<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 1998
REGISTRATION NO. 333-64975
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0148208
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
OR ORGANIZATION)
</TABLE>
3400 WEST WARREN AVENUE
FREMONT, CALIFORNIA 94538
(510) 623-9001
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
THE PRENTICE HALL CORPORATION
1013 CENTRE ROAD
WILMINGTON, DELAWARE 19805
(302) 998-0595
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
WITH COPIES TO:
DON S. HERSHMAN, ESQ.
BETH M. GOTTLIEB, ESQ.
HOLLEB & COFF
55 EAST MONROE, SUITE 4100
CHICAGO, ILLINOIS 60603
Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1) of
this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
SUBJECT TO COMPLETION, DATED DECEMBER 17, 1998
6,807,915 SHARES
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
COMMON STOCK
------------------------
The common stock, par value $0.001 per share ("Common Stock"), of Sunrise
Technologies International, Inc., a Delaware corporation ("Sunrise" and,
together with its subsidiaries, the "Company"), offered hereby (the "Offered
Shares") may be sold by certain stockholders, note holders and warrant holders
of the Company (collectively, the "Selling Securityholders"). The Company will
not receive any of the proceeds from the sale of the Offered Shares. Information
regarding the Selling Securityholders is set forth herein under the heading
"Selling Securityholders."
The Common Stock currently is traded on the Nasdaq National Market System
under the symbol "SNRS". On December 16, 1998, the closing price reported on the
Nasdaq National Market System was $6.75 per share. See "Description of Capital
Stock -- Price Range of Common Stock."
ACQUISITION OF THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
Some or all of the Offered Shares may be offered for sale and sold from
time to time by the Selling Securityholders in transactions on the Nasdaq
National Market System (or any national securities exchange or interdealer
quotation system on which the Common Stock may be listed), or in privately
negotiated transactions (which may include block transactions) or otherwise. In
addition, the Selling Securityholders may engage in short sales and other
transactions in the Common Stock or derivatives thereof, and may pledge, sell,
deliver or otherwise transfer the Offered Shares in connection therewith. This
Prospectus may be used by the Selling Securityholders or by any broker-dealer
who may participate in sales of the Offered Shares. Participating broker-dealers
may act as agents or principals or both and may receive commissions, discounts
or concessions in connection with sales or other transfers of Offered Shares.
See "Selling Securityholders." The Company has agreed to pay the expenses of
registering the Offered Shares on behalf of the Selling Securityholders, other
than broker-dealer commissions, discounts or concessions and any legal fees
incurred by the Selling Securityholders in connection with sales of the Offered
Shares.
No person is authorized by the Company or the Selling Securityholders to
give any information or to make any representations other than those contained
in this Prospectus. Neither the delivery of this Prospectus nor any sale made
hereunder shall create any implication that there has not been a change in the
information contained herein since the date hereof.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS DECEMBER , 1998.
<PAGE> 3
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-2 (together with any
amendments, supplements, exhibits, annexes and schedules thereto, the
"Registration Statement") pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), and the rules and regulations thereunder, with respect
to the Offered Shares. This Prospectus does not include all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements made in
the Prospectus as to the contents of any contract, agreement or other document
referred to in the Registration Statement are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices located
at Seven World Trade Center, Suite 1300, New York, New York 10048, and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material can be obtained by mail from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, reports, proxy
statements and other information that the Company files with the Commission
electronically are contained in the Internet Web site maintained by the
Commission at http://www.sec.gov.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, as it may be amended or supplemented, and certain
documents incorporated by reference herein contain or may contain both
statements of historical fact and "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Examples of forward-looking statements include: (i) projections of revenue,
income, earnings, capital expenditures, dividends, capital structure and other
financial items; (ii) statements of the plans and objectives of the Company or
its management; (iii) statements of the future economic performance of the
Company; and (iv) the assumptions underlying statements regarding the Company or
its business. Important factors, risks and uncertainties that could cause actual
results to differ materially from any forward-looking statements ("Cautionary
Statements") are disclosed herein, under the caption "Risk Factors" and
elsewhere, and in certain documents incorporated by reference herein. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information contained elsewhere in this Prospectus.
THE COMPANY
The Company develops, manufactures and markets laser systems for
applications in ophthalmology. All of the Company's business activities,
including engineering and development, manufacturing, assembly and testing take
place at the Company's facility in Fremont, California.
