SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
- - OR -
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-10428
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0148208
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
47257 FREMONT BOULEVARD, FREMONT, CALIFORNIA 94538
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:
510-623-9001
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check [X] whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No []
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check [X] whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes [] No []
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 9, 1997, the number of shares of Common Stock of the
Registrant outstanding was 27,886,247.
<PAGE>
INDEX
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
PAGE
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996............................. 1
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996......................................... 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996............................. 3
Notes to Consolidated Financial Statements................ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 6
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-k..................... 8
SIGNATURES................................................ 9
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Consolidated Statements of Operations
(unaudited)
Three months ended March 31,
1997 1996
________ ________
(In thousands, except
per share amounts)
Net revenues............................... $ 1,009 $ 1,521
Cost of revenues........................... 958 1,139
______ ______
Gross profit............................... 51 382
Other costs and expenses:
Engineering and development............. 273 343
Sales, marketing and regulatory......... 659 946
General and administrative.............. 706 567
______ ______
Total other costs and expenses.... 1,638 1,856
______ ______
Loss from operations....................... (1,587) (1,474)
Interest income............................ 11 34
Interest expense, including non-cash
interest associated with redeemable
convertible notes....................... (812) (3)
______ ______
Net loss........................... $ (2,388) $(1,443)
====== ======
Net loss per share......................... $ (0.09) $ (0.06)
====== ======
Shares used in calculation of net loss
per share............................... 27,871 25,315
====== ======
See accompanying notes
1
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Consolidated Balance Sheets
March 31, December 31,
1997 1996
_________ ____________
(unaudited) (Note)
Assets (In thousands)
Current assets:
Cash and cash equivalents................ $ 1,618 $ 647
Accounts receivable, net of allowance... 815 472
Inventories.............................. 2,225 2,135
Prepaid expenses......................... 214 288
_____ _____
Total current assets................ 4,872 3,542
Property and equipment, net................. 191 199
_______ _______
Total assets................................ $ 5,063 $ 3,741
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable......................... $ 700 $ 1,586
Accrued payroll and related expenses.... 252 209
Accrued warranty......................... 199 199
Other accrued expenses................... 456 475
_____ _____
Total current liabilities........... 1,607 2,469
Redeemable convertible notes................ 3,530 -
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,
27,886,247 and 27,868,613 shares
issued and outstanding at March 31,
1997 and December 31, 1996
respectively........................... 28 28
Additional paid-in capital............... 32,730 31,688
Accumulated deficit...................... (32,832) (30,444)
______ ______
Total stockholders' equity..... (74) 1,272
______ ______
Total liabilities and stockholders' equity.. $ 5,063 $ 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
2
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(unaudited)
Three months ended March 31,
1997 1996
________ ________
(In thousands)
Cash flows for operating activities:
Net Loss................................. $ (2,388) $ (1,443)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization............ 8 20
Provision for doubtful accounts.......... 15 -
Non-cash interest expense................ 812 -
Changes in assets and liabilities:
Accounts receivable...................... (358) (198)
Inventories.............................. (90) (967)
Prepaid expenses......................... 74 17
Accounts payable......................... (886) 421
Accrued payroll and related expenses..... 43 29
Other accrued expenses................... (19) (10)
_____ _____
Total adjustments........................ (401) (688)
_____ _____
Net cash used in operating activities.... (2,789) (2,131)
_____ _____
Cash flows from investing activities:
Purchase of property and equipment....... - (5)
_____ _____
Net cash used in investing activities.... - (5)
_____ _____
Cash flows from financing activities:
Issuance of common stock, net of offering
costs.................................. 17 74
Issuance of redeemable convertible notes,
net of issuance costs.................. 3,743 -
_____ _____
Net cash provided by (used in) financing
activities............................. 3,760 74
_____ _____
Net increase (decrease) in cash and cash
equivalents............................ 971 (2,062)
Cash and cash equivalents at beginning
of period.............................. 647 3,514
_______ _______
Cash and cash equivalents at end of
period................................. $ 1,618 $ 1,452
======= =======
See accompanying notes
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
March 31, 1997
1. 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 consolidated financial data for the quarters ended March
31, 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 March 31, 1997 has an accumulated deficit of
approximately $32,832,000. The accompanying condensed 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. On March 25, 1997, the Company signed a
definitive agreement to sell its dental assets to Lares Research.
