PROSPECTUS
Rule 424(b)
SEC File 333-35045
10,273,519 Shares
[GRAPHIC OMITTED]
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Common Stock
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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 November 3, 1997, the closing price reported on the OTC Bulletin Board was
$4.00 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 November 3, 1997.
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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); (v)
quarterly report on Form 10-Q for the quarter ended June 30, 1997 (filed August
14, 1997); and (vi) current report on Form 8-K dated October 24, 1997 (filed
October 27, 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.
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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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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.
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
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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, 1,016,460 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 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."
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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. At June 30, 1997, the Company had an accumulated
deficit of $32,995,000. 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. In this
regard, the Company has commenced discussions with prospective investors and
other finance sources to obtain working capital. 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. Any
additional equity financing may be dilutive to the Company's 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.
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
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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 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. In October 1997, the Company received conditional approval from
the FDA to retreat patients in the LTK clinical survey for hyperopia on an
as-needed basis. The Company also received conditional approval from the FDA to
treat presbyopic patients in a new clinical trial. The investigation will be a
sub-study of the primary hyperopic study and will include 60 patients at four
sites.
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
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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 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.
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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.
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 use of Summit's holmium laser system for LTK
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--The Vision Correction Market."
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Patent Concerns
Although the Company believes it holds dominant United States process
patents for the use of holmium lasers in non-destructive cornea shaping,
process and 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 by asserting a patent of the University against
the Company. If the Company is forced to redesign the LTK System, such redesign
efforts could be time consuming, expensive and prolong FDA review.
Reliance on Key Personnel
The Company's principal executive officers have extensive experience in
ophthalmic research, development and sales. The loss of the services of any of
the Company's executive officers or other key personnel, or the failure of the
Company to attract and retain other skilled and experienced personnel on
acceptable terms, could have a material adverse effect on the Company's
business, results of operations and financial condition. Any transactions and
loans by and between the Company and an affiliate will be made or entered into
on terms that are no less favorable to the Company than those that can be
obtained from unaffiliated third parties. All such material affiliated
transactions and loans, and any forgiveness of loans, will be approved by a
majority of the Company's independent directors that do not have an interest in
the transaction and who have access, at the Company's expense, to the Company's
or independent legal counsel.
Potential Anti-Takeover Effects
The Company has adopted a stockholder rights plan. The plan and provisions
of the Company's Certificate of Incorporation, as amended, the Company's
Bylaws, as amended, and the Delaware General Corporation Law (the "Delaware
Law") may have the effect of delaying, discouraging, inhibiting, preventing or
rendering more difficult an attempt to obtain control of the Company by means
of a tender offer, business combination, proxy contest or otherwise. These
provisions include the charter authorization of "blank check" preferred stock,
classification of the Board of Directors, a restriction on the ability of the
stockholders to take actions by written consent and a Delaware Law provision
imposing restrictions on business combinations with certain interested parties.
See "Description of Capital Stock."
9
<PAGE>
<TABLE>
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 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.
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>
December 31,
--------------------------------------------------------- June 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>
10
<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 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
11
<PAGE>
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. In October 1997, the Company received conditional approval from
the FDA to retreat patients in the LTK clinical survey for hyperopia on an as-
needed basis. The Company also received conditional approval from the FDA to
treat presbyopic patients in a new clinical trial. The investigation will be a
sub-study of the primary hyperopic study and will include 60 patients at four
sites.
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 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.
12
<PAGE>
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 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.
13
<PAGE>
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 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.
14
<PAGE>
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 20% of revenue in 1994, 22% 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 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.
15
<PAGE>
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.
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 $25,000,000. 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.
16
<PAGE>
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.
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 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.
17
<PAGE>
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.
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.
18
<PAGE>
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 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. 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) N/A
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).
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).
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 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.
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.
