SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Amendment No. 3)
Filed by the Registrant [X]
Filed by a Party other than the Registrant | |
Check the appropriate box:
[X] Preliminary Proxy Statement
| | Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
| | Definitive Proxy Statement
| | Definitive Additional Materials
| | Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
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(Name of Registrant as Specified In Its Charter)
--
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
| | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transactions applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
|X| Fee paid previously with preliminary materials.
| | Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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* Set forth the amount on which the filing fee is calculated and state how it
was determined.
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SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
47257 FREMONT BOULEVARD
FREMONT, CALIFORNIA 94538
May __, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting (the "Special Meeting")
of the holders of common stock ("Sunrise Stock") of Sunrise Technologies
International, Inc. ("Sunrise"), to be held on ____________, 1997 at 10:00 a.m.,
local time, at _______________, located at _______________.
At the Special Meeting, you will be asked to consider and vote upon certain
proposals (the "Proposals") to sell substantially all of the assets of Sunrise
relating to its dental business (the "Dental Sale") and to amend the authorized
capitalization of Sunrise.
Sunrise's Board of Directors has unanimously approved each of the Proposals
and unanimously recommends a vote in favor of the Proposals.
In the material accompanying this letter, you will find a Notice of Special
Meeting and a Proxy Statement relating to the actions to be taken by Sunrise's
stockholders at the Special Meeting. The Proxy Statement more fully describes
the Dental Sale and includes important information concerning Sunrise. A copy of
Sunrise's Annual Report on Form 10-K for the year ended December 31, 1996 and
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 also
accompany this letter.
Whether or not you plan to attend the Special Meeting, please complete, sign
and date the accompanying proxy card and return it in the enclosed prepaid
envelope. You may revoke your Proxy in the manner described in the accompanying
Proxy Statement at any time before it has been voted at the Special Meeting. If
you attend the Special Meeting, you may vote in person even if you have
previously returned your proxy card. Your prompt cooperation will be greatly
appreciated.
Sincerely,
David W. Light
Chairman of the Board and
Chief Executive Officer
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SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
47257 FREMONT BOULEVARD
FREMONT, CALIFORNIA 94538
NOTICE OF SPECIAL MEETING
TO THE STOCKHOLDERS OF SUNRISE TECHNOLOGIES INTERNATIONAL, INC.:
You are cordially invited to attend a Special Meeting (the "Special Meeting")
of the holders of common stock, par value $0.001 per share ("Sunrise Stock"), of
Sunrise Technologies International, Inc. ("Sunrise"), to be held on , , 1997 at
10:00 a.m., local time, at , located at .
At the Special Meeting, you will be asked to consider and vote upon a
proposal to sell substantially all of the assets of Sunrise relating to its
dental business (the "Dental Sale"). You also will be asked to approve certain
changes to Sunrise's capitalization.
Specifically, you will be asked to vote on the following matters (the
"Proposals"):
1. To approve the Dental Sale to Lares Research, substantially on the
terms contained in the Lares Letter of Intent, described in the
accompanying Proxy Statement.
2. To amend Sunrise's Certificate of Incorporation to effect a "reverse
stock split" by amalgamating every three shares of Sunrise Stock into one
share of Sunrise Stock.
3. To amend Sunrise's Certificate of Incorporation to increase the
number of shares of Sunrise Stock authorized to be issued from 40,000,000
to 75,000,000 (to 25,000,000 if Proposal 2 is approved).
4. For the transaction of such other business as may properly come
before said meeting or adjournments thereof.
You may vote on each of the Proposals independently. Approval of each of the
Proposals will require the affirmative vote of a majority of the outstanding
shares of Sunrise Stock entitled to vote at the Special Meeting.
Each of the Proposals is more fully described in the accompanying Proxy
Statement.
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The Board of Directors has fixed the close of business on ____________, 1997,
as the record date for the determination of stockholders entitled to notice of
and to vote at the Special Meeting and at any adjournment or postponement
thereof.
Sincerely,
David W. Light
Chairman of the Board and
Chief Executive Officer
Fremont, California
_____________, 1997
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN
PERSON. HOWEVER, TO ASSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO
MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, IN THE
POSTAGE PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER ATTENDING
THE MEETING MAY VOTE IN PERSON EVEN IF HE OR SHE RETURNED A PROXY. PLEASE NOTE,
HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
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PRELIMINARY
SUNRISE SPECIAL MEETING
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by management of Sunrise Technologies International, Inc. ("Sunrise"
and, together with its subsidiaries, the "Company"), for use at the special
meeting of stockholders (the "Special Meeting") scheduled to be held on , ,
1997, at 10:00 a.m., local time, at , located at . The Company intends to mail
this Proxy Statement and the accompanying proxy card to all stockholders
entitled to vote at the Special Meeting on or about , 1997. A copy of Sunrise's
Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form
10-K") and Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
also is being sent to such stockholders, together with the Proxy Statement.
At the Special Meeting, holders of common stock of Sunrise ("Sunrise Stock")
will be asked to consider and vote upon the following matters (the "Proposals"):
(1) to approve the sale (the "Dental Sale") of the Company's dental business and
substantially all of the assets used in the operation thereof (the "Dental
Assets") to Lares Research, a privately-held company located in Chico,
California, substantially on the terms contained in the Asset Purchase Agreement
(defined herein), (2) to amend Sunrise's Certificate of Incorporation (the
"Sunrise Certificate") to effect a "reverse stock split" by amalgamating every
three shares of Sunrise Stock into one share of Sunrise Stock and (3) to amend
the Sunrise Certificate to increase the number of shares of Sunrise Stock
authorized to be issued from 40,000,000 to 75,000,000 (to 25,000,000 if Proposal
2 is approved).
RECORD DATE; VOTING
The board of directors (the "Board") has fixed the close of business on ,
1997 as the record date (the "Record Date") for the determination of holders of
Sunrise Stock entitled to notice of and to vote at the Special Meeting. As of
the Record Date, there were shares of Sunrise Stock issued and outstanding, held
of record by persons.
Each share of Sunrise Stock is entitled to one vote on each of the Proposals.
The presence, whether in person or by proxy, of a majority of the outstanding
shares of Sunrise Stock is necessary to constitute a quorum at the Special
Meeting. Abstentions from voting and broker non-votes on a particular Proposal
will be counted for purposes of determining the presence of a quorum but will
not be counted as affirmative or negative vote on the Proposal. The affirmative
vote of a majority of the votes eligible to be cast at the Special Meeting is
required to approve each of the Proposals. Abstentions and broker non- votes
will have the effect of voting against the Proposals.
As of the Record Date, the directors and executive officers of Sunrise,
together with their respective affiliates, held shares of Sunrise Stock,
representing percent ( %) of the votes to be cast at the Special Meeting.
ABSENCE OF DISSENTERS' RIGHTS OF APPRAISAL
The General Corporation Law of the State of Delaware governs stockholders'
rights in connection with the Dental Sale. Under the applicable provisions of
Delaware law, stockholders of Sunrise will not have the right to dissent and
seek appraisal of their shares of Sunrise Stock in connection with the Dental
Sale.
REVOCABILITY OF PROXIES
If a person who has executed and returned a proxy is present at the meeting
and wishes to vote in person, such person may elect to do so and thereby suspend
the power of the proxy holders to vote such proxy. A proxy also may be revoked
before it is exercised by filing with the Secretary of Sunrise a duly signed
revocation or a proxy bearing a later date.
SOLICITATION
Sunrise will bear the entire cost of the solicitation of proxies from its
stockholders, including preparation, assembly, printing and mailing of this
Proxy Statement, the proxy and any additional information
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furnished to stockholders. Copies of solicitation materials will be furnished to
banks, brokerage houses, fiduciaries and custodians holding in their names
shares of Sunrise Stock beneficially owned by others to forward to such
beneficial owners. Original solicitation of proxies by mail may be supplemented
by telephone, facsimile, telegram or personal solicitation by directors,
officers or other regular employees of Sunrise. No additional compensation will
be paid to such persons for such services. Sunrise also intends to employ the
services of Beacon Hill Partners, Inc., a professional solicitation company
("Beacon Hill"), to assist with solicitation of Sunrise stockholders. Beacon
Hill will be paid a fee of $4,000 plus $3 per telephone call made by Beacon Hill
to a Sunrise stockholder entitled to vote at the Sunrise Special Meeting.
ChaseMellon Shareholder Services LLC, transfer agent and registrar for the
Sunrise Stock, will be paid its customary fee, estimated to be $1,500.
INDEPENDENT AUDITORS
Representatives of Ernst & Young LLP, the Company's independent auditors, are
expected to attend the Special Meeting and to be available to answer appropriate
questions. Such representatives will have the opportunity to make a statement to
the stockholders if they desire to do so.
THE COMPANY
The Company develops, manufactures and markets laser systems for applications
in ophthalmology and dentistry. In addition, the Company has developed,
manufactures and markets an air abrasive cavity preparation system for dentistry
(the "MicroPrep(R)"). All of the Company's business activities, including
engineering and development, manufacturing, assembly and testing activities,
take place in the Company's facility in Fremont, California (the "Fremont
Facility"). The executive offices of the Company also are located at the Fremont
Facility, which consists of approximately 26,000 square feet of leased space.
Under the terms of the lease, which expires in January 1998, the Company pays
approximately $26,000 per month, including expenses.
