SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
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.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
|X| 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: not
applicable
(2) Aggregate number of securities to which transactions applies: not
applicable
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:* Based on $7,750,000, the maximum
aggregate amount of cash and other property expected to be
received by the registrant
(4) Proposed maximum aggregate value of transaction: $7,750,000
(5) Total fee paid: $1,550
| | Fee paid previously with preliminary materials.
|X| 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: $3,548.09
(2) Form, Schedule or Registration Statement No.: Form S-4 (File No.
333-19269)
(3) Filing Party: Sunrise Technologies International, Inc.
(4) Date Filed: January 6, 1997
- ---------------
* Set forth the amount on which the filing fee is calculated and state how it
was determined.
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
46257 FREMONT BOULEVARD
FREMONT, CALIFORNIA 94538
, 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 March , 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 increase the number
of authorized shares of Sunrise Stock.
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.
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
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
46257 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 ,
March , 1997 at 10:00 a.m., local time, at , located at .
At the Special Meeting, you will be asked to consider and vote upon two
proposals to sell substantially all of the assets of Sunrise relating to its
dental business (the "Dental Sale"). You also will be asked to approve an
increase in 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 approve the Dental Sale to another purchaser on terms substantially
similar to those contained in the Lares Letter of Intent.
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.
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.
The Proposals are more fully described in the accompanying Proxy Statement.
<PAGE>
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.
<PAGE>
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 ,
March , 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.
At the Special Meeting, holders of 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 Business") to Lares
Research, a privately-held company located in Chico, California ("Lares"),
substantially on the terms contained in the Lares Letter of Intent (defined
herein), (2) to approve the Dental Sale to another purchaser on terms
substantially similar to those contained in the Lares Letter of Intent, and (3)
to amend Sunrise's Certificate of Incorporation (the "Sunrise Certificate") to
increase the number of shares of Sunrise Stock authorized to be issued from
40,000,000 to 75,000,000.
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. 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.
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.
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.
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<PAGE>
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 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.
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, under the caption "Risk Factors" and elsewhere. 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.
PROPOSALS 1 AND 2
THE DENTAL SALE
The Company proposes to sell its Dental Business, even though the Dental
Business is the predominent source of the Company's current revenue. Management
believes that, in light of the Company's limited resources, it is in the
stockholders' best interests to concentrate such resources on the Company's
ophthalmic business. Accordingly, management recommends selling the Dental
Business to raise cash for clinical studies, operations of the ophthalmic
business and other general business expenses.
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.
Through the end of 1991, Sunrise 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 has since been terminated, and the Company has been marketing its dental
laser systems directly. In 1990, Sunrise received market clearance
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<PAGE>
from the United States Food and Drug Administration ("FDA") to sell the Sunrise
dLase System in the United States for soft tissue applications; however, it has
not received FDA market clearance for the Sunrise dLase System for hard tissue
applications.
In October 1988, Sunrise filed a Pre-Market Approval application (a "PMA")
with the FDA for treatment of precarious lesions with the Sunrise dLase System.
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 SunLase 800 System is a portable laser system designed to be used in
dentistry for hard tissue applications, such as treatment of dental caries
(cavities) and precarious dental lesions. The SunLase 800 System is also used
for soft tissue cutting procedures in the oral cavity. Sunrise introduced the
SunLase 800 System for sales in international markets during the third quarter
of 1992.
In March 1993, Sunrise introduced in the United States market two dental
laser systems for soft tissue applications: the SunLase 400 System, a four watt
system and the SunLase Master, an eight watt system.
In 1993, pursuant to a joint development and manufacturing agreement with
Danville Engineering, Sunrise commenced development of the MicroPrep cavity
preparation system (the "Sunrise MicroPrep System"), an air abrasion system used
to prepare a cavity for restorative material. The Sunrise MicroPrep System
combines the technology developed by Danville Engineering with the electronics,
system engineering and manufacturing skills of Sunrise. Sunrise began
distribution of the system in the second quarter of 1994. In the United States,
the Sunrise MicroPrep System is marketed through distributors and independent
representatives. Outside the United States, the Sunrise MicroPrep System is
marketed through exclusive distributors on a country-by-country basis. In
October 1995, Sunrise introduced the Associate cavity preparation system, a
table-top version of the Sunrise MicroPrep System.
The vast predominance of the Company's revenues are derived from sales of its
dental laser products. In the first nine months of 1996, sales of the Sunrise
MicroPrep System alone accounted for approximately 60% of the Company's
revenues. If the proposed Dental Sale is consummated, all or a portion of the
purchase price will be paid in cash which the Company can use to fund its
ophthalmic activities; however, by selling the Dental Business, the Company will
lose a significant source of continued revenue.
PROPOSED DENTAL SALE TO LARES
On November 18, 1996, Sunrise entered into a non-binding letter of intent
(the "Lares Letter of Intent") with Lares Research, providing for the sale of
the Dental Business to Lares 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 outstanding
at the time of closing. The warrants must be redeemed for $750,000 if Lares has
not effected an initial public offering of its common stock within five years
after the closing. The parties expect to enter into a definitive agreement in
February 1997. If the transaction closes, Sunrise will pay to ADT a transfer fee
of approximately $350,000. ADT has licensed Sunrise and its successors to use
certain dental patents, subject to the payment of such transfer fee.
Pursuant to the Dental Sale to Lares, the Company would transfer to Lares all
of the Dental Business, except for cash and accounts receivable (book value at
September 30, 1996 of approximately $2,426,000). All liabilities of the Dental
Business would be retained by the Company, except for certain obligations
relating to royalties and a supply contract.
The Dental Sale to Lares is subject to several conditions, including the
successful completion by Lares of a debt or equity financing to cover the
$5,000,000 payment at closing. Lares has been a privately
3
<PAGE>
held, family-owned business for over 40 years. There can be no assurance that
Lares will be able to attract private capital for such financing. If Lares is
unsuccessful, the transaction will be abandoned.
ALTERNATIVE PROPOSED DENTAL SALE
In the event the Dental Sale to Lares is not consummated, the Company will
seek to sell the Dental Business to another purchaser on substantially similar
terms as those contained in the Lares Letter of Intent. Although the Company
does not have another definitive transaction to present to the stockholders at
this time, management is concerned about the time and expense that would be
involved in soliciting stockholder approval for an alternative Dental Sale, in
the event the Dental Sale to Lares is not consummated.
The Company is seeking stockholder approval for the Dental Sale on the
following conditions: (a) the Dental Sale is consummated on or prior to December
31, 1997, and (b) aggregate cash proceeds to Sunrise are not less than
$5,000,000.
Approval of each of the Dental Sales (i) to Lares pursuant to the Lares
Letter of Intent or (ii) to another purchaser on substantially similar terms
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 AND A VOTE
FOR THE DENTAL SALE TO ANOTHER PURCHASER ON SUBSTANTIALLY
SIMILAR TERMS AS THOSE CONTAINED IN THE LARES LETTER OF
INTENT, IN THE EVENT THE DENTAL SALE IS NOT CONSUMMATED WITH
LARES.
4
<PAGE>
SELECTED FINANCIAL INFORMATION
The statement of operations data set forth below with respect to the fiscal
years ended December 31, 1993, 1994 and 1995 and the balance sheet data at
December 31, 1994 and 1995 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, 1991 and 1992 and the balance sheet data at December 31, 1991, 1992 and 1993
are derived from audited financial statements not included in this Proxy
Statement. The statement of operations data for the nine months ended September
30, 1995 and 1996 and the balance sheet data at September 30, 1995 and 1996 are
derived from unaudited financial statements. The unaudited financial statements
have been prepared on the same basis as the audited financial statements and, in
the opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such periods. The results of operations for the nine months ended
September 30, 1996 are not necessarily indicative of results to be expected for
the full fiscal year.
The Company's independent auditors have included an explanatory paragraph in
their report covering the Company's financial statements for the year ended
December 31, 1995, which paragraph emphasizes substantial doubt as 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.
<TABLE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
--------- ---------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF OPERATIONS DATA:
Net sales ............................... $20,337 $ 8,550 $11,860 $ 7,578 $ 5,294 $ 3,680 $ 4,327
Gross profit ............................ 11,333 3,604 5,009 1,340 1,637 1,269 1,243
Purchase of in-process technology ...... -- 8,466 -- -- -- -- --
Income (loss) from operations ........... 6,038 (13,337) (6,452) (6,917) (4,187) (2,821) (4,062)
Income tax expense (benefit) ............ 2,176 (1,612) 232 -- -- -- --
Net income (loss) ....................... 3,986 (11,640) (6,624) (6,910) (4,130) (2,815) (4,019)
Net income (loss) per share(1) .......... 0.52 (1.44) (0.74) (0.68) (0.28) (0.24) (0.16)
Weighted average shares outstanding(1) . 7,693 8,111 8,955 10,129 14,935 11,487 25,898
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Working capital ............... $ 8,545 $ 7,877 $ 1,965 $ 1,101 $ 4,541 $ 5,843 $ 3,034
Total assets .................. 12,596 10,339 5,511 3,822 6,689 8,209 4,983
Long-term debt ................ 98 79 18 -- -- -- --
Stockholders' equity .......... 9,608 9,038 2,708 1,357 4,745 6,060 3,221
<FN>
(1) See Note 1 of Notes to Consolidated Financial Statements.
</FN>
</TABLE>
5
<PAGE>
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 disposal of the Dental Business and Net Assets on
a retroactive basis excluding the gain (if any) from the sale. 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, 1995 0.28 0.12
Nine months ended September 30, 1996 0.16 0.08
BOOK VALUE PER SHARE AT
December 31, 1995 .................... 0.19 --
September 30, 1996 ................... 0.12 0.12
1. Sunrise's historical net loss per share represents amounts for the year
ended December 31, 1995 and the nine months ended September 30, 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
(14,935,000 shares at December 31, 1995; 25,898,000 shares at September 30,
1996).