19
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1996
(In thousands, except per share data)
<CAPTION>
Sunrise Less
Technologies Sunrise Sunrise
International, Dental Ophthalmic
Inc. Business Business
---------------- ---------- -----------
(a) (b) (c)
<S> <C> <C> <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
======== ========
<FN>
- ------------
(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.
</FN>
</TABLE>
20
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Six Months Ended June 30, 1997
(In thousands, except per share data)
<CAPTION>
Sunrise
Technologies Less
International, Sunrise
Inc., including Dental Sunrise
gain on sale of Business and Ophthalmic
dental assets related gain Business
----------------- -------------- -----------
(a) (b) (c)
<S> <C> <C> <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
======== ========
<FN>
- ------------
(a) Represents historical Sunrise financial statements, including dental
business sold.
(b) Represents historical Sunrise dental business sold, including any gain
related to the sale.
(c) Represents historical Sunrise, net of dental business sold, exclusive of
gain realized on the sale.
</FN>
</TABLE>
21
<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.
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.
22
<PAGE>
<TABLE>
MANAGEMENT
The following persons serve as the current executive officers and
directors of Sunrise:
<CAPTION>
NAME AGE POSITION
- ----------------------------------- ----- ----------------------------------------------------
<S> <C> <C>
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 ............... 35 Vice President, Clinical and Regulatory Affairs
Paul M. Malin .................. 44 Vice President, Sales and Marketing
Robert A. Haddad ............... 50 Vice President, Operations and Product Development
Joseph D. Koenig ............... 67 Chairman of the Board and Director
Michael S. McFarland, M.D. ...... 47 Director
Ronald A. Slocum ............... 57 Director
</TABLE>
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 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
23
<PAGE>
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.
Dr. McFarland was appointed to the board of directors of the Company in
October 1997. From 1980, Dr. McFarland has been a practicing ophthalmologist in
Arkansas. Dr. McFarland was the recipient of the Innovators Award of the Irish
American Ophthalmological Association in 1992 for his development of sutureless
cataract surgery. Dr. McFarland has a B.S. degree from Hendrix College and a
M.D. degree from the University of Arkansas.
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 October 20, 1997, there were
28,883,862 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.
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. The issuance of shares of Preferred Stock may have
voting and conversion rights which could adversely affect the holders of shares
of Common Stock. Under certain circumstances, the issuance of shares of
Preferred Stock may render more difficult or tend to discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a large
block of the Company's securities or the removal of incumbent management. The
Company will not issue Preferred Stock unless such issuance is approved by a
majority of the Company's independent directors who do not have an interest in
the transaction and who will have access, at the Company's expense, to the
Company's or independent legal counsel.
As of the date hereof, the Board has not designated any series of
Preferred Stock.
Price Range of Common Stock
As of October 29, 1997, there were 691 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
24
<PAGE>
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 .................. $3.94 $1.00
Fourth Quarter (to October 29) .. $5.09 $3.50
- ------------
(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 November 3, 1997, the closing price of the Common Stock as reported on
the OTC Bulletin Board was $4.00 per share. The over-the-counter market
quotations provided herein may reflect inter-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.
25
<PAGE>
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 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. See "Risk
Factors--Potential Anti-Takeover Effects."
Stockholders' Rights Plan
Each issued and outstanding share of Common Stock has associated with it
one right to purchase from the Company a share of Common Stock (the "Rights")
at a price of $20 (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights are set forth in the rights agreement (the
"Rights Agreement") between the Company and ChaseMellon Shareholder Services,
L.L.C., as rights agent (the "Rights Agent"). The Rights will be evidenced by
the Common Stock certificates. Until the earlier to occur of: (i) ten business
days following a public announcement that a person or group of affiliated or
associated persons has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of the outstanding shares of Common Stock, or any
person who acquires beneficial ownership in a Permitted Transaction, as defined
below (an "Acquiring Person"); or (ii) ten business days (or such later date as
may be determined by action of the Board of Directors prior to any person
becoming an Acquiring Person) following the commencement of, or announcement of
an intention to make, a tender offer or exchange offer, the consummation of
which would result in the beneficial ownership by a person or group of 15% or
more of such outstanding shares of Common Stock (the earlier of such dates
being the "Distribution Date").