A substantial portion of the Company's revenues (98% in 1996 and 85% for the
first three months of 1997) are derived from domestic and international sales of
the Company's dental laser products, including the SunLase 800, the SunLase 400
and the SunLase Master, and air abrasive products, including the MicroPrep(R)
and the Associate(R), a table-top version of the MicroPrep(R). See "Proposal
1--The Dental Sale--The Dental Business" and "--Dental Products."
Since mid-1992, the Company has focused a significant portion of its efforts
on engineering and development of its laser corneal shaping product (the "LTK
System") for the treatment of refractive errors of the eye, such as hyperopia
(farsightedness) and astigmatism. The LTK System is based upon patented
technology acquired in the Company acquisitions of in-process technology from
Laser Biotech, Inc. and Emmetropix Corporation in 1992. See "Additional
Information Regarding the Company--Corneal Shaping System."
The Company has incurred substantial losses in the past five years, which
have seriously depleted its working capital. Sales of its existing dental
products at current levels will not be sufficient to sustain both the existing
business and the continued development and regulatory licensing of additional
products, including the LTK System. The Company is proposing to sell the Dental
Assets and discontinue its operations relating to its dental products. See
"Proposal 1--The Dental Sale." The net proceeds from the Dental Sale would be
used to fund clinical studies and other operations relating to its ophthalmic
laser products. See "Description of the Company Following the Dental Sale."
Reference is made to the 1996 Form 10-K, which accompanies this Proxy
Statement and is incorporated herein by reference, for additional information
regarding the Company and its business.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement, 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 Sunrise or its
management, (iii) statements of the future economic performance of Sunrise and
(iv) the assumptions underlying statements regarding Sunrise or its businesses.
Important factors, risks and uncertainties that could cause actual results to
differ materially from any forward-looking statements ("Cautionary Statements")
are disclosed herein and in the 1996 Form 10-K, which accompanies this Proxy
Statement. 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.
PROPOSAL 1
THE DENTAL SALE
The Company proposes to sell its assets associated with its dental laser, air
abrasion and composite curing systems to Lares Research, a California
corporation ("Lares"). Lares is a privately held company located in Chico,
California. Sales of dental products represented approximately 98% and 76% of
the Company's revenues during 1996 and 1995 respectively, and approximately 85%
of the Company's revenues for the first three months of 1997. The purchase price
for the Dental Assets is $5,500,000, consisting of $4,000,000 in cash and
$1,500,000 in the form of a subordinated promissory note, with two installments
due in three and four years, respectively (the "Lares Note"). Following the sale
of the Dental Assets, the Company's only remaining operations will be those
related to its ophthalmic laser products, primarily the LTK System which
currently is undergoing premarket clinical studies in the United States as
required by the Food and Drug Administration ("FDA").
BACKGROUND--REASONS FOR SALE
The Company's Board of Directors has been considering the sale of its
business and operations related to the Dental Assets (the "Dental Operations")
since late 1995 but was not successful in obtaining any satisfactory offers for
the Dental Operations until Lares presented its offer in November 1996. The
Board has determined to sell the Dental Operations for two primary reasons.
First, the Dental Operations have caused the Company to incur substantial losses
in each of the past three years, which losses have depleted the Company's
working capital and reduced the funds available to cover the cost of the
clinical studies for the LTK System. Second, the proceeds from the sale of the
Dental Operations will become available for clinical studies for the LTK System,
which and could delay the necessity for further capital raising.
Management began exploring the possibility of the sale of the Dental
Operations during 1995. Discussions were conducted during 1995 with two small
public companies which were already in the business of selling dental products
but such efforts did not produce any firm offers. Both of these companies stated
that they valued the Dental Operations at an amount far below the Lares offer.
Thereafter the Company continued to inform other suppliers of dental equipment
and dental supplies that it was interested in selling the Dental Assets and
Operations. The Company regularly attends large regional dental equipment
industry shows and was familiar with other participants in this industry. During
1996 and early 1997 the Company had extensive contacts with six additional
suppliers of dental products in addition to Lares concerning the sale of the
Dental Assets and Operations. None of these other discussions resulted in offers
to purchase. The Company first became aware of Lares and its possible interest
in acquiring the Dental Assets in mid 1996. Lares has been a privately held
family business for over 30 years and is primarily a manufacturer of dental
drills. The initial contact with Lares was made directly by Craig Lares, the
President and sole shareholder of Lares, to David Light, the Chief Executive
Officer of the Company, at an industry show in the summer of 1996. Prior to this
time, the Company did not know Mr. Lares, nor did the Company or any of its
management have any pre-existing personal or business relationship or prior
interaction with Mr. Lares or his company.
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Mr. Lares indicated that he was familiar with the Company's dental products
and expressed an interest in pursuing the possibility of an acquisition as a
means of expanding its business. Mr. Lares reported that Lares has recently been
unsuccessful in another potential acquisition and needed to expand its product
line. A series of meetings then ensued between Mr. Lares, Mr. Robert Oliver, a
consultant and business advisor to Lares, and Mr. Light. These meetings occurred
between August, 1996, and November, 1996, and did not involve any participants
other than Mr. Lares, Mr. Oliver, and Mr. Light. Mr. Light initially requested
an offer of $10,000,000, which was rejected by Mr. Lares. After completion of
their initial discussions, Mr. Lares suggested a package of consideration which
consisted of $5,000,000 in cash, $2,000,000 in non-interest bearing promissory
notes, and warrants to acquire 2 1/2 % of Lares which Mr. Lares asserted to be
valued at $1,000,000. After discussion with each member of the Company's Board
of Directors, Mr. Light verbally accepted Mr. Lares's offer.
On November 18, 1996 the Company and Lares entered into a non-binding letter
of intent which contemplated the purchase by Lares of the Dental Assets in
consideration for a cash payment of $5,000,000 at closing, a six-year
non-interest bearing promissory note in the principal amount of $2,000,000 and
warrants for 2 1/2 % of the stock of Lares. The proposed transaction was subject
to Lares being able to attact sufficient equity financing on acceptable terms to
enable it to complete the purchase. In March 1997, Lares reported that it had
not obtained satisfactory offers of equity capital and revised its proposal to
purchase the Dental Assets. Mr. Lares also stated that the prior offer was being
reduced to reflect the declining sales of dental products since the date of the
prior offer. The current proposal ($5,500,000 with $4,000,000 at closing) does
not require equity financing but, according to Craig Lares, can be completed
with loans being made available by Lares' bank (the "Bank") and a member of
Craig Lares' family. Mr. Lares has assured the Company that Lares will have the
financing in hand prior to the anticipated closing.
The Company has not retained a financial advisor to assist in the sale of the
Dental Assets and Operations and has not advertised for potential buyers. The
Company briefly consulted with a few potential financial advisors but was unable
to generate significant interest given the size of the proposed transaction. In
addition, management believed that the only likely potential buyers for the
Dental Assets and Operations would be companies which already participated in
the dental equipment business, all of whom were familiar to the Company and
would be available for discussions at many of the dental industry shows which
the Company attended. Management believes that it has presented the Dental
Assets and Operations to most of the suppliers of dental equipment who have the
financial capacity to fund the acquisition and have received no other purchase
offers. Under the terms of the Lares Letter of Intent the Company has been free
to negotiate with other potential purchasers since February 18, 1997 and has
made this information available to other prospective purchasers. Since the
public announcement of the Lares Letter of Intent in November 1996 the Company
has received no indications of interest from any party with whom it had not been
in contact prior to the announcement.
The management of the Company believes that the Lares transaction is in the
best interest of the shareholders of the Company. Operation of the Dental Assets
has caused the Company to incur substantial losses in each of the last five
years of operations and is forecast to continue to show losses. The dental laser
products which produced sustantial revenues and profits prior to 1992 have seen
a steady decline in demand and the market appears to be nearly saturated, as
least in the U.S. market. The refusal by the FDA to approve the use of dental
laser products in hard tissue applications eliminated the potential expansion of
the market for these products. The Company's dental air abrasive products are
also contributing to the Company's losses because of the current sales levels
and as a result of the high distribution costs associated with the sale of these
products. At current sales levels and with the limited scope of the dental
products currently marketed by the Company, it is not possible to operate this
line of business at a profit and the Company must either close or sell the
dental business in order to survive. Based upon the absence of purchase offers
other than that of Lares, the Company believes that it will receive
significantly more proceeds from selling the dental business to Lares than from
a piecemeal liquidation of the assets. The Company also believes that it cannot
afford to continue to operate the dental business for any substantial time in an
attempt to obtain an offer materially higher than the Lares offer, particularly
considering the ongoing losses which will be sustained. Based primarily upon the
continuing losses from
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the dental business and the absence of an alternative higher offer, the Company
believes it is in the best interests of the shareholders to complete the Lares
transaction on the terms described above. See "--Recommendation of the Board."
If the Company is successful in completing the sale of the Dental Assets it
will focus all of its efforts to obtain FDA approval to sell the LTK System in
the United States and to revive its sales effort in those countries in which
regulatory approval is not required. In February and March 1997, the Company
completed private placements of convertible notes (the "Notes") and warrants
which resulted in net proceeds of approximately $3,743,740. These proceeds,
together with the proceeds from the sale of the Dental Assets should provide
sufficient working capital for the balance of 1997. The Company will need to
raise significant additional working capital during 1998 to enable it to fund
its overhead and overseas marketing efforts and to complete the clinical
studies, a process which will not be complete until 1999 at the earliest. If the
Company is unable to raise additional working capital it could be forced to cut
back or suspend the clinical trials which would, at a minimum, delay the FDA
regulatory process. The Notes will come due in February 1999 and are secured by
the ophthalmic patents which cover the LTK System. If the Company is unable to
pay the Notes in February 1999, it could lose its rights to market its LTK
System or be required to pay royalties to retain such rights.