Since mid-1992, the Company has focused a significant portion of its
efforts on engineering and development of its holmium laser corneal shaping
product or process, known as Laser Thermal Keratoplasty (the "LTK System"), for
the treatment of refractive error of the eye, such as hyperopia (farsightedness)
and presbyopia (age-related loss of near focusing ability). The LTK System,
which is based upon patented technology acquired in the Company's acquisitions
of in-process technology from Laser Biotech, Inc. and Emmetropix Corporation in
1992, currently is undergoing premarket clinical studies in the United States,
as required by the Food and Drug Administration (the "FDA"). Prior to this time
the Company was primarily a developer and manufacturer of dental laser systems.
See "Business."
The Company has incurred substantial losses in the past seven years, which
have seriously depleted its working capital. Sales of its existing ophthalmic
products at current levels will not be sufficient to sustain the continued
development and regulatory licensing of the LTK System. The Company has been
able to raise additional working capital for all aspects of its business through
the private placement of its Common Stock and convertible notes with warrants.
These private placements raised $15,296,000 in 1994, 1995 and 1996 in new equity
for the Company, approximately $3,700,000 in the form of promissory notes with
warrants in 1997 (the "1997 Notes Placement"), approximately $9,300,000, net of
offering costs, in the form of promissory notes with warrants in January 1998
(the "1998 Notes Placement"), and approximately $11,800,000, net of offering
costs, from the sale of Common Stock (the "1998 Equity Offering").
The Company was incorporated in 1987 under the laws of the State of
California and was reincorporated in 1993 under the laws of the State of
Delaware. The principal executive offices of the Company are located at 3400
West Warren Avenue, Fremont, California 94538; telephone (510) 623-9001.
RECENT DEVELOPMENTS
PRIVATE EQUITY OFFERING
On December 4, 1998, the Company completed a private placement of
approximately $11,800,000 of its shares of Common Stock. The subscription price
per share was $3.50, which is the average of the closing sale price of the
Company's Common Stock, as reported on the Nasdaq National Market System
("Nasdaq NMS"), on each of the last ten consecutive Nasdaq NMS trading days in
October 1998 multiplied by 80%. $5,000,000 of the proceeds from the 1998 Equity
Offering were received in the form of promissory notes due on March 15, 1999
bearing interest at a rate of 9% per annum. As part of the 1998 Equity Offering,
the Company undertook that it will, not later than the 120th day after the
termination of the 1998 Equity Offering, prepare and file with the Securities
and Exchange Commission a registration statement for an offering covering the
shares.
ISSUANCE OF CONVERTIBLE NOTES
In January 1998, the Company issued and sold, without registration under
the Securities Act in the 1998 Notes Placement, an aggregate gross principal
amount of approximately $9,300,000 of its redeemable convertible notes due 2001
(collectively, the "1998 Notes") and accompanying warrants to purchase Common
Stock (collectively, the "1998 Warrants").
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The 1998 Notes are convertible at any time, at the option of the holder,
bear interest at the rate of 12%, payable in-kind semi-annually (additional
convertible notes), and convert at a price of $3.00 per share. The Company has
an option to extend the 1998 Notes for an additional two years for additional
warrant consideration. Warrants to purchase 1,870,000 shares of the Company's
Common Stock were issued as part of the 1998 Notes Placement with an exercise
price of $3.00 per share and an expiration date of January 2003. The 1998
Warrants issued had a fair value of approximately $1.87 per Warrant at the time
of issuance. The fair value of the 1998 Warrants has been reflected as
additional consideration for the 1998 Notes, recorded as a discount on the debt
and accreted as interest expense to be amortized over the life of the 1998
Notes.
SALE OF DENTAL BUSINESS
On June 26, 1997, the Company sold substantially all of its assets
associated with its dental laser, air abrasion and composite curing systems to
Lares Research, a California corporation ("Lares"). At closing, Lares delivered
to the Company $4,000,000 in cash and a promissory note in the amount of
$1,500,000 (the "Lares Note"). Although the Company anticipates collecting
interest and principal on the Lares Note, collection is not reasonably assured
due to the subordination of the Lares Note to Lares' bank and the Company
intends to recognize proceeds from the sale and interest on the Lares Note as
cash is received. Prior to the sale of the dental assets, a substantial portion
of the Company's revenues (98% in 1996 and 80% for the first six months of 1997)
were derived from the domestic and international sales of the Company's dental
products. However, operation of the dental business had contributed to the
Company's substantial losses in each of the five years ending December 31, 1997.