The Rights Agreement provides that, until the Distribution Date, the
Rights will be transferred with and only with the shares of Common Stock. Until
the Distribution Date (or earlier redemption or
26
<PAGE>
expiration of the Rights), new shares of Common Stock certificates issued upon
transfer or new issuances of shares of Common Stock will contain the notation
incorporating the Rights Agreement by reference. As soon as practicable
following the Distribution Date, separate certificates evidencing the Rights
(the "Rights Certificates") will be mailed to holders of record of the shares
of Common Stock as of the close of business on the Distribution Date and such
separate Rights Certificates alone will evidence the Rights. The Rights are not
exercisable until the Distribution Date and will expire on October 24, 2007
(the "Final Expiration Date"), unless extended or unless the Rights are earlier
redeemed by the Company.
The Purchase Price payable and the number of shares of Common Stock or
other securities or property issuable upon exercise of the Rights are subject
to adjustment in certain circumstances. In the event any person or entity
becomes an Acquiring Person and one of the following events have occurred, then
proper provision will be made so that each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will then be void), will have
the right to receive upon exercise that number of shares of Common Stock having
a market value of two times the applicable exercise price of the Right: (i) the
Company is the surviving corporation in a merger with an Acquiring Person and
the shares of Common Stock are not changed or exchanged; (ii) the Acquiring
Person engages in certain self-dealing transactions with the Company; (iii) any
person becomes the beneficial owner of 15% or more of the outstanding shares of
Common Stock (unless the event in which such person acquired 15% or more of the
outstanding shares of Common Stock is a Permitted Transaction); or (iv) the
Company engages in a reclassification or recapitalization that results in an
increase of 1% or more in the Acquiring Person's percentage of ownership of the
Company.
A Permitted Transaction is a stock acquisition or tender or exchange offer
pursuant to a definitive agreement that would result in a person beneficially
owning 50% or more of the outstanding shares of shares of Common Stock and that
was approved by the directors (including a majority of the directors not in
association with an Acquiring Person) prior to the execution of the agreement
or the public announcement of the offer. In the event that the Company is
acquired in a merger or other business combination transaction or 50% or more
of its consolidated assets or earning power are sold, unless such event is a
Permitted Transaction, proper provisions will be made so that each holder of a
Right will have the right to receive, upon the exercise of the Right at the
then applicable exercise price, that number of shares of common stock of the
acquiring company that at the time of such transaction will have a market value
of two times the applicable exercise price of the Right. At any time prior to
the tenth business day following an Acquiring Person's acquisition of 15% or
more of the outstanding shares of the shares of Common Stock, the Board of
Directors, with concurrence of a majority of the directors in office at the
time the Rights Agreement was adopted or whose initial election or nomination
for election by the Company's stockholders was approved by a majority of the
such directors then serving on the Board of Directors (the "Continuing
Directors"), may redeem the Rights in whole, but not in part, at a price of
$0.001 per Right. In addition, the Board of Directors may extend or reduce the
period during which the Rights are redeemable, so long as the Rights are
redeemable at the time of such extension or reduction. Immediately upon any
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption
Price. The terms of the Rights may be amended by the Board of Directors, with
concurrence of a majority of the Continuing Directors, without the consent of
the holders of the Rights, including an amendment to extend the Final
Expiration Date, except that from and after the Distribution Date no such
amendment may adversely affect the economic interests of the holders of the
Rights. See "Risk Factors--Potential Anti-Takeover Effects."
27
<PAGE>
<TABLE>
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Common
Stock as of October 29, 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.
