successor
corporation or a parent or subsidiary of such successor corporation in
exchange for Shares subject to a repurchase option, such exchanged shares
shall continue to be subject to the repurchase option as provided in the
restricted stock purchase agreement.
12. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Board makes the determination granting such
Option. Notice of the determination shall be given to each Employee or
Consultant to whom an Option is so granted within a reasonable time after the
date of such grant.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, suspend or
terminate the Plan. To the extent necessary and desirable to comply with
Applicable Laws, the Company shall obtain shareholder approval of any Plan
amendment in such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or termination
of the Plan shall not affect Options already granted and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the
Board, which agreement must be in writing and signed by the Optionee and the
Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
16. Option Agreement. Options shall be evidenced by written option agreements
in such form as the Board shall approve.
17. Shareholder Approval. Continuance of the Plan with respect to the grant
of Incentive Stock Options and grants to Covered Employees shall be subject to
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted, and such
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<PAGE>
stockholder approval shall be a condition to the right of a Covered Employee to
receive Performance-Based Compensation hereunder. Such stockholder approval
shall be obtained in the degree and manner required under Applicable Laws.
18. Information to Optionees. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company. The Company shall not be required to provide such
information if the issuance of Options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
19. Miscellaneous.
(a) Code Section 162(m). In the sole discretion of the Committee,
Agreements may provide that, in the event Code Section 162(m), or any
successor provision relating to excessive employee remuneration, would
operate to disallow a deduction by Company for all or part of any
compensation attributable to an Option under the Plan, an Employee's exercise
of an Option, to the extent that the exercise would result in compensation
that would not be deductible by Company, shall be deferred until the next
succeeding year or years in which the Employee's remuneration either does not
exceed the limit set forth in Code Section 162(m) or is not subject to Code
Section 162(m).
(b) Withholding. To the extent required by applicable federal, state,
local or foreign law, a Participant or his or her successor shall make
arrangements satisfactory to the Company for the satisfaction of any
withholding tax obligations that arise in connection with the Plan. The
Company shall not be required to issue any Shares or make any cash payment
under the Plan until such obligations are satisfied. The Committee may permit
a Participant to satisfy all or part of his or her withholding or income tax
obligations by having the Company withhold all or a portion of any Shares
that otherwise would be issued to him or her or by surrendering all or a
portion of any Shares that he or she previously acquired. Such Shares shall
be valued at their Fair Market Value on the date when taxes otherwise would
be withheld in cash. Any payment of taxes by assigning Shares to the Company
may be subject to restrictions, including any restrictions required by rules
of the Securities and Exchange Commission.
(c) Pooling. If any Option, or any provision of any Option, granted under
the Plan would prevent a transaction from being account for as a pooling of
interests (in the opinion of the Company's accountants), the Option, or the
provision shall be void. No consent shall be required to void the Option or
the provision.
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<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
INCENTIVE STOCK OPTION AGREEMENT
Sunrise Technologies International, Inc., a Delaware corporation (the
"Company"), has granted to [EMPLOYEE.NAME] (the "Optionee"), an option (the
"Option") to purchase a total of [NO.SHARES] shares of Common Stock (the
"Shares"), at the price determined as provided herein, and in all respects
subject to the terms, definitions and provisions of the Sunrise Technologies,
Inc. 1997 Stock Option Plan (the "Plan") adopted by the Company, which is
incorporated herein by reference. Unless otherwise defined herein, the terms
defined in the Plan shall have the same defined meanings herein.
1. Nature of the Option. This Option is intended to qualify as an
Incentive Stock Option as defined in Section 422 of the Internal Revenue Code of
1986, as amended ("Code").
2. Exercise Price. The exercise price is [EXERCISE.PRICE] for each
share of Common Stock, which price in not less than the fair market value per
share of the Common Stock on the date of grant. [EXERCISE PRICE MUST BE NO LESS
THAN 110% OF FMV IF GRANTED TO EMPLOYEE OWNING MORE THAN 10% OF VOTING POWER OF
ALL CLASSES OF STOCK.]
3. Exercise of Option. This Option shall be exercisable during its term
in accordance with the provisions of Section 9 of the Plan as follows:
(i) Right to Exercise.
(a) Subject to subsections 3(i) (b), (c), (d) and (e) below,
this Option shall be exercisable cumulatively, to the extent of 1/4 of
the Shares subject to the Option at the end of the first 12 month
period following the vesting start date and 1/36 of the Shares subject
to the Option for each full calendar month thereafter. [THIS PARAGRAPH
MUST BE TAILORED]
(b) This Option may not be exercised for a fraction of a
share.