The Company used the net proceeds from the sale of the dental assets
primarily for clinical trials for its ophthalmic products, including the LTK
System.
THE SELLING SECURITYHOLDERS
The Offered Shares were acquired by the Selling Securityholders through
warrant grants subsequent to October 1997 or investment in the 1998 Notes
Placement. Absent registration under the Securities Act, the Offered Shares are
subject to certain limitations on resale. The Registration Statement of which
this Prospectus forms a part has been filed in satisfaction of certain
registration rights granted by the Company to the Selling Securityholders. None
of the Offered Shares were acquired by the Selling Securityholders in the 1998
Equity Offering.
As of the date of this Prospectus, 6,664,582 of the Offered Shares have not
been issued by the Company but may be issued at any time upon conversion of the
Notes or exercise of the Warrants by certain Selling Securityholders. See
"Selling Securityholders."
PLAN OF DISTRIBUTION
The Offered Shares may be offered for sale and sold from time to time by
the Selling Securityholders in transactions on the Nasdaq NMS (or any national
securities exchange or interdealer quotation system on which the Common Stock
may be listed), or in privately negotiated transactions (which may include block
transactions) or otherwise. In addition, the Selling Securityholders may engage
in short sales and other transactions in the Common Stock or derivatives
thereof, and may pledge, sell, deliver or otherwise transfer the Offered Shares
in connection therewith. This Prospectus may be used by the Selling
Securityholders or by any broker-dealer who may participate in sales of the
Offered Shares. Participating broker-dealers may act as agents or principals or
both and may receive commissions, discounts or concessions in connection with
sales or other transfers of the Offered Shares.
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RISK FACTORS
The following factors should be considered carefully in evaluating an
acquisition of Common Stock.
HISTORY OF LOSSES; PROFITABILITY UNCERTAIN; CASH FLOW DEFICITS
The Company has incurred substantial losses, which have depleted its
working capital and reduced its stockholders' equity. In addition, the Company's
business will continue to be a significant consumer of cash, as the revenues
from its business will not be sufficient to cover its operating costs, unless
and until FDA approval is obtained to permit domestic sale of the LTK System.
The Company currently anticipates submitting its premarket approval application
("PMA") to the FDA by the end of 1998, however, FDA approval is not expected
until the second-half of 1999, at the earliest.
The negative cash flows for the Company have been funded during 1996, 1997
and 1998 by the sale of additional equity and convertible debt with warrants. At
December 31, 1997, cash and cash equivalents for the Company were approximately
$1,958,000, and at September 30, 1998, after consummation of the 1998 Notes
Placement (approximate net proceeds of $9,300,000), cash and cash equivalents of
the Company were approximately $5,783,000. Notwithstanding the proceeds of the
1998 Equity Offering, the Company anticipates that it will be required to raise
additional working capital during the second quarter of 1999 to fund its
activities for late 1999 and beyond. Any additional equity or debt offerings
will dilute the holdings of the Company's stockholders. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements attached hereto.
CONTINUING LOSSES EXPECTED
The Company expects to report operating losses during 1998 and beyond. The
losses will come primarily from the expenses of the FDA approval process and
underlying clinical studies related to the LTK System. The Company will not have
any domestic revenues from this product line unless and until FDA approval is
obtained. International revenues will not be sufficient to cover the cost of the
approval process or the general operating expenses of the Company.
DILUTION
Stockholders of the Company have no preemptive rights and, therefore, in
the event the Company: (i) commences a subsequent public or private offering of
its shares of Common Stock or of convertible debt or Preferred Stock; or (ii)
issues Preferred Stock or shares of Common Stock upon exercise of warrants to
consultants or other parties providing goods or services to the Company in lieu
of or in addition to cash consideration, stockholders who do not participate in
any future stock issuance will experience dilution of their equity investment in
the Company. As the Company anticipates it will be required to raise additional
working capital during the second quarter of 1999 to fund its operations, such
additional equity or debt offerings will dilute the holdings of the Company's
stockholders, however the potential dilution of the Company's stockholders
cannot be determined at this time.
No assurance can be given that additional financing will be available, or
if available, that it will be available on terms favorable to the Company and
its stockholders. If funds are not available to satisfy the Company's short-term
and long-term operating requirements, the Company may be required to limit or
suspend its operations in their entirety or, under certain circumstances, seek
protection from creditors. In this regard, the Company's recent debt and equity
offerings contained terms adverse to the Company's then existing stockholders.