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UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statements represent
the proposal that Sunrise may dispose of the Dental Business.
Sunrise may dispose of its dental business and assets used in the operation
thereof ("Dental Assets"). Sunrise has accepted a non-binding letter of intent
to sell its Dental Business to an unrelated third party. If the transaction is
completed, Sunrise expects to receive consideration of $5,000,000 in cash,
$2,000,000 of non-interest bearing promissory notes receivable in six equal
annual installments beginning December 31, 1997 and warrants. This transaction
is subject to certain conditions including the acquirer's ability to complete a
private placement in an amount not less than $5 million.
The unaudited condensed financial information ("Sunrise Net of Dental Assets
to be Sold") gives effect to the disposal of the Dental Business as if the
transaction had occurred on January 1, 1995 for the purposes of the unaudited
statements of operations and as of September 30, 1996 for the purposes of the
unaudited balance sheet.
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.
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<PAGE>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(IN THOUSANDS)
SUNRISE SUNRISE NET
TECHNOLOGIES SUNRISE OF DENTAL
INTERNATIONAL, DENTAL ASSETS ASSETS TO
INC. TO BE SOLD BE SOLD
-------------- --------------- -------------
(a) (b) (c)
ASSETS
Cash and cash equivalents ...... $ 1,443 $ 2,426 $ 3,869
Accounts receivable ............. 1,014 -- 1,014
Inventories ..................... 2,031 (1,988) 43
Prepaid expenses ................ 308 (270) 38
-------------- --------------- -------------
Total current assets ............ 4,796 168 4,964
Net property, plant & equipment 187 (168) 19
Other non-current assets ........ -- -- --
Intangible assets ............... -- -- --
-------------- --------------- -------------
Total non-current assets ........ 187 (168) 19
-------------- --------------- -------------
Total assets .................... $ 4,983 $ -- $ 4,983
============== =============== =============
- -----------------
(a) Represents historical Sunrise financial statements, including Dental Assets
to be sold.
(b) Represents historical Sunrise Dental Assets to be sold and consideration
received therefrom exclusive of any gain which may be realized on sale.
(c) Represents historical Sunrise, net of Dental Assets to be sold and
consideration received therefrom exclusive of any gain which may be
realized on sale.
See accompanying note to the Pro Forma Condensed Financial Statements
8
<PAGE>
<TABLE>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(IN THOUSANDS)
<CAPTION>
SUNRISE SUNRISE NET
TECHNOLOGIES SUNRISE OF DENTAL
INTERNATIONAL, DENTAL ASSETS ASSETS TO
INC. TO BE SOLD BE SOLD
------------------ ----------------- ---------------
(a) (b) (c)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable ................................... $ -- $ -- $ --
Notes payable to stockholders, current maturities -- -- --
Accounts payable ................................ 770 -- 770
Accrued interest on convertible debt ............ -- -- --
Accrued payroll and related expenses ............ 306 -- 306
Accrued warranty ................................ 324 -- 324
Other accrued expenses .......................... 362 -- 362
-------- -------- --------
Total current liabilities ....................... 1,762 -- 1,762
Term notes payable .............................. -- -- --
Long-term deferred income tax ................... -- -- --
-------- -------- --------
Total non-current liabilities ................... -- -- --
-------- -------- --------
Convertible preferred stock ..................... -- -- --
Common stock .................................... 28 -- 28
Additional paid-in capital ...................... 31,688 -- 31,688
Less treasury stock at cost ..................... -- -- --
Accumulated deficit ............................. (28,495) -- (28,495)
-------- -------- --------
Total stockholders' equity ...................... 3,221 -- 3,221
-------- -------- --------
Total liabilities and stockholders' equity ...... $ 4,983 $-- $ 4,983
======== ======== ========
<FN>
- --------------
(a) Represents historical Sunrise financial statements, including Dental Assets
to be sold.
(b) Represents historical Sunrise Dental Assets to be sold and consideration
received therefrom exclusive of any gain which may be realized on sale.
(c) Represents historical Sunrise, net of Dental Assets to be sold and
consideration received therefrom exclusive of any gain which may be
realized on sale.
See accompanying note to the Pro Forma Condensed Financial Statements
</FN>
</TABLE>
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UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SUNRISE LESS
TECHNOLOGIES SUNRISE SUNRISE
INTERNATIONAL, DENTAL OPHTHALMIC
INC. BUSINESS BUSINESS
-------------- ---------- ------------
(a) (b) (c)
Net Revenues ......................... $ 4,327 $ 4,192 $ 135
Cost of revenues ..................... 3,084 3,039 45
-------------- ---------- ------------
Gross profit ......................... 1,243 1,153 90
Other costs and expenses
Engineering & development .......... 494 379 115
Sales, marketing & regulatory ...... 2,938 2,021 917
General and administrative ......... 1,873 811 1,062
-------------- ---------- ------------
Total other costs and expenses ....... 5,305 3,211 2,094
-------------- ---------- ------------
Net income/(loss) from operations .... (4,062) (2,058) (2,004)
-------------- ---------- ------------
Net interest income/(expense) ........ 43 30 13
-------------- ---------- ------------
Net income/(loss) before taxes ....... (4,019) (2,028) (1,991)
Income tax expense ................... -- -- --
-------------- ---------- ------------
Net income/(loss) .................... $(4,019) $(2,028) $(1,991)
============== ========== ============
Net loss per share ................... $ (0.16) $ (0.08)
============== ============
Shares used in calculation of
net loss per share ................ 25,898 25,898
============== ============
- ---------------
(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 sale.
(c) Represents historical Sunrise, net of Dental Business to be sold, exclusive
of any gain which may be realized on sale.
See accompanying note to the Pro Forma Condensed Financial Statements
10
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SUNRISE LESS
TECHNOLOGIES SUNRISE SUNRISE
INTERNATIONAL, DENTAL OPHTHALMIC
INC. BUSINESS BUSINESS
-------------- ---------- ------------
(a) (b) (c)
Net Revenues ......................... $ 5,294 $ 4,017 $ 1,277
Cost of revenues ..................... 3,657 2,848 809
-------------- ---------- ------------
Gross profit ......................... 1,637 1,169 468
Other costs and expenses
Engineering & development .......... 503 299 204
Sales, marketing & regulatory ...... 2,992 2,225 767
General and administrative ......... 2,329 1,073 1,256
-------------- ---------- ------------
Total other costs and expenses ....... 5,824 3,597 2,227
-------------- ---------- ------------
Net income/(loss) from operations .... (4,187) (2,428) (1,759)
-------------- ---------- ------------
Net interest income/(expense) ........ 57 57 --
-------------- ---------- ------------
Net income/(loss) before taxes ....... (4,130) (2,371) (1,759)
Income tax expense ................... -- -- --
-------------- ---------- ------------
Net income/(loss) .................... $(4,130) $(2,371) $(1,759)
============== ========== ============
Net loss per share ................... $ (0.28) $ (0.12)
============== ============
Shares used in calculation of
net loss per share ................ 14,935 14,935
============== ============
- ---------------
(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 sale.
(c) Represents historical Sunrise, net of Dental Business to be sold, exclusive
of any gain which may be realized on sale.
See accompanying note to the Pro Forma Condensed Financial Statements
11
<PAGE>
NOTE TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND THE YEAR ENDED DECEMBER 31, 1995
The pro forma condensed financial statements gives effect to the following pro
forma adjustments:
On November 18, 1996 the Company signed a non-binding letter of intent to
sell its Dental Business and related assets to an unrelated party. Consideration
is anticipated to be $5 million in cash, $2 million of non-interest bearing
promissory notes receivable in six equal annual installments beginning December
31, 1997 and warrants to purchase 2.5% of the common stock of the purchaser.
Completion of this transaction is subject to certain conditions including the
acquirer's ability to complete a private placement in an amount not less than $5
million. The unaudited pro forma condensed balance sheet column Sunrise Net of
Dental Assets to be Sold reflects the elimination of the assets of the Dental
Business to be sold as though the transaction occurred at the balance sheet
date.
The unaudited pro forma condensed balance sheet column Sunrise Net of Dental
Assets to be Sold reflects the proceeds of the sale equal to the net assets to
be disposed. No profit, if any ultimately arises, has been reflected in the
column Sunrise Net of Dental Assets to be Sold due to (a) the significant
conditions and uncertainties associated with this proposed transaction and (b)
the nonrecurring nature of this transaction.
12
<PAGE>
PROPOSAL 3
AMENDMENT 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 historically has issued Sunrise Stock in order to raise working
capital to fund its activities. In 1995, Sunrise effected two (2) private
placements of an aggregate of 15,100,000 shares of Sunrise Stock. Until FDA
approval is granted for commercial distribution of the Sunrise Corneal Shaping
System, even if the Dental Sale 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. Accordingly,
management of Sunrise considers it desirable to increase the authorized Sunrise
Stock. 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 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.
PRICE RANGE OF SUNRISE STOCK
As of December 31, 1996, there were 715 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 LOW
----- -----
1994
First Quarter ............... $6.50 $4.25
Second Quarter .............. $6.25 $4.25
Third Quarter ............... $4.50 $1.63
Fourth Quarter .............. $3.00 $1.13
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 ............... $2.94 $1.13
Second Quarter .............. $2.31 $1.13
Third Quarter ............... $2.00 $0.88
Fourth Quarter .............. $2.13 $0.81
1997
First Quarter (to February
, 1997) ................. $ $
On February , 1997, the closing price of Sunrise Stock as reported on
the OTC Bulletin Board was $ 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.
DIVIDEND POLICY
In the past three years, Sunrise has not declared or paid any cash dividend
on the Sunrise Stock. Sunrise currently intends to retain any and all future
earnings to finance its business. Accordingly, Sunrise does not anticipate
paying cash or other dividends on the Sunrise Stock in the foreseeable future.