THE DENTAL BUSINESS
Although recently the Company's primary efforts have been focused on the
engineering and development of laser products used in the ophthalmic business,
the Company began as a developer and manufacturer of dental laser systems. In
1990, Sunrise received market clearance from the FDA to sell the Sunrise dLase
System in the United States for soft tissue applications. At that time the
Company was the exclusive developer and manufacturer of dental laser systems for
American Dental Technologies, Inc. ("ADT") and received substantially all of its
revenues from the sale of its dLase Dental Laser System (the "Sunrise dLase
System") to ADT. The Company's exclusive relationship with ADT was terminated in
1992 because ADT failed to meet its minimum purchase requirements. The parties
reached a preliminary settlement in February 1993, but further disputes arose
and litigation ensued. Effective as of July 30, 1996, the parties entered into a
settlement agreement (the "ADT Settlement Agreement") under which the Company
was granted royalty bearing licenses under the ADT patents which permit the
Company to develop, manufacture and market dental laser systems for its own
account. The licenses are transferable by the Company in connection with the
sale of substantially all of the Company's Dental Assets, although the Company
is required to pay a transfer fee to ADT.
The Company has sought FDA market clearance for use of the Sunrise dLase
System for hard tissue applications, but has not yet received FDA approvals. The
Company first filed a Pre-Market Approval application (a "PMA") with the FDA for
treatment of precarious lesions with the Sunrise dLase System in hard tissue in
October 1988.The application was denied in August 1990. The Company commenced
additional clinical trials for this application in 1991 after conferring with
the FDA with respect to a new protocol. In the first quarter of 1993, Sunrise
received FDA approval to expand the clinical studies to add more patients, an
additional research site, and include the treatment of 2 degree caries. Sunrise
filed a new PMA during 1994. In February 1996 the FDA's dental products advisory
board voted not to recommend pre-market approval of Sunrise's dental laser for
hard tissue applications. Sunrise is currently evaluating this development in
relation to the overall marketing of the dental laser and whether it should
continue to pursue FDA approval for hard tissue. The FDA's refusal to permit the
Company's dental laser systems to be used for hard tissue applications is one of
the factors that was considered by the Board in evaluating the Dental Sale.
In May 1997, Premier Laser Systems Inc. ("Premier") received FDA approval to
use its ebrium YAG dental laser system (the "Centauri") for hard tissue
applications. The Centauri is described as a laser drill that removes dental
decay and prepares the cavity for filling. The function performed by the
Centauri is similar to that of air abrasive systems, such as the MicroPrep(R).
The Company does not believe that Premier's receipt of FDA approval for the
Centauri will have any effect on the FDA approval process for the Sunrise dLase
System, which is designed to eradicate dental decay without cutting the tooth.
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DENTAL PRODUCTS
SUNLASE DENTAL LASER SYSTEMS
The SunLase series of dental laser systems are portable laser systems
designed to be used in dentistry, without the use of local anesthetic, for hard
tissue applications such as treatment of dental caries (cavities) and
pre-carious dental lesions (the precursor of cavities) and for soft tissue
cutting procedures in the oral cavity.
The Company introduced the SunLase 800 for sales in international markets
during the third quarter of 1992 for hard and soft tissue applications. The
SunLase 800, which was developed using technology from the Company's ophthalmic
and surgical laser technologies, uses a pulsed Nd:YAG with a variable power of
0.3 watts to 8 watts and provides a choice of pulse rates from 10 to 50 pulses
per second. The SunLase 800 incorporates a memory feature that allows the
practitioner the choice of up to eight programmable treatment settings. The
application of solid-state laser technology provides low-cost, efficient and
reliable operations. No special utilities are required and the unit plugs into
any standard electrical outlet.
In March 1993, the Company introduced two new dental laser systems in the
United States market for soft tissue applications--the SunLase 400, a four watt
dental laser system and the SunLase Master, an eight watt dental laser system
with a pulse rate of from 10 pulses per second to 100 pulses per second. The
Company obtained FDA clearance to market these procedures for soft tissue
applications prior to their introduction, but has not obtained FDA clearance for
hard tissue applications.
MicroPrep(R) Dental Applications
The Company entered into a joint development agreement with Danville
Engineering, Inc. ("Danville") in April 1993, to develop the MicroPrep(R), a
low-cost, compact, microprocessor-controlled air abrasive unit. Pursuant to the
terms of the agreement, Danville provides the air abrasive module for
incorporation into the MicroPrep(R). In addition, Danville may act as a
non-exclusive distributor of the product. The MicroPrep(R) uses a high speed air
stream containing small particles which, when directed at teeth, have an
abrasive action that can be used to cut enamel and dentin, thereby prepare a
cavity for restorative material. The air abrasive method allows for rapid
cutting of the tooth structure with minimal heat, vibration and pressure,
thereby permitting cavity preparation without the use of local anesthetic in
most cases. In cases where the tooth is hypersensitive, pulpal stimulation can
be controlled by reducing the pressure of abrasive material delivered to the
tooth structure.
The MicroPrep(R) Director is approximately suitcase-sized (similar to the
Company's dental laser packaging) and has a built-in compressor which improves
the portability of the system as compared to the competitive product which uses
the dentist's existing compressed air supply. The Director utilizes a standard
115 volt outlet, delivers abrasive at from 80 psi to 120 psi, and operates at
three different pressures, three different abrasive concentrations and also has
a pulsed mode to allow the dentist innumerable variations on delivering abrasive
to the target tooth structure. The Company filed a 510(k) with the FDA in June
1993 and received clearance to market the product in May 1994. Initial product
shipment began in June 1994. In October 1995, the Company introduced the
"Associate," a table-top version of the MicroPrep(R).
Company's revenues are substantially derived from sales of its dental laser
and air abrasion products. In 1996, these sales represented 98% of the Company's
revenues. If the sale of the Dental Assets to Lares is consummated, $4 million
of the purchase price will be paid in cash, which the Company intends to use
primarily to fund its ophthalmic activities; however, by selling the Dental
Assets, the Company will lose a significant source of continued revenue.
TERMS OF TRANSACTION
On March 25, 1997, Sunrise entered into an Asset Purchase Agreement with
Lares (the "Asset Purchase Agreement"), providing for the sale to Lares of the
Dental Assets, excluding cash and accounts receivable.
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Purchase Price
At closing Lares will pay Sunrise $4,000,000 in cash and deliver a
subordinated promissory note for $1,500,000. The $4,000,000 cash payment is
expected to be funded by a $3,000,000 advance from Lares' bank (the "Closing
Bank Loan") and a $1,000,000 unsecured loan from Joseph Lares, Craig Lares'
father.
Under the promissory note, $1,000,000 is payable on the third anniversary of
the closing date (2000), and a second installment of $500,000 is payable on the
fourth anniversary of the closing date (2001). Interest accrues on the unpaid
principal amount of the Lares Note at the rate of 8% per annum. Interest is
payable on the $1,000,000 installment quarterly; interest on the $500,000
installment accrues for two years and is thereafter added to principal and bears
interest at the rate of 8% per annum until paid.
The Company's right to receive payment on the Lares Note is subordinate to
any existing or future obligations of Lares to the Bank, which at closing are
expected to include the $3,000,000 Closing Bank Loan and an additional
$1,750,000 for a business line of credit, a building loan and an existing
mortgage against the real estate owned by Lares from the Small Business
Administration which is payable to 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. There can be no assurances that Lares will not default on its
obligations under the Lares Note, or that the Company will receive more than the
$4,000,000 portion of the purchase price payable in cash at the closing.
Limited Assumption of Liabilities
Lares will not assume any liabilities of the Dental Operations which exist on
the closing date, except those arising from certain existing contacts of the
Dental Operations, outstanding inventory purchase and product sales orders, and
all unsatisfied warranty obligations of the Company related to dental products.
The existing contracts which will be assumed by Lares include the royalty
bearing license agreements with ADT and Patlex Corporation and the Company's
exclusive supply contract with Danville which obligates Lares to purchase its
air abrasive products from Danville.
The ADT license agreements which Lares has agreed to assume (the "ADT
Licenses") were granted to the Company by ADT in connection with the ADT
Settlement Agreement. The ADT Licenses permit the holder thereof to develop,
manufacture and market dental laser systems which may be covered by certain ADT
patents, and require payment of ongoing royalty fees to ADT.
Each party has agreed to pay its own transaction expenses. The Company
estimates its transaction expenses will aggregate $150,000, not including the
ADT Transfer Fee (discussed below) of $275,000-$358,000.
Transfer Fee to ADT
The ADT Licenses are transferable by the Company in connection with the sale
of substantially all of the Company's Dental Assets without the consent of ADT.
Under the terms of the ADT Settlement Agreement, the Company is required to pay
a transfer fee equal to 10% of the amount received for the sale of its dental
air abrasive assets (the "ADT Transfer Fee"). Sunrise and Lares have allocated
50% of the purchase price to the air abrasive products, 40% to the laser
products and 10% to the CureStar composite curing lamp portion of the business
based upon the comparative sales and capital investment made with respect to
each of the product lines, as well as the goodwill associated with each product
line and the comparative quality, dependability and market share of each of the
product lines. Based upon the allocation agreed upon between the Company and
Lares, the ADT Transfer Fee will be $275,000. ADT has not agreed to the
allocation made by the Company and Lares, and may claim that the Company is
obligated to make a greater payment. In no event does the Company expect the ADT
Transfer Fee to exceed $358,000. Agreements Prior to Closing
The parties have agreed to continue to operate their respective businesses in
a manner consistent with past practices prior to the closing with a view to the
maintenance and preservation of the assets and the going concern value of the
businesses. The Company has agreed that as of the closing, the book value
7
<PAGE>
of inventory, net of seller's reserve for obsolete inventory, shall not be less
than 80% of the book value of its inventory as of December 31, 1996. Sunrise is
obligated to obtain Lares' consent to commitments which extend beyond closing.