(c) In the event of Optionee's death, disability (as defined
in Section 8 below) or other termination of employment, the
exercisability of the Option is governed by Sections 7, 8 and 9 below,
subject to the limitations contained in subsections 3(i) (d) and (e).
(d) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in Section 11 below.
(e) In no event may this Option be exercisable at a time or
times which, when this Option is aggregated with all other incentive
options granted to Optionee by the Company or any Parent or Subsidiary,
would result in Shares having an aggregate fair market value
(determined for each Share as of the date of grant of the option
covering such share) in excess of $100,000 becoming first available for
purchase upon exercise of one or more incentive stock options during
any calendar year. To the extent this Option would otherwise have
become exercisable in a year but for this subsection 3(i)(e) (the
"Excess Shares"), it shall become exercisable for the Excess Shares in
the first succeeding year that the provisions of subsection 3(i)(e)
would not thereby be violated.
<PAGE>
(ii) Method of Exercise. This Option shall be exercisable by
written notice which shall state the election to exercise the Option, the number
of Shares in respect of which the Option is being exercised, and such other
representations and agreements as to the holder's investment intent with respect
to such shares of Common Stock as may be required by the Company pursuant to the
provisions of the Plan. Such written notice shall be signed by the Optionee and
shall be delivered in person or by certified mail to the Secretary of the
Company. The written notice shall be accompanied by payment of the exercise
price. This Option shall be deemed to be exercised upon receipt by the Company
of such written notice accompanied by the exercise price.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the Shares may then be listed.
Assuming such compliance, for income tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
4. Optionee's Representations. In the event the Shares purchasable
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, concurrently with the exercise of all or any portion of this
Option, deliver to the Company his Investment Representation Statement in a form
acceptable to the Company, and shall read the applicable rules of the
Commissioner of Corporations attached to such Investment Representation
Statement.
5. Method of Payment. Payment of the exercise price shall be by any of
the following, or a combination thereof, at the election of the Board:
(i) cash;
(ii) check;
(iii) delivery of a promissory note (the "Note") of Optionee in
the amount of the exercise price together with the execution and delivery by the
Optionee of the Security Agreement, attached hereto as Exhibit A; the Note shall
be in the form attached hereto as Exhibit B, shall contain the terms and be
payable as set forth therein, shall bear interest at a rate (compounded
semiannually) not less than the rate required to ensure that there will be no
"unstated interest" with respect to the purchase of shares under this Option,
pursuant to the applicable provisions of the Code and the regulations in effect
thereunder at the time of such purchase, and shall be secured by a pledge of the
Shares purchased by the Note pursuant to the Security Agreement; or
(iv) surrender of other shares of Common Stock of the Company
which: (A) either have been owned by the Optionee for more than six (6) months
on the date of surrender or were not acquired, directly or indirectly, from the
Company; and (B) have a fair market value on the date of surrender equal to the
exercise price of the Shares as to which the Option is being exercised.
6. Restrictions on Exercise. This Option may not be exercised until
such time as the Plan has been approved by the shareholders of the Company, or
if the issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board.
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<PAGE>
As a condition to the exercise of this Option, the Company may require Optionee
to make any representation and warranty to the Company as may be required by any
applicable law or regulation.
7. Termination of Status as an Employee. In the event of termination of
Optionee's Continuous Status as an Employee, as defined by the Plan, he may, but
only within thirty (30) days after the date of such termination (but in no event
later than the date of expiration of the term of this Option as set forth in
Section 11 below), exercise this Option to the extent that he was entitled to
exercise it at the date of such termination. To the extent that he was not
entitled to exercise this Option at the date of such termination, or if he does
not exercise this Option within the time specified herein, the Option shall
terminate. [PLAN ALLOWS EXTENSION OF EXERCISE PERIOD TO MAXIMUM OF THREE MONTHS
IF SO DETERMINED BY THE BOARD AT TIME OF GRANT. THIS SECTION MAY NEED TO BE
MODIFIED.]