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<PAGE>
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Sunrise Stock as
of January 31, 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) ...................................... 431,666 1.5
C. Russell Trenary, III(3) ............................. 100,000 *
Joseph W. Shaffer ...................................... 815,913 2.9
Joseph D. Koenig(4) .................................... 13,334 *
Ronald A. Slocum(5) .................................... 23,334 *
All executive officers and directors as a
group (5 persons)(2)(3)(4)(5) .................... 1,446,747 5.2
- -----------------
* Less than one percent
(1) Based on information provided by each of the identified officers and
directors.
(2) Includes 391,666 shares that Mr. Light does not currently own, but which he
has the right to acquire within 60 days of January 31, 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 January 31, 1997, pursuant to
Options.
(4) Consists of shares that Mr. Koenig does not currently own, but which he has
the right to acquire within 60 days of January 31, 1997, pursuant to
Options.
(5) Includes 13,334 shares that Mr. Slocum does not currently own, but which he
has the right to acquire within 60 days of January 31, 1997.
ADDITIONAL INFORMATION REGARDING THE COMPANY
The Company develops, manufactures and markets laser and other systems for
applications in opthalmology and dentistry. For a discussion of the Company's
dental business, see "The Asset Sale--The Dental Business."
The Ophthalmic Business
The Company holds certain patents and patent applications covering a laser
thermal keratoplasty ("LTK") technique for reshaping the cornea to correct
certain refractive disorders of the eye. In 1992, Sunrise acquired Laser Biotech
Inc., a California corporation ("Laser Biotech"), and began clinical trials with
a prototype of the Company's patented laser corneal shaping product (the
"Sunrise Corneal Shaping System") pursuant to an Investigational Device
Exemption ("IDE") from the FDA. In January 1996, Sunrise decided to have Laser
Biotech independently pursue the research and development and governmental
approvals required in order to commercialize the Sunrise Corneal Shaping System
in the United States. As a result, certain Sunrise personnel, and other
resources associated with the LTK program, were transferred to Laser Biotech.
The Sunrise Corneal Shaping System alters the shape of the cornea to correct
certain refractive disorders such as hyperopia (farsightedness) and presbyopia
(loss of variable focusing over distances). The Sunrise Corneal Shaping System
employs a holmium laser to shrink selectively the collagen in the cornea,
changing the curvature of the cornea and thereby changing the refractive power
of the eye, without removing corneal tissue. The Sunrise Corneal Shaping System
was introduced outside the United States in 1993 and is currently sold to
ophthalmologists in over 10 countries for use in treatment of hyperopia. The
Sunrise Corneal Shaping System has been found to be most effective for the
treatment of patients with low hyperopia, in the +1 to +2 diopter treatment
groups, which covers the majority of those requiring treatment for hyperopia.
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<PAGE>
The Sunrise Corneal Shaping System currently is undergoing premarket clinical
studies in the United States as required by the FDA. Approval from the FDA is
required before the Sunrise Corneal Shaping System may be sold commercially in
the United States. There can be no assurance FDA approval will be obtained. In
any event, Sunrise does not expect to receive FDA approval prior to 1999.
The IDE issued to Sunrise by the FDA permits Sunrise to generate data
necessary to support a PMA application for the use and marketing of the Sunrise
Corneal Shaping System. The FDA has advised Sunrise that the initial Phase II(a)
clinical trials conducted by Sunrise did not produce enough statistically
significant data to enable the FDA to determine that the treatment algorithms
employed in such clinical trials were predictable or effective for the treatment
of hyperopia. On September 5, 1996, the FDA authorized Sunrise to treat an
additional 100 subjects at five United States locations in a continuation of
Phase II(a) clinical trials using a treatment algorithm developed by Sunrise in
the course of the initial Phase II(a) 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.
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.
Ophthalmic Products
Sunrise believes that the Sunrise Corneal Shaping System, which uses the LTK
process, offers several advantages over the use of excimer lasers for treating
hyperopia, including ease of use and decreased invasiveness. In contrast to
radial keratotomy and PRK procedures, there is no surgical trauma or major
inconvenience in the Sunrise Corneal Shaping System.
The Sunrise Corneal Shaping System incorporates a holmium laser source built
into a standard slit-lamp to perform the LTK procedure. A slit-lamp is a
binocular microscope used regularly by ophthalmologists to examine an eye
binocularly under high magnification. The Sunrise Corneal Shaping System
delivers simultaneous laser beams in a symmetrical ring of spots whose diameter
can be varied. This system allows for easy alignment on the patient's eye and
the delivery of a two-second or less exposure for the treatment. To the
knowledge of Sunrise, after use of the system in at least four thousand
treatments, no patient has ever suffered a vision-threatening complication. The
LTK procedure typically is performed on the area of the eye that is outside the
central visual zone, leaving the central cornea untouched.
Two direct competitors of Sunrise have developed LTK devices for the
treatment of hyperopia: Summit and TechnoMed, a German company. Both of these
competitors produce a contact-mode holmium laser system equipped with a
hand-held probe that delivers laser energy to a single spot on the cornea during
each application. The physician must move the probe sequentially from spot to
spot in order to produce treatment patterns. Since laser energy is not delivered
simultaneously and symmetrically to a ring of spots, as it is with the Sunrise
Corneal Shaping System, the cornea is changed asymmetrically during treatment,
which the Company believes may lead to irregular induced astigmatism.
Sunrise has developed two other products for the ophthalmic business. The
first, a holmium laser system designed to perform a filtering procedure for
treatment of glaucoma, the gLase 210 System, was
15
<PAGE>
developed in 1990. The gLase 210 System filtering procedure relieves pressure
inside the eye by making a small hole in the sclera. The design characteristics
and the unique delivery device of the gLase 210 System enable ophthalmologists
to perform the procedure on an outpatient basis. Foreign sales of the gLase 210
System commenced on a limited basis during the second quarter of 1990. Domestic
sales began in December 1990 upon receipt by Sunrise of FDA clearance to
commence commercial sale of the product in the United States for the filtering
procedure. The gLase 210 System currently is marketed through dealers in the
United States and distributors abroad. Sunrise has also obtained an IDE for a
second laser product used in the treatment of glaucoma. The IDE permits
treatment of up to six persons, only one of whom has been treated to date.
On December 27, 1996, Sunrise and EyeSys Technologies, Inc., a corneal
topography company, entered into an Agreement and Plan of Merger, which was
terminated in January 1997. As a result, Sunrise will expense in the fourth
quarter of 1996 substantial costs incurred in connection with the negotiation of
such agreement and preparation for the transactions contemplated thereby.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
FOR THE YEAR ENDED DECEMBER 31, 1995
OVERVIEW
The Company has incurred substantial losses in the past three years which
have seriously depleted its working capital. Sales of its existing dental
products at current levels will not be sufficient to sustain both the existing
business and the continued development and regulatory licensing of additional
products including the LTK system. Sunrise has been able to raise additional
working capital for all aspects of its business through the private placement of
its common stock. These private placements raised $13,051,000 in 1994 and 1995
in new equity for Sunrise. Sunrise is seeking to raise additional working
capital for all aspects of its business. If Sunrise is unable to obtain
additional working capital, it may be forced to substantially curtail its
activities and could, under certain circumstances, be forced to eliminate or
suspend operations.
Since its inception, Sunrise has been engaged in the design, development,
manufacture and sale of laser systems for applications in medicine and
dentistry. Sunrise's first commercial product, the Sunrise dLase System, was
developed pursuant to a series of development, manufacturing and marketing
agreements with American Dental Technologies, Inc. Pursuant to its agreements
with ADT, Sunrise had exclusive manufacturing rights to this product and ADT had
exclusive distribution rights and owns the technology rights including related
patent rights. ADT commenced foreign sales of the Sunrise dLase System in
December 1988 and, following clearance from the FDA to market the product for
soft tissue applications, commenced United States distribution at the end of the
second quarter of 1990. Sunrise filed a PMA with the FDA for treatment of
precarious lesions in October 1988, which was denied in August 1990, and
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(o) 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.
Commencing in late 1990, Sunrise completed development of two new holmium
laser systems, the gLase 210 and sLase 210, and obtained United States and
certain foreign regulatory approvals for filtering and thermal sclerostomy
procedures for treatment of glaucoma, percutaneous disc compression procedures
for minimally invasive back surgery, as well as general and orthopedic surgical
procedures.
In the first half of 1992, Sunrise completed the acquisitions of in-process
technology from Laser Biotech and Emmetropix Corporation ("Emmetropix"), which
together had patents, patent applications and other proprietary technology
relating to laser thermal keratoplasty, which Sunrise believes will be useful in
the treatment of myopia, hyperopia, and astigmatism. Phase I clinical trials
using a prototype
16
<PAGE>
system commenced in mid-1992 pursuant to an Investigational Device Exemption
from the FDA. The results of Phase I were filed with the FDA in the summer of
1993 and permission was granted by the FDA to commence Phase IIa in the fourth
quarter of 1993. Sunrise completed Phase IIa clinical trials of the LTK system
for hyperopia in the United States in November 1994. In February 1995, Sunrise
filed its request with the FDA to commence Phase IIb clinical trials. In a March
1995 letter, the FDA cited various deficiencies in Sunrise's February letter and
requested additional information. In December 1995, Sunrise submitted the
requested additional information. In January 1996, the FDA responded to
Sunrise's submittal by requesting current follow-up data on all Phase IIa
patients. In March 1996, Sunrise provided the current follow-up data on all
Phase IIa patients and received approval to expand its Phase II study in April
1996. Sunrise does not expect it will receive FDA approval of the LTK system for
several years.
In April 1993 Sunrise entered into an agreement with Danville Engineering to
develop the MicroPrep, an air abrasive unit for cavity preparation by dentists.
A 510(k) was filed with the FDA in July 1993. Sunrise received FDA clearance to
commence commercial sale of the product in the United States on May 3, 1994.