<CAPTION>
Beneficial Ownership (1)
-------------------------
Number of Percent of
Shares Shares
----------- -----------
<S> <C> <C>
C. Russell Trenary, III (2) ....................................... 329,522 1.1
Timothy A. Marcotte (3) .......................................... 22,613 0.1
Paul M. Malin (4) ................................................ 43,539 0.2
Jeannie G. Cecka (5) ............................................. 39,692 0.1
Robert A. Haddad (6) ............................................. 39,071 0.1
Joseph D. Koenig (7) ............................................. 37,292 0.1
Michael S. McFarland (8) .......................................... 12,667 0.0
Ronald A. Slocum (9) ............................................. 47,292 0.2
All executive officers and directors as a group (8 persons) ...... 571,688 1.9
<FN>
- ------------
(1) Based on information provided by each of the identified officers and
directors.
(2) Includes 259,438 shares that Mr. Trenary does not currently own, but which
he has the right to acquire within 60 days of October 17, 1997, pursuant
to outstanding options granted under the Company's stock option plan
("Options") and 68,517 shares associated with convertible notes and
warrants purchased in February 1997.
(3) Consists of shares that Mr. Marcotte does not currently own, but which he
has the right to acquire within 60 days of October 17, 1997, pursuant to
Options.
(4) Includes 41,363 shares that Mr. Malin does not currently own, but which he
has the right to acquire within 60 days of October 17, 1997, pursuant to
Options.
(5) Includes 34,592 shares that Ms. Cecka does not currently own, but which she
has the right to acquire within 60 days of October 17, 1997, pursuant to
Options.
(6) Includes 9,071 shares that Mr. Haddad does not currently own, but which he
has the right to acquire within 60 days of October 17, 1997, pursuant to
Options.
(7) Consists of shares that Mr. Koenig does not currently own, but which he has
the right to acquire within 60 days of October 17, 1997, pursuant to
Options.
(8) Includes 6,667 shares that Dr. McFarland does not currently own, but which
he has the right to acquire within 60 days of October 17, 1997, pursuant
to Options.
(9) Includes 37,292 shares that Mr. Slocum does not currently own, but which he
has the right to acquire within 60 days of October 17, 1997, pursuant to
Options.
</FN>
</TABLE>
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
28
<PAGE>
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.
<CAPTION>
Number
of
Common Shares Shares
Beneficially Owned Prior Held of Common Shares Beneficially
to the Offering (1) Record to Owned After the Offering (1)
--------------------------------- be Sold in ------------------------------
Number of Percent the Number of Percent
Shares of Class Offering 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 --
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 --
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Number
of
Common Shares Shares
Beneficially Owned Prior Held of Common Shares Beneficially
to the Offering (1) Record to Owned After the Offering (1)
--------------------------------- be Sold in ------------------------------
Number of Percent the Number of Percent
Shares of Class Offering Shares of Class
-------------------- ---------- ------------ ------------------ ---------
<S> <C> <C> <C> <C> <C>
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 --
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 --
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 Ac-
count No. 698-101714 61,500 * 61,500 0 --
EDJ Limited ........................ 90,000 * 90,000 0 --
Amir L. Ecker ..................... 150,000 * 150,000 0 --
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Number
of Common Shares
Common Shares Shares Beneficially
Beneficially Owned Prior Held of Owned After the
to the Offering (1) Record to Offering (1)
------------------------ be Sold in -----------------------
Number of Percent the Number of Percent
Shares of Class Offering Shares of Class
----------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
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 Remain-
der Trust 342,858 1.2 342,858 0 --
Donaldson, Lufkin & Jenrette Securi-
ties Corporation, Custodian
F/B/O John A. Retzlaff Account
No. 698-708245 ........................ 188,571 * 188,571 0 --
Donaldson, Lufkin & Jenrette Securi-
ties 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 --
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.
31
<PAGE>
(4) Includes 800,000 shares held of record by Donald S. Chapman.
(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
General
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.