8. Disability of Optionee. Notwithstanding the provisions of Section 7
above, in the event of termination of Optionee's Continuous Status as an
Employee as a result of his total and permanent disability (as defined in
Section 22 (e) (3) of the Code), he may, but only within six (6) months from the
date of termination of employment (but in no event later than the date of
expiration of the term of this Option as set forth in Section 11 below),
exercise his Option to the extent he was entitled to exercise it at the date of
such termination. To the extent that he was not entitled to exercise the Option
at the date of termination, or if he does not exercise such Option (which he was
entitled to exercise) within the time specified herein, the Option shall
terminate. [PLAN ALLOWS EXTENSION OF THE PERIOD TO MAXIMUM OF TWELVE MONTHS IF
SO DETERMINED BY THE BOARD AT TIME OF GRANT. THIS SECTION MAY NEED TO BE
MODIFIED.]
9. Death of Optionee. In the event of the death of Optionee:
(i) During the term of this Option and while an Employee of the
Company and having been in Continuous Status as an Employee since the date of
grant of the Option, the Option may be exercised, at any time within twelve (12)
months following the date of death (but in no event later than the date of
expiration of the term of this Option as set forth in Section 11 below), by
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
would have accrued had Optionee continued living and remained in Continuous
Status as an Employee twelve (12) months after the date of death, subject to the
limitations contained in Section 3 (i) (e) above; or
(ii) Within thirty (30) days after the termination of Optionee's
Continuous Status as an Employee, the Option may be exercised, at any time
within six (6) months following the date of death (but in no event later than
the date of expiration of the term of this Option as set forth in Section 11
below), by Optionee's estate or by a person who acquired the right to exercise
the Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of termination.
10. Non-Transferability of Option. This Option may not be transferred
in any manner otherwise than by will or by the laws of descent or distribution
and may be exercised during the lifetime of Optionee only by him. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
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<PAGE>
11. Term of Option. This Option may not be exercised more than ten (10)
years (five (5) years if Optionee owns, immediately before the Option is
granted, stock representing more than 10 percent (10%) of the total combined
voting power of all classes of stock of the Company or of any parent or
subsidiary) from the date of grant of this Option, and may be exercised during
such term only in accordance with the Plan and the terms of this Option. [PLAN
ALLOWS AGREEMENT TO PROVIDE FOR SHORTER TERM. THIS SECTION MAY NEED TO BE
MODIFIED]
12. Early Disposition of Stock. Optionee understands that if he
disposes of any shares received under this Option within two (2) years after the
date of this Agreement or within one (1) year after such Shares were transferred
to him, he will be treated for federal income tax purposes as having received
ordinary income at the time of such disposition in an amount generally measured
by the difference between the option's exercise price and the fair market value
at the time of the option exercise. The amount of such ordinary income may be
measured differently if Optionee is an officer, director or 10% stockholder of
the Company, or if the Shares were subject to a substantial risk of forfeiture
at the time they were transferred to Optionee. Optionee hereby agrees to notify
the Company in writing within thirty (30) days after the date of any such
disposition. Optionee understands that if he disposes of such Shares at any time
after the expiration of such two-year and one-year holding periods, he will
recognize as capital gains income the difference between the amount received in
such disposition over the basis in the option stock.
DATE OF GRANT: [GRANT.DATE]
VESTING START DATE: [VEST.DATE]
Sunrise Technologies International, Inc.,
a Delaware corporation
By: ___________________________________
Title: _________________________________
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<PAGE>
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE AT
THE WILL OF THE COMPANY NOT THROUGH THE ACT OF BEING HIRED, BEING
GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER. OPTIONEE FURTHER
ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE
COMPANY'S 1997 STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY
REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO
CONTINUATION OF EMPLOYMENT BY THE COMPANY, NOR SHALL IT INTERFERE IN
ANY WAY WITH HIS RIGHT OR THE COMPANY'S RIGHT TO TERMINATE HIS
EMPLOYMENT AT ANY TIME, WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and certain information
related thereto and represents that he is familiar with the terms and provisions
thereof, and hereby accepts this Option subject to all of the terms and
provisions thereof. Optionee has reviewed the Plan and this Option in their
entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Option and fully understands all provisions of the Option.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Compensation Committee upon any questions arising
under the Plan. Optionee further agrees to notify the Company upon any change in
the residence address indicated below.