Lares has agreed to use its best efforts to enter into a new agreement with a
distributor of the Company's dental products in Germany and to secure the
termination of the existing agreement between the distributor and the Company
effective as of the closing in order to ensure that no further payments will be
due to the distributor by the Company after the closing date. There can be no
assurances that a claim will not be made against the Company for commissions in
an amount which cannot be calculated prior to the closing if the existing
agreement is not terminated. Lares has advised the Company that it presently
anticipates that it will conclude an agreement with the Company's distributor
which will be satisfactory to Lares and Sunrise prior to closing, but no
assurances can be given that such an agreement will actually be finalized on
terms which are acceptable to the parties.
Lares has indicated that it will make offers of employment to the Company's
employees who are currently involved in the Dental Operations, but it is not
required to do so.
Post-Closing Agreements
The Asset Purchase Agreement includes a non-complete provision pursuant to
which Sunrise agrees not to operate a business in competition with the business
sold to Lares under the agreement. Sunrise also agrees to provide "tail
coverage" on its products liability insurance for a five year period after the
closing.
Sunrise has made standard representations and warranties concerning its due
organization and corporate power, its authorization to enter into the
transaction, the absence of adverse changes and undisclosed liabilities, title
to and condition of its assets, tax matters, litigation, environmental,
regulatory and ERISA matters, outstanding contracts and insurance coverage and
with respect to patents trademarks and other intellectual property matters. The
representations and warranties terminate thirty months after the closing date.
Any liquidated claims by Lares under the representations and warranties will be
payable by the Company by offsetting amounts otherwise due to the Company under
the Lares Note.
Federal Income Tax Consequences
The transaction will produce taxable gain for federal income tax purposes,
but such gain is expected to be fully offset by current year losses and
allowable loss carrybacks.
Conditions to Closing; Termination
The Dental Sale is subject to the absence of material adverse changes through
closing, completion of the Lares financing with the Bank and Joseph Lares, and
approval by the stockholders of Sunrise. The transaction does not require any
regulatory approvals.
The parties may terminate the Asset Purchase Agreement prior to closing by
mutual consent or if the transaction has not closed by June 30, 1997.
INFORMATION REGARDING LARES
Lares Research is privately held and majority owned and managed by Craig
Lares. Mr. Lares has worked in the dental equipment industry for over 17 years
and is the current elected president of the Dental Manufacturers of America. The
information in this section was provided to the Company by Lares.
Joseph Lares, Craig Lares' father, was one of the founders of Lares in 1956,
at which time Lares specialized in micro-precision machining for the
electronics, instrument and defense industries in Northern California. In the
early 1970s, Lares became involved in supplying specialized components for a
highspeed dental handpiece (drill) manufacturer in the Pacific Northwest. In
1979, Lares completed its own patented design and introduced its first highspeed
handpiece under the Lares brand. In 1982, Lares began to broaden its product
line with the addition of a fiber optic lighting system to power the dental
drill's fiber optic elements. Eventually, Lares added to its product line a
larger head highspeed handpiece, lowspeed handpieces and composite curing
systems.
8
<PAGE>
Lares sells its products to over 15,000 dentists in the United States, to
private label domestic distributors and through foreign distributors in over 65
countries worldwide. One of the ways in which Lares plans to grow its business
is by broadening its dental equipment product line. For example, in mid-1997,
Lares anticipates introducing a heat sterilizable independent water delivery
system that is designed to prevent dental unit waterline contamination. The
addition of Sunrise's dental laser and air abrasive systems to its product line
is a part of this strategy.
Substantially all of the design, manufacturing, assembly, testing and repairs
of Lares' products are performed at its 19,200 square foot facility in Chico,
California. In anticipation of the Dental Sale, Lares is in the process of
expanding its facility by approximately 11,000 square feet, which is expected to
be complete in June 1997.
Lares employs over 135 persons. For the fiscal year ended October 31, 1996,
Lares reported revenue of approximately $10.1 million.
RECOMMENDATION OF THE BOARD
The Board of Directors unanimously recommends approval of the Dental Sale on
the terms disclosed above. The Board believes that the Company does not have the
resources both to continue the Dental Operations and to pursue clinical trials
for the LTK System and that the potential revenue from sales of the LTK System
is significantly greater than the maximum size of the market for the Company's
dental products as to mandate the sale or discontinuance of the Dental
Operations. The Board considered the following factors in its decision to
recommend the sale of the Dental Operations:
o The losses suffered from the Dental Operations, including current and
ongoing losses on account of the Company's inability to generate
sufficient sales in order to manufacture its dental products efficiently.
o The cost of the clinical studies for the LTK System and the expected
time-table for the regulatory approval process.
o The need to raise additional working capital to fund clinical studies for
the LTK System and to pay overhead expenses.
o The historic difficulties in raising working capital including the
dilution and the fees involved.
o Investor interest in the corneal shaping market addressed by the LTK
System compared to relative lack of interest in the smaller and fragmented
dental equipment market.
o Competitive and cost factors affecting the dental equipment market
including the obigation to pay substantial ongoing royalties to ADT.
o The refusal by the FDA to permit the Company's dental laser systems to be
used for hard tissue applications.
o The absence of material revenues following sale of the Dental Assets until
FDA approval is obtained for the LTK System.
o The absence of other offers for the Dental Assets, in spite of the
Company's continuing efforts since 1995.
The Board did not believe that it needed to quantify any of the foregoing
factors in determining the advisability of the Dental Sale. In light of the
Company's needs for cash, ongoing losses of the Dental Operations, the declining
potential of the Dental Assets and the absence of alternative offers for the
Dental Operations, the Board believes that the Company must either quickly
convert the Dental Assets to cash or risk cessation of its entire business.
Management has expended significant time and resources seeking offers for the
Dental Assets and Operations, while the clinical studies for the Company's
ophthalmic products, including the LTK System, continue to require substantial
funding without generating significant revenues, and the Dental Operations
continue to incur greater expenses than the revenues they generate.
Management is aware that Premier received FDA approval to use the Centauri
for hard tissue applications in May 1997. Because the function performed, and
the technology used, by the Centauri is different from the Company's dental
laser systems, the Company does not believe that Premier's receipt
9
<PAGE>
of FDA approval for the Centauri will have any effect on the FDA approval
process or potential market for the Company's dental laser systems. The Centauri
may become competitive with the MicroPrep(R), since both systems perform cavity
preparation functions; however, the Company expects that the initial price point
of the Centauri will be substantially higher than the current price of the
MicroPrep(R). The book value of the Dental Assets to be sold was approximately
$1,904,000 at December 31, 1996. The Board believes that the Dental Sale is in
the interest of the stockholders and that the terms of the Asset Purchase
Agreement are fair.
Approval of the sale of the Dental Assets to Lares pursuant to the Asset
Purchase Agreement requires the affirmative vote of holders of a majority
(13,934,307 shares) of the Sunrise Stock outstanding as of the Record Date.
THE BOARD OF DIRECTORS OF SUNRISE UNANIMOUSLY RECOMMENDS A VOTE FOR
THE APPROVAL OF THE DENTAL SALE TO LARES SUBSTANTIALLY ON THE TERMS
CONTAINED IN THE ASSET PURCHASE AGREEMENT.
10
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
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 Proxy
Statement 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 Proxy
Statement.
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
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
--------------------------------------------------
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF OPERATIONS DATA:
Net revenues ........................... $ 8,550 $11,860 $ 7,578 $ 5,294 $ 5,654
Gross profit ........................... 3,604 5,009 1,340 1,637 1,638
Purchase of in-process technology ..... 8,466 -- -- -- --
Income (loss) from operations .......... (13,337) (6,452) (6,917) (4,187) (6,020)
Income tax expense (benefit) ........... (1,612) 232 -- -- --
Net income (loss) ...................... (11,640) (6,624) (6,910) (4,130) (5,968)
Net income (loss) per share(1) ......... (1.44) (0.74) (0.68) (0.28) (0.23)
Weighted average shares outstanding(1).. 8,111 8,955 10,129 14,935 26,414
</TABLE>
DECEMBER 31,
-------------------------------------------------
1992 1993 1994 1995 1996
HISTORICAL BALANCE SHEET DATA:
Working capital .............. $ 7,877 $ 1,965 $ 1,101 $ 4,541 $1,073
Total assets .................. 10,339 5,511 3,822 6,689 3,741
Long-term debt ................ 79 18 -- -- --
Stockholders' equity .......... 9,038 2,708 1,357 4,745 1,272
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements.
11
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
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 Sunrise Stock; and (2) the unaudited pro
forma net loss per share and the unaudited pro forma book value per share after
giving effect to the proposed sale of the Dental Operations and Net Assets on a
retroactive basis excluding the gain (if any) from the sale for Pro Forma Net
Loss Per Share and recognizing the initial cash payment of $4,000,000 for the
Pro Forma Book Value Per Share. The information presented in the table should be
read in conjunction with the unaudited pro forma condensed financial statements,
the Company's historical consolidated financial statements and unaudited interim
consolidated financial statements and the notes thereto appearing elsewhere
herein or incorporated by reference. No cash dividends have been declared by
Sunrise.