Consideration for the sale will be $4,000,000 in cash at closing
and $1,500,000 in an interest bearing promissory note, with two
installments due three and four years, respectively, from the date
of closing. 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.
2. NET LOSS PER SHARE
Net loss per share for the three months ended March 31, 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 quarters ended March 31, 1997
and March 31, 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
<PAGE>
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:
March 31, December 31,
1997 1996
________ __________
(In thousands)
Raw materials $ 1,327 $ 1,180
Work-in-process 401 299
Finished goods 497 656
_______ _______
$ 2,225 $ 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
$4.1 million, and net proceeds aggregated approximately $3.7
million. In accordance with recent Securities and Exchange
Commission Division of Corporation Finance guidance, the Company
has recorded a premium of approximately $269,000 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.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Sunrise Technologies International, Inc. (the "Company")
develops, manufactures and markets laser systems for applications
in ophthalmology and dentistry. In addition, the Company has
developed, manufactures and markets an air abrasive cavity
preparation system for dentistry (the "MicroPrep (Registered)").
A substantial portion of the Company's revenues (98% in 1996
and 85% for the first three months of 1997) are derived from
domestic and international sales of the Company's dental laser
products, including the SunLase 800, the SunLase 400 and the
SunLase Master, and air abrasive products, including the
MicroPrep (Registered) and the Associate (Registered), a table-top
version of the MicroPrep (Registered).
Since mid-1992, the Company has focused a significant portion
of its efforts on engineering and development of its laser corneal
shaping product (the "LTK System") for the treatment of refractive
errors of the eye, such as hyperopia (farsightedness) and
astigmatism. The LTK System is based upon patented technology
acquired in the Company acquisitions of in-process technology from
Laser Biotech, Inc. and Emmetropix Corporation in 1992.
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 will not 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 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 (collectively, the "1997
Notes Placement") 5% redeemable convertible notes due 1999
(convertible into common stock) and warrants to purchase common
stock for aggregate net proceeds of approximately $3,743,000.
In March 1997, the Company entered into an asset purchase
agreement (the "Asset Purchase Agreement") with Lares Research, a
California corporation ("Lares"), providing for the sale of the
Company's assets associated with its dental laser, air abrasive
and composite curing systems (the "Dental Assets"). Lares is a
privately held company located in Chico, California. Pursuant to
the Asset Purchase Agreement, Lares will pay the Company
$4,000,000 in cash at closing and will deliver a promissory note
for $1,500,000 (the "Lares Note"), which will bear interest at the
rate of 8%. Under the Lares Note, $1,000,000 will be payable on
the third anniversary of the closing, and $500,000 will be payable
on the fourth anniversary of the closing. The Lares Note will be
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, collection is not reasonably
assured. Closing of the Asset Purchase Agreement is subject to
certain conditions, including approval of the Company's
stockholders.
FINANCIAL CONDITION
As of March 31, 1997 the Company had $1,618,000 in cash and
cash equivalents. The Company's operating activities used
approximately $2,789,000 in the three months ended March 31, 1997
and used approximately $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
6
<PAGE>
proceeds of approximately $2,245,000
(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 March 31, 1997, including the net proceeds from
the 1997 Notes Placement (approximately $3,743,000), amounted to
approximately $3,265,000. 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 believes
the net proceeds from the sale of the Dental Assets pursuant to
the Asset Purchase Agreement, together with existing working
capital, will provide sufficient funds for the Company's planned
operations in 1997. If the sale of the Dental Assets is not
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.
RESULTS OF OPERATIONS
Revenues of $1,009,000 for the three months ended March 31,
1997 represent a 34% decrease from revenues of $1,521,000 for the
same period in 1996. This decline is due primarily to the
introduction of the Associate (Registered) in late 1995 (with strong
initial sales in 1996) and continued decline in demand for the
Company's dental laser products.