Dated: __________, ____ ____________________________________
[EMPLOYEE.NAME]
Residence Address:
___________________________________
___________________________________
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<PAGE>
EXHIBIT A
SECURITY AGREEMENT
This Security Agreement is made as of __________, _____ between Sunrise
Technologies International, Inc., a Delaware corporation ("Pledgee"), and
__________("Pledgor").
Recitals
Pursuant to Pledgor's election to purchase Shares, as hereinafter defined,
under the Stock Option Agreement dated __________, _____ (the "Option
Agreement"), between Pledgor and Pledgee under Pledgee's 1997 Stock Option Plan,
and Pledgor's election under the terms of the Option Agreement to pay for such
shares with his promissory note (the "Note"), Pledgor has purchased __________
shares of Pledgee's Common Stock (the "Shares") at a price of $__________ per
share, for a total purchase price of $__________ per share, for a total purchase
price of $__________. The Note and the obligations hereunder are as set forth in
Exhibit B to the Option Agreement.
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of the
transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant
to the Commercial Code of the State of California, hereby pledges all of such
Shares (herein sometimes referred to as the "Collateral") represented by
certificate number __________, duly endorsed in blank or with executed stock
powers, and herewith delivers said certificate to the Secretary of Pledgee
("Pledgeholder"), who shall hold said certificate subject to the terms and
conditions of this Security Agreement.
The pledged stock (together with an executed blank stock assignment for use
in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option
Agreement, and the Pledgeholder shall not encumber or dispose of such Shares
except in accordance with the provisions of this Security Agreement.
2. Pledgor's Representations and Covenants. To induce Pledgee to enter into
this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
(a) Payment of Indebtedness. Pledgor will pay the principal sum of the
Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.
(b) Encumbrances. The Shares are free of all other encumbrances,
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
(c) Margin Regulations. In the event that Pledgee's Common Stock
becomes margin-listed by the Federal Reserve Board subsequent to the execution
of this Security Agreement, and Pledgee is classified as a "lender" within the
meaning of the regulations under Part 207 of Title 12 of the Code of Federal
Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making
any amendments to the Note or providing any additional collateral as may be
necessary to comply with such
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<PAGE>
regulations.
3. Voting Rights. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge any
stock dividend, reclassification, readjustment or other changes declared or made
in the capital structure of Pledgee, all new, substituted and additional shares
or other securities issued by reason of any such change shall be delivered to
and held by the Pledgee under the terms of this Security Agreement in the same
manner as the Shares originally pledged hereunder. In the event of substitution
of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and
execute such documents as are reasonable so as to provide for the substitution
of such Collateral and, upon such substitution, references to "Shares" in this
Security Agreement shall include the substituted shares of capital stock of
Pledgor as a result thereof.
5. Warrants and Rights. In the event that, during the term of this pledge,
subscription warrants or other rights or options shall be issued in connection
with the pledged Shares, such rights, warrants and options shall be the property
of Pledgor and, if exercised by Pledgor, all new stock or other securities so
acquired by Pledgor as it relates to the pledged Shares then held by
Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and of
this Security Agreement in the event:
(a) Payment of principal or interest on the Note shall be delinquent
for a period of 10 days or more; or
(b) Pledgor fails to perform any of the covenants set forth in the
Option Agreement or contained in this Security Agreement for a period of 10 days
after written notice thereof from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall have
the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee
shall thereafter be entitled to pursue his remedies under the Commercial Code of
the State of California.
7. Release of Collateral. Subject to any applicable contrary rules under
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder hereunder upon payments of the principal of the
Note. The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.
8. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. Term. The within pledge of Shares shall continue until the payment of
all indebtedness secured hereby, at which time the remaining pledged stock shall
be promptly delivered to Pledgor, subject to the provisions for prior release of
a portion of the Collateral as provided in paragraph 7 above.
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<PAGE>
10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.
11. Pledgeholder Liability. In the absence of willful or gross negligence,
Pledgeholder shall not be liable to any party for any of his acts, or omissions
to act, as Pledgeholder.
12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that the
enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
13. Successors or Assigns. Pledgor and Pledgee agree that all of the terms
of this Security Agreement shall be binding on their respective successors and
assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall
be deemed to include, for all purposes, the respective designees, successors,
assigns, heirs, executors and administrators.
14. Governing Law. This Security Agreement shall be interpreted and
governed under the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"PLEDGOR" ________________________________
Address:________________________
--------------------------------
"PLEDGEE" SUNRISE TECHNOLOGIES INTERNATIONAL,
INC., a Delaware corporation
By:_____________________________
Title: _________________________
"PLEDGEHOLDER" ________________________________
Secretary of Sunrise
Technologies International, Inc.