Suitability Standards
An investment in the Offered Shares involves certain risks and is suitable
only for persons of adequate financial means. The Company's securities are now
subject to the Commission's "penny stock rules" that impose additional sales
practice requirements on broker-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. In addition, certain state securities commissions
are requiring investors residing in their state to be subject to additional
suitability standards. Investors in California and Oregon must have either: (i)
32
<PAGE>
a minimum annual gross income of $65,000 and a net worth (exclusive of home,
home furnishings and automobiles) of $65,000; or (ii) a net worth (determined
with the foregoing exclusions) of $225,000. Investors in Kentucky must be
accredited investors.
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.
33
<PAGE>
<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
<CAPTION>
Page
-----
<S> <C>
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 Statement 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-14
Condensed Consolidated Statements of Operations--Three and Six Months ended
June 30, 1997 and 1996 (unaudited) .......................................... F-15
Condensed Consolidated Balance Sheets--June 30, 1997 (unaudited) and December
31, 1996 ..................................................................... F-16
Condensed Consolidated Statements of Cash Flows--Six Months ended June 30, 1997
and 1996 (unaudited) ......................................................... F-17
Notes to Condensed Consolidated Financial Statements ........................... F-18
</TABLE>
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.
<GRAPHIC OMITTED>
Palo Alto, California
March 10, 1997
F-2
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Consolidated Balance Sheets
<CAPTION>
December 31,
---------------------------
1996 1995
------------ ------------
(In thousands)
<S> <C> <C>
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
========= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Consolidated Statements of Operations
<CAPTION>
Years ended December 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -----------
(In thousands, except per share amounts)
<S> <C> <C> <C>
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
========= ========= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
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>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
Increase (decrease) in cash and cash equivalents
<CAPTION>
Years ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $ (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
======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
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>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
======= =======
F-8
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method for financial reporting over estimated useful lives of two
to five years. Assets under capitalized leases are amortized over the shorter
of the term of the lease or their useful lives, and such amortization is
included with depreciation expense. Property and equipment at December 31,
consists of:
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 amortization (2,655) (2,181)
-------- --------
$ 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
======= ======= =======
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.
F-9
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
Significant components of the Company's deferred tax assets as of December
31 are as follows:
<CAPTION>
1996 1995
------------ -----------
(In thousands)
<S> <C> <C>
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 ........................... $ -- $ --
========= ========
</TABLE>
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.
(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.
F-10
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<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 Share
For 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
Remaining Weighted
Contractual Average
Number Life Exercise
Outstanding (Years) Price
------------- ------------- ---------
$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 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%
F-12
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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-13
<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-14
<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-15
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(unaudited)
<CAPTION>
June 30, December 31,
1997 1996
----------- -------------
(In thousands)
<S> <C> <C>
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
========= =========
<FN>
- ------------
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.
</FN>
</TABLE>
F-16
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(unaudited)
<CAPTION>
Six months ended June 30,
---------------------------
1997 1996
------------ ------------
(In thousands)
<S> <C> <C>
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
======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-17
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
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.
F-18
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SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
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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 the Company or 10,273,519 Shares
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 [Logo]
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, SUNRISE TECHNOLOGIES
nor any sale made hereunder shall, under any INTERNATIONAL, INC.
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.
Common Stock
----------------
TABLE OF CONTENTS
Page
-----
Available Information ........................... 1
Incorporation of Certain Information by
Reference .................................... 1
Disclosure Regarding Forward-Looking --------------
Statements .................................... 2 PROSPECTUS
Prospectus Summary .............................. 3 --------------
Risk Factors .................................... 5
Selected Financial Information .................. 10
Business ....................................... 11
Management's Discussion and Analysis of
Financial Condition and Results of November 3, 1997
Operations .................................... 14
Pro Forma Financial Statements .................. 19
Management ....................................... 23
Description of Capital Stock ..................... 24
Share Ownership by Principal Stockholders
and Management .............................. 28
Selling Securityholders ........................ 28
Plan of Distribution ........................... 32
Use of Proceeds ................................. 33
Experts .......................................... 33
Legal Matters .................................... 33
Index to Consolidated Financial Statements ...... F-1
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