HISTORICAL PRO FORMA
---------- ---------
NET LOSS PER SHARE
Fiscal Year ended December 31, 1996 ................... 0.23 0.17
BOOK VALUE PER SHARE AT
December 31, 1996 ..................................... 0.05 0.11
1. Sunrise's historical net loss per share represents amounts for the year
ended December 31, 1996.
2. Sunrise'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. Pro forma book value per share is computed by dividing pro
forma stockholders' equity by the number of shares of common stock outstanding
at the end of the period.
3. The unaudited pro forma net loss per share is based on the weighted
average number of shares of Sunrise Stock outstanding during the period
(26,414,218 shares at December 31, 1996).
4. The unaudited pro forma book value per share is based on an estimated ADT
Transfer Fee of $275,000. In no event does the Company expect the ADT Transfer
Fee to exceed $358,000. If the ADT Transfer Fee were $358,000, the unaudited pro
forma book value per share would be $0.10. See "Proposal 1--The Dental
Sale--Terms of Transaction--Transfer Fee to ADT."
12
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statements represent
the proposal that Sunrise may sell the Dental Assets and Operations.
On March 26, 1997, the Company entered into an Asset Purchase Agreement with
Lares Research, providing for the sale of the Company's Dental Assets. Lares is
a privately held company located in Chico, California. Consummation of the
proposed Dental Sale is subject to Lares' ability to raise $4,000,000 to fund
the closing date payment described below. There is no assurance that Lares will
be able to attract the required financing from banking institutions and members
of the Lares family, and, if Lares is unsuccessful, the transaction will be
abandoned.
If Lares is able to raise the required capital, the Company would transfer to
Lares all of the Dental Assets except for cash and accounts receivable. All
liabilities of the Dental Operations would be retained by the Company, except
for certain obligations relating to royalties and a supply contract. At closing
Lares will pay Sunrise $4,000,000 in cash and deliver a promissory notes in the
principal amount of $1,500,000. The first installment of the Lares Note, in the
principal amount of $1,000,000, will bear interest at 8% and will be due April
30, 2000, with interest payable quarterly from inception. The second installment
of the Lares Note in the principal amount of $500,000 will be due April 30, 2001
and will bear interest at 8%. Interest on the second installment of the Lares
Note accrues for the first two years. The Lares Note will be subordinate in
right of payment to Lares' obligations to the Bank, which at closing are
expected to include a $3,000,000 advance to partially fund the cash payment to
be made to the Company at closing, a business line of credit, a building loan
and a Small Business Administration Loan. 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 note, due to subordination of the note to Lares's bank debt, collection
is not reasonably assured and the Company intends to recognize proceeds from the
sale and interest on the note as cash is received.
The Company's revenues are substantially derived from the sale of its dental
laser and air abrasive products. These sales represented 98% and 85% of the
Company's revenues in 1996 and the first three months of 1997, respectively. If
the proposed sale of the Dental Assets is consummated, $4,000,000 of the
purchase price will be paid in cash which the Company will use to fund its
ophthalmic activities; however, by selling the Dental Assets, the Company will
lose a significant source of continued revenue.
The unaudited condensed financial information ("Sunrise Net of Dental Assets
to be Sold") gives effect to the sale of the Dental Operations as if the
transaction had occurred on January 1, 1996 for purposes of the unaudited
statements of operations and as of December 31, 1996 for purposes of the
unaudited balance sheet.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the sale had been consummated as presented in the
accompanying unaudited pro forma condensed financial information, nor is it
necessarily indicative of future operating results or financial position.
The unaudited pro forma condensed financial information should be read in
conjunction with the accompanying notes and the historical financial statements,
including the notes thereto, of the Company, included elsewhere in this Proxy
Statement.
13
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUNRISE SUNRISE NET
TECHNOLOGIES SUNRISE OF DENTAL
INTERNATIONAL, DENTAL ASSETS ASSETS TO
INC. TO BE SOLD BE SOLD
-------------- ------------------- -----------------------
(A) (B)(1) (B)(2) (C)(1) (C)(2)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ........... $ 647 $ 4,000 $ 4,000 $ 4,647 $ 4,647
Accounts receivable .................. 472 -- -- 472 472
Inventories .......................... 2,135 (1,749) (1,749) 386 386
Prepaid expenses ..................... 288 -- -- 288 288
-------- -------- -------- -------- --------
Total current assets ................. 3,542 2,251 2,251 5,793 5,793
Net property, plant & equipment ...... 199 (154) (154) 45 45
-------- -------- -------- -------- --------
Total assets ........................ $ 3,741 $ 2,097 $ 2,097 $ 5,838 $ 5,838
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable .................... $ 1,586 -- -- 1,586 1,586
Accrued payroll and related expenses . 209 -- -- 209 209
Accrued warranty ..................... 199 -- -- 199 199
Other accrued expenses ............... 475 425 508 900 983
-------- -------- -------- -------- --------
Total current liabilities ............ 2,469 425 508 2,894 2,977
Common stock ......................... 28 -- -- 28 28
Additional paid-in capital ........... 31,688 -- -- 31,688 31,688
Accumulated deficit .................. (30,444) 1,672 1,589 (28,772) (28,855)
-------- -------- -------- -------- --------
Total stockholders' equity ........... 1,272 1,672 1,589 2,944 2,861
-------- -------- -------- -------- --------
Total liabilities and stockholders'
equity .............................. $ 3,741 $ 2,097 $ 2,097 $ 5,838 $ 5,838
======== ======== ======== ======== ========
</TABLE>
- --------------------
(a) Represents historical Sunrise financial statements, including Dental Assets
to be sold.
(b) Represents historical Sunrise Dental Assets to be sold and initial cash
consideration received therefrom. Other accrued expenses consist of (i) an
ADT Transfer Fee of $275,000 (column (b)(1)) or $358,000 (column (b)(2)),
and (ii) estimated transaction costs of $150,000. Additional gain may be
recognized up to $1,500,000 as payment is received on the Lares Note.
(c) Represents historical Sunrise, net of Dental Assets to be sold and initial
cash consideration received therefrom, based on an ADT Transfer Fee of
$275,000 (column (c)(1)) or $358,000 (column (c)(2)).
See accompanying note to the Pro Forma Condensed Financial Statements
14
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<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 & development .............................. 1,326 470 856
Sales, marketing & 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 income/(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
======= =======
</TABLE>
- ----------------------
(a) Represents historical Sunrise financial statements, including Dental
Business to be sold.
(b) Represents historical Sunrise Dental Business to be sold, exclusive of any
gain which may be realized on the sale.
(c) Represents historical Sunrise, net of Dental Business to be sold, exclusive
of any gain which may be realized on the sale.
See accompanying note to the Pro Forma Condensed Financial Statements
15
<PAGE>
NOTE TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
The pro forma condensed financial statements gives effect to the following
pro forma adjustments:
On March 26, 1997, the Company entered into an asset purchase agreement with
Lares Research providing for the sale of the Company's Dental Assets. Lares is a
privately held company located in Chico, California. Consummation of the
proposed dental sale is subject to Lares' ability to raise $4,000,000 to fund
the closing date payment described below. There is no assurance that Lares will
be able to attract the required financing from banking institutions and members
of the Lares family, and, if Lares is unsuccessful, the transaction will be
abandoned.
If Lares is able to raise the required capital, the Company would transfer to
Lares all of the Dental Assets except for cash and accounts receivable. All
liabilities of the Dental Business would be retained by the Company, except for
certain obligations relating to royalties and a supply contract. At closing
Lares will pay Sunrise $4,000,000 in cash and deliver a promissory note in the
principal amount of $1,500,000. The first installment of the Lares Note, in the
principal amount of $1,000,000, will bear interest at 8% and will be due April
30, 2000, with interest payable quarterly from inception. The second installment
of the Lares Note in the principal amount of $500,000 will be due April 30, 2001
and will bear interest at 8%. Interest on the second installment of the Lares
Note accrues for the first two years. The Lares Note will be subordinate in
right of payment to Lares' obligations to the Bank, which at closing are
expected to include a $3,000,000 advance to partially fund the cash payment to
be made to the Company at closing, a business line of credit, a building loan
and a Small Business Administration Loan. 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 note, due to subordination of the note to Lares's bank debt, collection
is not reasonably assured and the Company intends to recognize proceeds from the
sale and interest on the note as cash is received.
In connection with the Dental Sale, the Company will be required to pay to
ADT a transfer fee equal to 10% of the amount received for the sale of the
company's dental air abrasive assets. Based on the allocation of the purchase
price among the Dental Assets, as agreed upon by the Company and Lares, the ADT
Transfer Fee will be $275,000. Because ADT has not agreed to this allocation,
for purposes of the pro forma condensed financial statements, the Company has
established a range of $275,000 to $358,000 for the ADT Transfer Fee. The pro
forma adjustments reflected in the pro forma condensed financial statements are
based on the high and low end of this range. See "Proposal 1--The Dental
Sale--Terms of Transaction--Transfer Fee to ADT."
The Company's revenues are substantially derived from the sale of its dental
products. In 1996, these sales represented 98% of the Company's revenues. If the
proposed sale of the Dental Assets is consummated, $4,000,000 of the purchase
price will be paid in cash which the Company will use to fund its ophthalmic
activities; however, by selling the Dental Assets, the Company will lose a
significant source of continued revenue.