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<PAGE>
EXHIBIT B
INSTALLMENT NOTE
FOR VALUE RECEIVED,______________________ promises to pay to Sunrise
Technologies International, Inc., a Delaware corporation (the "Company"), or
order, the principal sum of __________ Dollars ($__________), together with
interest on the unpaid principal hereof from the date hereof at the prime rate
of __________ percent (_____%) per annum, compounded semiannually.
Principal and interest shall be due and payable within 30 days. Should the
undersigned fail to make full payment of any installment of principal or
interest for a period of 10 days or more after the due date thereof, or should
the undersigned's employment or consulting relationship with the Company be
terminated for any reason (or for no reason), the whole unpaid balance on this
Note of principal and interest shall become immediately due at the option of the
holder of this Note. Payments of principal and interest shall be made in lawful
money of the United States of America.
The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.
This Note is subject to the terms of a Stock Option Agreement, dated as of
__________, _____. This Note is secured by a pledge of the Company's Common
Stock under the terms of a Security Agreement of even date herewith and is
subject to all the provisions thereof. Should any action be instituted for the
collection of this Note, the reasonable costs and attorneys' fees therein of the
holder shall be paid by the undersigned.
The holder of this Note shall have full recourse against the maker, and
shall not be required to proceed against the collateral securing this Note in
the event of default.
The undersigned understands that the one-year holding period under Rule 144
of the Securities Act of 1933, as amended, generally will not begin to run until
this Note has been paid in full.
--------------------------------
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<PAGE>
EXHIBIT C
INVESTMENT REPRESENTATION STATEMENT
PURCHASER: _______________________________________
COMPANY: SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
SECURITY: COMMON STOCK
AMOUNT: __________ SHARES
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Company the following:
(a) I am aware of the Company's business affairs and financial
condition, and have acquired sufficient information about the Company to reach
an informed and knowledgeable decision to acquire the Securities. I am
purchasing these Securities for my own account for investment purposes only and
not with a view to, or for the resale in connection with, any "distribution"
thereof for purposes of the Securities Act of 1933, as amended (the "Securities
Act")
(b) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of my investment intent
as expressed herein. In this connection, I understand that, in the view of the
Securities and Exchange Commission (the "SEC"), the statutory basis for such
exemption may be unavailable if my representation was predicated solely upon a
present intention to hold these Securities for any fixed period in the future,
including but not limited to, the minimum capital gains period specified under
tax statutes, for a deferred sale, or until an increase or decrease in the
market price of the Securities, or for a period of one year. or any other fixed
period in the future.
(c) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is otherwise available. Moreover, I understand that the
Company is under no obligation to register the Securities. In addition, I
understand that the certificate evidencing the Securities will be imprinted with
a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel for
the Company.
(d) I am familiar with the provisions of Rule 144, promulgated under
the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof, in a non-public offering subject to the satisfaction of certain
conditions. The Securities may be resold in certain limited circumstances
subject to the provisions of Rule 144, which requires among other things: (1)
the availability of certain public information about the Company; (2) the resale
occurring not less than one year after the party has purchased, and made full
payment for, within the meaning of Rule 144, the securities to be sold; and, in
the case of an affiliate, or a non-affiliate who has held the securities less
than two years; and (3) the sale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934) and the amount of
securities being sold during any three month period
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<PAGE>
not exceeding the specified limitations stated therein, if applicable.
(e) I agree, in connection with a public offering of the Company's
securities, (1) not to sell, make short sale of, loan, grant any options for the
purchase of, or otherwise dispose of any shares of Common Stock of the Company
held by me (other than those shares included in the registration) without the
prior written consent of the Company or the underwriters managing such
underwritten public offering of the Company's securities for one hundred eighty
(180) days from the effective date of such registration, and (2) I further agree
to execute any agreement reflecting (1) above as may be requested by the
underwriters at the time of the public offering; provided however that the
officers and directors of the Company who own the stock of the Company also
agree to such restrictions.
(f) I further understand that in the event all of the applicable
requirements of Rule 144 are not satisfied, registration under the Securities
Act, compliance with Regulation A, or some other registration exemption will be
required; the Staff of the SEC has expressed its opinion that persons proposing
to sell private placement securities other than in a registered offering and
otherwise than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
--------------------------------
(Signature of Purchaser)
Date:__________, _____
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Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 10, 1997, in the Registration Statement (Form S-2
No. _________) and related Prospectus of Sunrise Technologies International,
Inc. for the registration of 10,342,090 shares of its common stock.
/s/ Ernst & Young LLP
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Palo Alto, California
September 5, 1997