Sunrise expects some of its products will require filing of a 510(k)
application or a PMA with the FDA prior to marketing in the United States. In
the past, Sunrise has encountered significant delays with respect to its PMA
filing with the FDA for hard tissue dental applications and has been required to
perform additional clinical studies to support such application There can be no
assurance Sunrise's applications to the FDA, when filed, will ultimately receive
marketing approval or will be approved in a timely manner, the FDA will not
request additional information or, where a 510(k) application is filed, the FDA
will not require Sunrise to file a PMA for such products.
Through 1991, revenues increased dramatically, and a substantial portion of
Sunrise's revenues were derived from sales of the dLase 300 to ADT, accounting
for approximately 90% and 79% of revenues in 1990 and 1991, respectively.
Furthermore, since all dental products were marketed through ADT, Sunrise did
not have significant sales and marketing expenses until 1991, when Sunrise began
marketing the gLase 210. In early 1992, ADT withdrew earlier forecasts and
advised Sunrise that orders for 1992 would be significantly reduced. Sunrise
terminated its development and domestic distribution agreements with ADT, and
ADT filed for arbitration regarding termination of the agreements as well as
ownership of several new lasers developed by Sunrise in late 1991 and 1992. In
the third quarter of 1992, Sunrise commenced sale of the SunLase 800, an
eight-watt dental laser system, in Europe through established dental laser
distributors. The arbitration was settled in February 1993, and, pursuant to the
terms of settlement, both parties have equal rights to the eight-watt system
developed by Sunrise. Sunrise was free to develop, manufacture and market dental
lasers for its own account and has obtained royalty-bearing licenses under ADT's
patents for this purpose. Sunrise also relinquished its rights to exclusively
manufacture the dLase 300 for ADT or develop or manufacture future dental
products for ADT. Sunrise currently markets the SunLase 800 and SunLase 400, a
four watt dental laser system, overseas through established dental distributors.
In late February 1993, Sunrise introduced the SunLase and SunLase Master, a
four-watt and eight-watt system, respectively, for sale in the United States.
On August 31, 1994, Sunrise sold certain assets associated with its surgical
laser business to David Hennings, an individual, in exchange for 275,000 shares
of Sunrise's common stock held by Mr. Hennings and a note receivable of $48,000.
Sunrise also granted royalty-bearing licenses to certain patents owned by
Sunrise. Up until the time of the transaction, Mr. Hennings was an employee and
officer of Sunrise. Subsequent to the transaction, Mr. Hennings resigned his
position on Sunrise's board of directors. The loss in disposition of these
assets, which was facilitated through the formation of a new subsidiary, was not
significant.
As a result of termination of the ADT business relationship and competition
in the dental industry, sales of Sunrise's dental laser products decreased from
a high of $20 million in 1991, to less than $4 million in 1994. Revenues from
the sale of dental laser products were expected to stabilize or slightly
increase in 1995. However, the termination of the representation of the product
line by Sunrise's German distributor adversely affected 1995 revenues. Sales of
the MicroPrep, a non-laser dental product, which commenced in mid-1994, (see
"Business") are becoming a more important part of Sunrise's total revenues.
Sunrise
17
<PAGE>
does not expect any other products to contribute significantly to sales in 1996,
and its results are highly dependent on the sale of these products. Significant
revenues from sales of the LTK system cannot be anticipated until and unless
U.S. regulatory approvals are obtained, a process which is expected to take no
less than three additional years.
The following table sets forth certain operations data as a percentage of net
revenue for the periods indicated.
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
------- ------- -------
Net Revenues ................... 100% 100% 100%
Cost of revenues ............... 69 82 58
---- ---- ----
Gross profits .................. 31 18 42
Other costs and expenses:
Engineering and development ... 9 20 18
Sales, marketing and regulatory 57 50 48
General and Administration .... 44 39 30
---- ---- ----
Total other costs and expenses . 110 109 96
---- ---- ----
Loss from operations ........... (79) (91) (54)
Interest income, net of expense 1 -- 0
---- ---- ----
Loss before taxes on income .... (78) (91) (54)
Income tax expense (benefit) ... -- -- 2
---- ---- ----
Net Loss ....................... (78)% (91)% (56)%
==== ==== ====
REVENUES
1993 revenues of $11,860,000 reflect a full year of sales activity in the
international marketplace for the SunLase 800 and introduction of the LTK
product internationally in December 1993. Revenues decreased to $7,578,000 in
1994, approximately a 36% reduction from the 1993 levels. All product lines
suffered volume decreases in 1994 when compared to 1993 with the exception of
the newly introduced MicroPrep. Sunrise exited the surgical products market upon
the sale of its surgical laser operation business to David R. Hennings, a
co-founder and director of Sunrise. The sale was consummated in the third
quarter of 1994. The MicroPrep, an air abrasive cavity preparation system,
showed strong initial customer acceptance in both the domestic and international
marketplaces following its June 1994 introduction. Revenues decreased to
$5,294,000 in 1995, approximately a 30% reduction from the 1994 levels.
Substantially all of this decrease is attributed to the dental laser product
line, which experienced a revenue reduction in excess of 50%. The decrease is
principally related to the German market, where Sunrise's exclusive distributor
discontinued its representation of the product line. Sunrise's MicroPrep and
Corneal Shaping System product lines maintained 1994 volume levels. Another
factor influencing Sunrise's drop in revenue was its decision in July 1995 to
rely less upon its domestic distributors and develop its own direct sales force.
Although this strategic change should provide Sunrise with better control over
its future sales, the short term impact (during the last half of 1995) adversely
affected sales because of the training costs and learning curve for the new
sales organization.
In 1993, approximately 95% of Sunrise's dental laser sales were to
international customers with very little market penetration in the United
States. Although domestic laser sales increased in 1994, Sunrise experienced a
48% drop in total worldwide dental laser sales. Sunrise's marketing and sales
efforts indicate dentists have been confused by the variety of lasers offered
for dental applications and the market for dental lasers may not expand
significantly until FDA approval for hard tissue applications has been obtained
(see "Competition"-"Dentistry"). Sunrise believes university based educational
programs coupled with clinical support may allow the dental laser market to
become viable at some future date. This marketing program will require
significant effort and expenses in order to establish a market presence in the
United States.
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<PAGE>
For those international sales not made in United States dollars, Sunrise,
when appropriate, engages in foreign currency management to minimize the impact
of foreign exchange fluctuations.
GROSS PROFIT
Gross profit margins were 42%, 18% and 31% in 1993, 1994 and 1995
respectively. The major factors contributing to the significant reduction in
gross profit margins in 1994 from the 1993 levels include lower revenues of
Sunrise's high margin laser products, underutilization of manufacturing capacity
due to decreased product shipments and increased product costs associated with
the MicroPrep product line. The 1995 improvement in gross profit margin, when
compared to 1994, is attributed to introduction of the cost reduced MicroPrep
Director, price increases for dental lasers and the Corneal Shaping System (CSS)
being a greater percentage of total Company revenues. The CSS product line has a
higher gross profit margin than Sunrise's blended profit margin.
Underutilization of manufacturing capacity continues to adversely affect gross
profit margins.
ENGINEERING AND DEVELOPMENT
Engineering and development expenses were $2,170,000, $1,561,000 and $503,000
for the years ended 1993, 1994, and 1995, respectively. Engineering and
development expenses decreased to $503,000 in 1995, approximately a 68%
reduction from the 1994 level. This reduction is principally due to the effect
of the sale of the surgical products line (see "Overview").
SALES, MARKETING AND REGULATORY
Sales, Marketing and Regulatory expenses were $5,686,000, $3,763,000, and
$2,992,000 for the years ended 1993, 1994, and 1995 respectively.
Sunrise currently markets its ophthalmic lasers and dental products through a
direct sales organization working with dealers, distributors and manufacturer's
representatives in the United States. Distribution for all products
internationally is handled through distributors.
Sunrise had five direct sales employees at the end of 1993 and 1994, and
thirteen at the end of 1995. During the first quarter of 1993, Sunrise began to
aggressively pursue relationships with foreign distributors to market the
SunLase dental laser systems, resulting in increased sales and marketing
expenses. Increased spending for the United States market commenced during the
second quarter of 1993 with the development of brochures, attendance at trade
shows and discussions with United States distributors. 1994 sales, marketing,
and regulatory expenses decreased 34% from the 1993 levels. This reduction is
due primarily to reduced sales commissions resulting from a drop in revenues and
curtailment of advertising and promotional expenditures. Sales, Marketing and
Regulatory expenses decreased to $2,992,000 in 1995, approximately a 20%
reduction from the 1994 level. This reduction is principally due to lower
international sales and marketing costs, including commissions, as a result of
decreased revenues in Germany.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $3,605,000, $2,933,000 and
$2,329,000 for the years ended 1993, 1994, and 1995 respectively.
Sunrise'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 Sunrise's allowance
for bad debts. Expenses associated with the arbitration of the ADT contract
dispute and continued legal expenses associated with ADT legal actions in
federal and state courts in Michigan and California resulted in substantial
legal fees in all three years. Sunrise implemented a reduction in workforce in
December 1993 which resulted in a charge of approximately $175,000. Sunrise's
expansion of the foreign distribution network resulted in a significant increase
in the 1993 allowance for bad debts as compared with prior periods when
substantially all sales were made to domestic customers. Sunrise anticipates
on-going legal actions with ADT will result in continued high levels of legal
expenses in 1996. The major factors accounting for the decrease in general and
administrative expenses in 1994 from 1993 were lower salaries
19
<PAGE>
and related benefits, reduction in the provision for doubtful accounts and an
increase in currency exchange gains. General and administrative expenses
decreased to $2,329,000 in 1995, approximately a 20% reduction from the 1994
level.
Although legal expenses, both general corporate and litigation, remain at
high levels they are much lower than in 1994 and principally account for the
lower spending level.
INCOME TAXES
In 1993, a provision of $232,000 was made to write off deferred tax assets
which had been recorded in previous years. At December 31, 1995 and 1994, all
deferred tax assets computed in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" have been fully
offset by a valuation allowance.