Management of the Company believes that future financings undertaken prior to
the commencement of sales of the LTK System in the United States will contain
terms that could result in similar or more substantial dilution than that
incurred by the Company's stockholders from the 1998 Notes Placement and the
1998 Equity Offering. See "Regulatory Matters -- FDA Approval of the LTK System"
in this Section.
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REGULATORY MATTERS -- FDA APPROVAL OF THE LTK SYSTEM
The Company's activities are subject to extensive regulation by the FDA and
similar health authorities in certain foreign countries. The LTK System is
regulated as a Class III medical device by the FDA under the Food, Drug &
Cosmetic Act. Class III medical devices must have a PMA approved by the FDA
prior to commercial sale in the United States. The PMA process (and underlying
clinical studies) is lengthy, the outcome is difficult to predict and requires
substantial commitments of the Company's financial resources and management's
time and effort. Delays in obtaining or failure to obtain required regulatory
approvals or clearances in the United States and other countries would postpone
or prevent the marketing of the LTK System and other devices and would impair
the Company's ability to generate funds from operations, which in turn would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition to analyzing the LTK System itself, the
FDA may also evaluate public disclosures made by the Company regarding the LTK
System, as part of the review and approval process. In this regard, the Company
received in early September 1998 a letter from the FDA stating that recent press
releases contained certain prohibited representations. The FDA did not require
the Company to respond to the letter, however, the Company no longer includes
the items described in the FDA letter in its public disclosures. The Company
submitted its PMA on December 14, 1998 to the FDA.
There can be no assurance that the Company will be able to obtain in a
timely manner, if at all, the required approval of its PMA in the United States
for intended uses of the LTK System, or for any other devices which the Company
may seek approvals or clearances. Any products manufactured or distributed by
the Company will be subject to pervasive and continuing regulation by the FDA.
On February 2, 1999, a new FDA regulation will require the Company to
disclose the financial interests of its clinical investigators in the Company.
This new regulation will apply to all marketing applications submitted on or
after February 2, 1999. The purpose of this new regulation is to assist the FDA
in determining if, and to what extent, the clinical studies supporting the
marketing applications may have been subject to investigator bias. Six of the
Company's 11 current clinical investigators of the LTK System have financial
interests in the Company that the Company would have to disclose under the new
regulation. The Company believes that the results of its clinical investigations
have not been biased by these interests; however, it is not possible to predict
what impact, if any, the disclosure of these interests would have on the FDA's
review of the PMA the Company submits for the LTK System. The Company intends to
submit all of its clinical data used to support the PMA submission to an
independent audit to determine if any investigation bias exists.
The Company has received a CE (European Community) mark of approval on its
LTK device which allows for sale of the device in these countries. In addition
to the CE Mark, however, some foreign countries may require separate individual
foreign regulatory clearances. Although the Company's products have been sold in
approximately 15 countries, sales of the LTK System require rigorous regulatory
approvals before being sold in the United States and Japan. There can be no
assurance that the Company will be able to obtain regulatory clearances for its
products in the United States or foreign markets.
UNCERTAIN MARKET ACCEPTANCE OF THE LTK SYSTEM
Although the Company has another ophthalmic laser product, the gLase 210,
the Company has and intends to continue to concentrate its efforts primarily on
the development of the LTK System and will be dependent upon the successful
development of that system to generate revenues. The LTK System has not yet been
introduced commercially in the United States, and there can be no assurance that
if approved by the FDA, such system will be accepted by either the ophthalmic
community or the general population as an alternative to existing methods of
treating refractive vision disorders. Many ophthalmologists may have already
invested significant time and resources in developing expertise in other
corrective ophthalmic techniques. Acceptance of the LTK System may be affected
adversely by its costs, concerns related to its safety and efficacy, the general
resistance to use of laser products on the eye, the effectiveness of alternative
methods of correcting refractive vision disorders, the lack of long-term
follow-up data and the possibility of unknown side effects. Promotional efforts
by suppliers of products or procedures which are alternatives to the LTK System,
including eyeglasses, contact lenses and laser and non-laser surgical
procedures, may also
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adversely affect the marketplace for the LTK System. Failure by the Company to
achieve broad market acceptance of the LTK System will have a material adverse
effect on the Company's business, financial condition and results of operations.