The unaudited pro forma condensed balance sheet column Sunrise Net of Dental
Assets to be Sold reflects the initial cash proceeds of the sale. No profit from
the sale has been reflected in the unaudited pro forma condensed statement of
operations due to the nonrecurring nature of this transaction.
16
<PAGE>
DESCRIPTION OF THE COMPANY FOLLOWING THE DENTAL SALE
If the Dental Sale is effected, the Company's only remaining operations will
be those related to its ophthalmic laser products (the "Ophthmalic Operations").
Reference is made to the 1996 Form 10-K for a discussion of Risk Factors
associated with the Ophthalmic Operations under the caption "Cautionary
Statements--Risk Factors."
OPHTHALMIC PRODUCTS
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 avoiding the use of an operating room and the hospitalization
sometimes required with traditional filtering surgery. Foreign sales of the
gLase 210 system commenced on a limited basis during the second quarter of 1990;
domestic sales commenced in December 1990 when the Company received FDA
clearance to begin commercial sale of the product line in the United States for
the filtering procedure. The gLase 210 system is currently marketed directly and
through dealers, distributors and manufacturer's representatives in the United
States and through distributors internationally. Sales of the gLase 210 system
have been limited and never represented more than 11% of revenues in any year.
Corneal Shaping System (the LTK System)
In April 1992, the Company acquired Laser Biotech, Inc., a California
corporation ("Laser Biotech"), through a merger of a wholly-owned subsidiary of
the Company with Laser Biotech (the "Merger"). Laser Biotech was founded in 1986
by Bruce J. Sand, M.D., FACS, to research and develop a precision laser
instrument for eye surgery. In connection with the Merger, the Company also
acquired certain patent and patent applications held by Dr. Sand covering a
patented technique for reshaping the cornea using a laser. The technique, called
laser thermal keratoplasty, alters the shape of the cornea to correct refractive
disorders such as hyperopia (farsightedness), astigmatism and presbyopia without
removing corneal tissue. The procedure employs a laser to shrink, selectively,
the collagen in the cornea, changing the curvature of the cornea and thereby
changing the refractive power of the eye. By comparison, excimer laser systems
for corneal reshaping developed by Summit Technologies, Inc. and VISX, Inc.
remove parts of the cornea to achieve changes in refraction. Laser Biotech
conducted pre-clinical studies to gain preliminary information on the efficacy
and safety of the product, which resulted in positive indications the LTK System
can be applied successfully and safely to correct refractive errors.
In May 1992, the Company acquired substantially all of the in-process
technology of Emmetropix Corporation, a Texas corporation ("Emmetropix"),
including an assignment of certain patent applications and related technology
from an Emmetropix shareholder which the Company believes will be useful in
developing the LTK system.
The Company received an IDE from the FDA to begin Phase I clinical trials on
human subjects in the first quarter of 1992. Phase I trials commenced in June
1992 using a prototype LTK System designed and developed by the Company. The
Company completed Phase I of the clinical work for the LTK system and filed its
results with the FDA in June 1993. In September 1993, the Company received
clearance to
17
<PAGE>
begin Phase IIa clinical trials for the treatment of hyperopia. 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. The continued clinical trial is limited to the
treatment of forty subjects for the +1 diopter treatment group and sixty
subjects for the +2 diopter treatment group.
In addition, clinical trials were initiated outside the United States in
early 1993 and are ongoing. The Company has obtained FDA export clearance to
market the LTK System in most European countries, Turkey, Saudi Arabia, Canada,
Mexico, Brazil, Japan, China, Korea, Hong Kong, the Bahamas, and other
countries, although such sales are subject to the individual regulatory
authority of each country. Following regulatory approvals, the Company commenced
marketing the LTK System overseas, primarily in Europe, for the treatment of
hyperopia and astigmatism in December 1993.
The LTK System incorporates the Sun 1000, a modified gLase 210 system as the
laser source into a delivery system that is built into a standard slit-lamp to
perform the LTK procedure. A slit-lamp is a binocular microscope used regularly
by ophthalmologists to examine an eye binocularly under high magnification. The
LTK System delivers eight simultaneous laser beams disposed in a circle of
varying diameter. This system allows for easy alignment on the patient's eye and
the delivery of a two second exposure for the treatment. To date, international
sales of the LTK System have been limited. Revenue in the United States cannot
be expected until the Company is granted approval from the FDA to market in the
U.S., which will not be until 1999 at the earliest.
There can be no assurance the Company will successfully develop or market the
LTK System, the FDA will approve the results of continued clinical trials, or
the PMA will be approved which will result in the Company marketing the product
in the future.
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. 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 250,000
procedures worldwide, with a very limited number 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 FDA issued a PMA to
Summit Technologies, Inc. ("Summit") in October 1995 for the use of its excimer
laser system in PRK procedures. Currently, the excimer laser is the dominant
laser used for the treatment of refractive disorders.
The vision correction industry is subject to intense competition. Patients
with hyperopia (farsightedness) can achieve vision correction with eyeglasses,
contact lenses and radial keratotomy, as well as with other technologies and
surgical techniques currently under development, such as corneal implants and
surgery using different types of lasers. Most of the Company's competitors have
substantially greater product development capabilities and financial and
marketing resources 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 would have a material adverse effect on the
Company's business, financial condition and results
18
<PAGE>
of operations. The significant competitive factors in the industry include
price, convenience, success relative to vision correction, acceptance of new
technologies, patient satisfaction and government approval.
The excimer laser is the dominant laser used for the treatment of refractive
disorders, although it is not currently used to treat hyperopia. In the United
States, VISX and 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,
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.
Although the VISX and Summit excimer laser products are not currently approved
for treating hyperopia in the United States, 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 for
correcting refractive errors using lasers.
MANAGEMENT AND EMPLOYEES
Although it is not required to do so, Lares has indicated that it will make
offers of employment to the Company's employees who are currently involved in
the Dental Operations. If any of such employees desire to remain with the
Company, the Company will attempt to integrate them into the Ophthalmic
Operations.
Management of Sunrise will remain unchanged following the Dental Sale, except
that Catherine Caserza is expected to leave the Company following the Dental
Sale. The following persons are the current executive officers and directors of
Sunrise:
NAME AGE POSITION
- ----------------------- --- --------------------------------------------------
David W. Light 52 Chief Executive Officer and Chairman of the
Board of Directors
C. Russell Trenary, III 39 President and Chief Operating Officer and Director
Clara R. Munley 43 Vice President, Finance and Chief Financial
Officer
Joseph W. Shaffer 51 Director
Catherine Caserza 36 Vice President and General Manager,
Dental Division
Jeannie G. Cecka 34 Vice President, Regulatory and Clinical Affairs
Paul S. Malin 43 Vice President, Sales and Marketing
Joseph D. Koenig 67 Director
Ronald A. Slocum 57 Director
FACILITIES
The Company will continue to use its existing Facility in Fremont, California
for the Ophthalmic Operations. All of the Dental Assets and Operations will be
transferred to Lares' facility in Chico, California.
19
<PAGE>
PROPOSALS 2 AND 3
AMENDMENTS TO CAPITALIZATION
The authorized capitalization of Sunrise currently consists of 40,000,000
shares of Sunrise Stock and 2,000,000 shares of Preferred Stock, par value
$0.001 per share ("Preferred Stock"). As of the Record Date, there were shares
of Sunrise Stock issued and outstanding. No shares of Preferred Stock have been
issued or reserved for issuance by the Board.
Sunrise proposes to effect two changes to its authorized capitalization: (i)
to effect a "reverse stock split" by amalgamating every three shares of Sunrise
Stock into one share of Sunrise Stock (fractional shares would be rounded up to
the nearest whole share) (the "Reverse Stock Split"), and (ii) to increase the
number of shares of Sunrise Stock authorized to be issued. Stockholders can vote
on each of these proposals independently.
REVERSE STOCK SPLIT
On July 8, 1995, the Sunrise Stock was delisted from the Nasdaq National
Market because Sunrise was unable to maintain the requisite net assets and
market price standards for continued listing. Accordingly, trading of Sunrise
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 Sunrise Stock.
While Sunrise intends to pursue relisting the Sunrise Stock on The Nasdaq
Stock Market, Sunrise'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 individually
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 the sale. Such broker-dealers also must make certain disclosures regarding
commissions payable and must file monthly statements regarding recent price
information for penny stocks. Consequently, the holders of Sunrise securities
may find it diffulcult to sell their securities in the secondary market.
The interdealer quotation systems of The Nasdaq Stock Market, the New York
Stock Exchange and the American Stock Exchange, among others, require securities
listed hereon to have a minimum market price of $3.00 per share. The proposed
reverse stock split is expected to increase the trading price of the Sunrise
Stock, which would enable the Company to apply to have the Sunrise Stock listed
on an interdealer quotation system or securities exchange.