As of December 31, 1995, Sunrise had federal net operating loss
carry-forwards of approximately $18,800,000. The ownership provisions of the
Internal Revenue Code of 1986 would limit utilization of the carry-forwards
should there be a substantial change in Sunrise's ownership.
NET LOSS
Sunrise reported losses of $6,624,000, $6,910,000 and $4,130,000 in 1993,
1994, and 1995 respectively.
The net loss in 1993 was due primarily to increased sales and marketing
expenses associated with Sunrise's efforts to establish relationships with
dental laser distributors in the United States, expenses associated with the
development of MicroPrep, clinical work on the LTK system, sales launch of the
LTK system internationally in late 1993, legal expenses associated with ADT
litigation and the stockholders' class action suit settlement, and an increase
in the reserve for bad debts.
The net loss in 1994 was due principally to a severe drop in ophthalmic laser
sales in both the domestic and international marketplace and a decrease in
foreign sales of dental lasers. Somewhat offsetting these reductions were the
initial sales of the MicroPrep, Sunrise's air abrasive product introduced in
June 1994, 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 Sunrise's need to maintain the basic sales,
marketing, regulatory and corporate infrastructure. Although across-the-board
operating expense reduction totaled $2,433,000 in 1995 when compared to 1994,
the reductions did not offset the low level of sales volume.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995 Sunrise had $3,514,000 in cash and cash equivalents.
Sunrise's operating activities used $4,495,000 in cash during 1995. A
substantial portion of the 1995 loss was funded by the $7.5 million net proceeds
received from the completion of private placements of 15,100,000 shares of
Sunrise's common stock at prices ranging from $0.50 to $0.625 per share in June
and September, 1995.
Working capital amounted to $1,101,000 at December 31, 1994 and increased to
$4,541,000 at December 31, 1995. Working capital, including the proceeds from
the private placement, was used to fund Sunrise's 1995 loss and pay down its
Accounts Payable.
Sunrise's current operations continue to be cash flow negative, further
straining Sunrise's working capital resources. The level of current product
sales is not sufficient to provide enough cash to pursue the dental business and
support ongoing development and regulatory approval of the LTK system. In order
to continue its current level of operations, it will be necessary for Sunrise to
obtain additional working capital resources, whether from debt or equity
sources. If Sunrise is unable to obtain additional working capital resources
from the placement of debt or equity instruments or the sale of some of its
assets, it may be necessary for Sunrise to curtail or suspend operations.
20
<PAGE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
RESULTS OF OPERATIONS
Revenues of $1,767,000 and $4,327,000 for the three- and nine-month periods
ended September 30, 1996 represent 357% and 18% increases, respectively over the
$387,000 and $3,680,000 for the same periods in 1995. MicroPrep, Sunrise's air
abrasion cavity preparation system introduced in June 1994, continues to exhibit
strong customer acceptance and accounted for approximately 60% of Sunrise's
revenues for the three- and nine-month periods ended September 30, 1996.
Gross profit as a percentage of sales was 41% for the three months ended
September 30, 1996. Gross profit for the same period of 1995 was negative 14%
due to the effect of fixed manufacturing costs on a relatively low sales volume.
For the nine-month period ended September 30, 1996, gross profit as a percentage
of sales increased from 34% to 41%. This increase is due to increased absorption
of overheads due to higher sales and production volumes.
Engineering and development expenses increased $30,000 (25%) and $143,000
(41%) to $149,000 and $494,000 for the three- and nine-month periods ended
September 30, 1996, over the $119,000 and $351,000 expense for the same periods
in 1995. This increased effort was directed primarily toward Sunrise's air
abrasion product line with relatively level spending on the advancement of the
LTK system.
General and administrative expenses for the three-month period ended
September 30, 1996 decreased to $668,000 from $734,000 for the same period in
1995. This decrease is due to decreased legal expenses and Sunrise's efforts to
reduce costs. General and administrative expenses for the nine-month period
ended September 30, 1996 increased to $1,873,000 from $1,646,000 in the same
period of 1995. The increase is due to relatively higher legal expenses in
earlier quarters of 1996.
Sales, marketing and regulatory costs increased $409,000 (77%) and $845,000
(40%) to $942,000 and $2,938,000 for the three and nine months ended September
30, 1996, respectively, from the $533,000 and $2,093,000 for the same 1995
periods, due to increased costs relating to the implementation of a direct sales
organization as well as increased marketing and regulatory costs.
FINANCIAL CONDITION
As of September 30, 1996 Sunrise had $1,443,000 in cash and cash equivalents.
Sunrise's operating activities used $4,528,000 in the nine months ended
September 30, 1996 and used $4,495,000 in cash during fiscal 1995. A substantial
portion of the 1995 and 1996 losses were funded by the $7.5 million net proceeds
received from the completion of private placements of 15,100,000 shares of
Sunrise's common stock at prices ranging from $0.50 to $0.625 per share in June
and September 1995. In August 1996, Sunrise closed a private placement of
approximately 2,300,000 shares of its common stock in exchange for approximately
$2,200,000 net proceeds to Sunrise. This financing will be used primarily to
support FDA clinical trials for the Sunrise Corneal Shaping System, ongoing
research and development, and general and administrative costs including costs
associated with possible acquisitions.
Working capital amounted to $4,541,000 at December 31, 1995 and decreased to
$3,034,000 at September 30, 1996. Working capital, including the proceeds from
the private placements, was used to fund Sunrise's 1995 and 1996 losses.
Sunrise's current operations continue to be cash-flow negative, further
straining Sunrise's limited working capital resources. The level of current
product sales is not sufficient to provide enough cash for adequate working
capital to expand the dental business and support ongoing marketing and
regulatory development of the ophthalmic subsidiary. To continue its current
level of operations, it will be necessary for Sunrise to obtain additional
working capital resources from the placement of debt or equity instruments or
the sale of some of its assets or it will be necessary for Sunrise to curtail or
suspend operations.
21
<PAGE>
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
PAGE
--------
<S> <C>
Audited Financial Statements:
Report of Ernst & Young LLP ............................................................. F-2
Consolidated Balance Sheets at December 31, 1995 and 1994 ............................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 ...................................................... F-4
Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1995 ..................................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 ...................................................... F-6
Notes to Consolidated Financial Statements, December 31, 1995 ........................... F-7
Unaudited Financial Statements:
Consolidated Statements of Operations for the three months ended September 30, 1996
and 1995 and for the nine months ended September 30, 1996 and 1995 .................... F-16
Consolidated Balance Sheets at September 30, 1996 and December 31, 1995 ................ F-17
Consolidated Statements of Cash Flows, Increase (decrease) in cash and cash equivalents
for the nine months ended September 30, 1996 and 1995 ................................. F-18
Notes to Consolidated Financial Statements, September 30, 1996 .......................... F-19
Schedule II--Valuation and Qualifying Accounts ............................................ F-21
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
We have audited the accompanying consolidated balance sheet of Sunrise
Technologies International, Inc. as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sunrise Technologies International, Inc. at December 31, 1994 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that Sunrise Technologies International, Inc. will continue as a going
concern. As more fully described in Note 1, the Company has incurred recurring
operating losses. This condition raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the outcome of this uncertainty.
Ernst & Young LLP
Palo Alto, California
March 1, 1996
F-2
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 3,514 $ 559
Accounts receivable, net of allowance of $25,000 and $450,000
in 1995 and 1994 .............................................. 1,048 770
Inventories .................................................... 1,666 1,955
Prepaid expenses ............................................... 257 282
---------- ----------
Total current assets ....................................... 6,485 3,566
Property and equipment, net .................................... 204 256
---------- ----------
Total assets ............................................... $ 6,689 $ 3,822
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 1,097 $ 1,375
Accrued payroll and related expenses ........................... 181 150
Accrued warranty ............................................... 324 324
Current portion of capital lease obligations ................... -- 18
Other accrued expenses ......................................... 342 598
---------- ----------
Total current liabilities .................................. 1,944 2,465
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value, 2,000,000 shares authorized,
none issued or outstanding; Common stock, $0.001 par value,
40,000,000 shares authorized, 25,280,056 and 10,459,286 shares
issued and outstanding at December 31, 1995 and 1994,
respectively ................................................. 25 10
Additional paid-in-capital ...................................... 29,196 22,312
Less treasury stock at cost, 275,000 shares at
December 31, 1994 ............................................ -- (619)
Accumulated deficit ............................................ (24,476) (20,346)
---------- ----------
Total stockholders' equity ................................. 4,745 1,357
---------- ----------
Total liabilities and stockholders' equity ................. $ 6,689 $ 3,822
========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net revenues ..................................... $ 5,294 $ 7,578 $11,860
Cost of revenues ................................. 3,657 6,238 6,851
---------- ---------- ----------
Gross profit ..................................... 1,637 1,340 5,009
Other costs and expenses:
Engineering and development .................... 503 1,561 2,170
Sales, marketing and regulatory ................ 2,992 3,763 5,686
General and administrative ..................... 2,329 2,933 3,605
---------- ---------- ----------
Total other costs and expenses ............... 5,824 8,257 11,461
---------- ---------- ----------
Loss from operations ............................. (4,187) (6,917) (6,452)
Interest income, net of expense .................. 57 7 60
---------- ---------- ----------
Loss before taxes on income ...................... (4,130) (6,910) (6,392)
Income tax expense (benefit) ..................... -- -- 232
---------- ---------- ----------
Net loss ......................................... $(4,130) $(6,910) $(6,624)
========== ========== ==========
Net loss per share ............................... $ (0.28) $ (0.68) $ (0.74)
========== ========== ==========
Shares used in calculation of net loss per share 14,935 10,129 8,955
========== ========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1995
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TOTAL
COMMON STOCK PAID-IN TREASURY (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNTS CAPITAL STOCK DEFICIT) EQUITY
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 .... 8,907,209 $ 15,850 -- -- $ (6,812) $ 9,038
Recapitalization in the
State of Delaware ............ -- (15,841) 15,841 -- -- --
Exercise of warrants and options 101,084 -- 294 -- -- 294
Net loss ....................... -- -- -- (6,624) (6,624)
----------- ----------- ----------- ----------- ----------- -----------
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
----------- ----------- ----------- ----------- ----------- -----------
<FN>
See accompanying notes.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................. $(4,130) $(6,910) $(6,624)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ........................ 102 469 871
Provision for doubtful accounts ...................... 25 -- 845
Changes in assets and liabilities:
Accounts receivable ............................... (303) 777 237
Inventories ....................................... 289 (68) 685
Prepaid taxes and other ........................... 25 (69) 855
Accounts payable .................................. (278) (1,091) 1,789
Accrued payroll and related expenses .............. 31 68 (13)
Accrued warranty .................................. -- 181 38
Other accrued expenses ............................ (256) 571 (241)
---------- ---------- ----------
Total adjustments .................................... (365) 838 5,066
---------- ---------- ----------
Net cash used in operating activities ................ (4,495) (6,072) (1,558)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ................... (50) (22) (384)
Sale of short-term investments ..................... -- -- 958
---------- ---------- ----------
Net cash (used in) provided by
investing activities ............................. (50) (22) 574
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on capital lease obligations ................. (18) (61) (79)
Issuance of common stock, net of offering costs ..... 7,518 6,178 293
---------- ---------- ----------
Net cash provided by financing activities ............ 7,500 6,117 214
---------- ---------- ----------
Net increase (decrease) in cash and equivalents ..... 2,955 23 (770)
Cash and cash equivalents at beginning of period .... 559 536 1,306
---------- ---------- ----------
Cash and cash equivalents at end of period .......... $ 3,514 $ 559 $ 536
========== ========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-6
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
Sunrise Technologies International, Inc. (the "Company") develops,
manufactures and markets laser systems and other products for applications in
ophthalmology and dentistry. The Company was organized as a California
corporation in March 1987 and was reincorporated in Delaware in June 1993 as
Sunrise Technologies International, Inc. The Company continues to do business
under the name Sunrise Technologies, Inc.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries after elimination of all material intercompany
balances and transactions.