Gross profit as a percentage of revenue decreased to 5% for the
three months ended March 31, 1997, from approximately 25% for the
same period in 1996. This decline is due primarily to further
increases in the proportion of sales of dental products made
through distributors, at lower prices than direct sales, and to
lower overhead absorption as a result of reduced production
volume.
Engineering and development expenses totaled $273,000 for the
three months ended March 31, 1997 as compared to $343,000 for the
same period in 1996. Such expenses had been higher in 1996 due
primarily to one-time costs, including consulting fees, associated
with the CureStar composite curing system, a dental product
introduced in the first quarter of 1997.
Sales, marketing and regulatory costs were $659,000 for the
three months ended March 31, 1997, compared to $946,000 for the
same period in 1996. This decline is due primarily to two
factors: the reduction in the Company's direct sales force, as a
result of the decision to increase use of distributors for sales
of dental products, and higher costs in the first quarter of 1996
incurred in connection with the launch of the Associate (Registered).
General and administrative expenses were $706,000 for the three
months ended March 31, 1997, compared to $567,000 for the same
period in 1996, primarily as a result of changes in the Company's
management team and increases in legal and audit expenses.
Interest expense during the period of $812,000 is primarily
non-cash deemed interest associated with the issuance of the Notes.
Net loss for the three months ended March 31, 1997 was
$2,388,000, compared to a net loss of $1,443,000 for the same
period in 1996. The increase in net loss was due primarily to a
decrease in demand for the Company's products, an increase in the
Company's use of distributors and the non-cash interest expense of
$812,000 recorded in connection with the 1997 Notes Placement.
7
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Number Description
2 PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT,
LIQUIDATION OR SUCCESSION
2.1 Asset Purchase Agreement dated as of March 26,
1997, by and among Sunrise and Lares Research, a
California corporation (1)
3 CHARTER DOCUMENTS
3.1 Certificate of Incorporation, as amended (2)
3.2 Bylaws (2)
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
4.1 Form of 5% Convertible Notes due 1999 (3)
4.2 Form of Security Agreement relating to 5% Convertible
Notes due 1999 (3)
4.3 Form of Registration Rights Agreement (3)
4.4 Form of Warrant issued to Pennsylvania Merchant Group (4)
27 FINANCIAL DATA SCHEDULE
(1) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 (File No.
1-10428)
(2) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1994 (File No. 0-17816)
(3) Incorporated by reference from the Company's Current
Report on Form 8-K dated March 12, 1997 (File No. 1-10428)
(4) Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1992 (File
No. 0-17816)
B. Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated March 12,
1997, to report the sale, in reliance on Regulation S under the
Securities Act of 1933, as amended, of 5% redeemable convertible
notes due 1999 (convertible into Common Stock) and warrants to
purchase Common Stock, as part of the 1997 Notes Placement.
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Date: May 14, 1997 By: /s/ David W. Light
David W. Light
Chairman of the Board and Chief
Executive Officer
Date: May 14, 1997 By: /s/ Clara R. Munley
Clara R. Munley
Vice President, Finance and Chief
Financial Officer
(Principal Financial Officer)
9
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the Sunrise Technologies International, Inc. consolidated
financial statements for the quarter ended March 31, 1997 and
is qualified in its entirety by reference to such financial
statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,618
<SECURITIES> 0
<RECEIVABLES> 815
<ALLOWANCES> 0
<INVENTORY> 2,225
<CURRENT-ASSETS> 4,872
<PP&E> 191
<DEPRECIATION> 8
<TOTAL-ASSETS> 5,063
<CURRENT-LIABILITIES> 1,607
<BONDS> 3,530
0
0
<COMMON> 28
<OTHER-SE> (102)
<TOTAL-LIABILITY-AND-EQUITY> 5,063
<SALES> 1,009
<TOTAL-REVENUES> 1,009
<CGS> 958
<TOTAL-COSTS> 2,596
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 812
<INCOME-PRETAX> (1,587)
<INCOME-TAX> (2,388)
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<NET-INCOME> (2,388)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