SAFETY AND EFFICACY CONCERNS; LACK OF LONG-TERM FOLLOW-UP
The Company has developed limited clinical data to date on the safety and
efficacy of the LTK System in correcting hyperopia (farsightedness), and related
long-term safety and efficacy data. The FDA has not yet determined whether the
LTK System will prove to be safe or effective for the predictable and reliable
treatment of hyperopia or other common vision problems. Potential complications
and side effects reported in studies to date from the use of the LTK System
include mild foreign body sensation, temporary increased light sensitivity,
modest fluctuations in refractive capabilities during healing, unintended over
or under-corrections, regression of effect and induced astigmatism. There can be
no assurance that long-term safety and efficacy data when collected will be
consistent with the clinical trial results previously obtained or will
demonstrate that the LTK System can be used safely and successfully to treat
hyperopia in a broad segment of the population on a long-term basis.
PATENT CONCERNS
The Company believes it holds United States process patents for the use of
holmium lasers in non-destructive cornea shaping, although process and apparatus
patents relating to shaping the cornea with holmium lasers have been issued to
others. Generally, an apparatus patent contains claims to a new and useful
machine or device. A process patent, generally, contains claims to a new and
useful process, art or method, which may include a new use of a known process,
machine, manufacture, composition of matter or material. The Company believes it
is not infringing on any patents held by others; however, if patents held by
others were adjudged valid and interpreted broadly in an adversarial proceeding,
they could be deemed to cover one or more aspects of the Company's holmium laser
corneal shaping systems, use of the LTK System or other procedures. Any claims
for patent infringement could be time-consuming, result in costly litigation,
divert technical and management personnel or require the Company to develop
non-infringing technology or to enter into royalty or licensing agreements.
There can be no assurance that the Company will not be subject to one or more
claims for patent infringement, that the Company would prevail in any such
action or that its patents will afford protection against competitors with
similar technology.
In the event the LTK System is adjudged to infringe, directly or
indirectly, a patent in a particular market, the Company may be enjoined from
making, using and selling such system, be required to pay damages, or be
required to obtain a royalty-bearing license, if available, on acceptable terms.
Alternatively, in the event a license is not offered or available, the Company
may be required to redesign those aspects of the LTK System held to infringe,
directly or indirectly, so as to avoid such infringement. Any redesign could
delay reintroduction of the Company's products into certain markets, or may be
so significant as to be impractical. If redesign efforts were impractical, the
Company could be prevented from manufacturing and selling the infringing
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
LOSS OF AVAILABILITY OF KEY SYSTEM COMPONENTS
Although some of the parts and components used by the Company in producing
its products are available from multiple sources, the Company currently
purchases each of its components from a single source in an effort to obtain
volume discounts. Lack of availability of any of these parts and components
could result in production delays, increased costs or costly redesign of the
Company's products. The Company continually evaluates ways to minimize any
impact to its business from any potential part or component shortage through
inventory stockpiling and design changes to afford opportunities for multiple
sources of supply for these key components.
In addition, the Company has attempted to negotiate with the University of
Miami to reach agreement regarding the non-exclusive use of a component of the
delivery system used in the LTK System which was
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<PAGE> 9
jointly developed by the Company and the University. The Company believes that
it will be able to make reasonable arrangements with the University. If,
however, the Company is unable to conclude negotiations with the University
successfully, the Company may have no rights in the delivery system presently
configured in the LTK System. If the Company is forced to redesign the LTK
System, such redesign efforts could be time consuming, expensive and prolong FDA
review. Any loss of availability of a key system component could result in a
material adverse change to the Company's business, financial condition and
results of operations.
COMPETITION
The vision correction industry is subject to intense competition. The
significant competitive factors in the industry include price, convenience,
success relative to vision correction, acceptance of new technologies, patient
satisfaction and government approval. Patients with hyperopia (farsightedness)
can achieve vision correction with eyeglasses, contact lenses and possibly with
other technologies and surgical techniques currently under development, such as
corneal implants, human lens replacement, intra-ocular implantable contact
lenses and surgery using different types of lasers. The success of any competing
alternative to the LTK System for treating hyperopia could have a material
adverse effect on the Company's business, financial condition and results of
operations. Most of the Company's competitors have substantially greater
financial capabilities for product development and marketing than the Company,
which may enable such competitors to market their products or procedures to the
consumer and to the ophthalmic community in a more effective manner.