The Company has incurred significant losses for the last several years and at
December 31, 1995 has an accumulated deficit of $24,476,000. The accompanying
financial statements have been prepared assuming the Company will continue as a
going concern. The Company's long term ability to continue as a going concern is
dependent upon returning to profitable operations. Management's plans include
increasing sales through increased direct sales and marketing efforts on
existing products and pursuing timely regulatory approval for certain products
under development. Management also recognizes the need for infusion of cash
during the fiscal year 1996 and is actively pursuing various options including
securing additional equity financing.
INDUSTRY SEGMENT AND CONCENTRATION OF RISK
The Company, which operates in a single industry segment, designs,
manufactures, markets and services medical laser and air abrasive systems. The
Company sells its products to customers in the medical industries globally. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company maintains reserves for potential credit
losses and such losses have been within management's expectations. One customer
accounted for 21%, 57% and 53% of revenues in 1995, 1994 and 1993 respectively.
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash investments and trade receivables.
The Company invests its excess cash in deposits with major banks, in U.S.
Treasury and U.S. Agency obligations.
CONCENTRATION OF OTHER RISKS
The Company's operating results each quarter are subject to various
uncertainties as discussed in the Company's Annual Report on 10-K for 1995,
including uncertainties related to the composition, timing and size of orders
from the shipments to major customers, variations in product mix and variations
in product cost and competitive pressures.
One of the more significant risks potentially affecting the Company's
operating results is the fact that a substantial portion of the Company's net
revenues in each quarter generally result from shipments during the latter part
of the quarter. Because the Company establishes its operating expense level
based on expected revenue, if anticipated shipments in any quarter do not occur
as expected, gross profits may be adversely affected. For these and other
reasons, the Company may not learn of shortfalls in revenues, margins or other
financial results until later in a quarter. Any such shortfall could have an
immediate and significant adverse effect on the trading price of the Company's
common stock.
Inventories: Most components used in the Company's air abrasive and laser
systems are purchased from outside sources. Certain components in the air
abrasive systems are currently purchased from a
F-7
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 -- (Continued)
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,
1995 and 1994, the Company did not hold any investments in debt or equity
securities.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventory at December 31, consists of:
1995 1994
-------- --------
(IN THOUSANDS)
Raw materials .... $909 $1,262
Work-in-process .. 237 377
Finished goods ... 520 316
------ ------
$1,666 $1,955
====== ======
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the
straight-line method for financial reporting over estimated useful lives of two
to five years. Assets under capitalized leases are amortized over the shorter of
the term of the lease or their useful lives, and such amortization is included
with depreciation expense. Property and equipment at December 31, consists of:
1995 1994
--------- ---------
(IN THOUSANDS)
Machinery and equipment ........................$ 1,412 $ 1,458
Computer Equipment ............................. 599 503
Furniture and fixtures ......................... 207 207
Leasehold improvements ......................... 167 167
--------- ---------
2,385 2,335
Less accumulated depreciation and amortization (2,181) (2,079)
--------- ---------
$ 204 $ 256
========= =========
F-8
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 -- (Continued)
NET LOSS PER SHARE
Net loss per share for the years ended December 31, 1995, 1994 and 1993 is
based solely on weighted average shares of common stock outstanding during the
period. Common equivalent shares have not been considered in the computation
since their inclusion would have an antidilutive effect.
REVENUE RECOGNITION
Revenues are recognized at time of shipment. A provision for the estimated
future cost of warranty is made at the time a sale is recorded.
CONCENTRATION OF CREDIT RISK, SIGNIFICANT CUSTOMERS AND EXPORT SALES
The Company performs on-going credit analysis of its customers. The Company
maintains reserves for potential credit losses and such losses have been within
management's expectations. One customer accounted for 21%, 57% and 53% of
revenues in 1995, 1994 and 1993 respectively.
The Company had export sales by region as follows:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Europe ........ $1,948 $4,291 $ 7,400
Pacific Rim .. 1,192 139 1,363
Canada ........ 248 393 82
Other ......... 282 363 1,354
-------- -------- --------
Total ....... $3,670 $5,186 $10,199
======== ======== ========
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation," which is effective for the
Company's December 31, 1996 financial statements. Statement 123 allows companies
to either account for stock-based compensation under the new provisions of
Statement 123 or under the provisions of APB 25, but requires pro forma
disclosure in the footnotes to the financial statements as if the measurement
provisions of Statement 123 had been adopted. The Company intends to continue
accounting for its stock-based compensation in accordance with the provisions of
APB 25. As such, the adoption of Statement 123 will not impact the financial
position or the results of operations of the Company.
2. TAXES ON INCOME
Effective January 1, 1993, the Company changed its method of accounting for
income taxes to the liability method required by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). As
permitted under the new standard, prior years' financial statements have not
been restated. The cumulative effect of adopting SFAS 109 was not material.
F-9
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 -- (Continued)
The provision for income taxes for each of the three years ended December 31,
consists of:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Federal:
Current .............. -- -- --
Deferred (prepaid) .... -- -- 232
-- -- 232
-------- -------- --------
State:
Current .............. -- -- --
-------- -------- --------
$ -- $ -- $232
======== ======== ========
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rates to income before income taxes. The source
and tax effect of the differences is as follows:
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
Statutory Rate ........................ (35)% (35)% (35)%
Purchase of in-process technology .... -- -- --
Foreign sales corporation ............. -- -- --
Other ................................. -- -- --
NOL's not benefited which have been
reserved ............................. 35% 35% 35%
Increase in valuation reserve ......... -- -- 4%
--------- --------- ---------
-- -- 4%
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities for 1995 and 1994 are as follows:
1995 1994
--------- ---------
(IN THOUSANDS)
Deferred tax assets:
Net Operating Loss Carryforwards .......... $ 0 $ 5,168
Research Credits (expire 2005-2009) ...... 642 577
Inventory valuation adjustment ............ 188 206
Bad Debt Reserve .......................... 10 181
Other ..................................... 751 706
--------- ---------
Total deferred tax asset ................ 8,766 6,838
Valuation allowance for deferred tax assets (8,766) (6,838)
--------- ---------
Net deferred tax assets ..................... $ -- $ --
========= =========
As of December 31, 1995, the Company had federal and state net operating loss
carryforwards of approximately $18,800,000 and $8,400,000 respectively. The
change in the Company's valuation allowance from 1993 to 1994 was an increase of
$2,601,000. The net operating loss and credit carryforwards will expire at
various dates through 2010 if not utilized.
The ownership change provisions of the Internal Revenue Code of 1986 and
similar state provisions would limit utilization of the carryforwards should
there be a substantial change in the Company's ownership. The annual limitation
may result in the expiration of net operating losses and credits before
utilization.
F-10
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 -- (Continued)
3. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leased certain equipment under noncancellable capital leases. The
cost of assets under capital leases as of December 31, 1994 was approximately
$236,000 and accumulated amortization applied to assets under capital leases was
$236,000 and $231,000 at December 31, 1995 and in 1994 respectively. The Company
leases certain of its facilities and equipment under a noncancellable operating
lease. Rent expense was $281,000, $279,000 and $271,000 in 1995, 1994 and 1993,
respectively.
The following is a schedule by year of future minimum lease payments at
December 31, 1995:
OPERATING
--------------
(IN THOUSANDS)
Year ending December 31,
1996 .................. $245
1997 .................. 24
--------------
Total minimum payments
required ............... $269
==============
CONTINGENCIES
American Dental Technologies, Inc. v. Sunrise Technologies International, Inc.