However, even if the Reverse Stock Split is effected, there can be no
assurance that Sunrise will be successful in listing the Sunrise Stock in the
near future, or at all. For example, the Company believes that, except for the
market price requirement, it currently meets the stated minimum initial listing
standards of The Nasdaq SmallCap Market. However, The Nasdaq Stock Market
("Nasdaq"), which operates The Nasdaq SmallCap Market, is not required to accept
a security for listing merely because it meets the minimum standards. Further
Nasdaq has proposed to increase the initial and continued listing standards. If
Nasdaq's current proposal is adopted, the minimum market price required for
initial listing will be increased to $4.00 per share. In the first quarter of
1997, the market price for the Sunrise Stock as quoted on the OTC Bulletin Board
ranged from $0.75 to $1.72. The market price of a publicly traded security is
subject to many factors. In addition to general market conditions, the market
price of the Sunrise Stock may be affected, positively or negatively, by such
factors as future offerings or placements of Sunrise Stock, investors'
perceptions of the Dental Sale, if effected, and/or successes or failures by the
Company's competitors. Moreover, there can be no assurance that the Reverse
Stock Split will in fact increase the trading price by a factor of three. The
Reverse Stock Split may have the effect of creating odd-lots (blocks of fewer
than 100 shares) for certain stockholders who, as a result, may have difficulty
or incur greater brokerage and other costs selling such odd-lots.
20
<PAGE>
Approval of the Proposal to effect a reverse stock split requires the
affirmative vote of holders of a majority (13,934,307 shares) of the Sunrise
Stock outstanding as of the Record Date.
THE BOARD OF DIRECTORS OF SUNRISE UNANIMOUSLY RECOMMENDS A VOTE FOR
APPROVAL OF THE REVERSE STOCK SPLIT.
INCREASE IN CAPITALIZATION
Sunrise historically has issued Sunrise Stock in order to raise working
capital to fund its activities. In 1995, Sunrise issued, in two private
placements, an aggregate of 15,100,000 shares of Sunrise Stock, for aggregate
net proceeds of approximately $7.5 million. In 1996, Sunrise effected a private
placement of approximately 2,300,000 shares of Sunrise Stock for net proceeds of
approximately $2.2 million. In February and March 1997, Sunrise issued an
aggregate principal amount of approximately $4.1 million of 5% convertible notes
due 1999 (previously defined as the "Notes"), which were accompanied by warrants
to purchase Sunrise Stock ("Warrants"), for aggregate net proceeds of
approximately $3.7 million. Sunrise has reserved an aggregate of 4,686,572
shares of Sunrise Stock for issuance on conversion of the Notes and an aggregate
of 2,343,286 shares of Sunrise Stock for issuance on exercise of the Warrants.
Until FDA approval is granted for commercial distribution of the LTK System,
even if the sale of the Dental Assets to Lares is consummated, Sunrise expects
to continue to require to raise working capital to fund its activities, which
may involve additional private placements or offerings of Sunrise Stock or
securities convertible into or exercisable or exchangeable for Sunrise Stock.
Accordingly, management of Sunrise considers it desirable to increase the
authorized Sunrise Stock.
The Company does not have any current plans, commitments or agreements
relating to the issuance of the additional shares of Sunrise Stock to be
authorized. The timing of the actual issuance of such shares will depend on
several factors, including market conditions and the Company's needs for
additional working capital. To the extent that any shares of Sunrise Stock may
be issued on other than a pro rata basis to current stockholders, the ownership
position of current stockholders may be diluted.
The Proposal to increase the number of authorized shares of Sunrise Stock has
not been proposed as an anti-takeover measure, nor is the Company aware of any
offers or plans of any person to acquire control of the Company. However,
stockholders are advised that adoption of this Proposal may have the effect of
discouraging, delaying or preventing a change of control of the Company that,
under certain circumstances, a stockholder might consider favorable.
Approval of the Proposal to amend the Sunrise Certificate to increase the
number of shares of Sunrise Stock authorized to be issued from 40,000,000 to
75,000,000 (to 25,000,000 if the reverse stock split is approved) requires the
affirmative vote of holders of a majority (13,934,307 shares) of the Sunrise
Stock outstanding as of the Record Date.
THE BOARD OF DIRECTORS OF SUNRISE UNANIMOUSLY RECOMMENDS A VOTE FOR AN
INCREASE IN THE NUMBER OF AUTHORIZED SHARES OF SUNRISE STOCK FROM
40,000,000 TO 75,000,000 (TO 25,000,000 IF THE REVERSE STOCK SPLIT IS
APPROVED).
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<PAGE>
PRICE RANGE OF SUNRISE STOCK
As of the Record Date, there were holders of record of Sunrise Stock. Price
information for Sunrise Stock may be obtained from the OTC Bulletin Board. The
table below sets forth the reported high and low bid quotations of Sunrise 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 (to May 20) $1.25 $0.91
- --------------------
(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 May 20, 1997, the closing price of the Sunrise Stock as reported on the
OTC Bulletin Board was $ 29/32 (approximately $0.91) 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. Sunrise 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 its common stock in the foreseeable
future.
22
<PAGE>
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Sunrise Stock as
of April 24, 1997 by certain members of management and by all executive officers
and directors of Sunrise, as a group. Sunrise is not aware of any person who
beneficially owns more than 5% of the outstanding Sunrise Stock.
BENEFICIAL OWNERSHIP(1)
-----------------------
NUMBER OF PERCENT OF
SHARES SHARES
----------- -----------
David W. Light(2) ....................................... 551,250 2.0
C. Russell Trenary, III(3) .............................. 224,821 *
Clara Munley ............................................ Nil Nil
Joseph W. Shaffer ....................................... 797,288 2.9
Paul S. Malin(4) ........................................ 18,750 *
Jeannie G. Cecka(5) ..................................... 17,163 *
Catherine Caserza(6) .................................... 125,000 *
Joseph D. Koenig(7) ..................................... 29,167 *
Ronald A. Slocum(8) ..................................... 39,167 *
All executive officers and directors as a group
(9 persons)(9).........................................1,802,592 6.5
- --------------------
* Less than one percent
(1) Based on information provided by each of the identified officers and
directors.
(2) Includes 511,250 shares that Mr. Light does not currently own, but which he
has the right to acquire within 60 days of April 24, 1997, pursuant to
outstanding options granted under the Company's stock option plan
("Options").
(3) Consists of shares that Mr. Trenary does not currently own, but which he
has the right to acquire within 60 days of April 24, 1997, pursuant to
Options.
(4) Consists of shares that Mr. Malin does not currently own but which he has
the right to acquire within 60 days of April 24, 1997, pursuant to Options.
(5) Includes 14,063 shares that Ms. Cecka does not currently own but which she
has the right to acquire within 60 days of April 24, 1997, pursuant to
Options.
(6) Consists of shares that Ms. Caserza does not currently own, but which she
has the right to acquire within 60 days of April 24, 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 April 24, 1997, pursuant to Options.
(8) Includes 29,167 shares that Mr. Slocum does not currently own, but which he
has the right to acquire within 60 days of April 24, 1997.
(9) Includes 961,592 shares that such persons do not currently own but which
they have the right to acquire within 60 days of April 24, 1997.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
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 will not be sufficient to sustain both the existing business and
the continued development and regulatory licensing of additional products
including the LTK system. Historically, the Company has been able to raise
additional working capital for all aspects of its business through the private
placement of its common stock. 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 $3,743,740 in net procees.
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, pursuant to which Lares will pay the Company a total of $5.5
million, consisting of $4.0 million in cash and $1.5 million in notes payable
over four years. The transaction is subject to stockholder approval.
Since its inception, the Company has generated revenues from the manufacture
and sale of laser systems for applications in 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 have decreased steadily from a high of approximately $20 million in 1991
to approximately $2 million 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 limits the potential
market for these products. The Company does 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, presbyopia and over correction from photo
refractive keratectomy (previously defined as "PRK"). The Company filed its PMA
Application with the FDA in 1992 and commenced Phase I clinical trials in that
year. The FDA approval process is expected to continue through at least 1999
with the cost of clinical studies increasing as the number of sites and patients
increases during the period. Although the Company has had limited sales of its
LTK System outside the United States, significant revenues cannot be expected
unless and until FDA approval is obtained to market the system in the United
States.
The following table sets forth certain operations data as a percentage of net
revenue for the periods indicated.
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
Net Revenues .......................... 100% 100% 100%
Cost of revenues ...................... 71 69 82
---- ---- ----
Gross profits ......................... 29 31 18
---- ---- ----
Other costs and expenses:
Engineering and development .......... 23 23 20
Sales, marketing and regulatory ....... 64 43 50
General and Administration ............ 48 44 39
---- ---- ----
Total other costs and expenses ....... 135 110 109
---- ---- ----
Loss from operations .................. (106) (79) (91)
Interest income, net of expense ....... 1 1 --
---- ---- ----
Loss before taxes on income .......... (105) (78) (91)
Income tax expense (benefit) .......... -- -- --
---- ---- ----
Net Loss .............................. (105%) (78%) (91%)
==== ==== ====
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<PAGE>
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 31%. 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-U.S. sales of
the Corneal Shaping System, were also lower in 1995 than 1994. Non-dental sales
represented 20% of revenue in 1994 and 22% in 1995.
Revenues increased from $5,294,000 in 1995 to $5,655,000 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(R)
in the first quarter of 1996 provided the impetus for the increase in sales of
the air abrasive product line.
GROSS PROFIT
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(R) 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 LTK Systems which carry 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(R) product.
Engineering and development increased by $108,000 in 1996 compared to 1995
due primarily to development costs associated with the CureStar curing system, a
dental product introduced in the first quarter of 1997.
SALES, MARKETING AND REGULATORY
Sales, Marketing and Regulatory expenses were $3,763,000, $2,277,000 and
$3,632,000 for the years ended 1994, 1995 and 1996 respectively.
The Company currently markets its ophthalmic lasers and 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
thirteen 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 40% 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(R) 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.
25
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2,933,000, $2,329,000 and
$2,700,000 for the years ended 1994, 1995 and 1996, respectively.