In October 1993, the Company filed an action against American Dental
Technologies, Inc., formerly American Dental Laser, Inc., in Alameda County
Superior Court. The complaint asserts a cause of action for breach of contract
and seeks compensatory damages in excess of $900,000, as well as attorneys' fees
and costs. The case arises from a dispute between the parties regarding their
rights and obligations under the terms of the settlement agreement that
terminated their manufacturing/distribution relationship for dental products. In
December 27, 1993, ADT filed a general answer to the complaint denying all
material allegations thereof and asserting various affirmative defenses. In
addition, ADT filed a cross-complaint against the Company asserting causes of
action for breach of contract, fraud, unfair competition, unfair trade
practices, interference with contract and prospective economic advantage,
indemnity, and injunctive and declaratory relief. The Company filed its answer
to the cross-complaint in January 1994, generally denying all the allegations
thereof and asserting various affirmative defenses. This matter was brought to
trial in July 1995, resulting in a jury verdict in the Company's favor on July
28, 1995. Subsequently, on November 14, 1995, ADT deposited with the court a
cashier's check in the amount of $1,410,267 and filed an appeal of the jury
verdict, which is presently pending. Such amount has not been recorded on the
Company's book pending outcome of the appeal. The Company believes the outcome
of this legal proceeding will not have a material adverse effect on the
financial position, results of operations or liquidity of the Company.
Sunrise Technologies International, Inc. and Danville Engineering, Inc. v.
American Dental Technologies, Inc.
In May 1994, the Company and Danville Engineering, Inc. filed two separate
actions against ADT in the U.S. District Court for the Northern District of
California seeking a declaration of invalidity and non-infringement of five
patents related to air-abrasive dental technology. The patents at issue are
either owned or exclusively licensed by ADT. ADT acknowledged the patents in one
of the cases and did not cover Sunrise products. Accordingly, this action was
dismissed. ADT brought a motion to dismiss both complaints for lack of subject
matter jurisdiction, which was denied on July 7, 1994. ADT answered the
complaints on October 12, 1994. The answers assert numerous affirmative
defenses, as well as a counterclaim that the Company and Danville have infringed
one of ADT's patents by the manufacture, sale
F-11
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 -- (Continued)
or use of the MicroPrep. The counterclaim seeks damages, injunctive relief,
attorneys' fees, costs, and a declaration of validity and infringement. ADT also
seeks a declaration of validity for the remaining patents. Discovery is
currently pending. The Company believes it has meritorious defenses to the
cross- complaint. The Company believes the outcome of this legal proceeding will
not have a material adverse effect on the financial position, results of
operations or liquidity of the Company.
American Dental Technologies, Inc. v. Sunrise Technologies International,
Inc. et al.
In October 1994, ADT filed an action against the Company and several of its
distributors in the U.S. District Court for the Eastern District of Michigan,
alleging infringement of a newly-issued patent assigned to ADT, which covers
technology and uses related to air-abrasive dental products. This action appears
to involve substantially the same issues as the actions filed by the Company in
the Northern District of California, but is based on a patent which has not
issued at the time the Company filed its claims. In December 1994, the Company
filed a motion to dismiss this action as to one of the distributor defendants
and to transfer the remainder of the case to California for consolidation with
the California declaratory relief actions filed by the Company against ADT. The
Company's motion was granted in May 1995. The case was transferred and has been
consolidated. Discovery is currently pending. The Company vigorously denies the
plaintiffs allegations and believes it has meritorious defenses to this claim.
The Company believes the outcome of this legal proceeding will not have a
material adverse effect on the financial position, results of operations or
liquidity of the Company.
4. STOCKHOLDERS' EQUITY
COMMON STOCK
As of December 31, 1995, there remains 38,340 warrants to purchase common
stock which were issued in connection with the acquisition of Laser Biotech,
Inc. in April 1992. The exercise prices of these warrants range from $3.70 to
$9.26 per share.
In September 1995, the Company completed a private placement of 13,000,000
shares of common stock. In connection with the private placement, the placement
agent received a warrant to purchase 675,000 shares of common stock. The
exercise price for these warrants is $0.55 and they are exercisable at any time
before September 6, 2000.
In June 1995, the Company completed a private placement of 2,100,000 shares
of common stock.
In February 1994, the Company completed a private placement of 1,250,000
shares of common stock. In connection with the private placement, the placement
agent received a warrant to purchase 62,500 shares of common stock. The exercise
price for these warrants is $6.00 and they are exercisable at any time before
February 8, 1999.
In conjunction with the 1992 private placement, the placement agent received
a warrant to purchase 25,000 shares of common stock for $8.05 per share. The
warrant is exercisable at any time prior to August 28, 1997 and is not
redeemable by the Company.
As of December 31, 1995, there were warrants outstanding to purchase 800,840
shares of common stock.
STOCK OPTION PLAN
In 1988, the Company adopted the 1988 Stock Option Plan (the "Plan") under
which employees, directors and consultants may be granted incentive or
nonstatutory stock options. Under the Plan, incentive stock options must be
granted at an exercise price of not less than the fair market value of the
common stock at the date of grant, except that options granted to stockholders
owning greater than 10
F-12
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 -- (Continued)
percent of the total voting power of all classes of stock of the Company must
have an exercise price of not less than 110 percent of the fair market value at
the date of grant. Nonstatutory options must be at least 85 percent of fair
market value at the date of grant. Options granted generally provide that 25
percent of the shares subject thereto become exercisable one year after the date
of grant and 1/36 of the remaining shares subject to the option become
exercisable each month thereafter. The Plan expires in 1998.
Information with respect to Plan activity is as follows:
OUTSTANDING OPTIONS
SHARES -----------------------------
AVAILABLE SHARE
FOR GRANT SHARES PRICE
------------- ------------- ---------------
Balance, December 31, 1993 ...... 415,350 771,900 $0.75 - $8.50
Shares reserved ................. 440,000 -- --
Granted ......................... (1,168,214) 1,168,214 $ 2.00
Exercised ....................... -- (189,561) $0.75 - $5.63
Canceled ........................ 582,339 (582,339) $1.25 - $8.50
---------- ---------- -------------
Balance, December 31, 1994 ...... 269,475 1,168,214 $0.75 - $2.00
Shares reserved ................. 1,550,000 -- --
Granted ......................... (1,633,331) 1,633,331 $0.97 - $2.50
Exercised ....................... -- -- --
Canceled ........................ 1,497,381 (1,497,381) $ 1.00
---------- ---------- -------------
Balance, December 31, 1995 ...... 1,683,529 1,304,164 $0.75 - $2.50
========== ========== =============
As of December 31, 1995 and 1994, options to purchase 472,840 and 555,119
shares respectively were exercisable. In 1995, 1,058,331 options to purchase
shares were reissued at $1.00 per share prices under an option exchange program.
During 1994 options outstanding were cancelled and reissued under an option
exchange program.
EMPLOYEE STOCK PURCHASE PLAN
In June 1992, the Company adopted the 1992 Employee Stock Purchase Plan under
which 200,000 shares have been reserved for issuance. Eligible employees may
purchase common stock at 85 percent of the lower of the closing price of the
stock on the offering date or the exercise date determined by the Board of
Directors. Purchases are limited to 10 percent of each employee's compensation.
As of December 31, 1995 and 1994, 34,689 shares had been issued under the plan.
5. SALE OF ASSETS
On August 31, 1994, the Company sold certain assets associated with its
surgical laser business to David Hennings, an individual, in exchange for
275,000 shares of the Company's common stock held by Mr. Hennings and a note
receivable of $48,000. The Company also granted royalty-bearing licenses to
certain patents owned by the Company. Up until the time of the transaction, Mr.
Hennings was an employee and officer of the Company. Subsequent to the
transaction, Mr. Hennings also resigned his position on the Company's board of
directors. The loss in disposition of these assets, which was facilitated
through the formation of a new subsidiary, was not significant.
F-13
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 -- (Continued)
6. SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
1995 1994 1993
------ ------ -------
(IN THOUSANDS)
Cash paid (refunded) during the year for:
Interest ........................... -- -- $ 60
Income taxes ....................... -- -- $(826)
Supplemental schedule of noncash investing and financing activities:
1995 1994 1993
------ ------ ------
(IN THOUSANDS)
Acquisition of equipment pursuant to
capital gains lease obligations ... -- -- $8
7. EVENTS SUBSEQUENT TO DATE OF AUDITORS REPORT
LITIGATION SETTLEMENTS
In July 1996, the Company settled all of its outstanding litigation with
American Dental Technologies ("ADT"). These matters were reported on most
recently in the Company's Form 10-K for the year ended December 31, 1995. The
material terms of the settlement are as follows:
1. Sunrise waived its rights to collect a judgment of $940,000 obtained
against ADT in a prior case, which had been subject to an appeal by ADT.
2. Sunrise obtained a non-exclusive license to certain ADT patents
covering air abrasion systems used in dental applications.
3. Sunrise will pay ADT a royalty of 7% on all air abrasion products
shipped after December 31, 1996.
4. If Sunrise sells its dental air abrasion business before July 1998, it
must pay to ADT a transfer fee equal to 10% of the amount received for the
air abrasion business.
PROPOSED DISPOSAL
On November 18, 1996 the Company signed a Letter of Intent to sell its Dental
Operations to Lares Research. Consideration for the sale will be $5 million in
cash on completion, $2 million in non-interest- bearing promissory notes
receivable in six annual installments beginning December 31, 1997 and warrants
to purchase 2.5% of the outstanding common stock of Lares Research. This
transaction is subject to stockholder approval and other conditions including
Lares' ability to complete a private placement in an amount not less than $5
million.
F-14
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE- AND NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1995
F-15
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------------- --------------
(UNAUDITED) (NOTE)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 1,443 $ 3,514
Accounts receivable, net of allowance ................................... 1,014 1,048
Inventories ............................................................. 2,031 1,666
Prepaid expenses ........................................................ 308 257
--------------- --------------
Total current assets .................................................. 4,796 6,485
Property and equipment, net ............................................... 187 204
--------------- --------------
Total assets .......................................................... $ 4,983 $ 6,689
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 770 $ 1,097
Accrued payroll and related expenses .................................... 306 181
Accrued warranty ........................................................ 324 324
Other accrued expenses .................................................. 362 342
--------------- --------------
Total current liabilities ............................................. 1,762 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, 27,866,613 and 25,280,056 shares issued and outstanding at
September 30, 1996 and December 31, 1995 respectively. ................. 28 25
Additional paid-in-capital .............................................. 31,688 29,196
Accumulated deficit ..................................................... (28,495) (24,476)
--------------- --------------
Total stockholders' equity ............................................ 3,221 4,745
--------------- --------------
Total liabilities and stockholders' equity ............................ $ 4,983 $ 6,689
=============== ==============
<FN>
Note: The consolidated balance sheet at December 31, 1995 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See accompanying notes.
</FN>
</TABLE>
F-16
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenues ..........................$ 1,767 $ 387 $ 4,327 $ 3,680
Cost of revenues ...................... 1,046 440 3,084 2,411
---------- ---------- ---------- ----------
Gross profit (loss) ................... 721 (53) 1,243 1,269
Other costs and expenses:
Engineering and development ......... 149 119 494 351
Sales, marketing and regulatory .... 942 533 2,938 2,093
General and administrative .......... 668 734 1,873 1,646
---------- ---------- ---------- ----------
Total other costs and expenses .... 1,759 1,386 5,305 4,090
---------- ---------- ---------- ----------
Loss from operations .................. (1,038) (1,439) (4,062) (2,821)
Interest income ....................... 10 2 43 6
---------- ---------- ---------- ----------
Net loss ..............................$(1,028) $(1,437) $(4,019) $(2,815)
========== ========== ========== ==========
Net loss per share ....................$ (0.04) $ (0.11) $ (0.16) $ (0.24)
========== ========== ========== ==========
Shares used in calculation of net loss
per share ............................ 26,932 13,234 25,898 11,487
========== ========== ========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-17
<PAGE>
<TABLE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(unaudited)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ..................................................................$(4,019) $(2,815)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation, amortization and additions to allowance
for doubtful accounts .................................................... 85 78
Changes in assets and liabilities:
Accounts receivable ..................................................... 4 437
Inventories ............................................................. (365) 284
Prepaid expenses ........................................................ (51) (81)
Accounts payable ........................................................ (327) (30)
Accrued payroll and related expenses .................................... 125 25
Other accrued expenses .................................................. 20 (299)
Total adjustments ......................................................... (509) 414
Net cash used in operating activities ..................................... (4,528) (2,401)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ........................................ (38) (39)
Net cash used in investing activities ..................................... (38) (39)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on capital lease obligations ...................................... -- (12)
Issuance of common stock, net of offering costs ........................... 2,495 7,573
Purchase of Treasury Stock ................................................ -- (55)
Net cash provided by financing activities ................................. 2,495 7,506
Net increase (decrease) in cash and equivalents ........................... (2,071) 5,066
Cash and cash equivalents at beginning of period .......................... 3,514 559
Cash and cash equivalents at end of period ................................$ 1,443 $ 5,625
<FN>
See accompanying notes.
</FN>
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 1996
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries after elimination of all material intercompany
balances and transactions.
The consolidated financial data at and for the periods ended September 30,
1996 and 1995 are unaudited, but include all adjustments (consisting only of
normal recurring adjustments) that the management of Sunrise Technologies
International, Inc. believes to be necessary for fair presentation of the
periods presented. Interim results are not necessarily indicative of results for
the full year. The financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1995 included in
the Company's annual report on Form 10-K filed with the Securities and Exchange
Commission.
The Company has incurred significant losses for the last several years and,
at September 30, 1996 has an accumulated deficit of approximately $28,495,000.
The accompanying condensed financial statements have been prepared assuming the
Company will continue as a going concern. The Company's long-term ability to
continue as a going concern is dependent on returning to profitable operations.
Management's plans include increasing sales through expanded marketing efforts
for existing products and pursuing timely regulatory approval for certain
products under development. Management also recognizes the need for infusion of
cash and is actively pursuing various options including securing additional
equity financing. If the Company is unable to obtain additional working capital
resources from the placement of debt or equity instruments, or the sale of some
of its assets, it will be necessary for the Company to curtail or suspend
operations.
2. NET LOSS PER SHARE
Net loss per share for the periods ended September 30, 1996 and 1995 is based
solely on weighted average shares of common stock outstanding during the period.
Common equivalent shares have not been considered in the computation since their
inclusion would have an antidilutive effect.
3. REVENUE RECOGNITION
Revenues are recognized at time of shipment.
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and consisted of the following on the dates indicated:
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------------- --------------
(IN THOUSANDS)
Raw materials .. $1,166 $ 909
Work-in-process 435 237
Finished goods . 430 520
--------------- --------------
$2,031 $1,666
=============== ==============
5. INCOME TAXES
Due to the Company's losses from operations, all deferred tax assets, which
primarily result from net operating loss carry forwards, have been offset in
full by a valuation allowance in accordance with SFAS No. 109.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 1996 -- (Continued)
6. LITIGATION SETTLEMENTS
In July 1996, the Company settled all of its outstanding litigation with
American Dental Technologies ("ADT"). These matters were reported on most
recently in the Company's Form 10-K for the year ended December 31, 1995. The
material terms of the settlement are as follows:
1. Sunrise waived its rights to collect a judgment of $940,000 obtained
against ADT in a prior case, which had been subject to an appeal by ADT.
2. Sunrise obtained a non-exclusive license to certain ADT patents
covering air abrasion systems used in dental applications.
3. Sunrise will pay ADT a royalty of 7% on all air abrasion products
shipped after December 31, 1996.
4. If Sunrise sells its dental air abrasion business before July 1998, it
must pay to ADT a transfer fee equal to 10% of the amount received for the
air abrasion business.
7. SUBSEQUENT EVENT
On November 18, 1996 the Company signed a Letter of Intent to sell its Dental
Operations to Lares Research. Consideration for the sale will be $5 million in
cash on completion, $2 million in non-interest- bearing promissory notes
receivable in six annual installments beginning December 31, 1997 and warrants
to purchase 2.5% of the outstanding common stock of Lares Research. This
transaction is subject to stockholder approval and other conditions including
Lares' ability to complete a private placement in an amount not less than $5
million.
F-20
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
<TABLE>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OTHER(A) OF PERIOD
------------ ------------ ------------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Reserves and allowances deducted
from assets accounts:
Allowance for uncollectible
accounts ...................... $135 $846 $ -- $ -- $981
Allowance for inventory ........ $349 $537 $ -- $ -- $886
Year ended December 31, 1994
Reserves and allowances deducted
from assets accounts:
Allowance for uncollectible
accounts ...................... $981 $ -- $ -- $(531) $450
Allowance for inventory ........ $886 $ -- $ -- $(373) $513
Year ended December 31, 1995
Reserves and allowances deducted
from assets accounts:
Allowance for uncollectible
accounts ...................... $450 $ 25 $(450) $ -- $ 25
Allowance for inventory ........ $513 $250 $(295) $ -- $468
<FN>
(A) Amounts relate to valuation allowance assigned to disposed assets as
discussed in note 5 to the consolidated financial statements.
</FN>
</TABLE>
F-21
<PAGE>
APPENDIX A
- -------------------------------------------------------------------------------
PROXY SUNRISE TECHNOLOGIES INTERNATIONAL, INC. PROXY
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH , 1997
The undersigned hereby appoints David W. Light and Joseph W. Shaffer and each
of them, as attorneys and proxies of the undersigned, with full power of
substitution, to vote all of the shares of stock of Sunrise Technologies
International, Inc. which the undersigned may be entitled to vote at the Special
Meeting of Stockholders of Sunrise Technologies International, Inc. to be held
at on March , 1997, at 10:00 a.m., local time, and at any and all
continuations and adjournments thereof, with all powers that the undersigned
would possess if personally present, upon and in respect of the following
matters and in accordance with the following instructions, with discretionary
authority as to any and all other matters that may properly come before the
meeting.
(Continued, and to be signed on the other side)
- -------------------------------------------------------------------------------
* FOLD AND DETACH HERE *
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Please mark
/X/ your votes
as this
FOR AGAINST ABSTAIN
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS Proposal 1: To approve the sale of substantially
PROXY WILL BE VOTED FOR EACH OF PROPOSALS 1, 2 AND all of the assets of Sunrise Technologies
3 AS MORE SPECIFICALLY DESCRIBED IN THE PROXY International, Inc. relating to its dental [ ] [ ] [ ]
STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, business to Lares Research, substantially on the
THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH. terms contained in the Lares Letter of Intent
MANAGEMENT RECOMMENDS A VOTE FOR EACH OF PROPOSALS Proposal 2. To approve the sale of substantially
1, 2 AND 3. all of the assets of Sunrise Technologies
International, Inc. relating to its dental
business to a purchaser other than Lares Research, [ ] [ ] [ ]
in the event the transaction is not consummated
with Lares Research, provided that (a) the
transaction is consummated on or prior to December
31, 1997 and (b) aggregate cash proceeds to
Sunrise Technologies International, Inc. are not
less than $5,000,000
I PLAN TO ATTEND THE MEETING [ ] Proposal 3. To increase the number of authorized
shares of common stock, par value $0.001 per [ ] [ ] [ ]
share, of Sunrise Technologies International, Inc.
from 40,000,000 to 75,000,000
Please sign exactly as your name appears hereon.
If the stock is registered in the names of two or
more persons, each should sign. Executors,
administrators, trustees, guardians and
attorneys-in-fact should add their titles. If
signer is a corporation, please give full
corporate name and have a duly authorized officer
sign, stating title. If signer is a partnership,
please sign in partnership name by authorized
person.
Signature(s) ______________________________________________________________ Date ________________
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE WHICH IS POSTAGE PREPAID IF MAILED IN THE
UNITED STATES.
- -----------------------------------------------------------------------------------------------------------------------------------
* FOLD AND DETACH HERE *
</TABLE>