The Company's general and administrative expenses consist primarily of
product liability and officer and director liability insurance premiums;
accounting, legal and other fees related to financial transactions, patent and
general corporate matters, and litigation as well as provisions for the
Company's allowance for bad debts. General and Administrative expenses decreased
to $2,329,000 in 1995, approximately a 20% reduction from the 1994 level, due
primarily to reduction in legal and accounting fees associated with litigation.
General and administrative expenses in 1996 increased compared to 1995
primarily as a result of costs associated with the proposed acquisition of
EyeSys Technologies 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 $6,020,000 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 market place and a decrease in foreign sales
of dental lasers. Somewhat offsetting these reductions were the initial sales of
the MicroPrep(R) 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 do not offset the low level of sales volume.
The net loss in 1996 was due primarily to increased selling, marketing and
product development costs required to grow the business. A new sales, marketing,
and regulatory team was hired to focus on sales of the Corneal Shaping 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 $2.2 million 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 current product
sales is not sufficient to provide enough cash to continue the Dental Operations
and support ongoing development and regulatory approval of the LTK system.
Management's plans include selling the Dental Assets and field of use rights
related to its Dental Business. 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
26
<PAGE>
and the 1997 Notes Placement 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 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 $3.7 million.
Management believes the net proceeds from the 1997 Notes Placement 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.
27
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
------
Audited Financial Statements:
Report of Ernst & Young LLP ............................................ 29
Consolidated Balance Sheets at December 31, 1996 and 1995 .............. 30
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 ....................................... 31
Consolidated Statements of Stockholders' Equity for the three years
ended December 31, 1996 ................................................ 32
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994 ...................................... 33
Notes to Consolidated Financial Statements, December 31, 1996 .......... 34
Schedule II--Valuation and Qualifying Accounts .......................... 42
28
<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) of the Company's Annual Report on Form 10-K. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sunrise Technologies International, Inc. at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that Sunrise Technologies International, Inc. will continue as a going
concern. As more fully described in Note 1, the Company has incurred recurring
operating losses. This condition raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Palo Alto, California
March 10, 1997
29
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<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>
30
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net revenues ............................ $ 5,654 $ 5,294 $ 7,578
Cost of revenues ........................ 4,016 3,657 6,238
-------- -------- --------
Gross profit ............................ 1,638 1,637 1,340
-------- -------- --------
Other costs and expenses:
Engineering and development ........... 1,326 1,218 1,561
Sales, marketing and regulatory ....... 3,632 2,277 3,763
General and administrative ............ 2,700 2,329 2,933
-------- -------- --------
Total other costs and expenses .......... 7,658 5,824 8,257
-------- -------- --------
Loss from operations .................... (6,020) (4,187) (6,917)
Interest income, net of expense ......... 52 57 7
-------- -------- --------
Net loss ................................ $ (5,968) $ (4,130) $ (6,910)
======== ======== ========
Net loss per share ...................... $ (0.23) $ (0.28) $ (0.68)
-------- -------- --------
Shares used in calculation of net
loss per share ........................ 26,414 14,935 10,129
======== ======== ========
See accompanying notes.
31
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK 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>
32
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net ............................................ $(5,968) $(4,130) $(6,910)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................. 438 102 469
Provision for doubtful accounts ................ 115 25 --
Changes in assets and liabilities:
Accounts receivable .......................... 461 (303) 777
Inventories .................................. (837) 289 (68)
Prepaid expenses ............................. (31) 25 (69)
Accounts payable ............................. 489 (278) (1,091)
Accrued payroll and related expenses ......... 28 31 68
Accrued warranty ............................. (125) -- 181
Other accrued expenses ....................... 133 (256) 571
------- ------- -------
Total adjustments ............................ 671 (365) 838
------- ------- -------
Net cash used in operating activities .......... (5,297) (4,495) (6,072)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ............. (65) (50) (22)
------- ------- -------
Net cash used in investing activities ........ (65) (50) (22)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on capital lease obligations ........... -- (18) (61)
Issuance of common stock, net of offering costs 2,495 7,518 6,178
------- ------- -------
Net cash provided by financing activities ...... 2,495 7,500 6,117
------- ------- -------
Net increase (decrease) in cash and equivalents (2,867) 2,955 23
Cash and cash equivalents at beginning of period 3,514 559 536
------- ------- -------
Cash and cash equivalents at end of period ..... $ 647 $ 3,514 $ 559
======= ======= =======
See accompanying notes.
33
<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.
34
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996--(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
====== ======
35
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996--(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.
36
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996--(Continued)
Significant components of the Company's deferred tax assets as of December 31
are as follows:
1996 1995
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carry-forwards .......... $ 9,000 $ 7,175
Research credits (expire 2007-2011) .......... 600 642
Other ........................................ 600 949
-------- --------
Total deferred tax assets .................... 10,200 8,766
Valuation allowance for deferred tax assets .. (10,200) (8,766)
-------- --------
Net deferred tax assets ...................... $ -- $ --
======== ========
Because of the Company's lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $1,928,000 during the year ended December 31, 1995.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change provisions of the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
3. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain of its facilities and equipment under a
non-cancelable operating lease. Rent expense was $299,000, $281,000 and $279,000
in 1996, 1995 and 1994, respectively.
Future minimum lease payments under the lease are $255,000 in 1997 and
$21,000 in 1998.
LITIGATION SETTLEMENTS
In July 1996, the Company settled all of its outstanding litigation with ADT.
The material terms of the settlement are as follows:
(a) The Company waived its rights to collect a judgment for $940,000 obtained
against ADT in a prior case, which had been subject to an appeal by ADT.
(b) The Company obtained a non-exclusive license to certain ADT patents
covering air abrasion systems used in dental applications.
(c) The Company will pay ADT a royalty of 7% on all air abrasion products
shipped after December 31, 1996.
(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.
37
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996--(Continued)
In conjunction with a 1992 private placement, the placement agent received a
warrant to purchase 25,000 shares of common stock for $8.05 per share. The
warrant is exercisable at any time prior to August 28, 1997.
In February 1994, the Company completed a private placement of 1,250,000
shares of common stock. In connection with the private placement, the placement
agent received a warrant to purchase 62,500 shares of common stock. The exercise
price for these warrants is $6.00 per share and they are exercisable at any time
before February 8, 1999.
In June 1995, the Company completed a private placement of 2,100,000 shares
of common stock.
In September 1995, the Company completed a private placement of 13,000,000
shares of common stock. In connection with the private placement, the placement
agent received a warrant to purchase 675,000 shares of common stock. The
exercise price for these warrants is $0.55 per share and they are exercisable at
any time before September 6, 2000.
In August 1996, the Company completed a private placement of 2,334,000 shares
of common stock. In connection with the private placement, the placement agent
received a warrant to purchase 116,721 shares of common stock. The exercise
price for these warrants is $1.06 per share and they are exercisable at any time
between August 7, 1997 and August 7, 2001.
As of December 31, 1996, there were warrants outstanding to purchase 917,561
shares of common stock.
STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("FAS 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation is recognized.
In 1988, the Company adopted the 1988 Stock Option Plan (the "Plan") under
which employees, directors and consultants may be granted incentive or
non-statutory stock options. Under the Plan, incentive stock options must be
granted at an exercise price of not less than the fair market value of the
common stock at the date of grant, except that options granted to shareholders
owning greater than 10 percent of the total voting power of all classes of stock
of the Company must have an exercise price of not less than 110 percent of the
fair market value at the date of grant. Non-statutory options must be at least
85 percent of fair market value at the date of grant. Options granted generally
provide that 25 percent of the shares subject thereto become exercisable one
year after the date of grant and 1/36 of the remaining shares subject to the
option become exercisable each month thereafter. The Plan expires in 1998.
38
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996--(Continued)
The following table summarizes the Company's stock option activity and
related information for the three years ended December 31, 1996:
OUTSTANDING OPTIONS
--------------------------------------------
SHARES
AVAILABLE SHARE
FOR GRANT SHARES PRICE
------------- ------------- ---------------
Balance, December 31, 1993 ...... 415,350 771,900 $0.75 - $8.50
Shares reserved ................. 440,000 -- --
Granted ......................... (1,168,214) 1,168,214 $2.00
Exercised ....................... -- (189,561) $0.75 - $5.63
Canceled ........................ 582,339 (582,339) $1.25 - $8.50
---------- ---------- -------------
Balance, December 31, 1994 ...... 269,475 1,168,214 $0.75 - $2.00
Shares reserved ................. 1,550,000 -- --
Granted ......................... (1,633,331) 1,633,331 $0.97 - $2.50
Exercised ....................... -- -- --
Canceled ........................ 1,497,381 (1,497,381) $1.00
---------- ---------- -------------
Balance, December 31, 1995 ...... 1,683,525 1,304,164 $0.75 - $2.50
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*
========== ========== =============
- --------------------
* Represents the weighted average exercise price for the applicable options.
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%
39
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996--(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.
40
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996--(Continued)
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.
41
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996--(Continued)
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<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>
42
<PAGE>
INCORPORATION OF DOCUMEMTS BY REFERENCE
The following documents heretofore filed by Sunrise with the Commission
pursuant to the Exchange Act (File No. 1-10428) are hereby incorporated by
reference: (a) Sunrise's Annual Report on Form 10-K for the year ended December
31, 1996, and (b) all other reports filed by Sunrise pursuant to Section 13(a)
or 15(d) of the Exchange Act since December 31, 1996.
By order of the Board of Directors
David W. Light
Chairman of the Board and
Chief Executive Officer
43