The excimer laser is the dominant laser used for the treatment of
refractive disorders. In the United States, VISX, Inc. ("VISX") and Summit
Technologies, Inc. ("Summit") are the leading manufacturers of excimer
refractive surgical systems. While the Company believes the LTK System offers
several distinct advantages over the use of excimer lasers for treating
hyperopia, including ease of use and decreased invasiveness, both VISX and
Summit have significantly greater financial resources than the Company and have
received FDA approval for their respective excimer laser products for treating
myopia (nearsightedness) and astigmatism . In addition, certain of the Company's
competitors, including Summit, have developed LTK devices for the treatment of
hyperopia and one of the Company's competitors, VISX, has received FDA approval
to treat hyperopia in the United States with its excimer laser. The Company
believes its LTK System is superior to those of its competitors and that use of
Summit's holmium laser system for LTK may violate certain of the Company's
patents. None of the Company's competitors is currently engaged in United States
clinical trials to approve their LTK devices for treating hyperopia. Although
neither the Summit excimer laser products nor the Summit LTK devices are
currently approved for treating hyperopia in the United States and Summit
discontinued its clinical trials for treating hyperopia with its holmium laser
system in 1996, any alternative treatment offered by VISX or Summit will have a
competitive advantage because of the name recognition being created by the
current promotion of their excimer laser products for correcting myopia
(nearsightedness) using lasers and the fact that VISX and Summit have been able
to establish a base of customers that are currently using their products. See
"Business -- Competition."
The Company believes the potential use of its process of shrinking collagen
is more attractive than competitive methods of treating certain refractive
errors because it can address refractive error with minimal invasiveness to the
cornea. There can be no assurance, however, that the method can be reduced to
practice using a reliable laser system, or that the Company will receive
regulatory approvals or successfully market such a product.
RELIANCE ON KEY PERSONNEL
The Company's principal executive officers have extensive experience in
ophthalmic research, development and sales. The loss of the services of any of
the Company's executive officers or other key personnel, or the failure of the
Company to attract and retain other skilled and experienced personnel on
acceptable terms, could have a material adverse effect on the Company's
business, results of operations and financial condition.
Any transactions and loans by and between the Company and an affiliate will
be made or entered into on terms that are no less favorable to the Company than
those that can be obtained from unaffiliated third parties.
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<PAGE> 10
All such material affiliated transactions and loans, and any forgiveness of
loans, will be approved by a majority of the Company's directors, including a
majority of the disinterested directors, that do not have an interest in the
transaction and who have access, at the Company's expense, to the Company's or
independent legal counsel.
LOSS OF DENTAL REVENUES
Prior to the sale of the dental assets in June 1997, the Company's revenues
were substantially derived from the sale of its dental laser and air abrasive
products. These sales represented 98% and 69% of the Company's revenues in 1996
and 1997, respectively. By selling the dental assets, the Company lost a
significant source of continued revenue, although the dental assets made a
negative contribution to the Company's financial results.
POTENTIAL ANTI-TAKEOVER EFFECTS
The provisions of the Company's Certificate of Incorporation, as amended,
the Company's Bylaws, as amended, and the Delaware General Corporation Law (the
"Delaware Law") may have the effect of delaying, discouraging, inhibiting,
preventing or rendering more difficult an attempt to obtain control of the
Company by means of a tender offer, business combination, proxy contest or
otherwise. These provisions include the charter authorization of "blank check"
preferred stock, classification of the Board of Directors, a restriction on the
ability of the stockholders to take actions by written consent and a Delaware
Law provision imposing restrictions on business combinations with certain
interested parties.
In addition, the Company has adopted a Stockholder Rights Plan (the "Rights
Plan") in which each issued and outstanding share of the Company's Common Stock
has associated with it one right to purchase a share of the Company's Common
Stock from the Company (the "Rights") at a price of $20, subject to adjustment.
The Rights will be exercisable if a person or group: (i) acquires beneficial
ownership of 15% or more of the Company; or (ii) commences a tender or exchange
offer upon consummation of which such person or group would beneficially own 15%
or more of the Common Stock. The Company will be entitled to redeem the Rights
at $.001 per Right at any time until ten days following a public announcement
that a 15% position has been acquired. See "Description of Capital Stock."
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock may be affected by quarterly
fluctuations in the Company's operating results, announcements by the Company or
its competitors of technological innovations or new product introductions and
other factors. If revenue or earnings in any quarter fail to meet expectations
of the investment community, there could be an immediate impact on the Company's
stock price. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations, particularly among stocks of high
technology companies, which on occasion have been unrelated to the operating
performance of particular companies. Factors not directly related to the
Company's performance, such as negative industry reports or disappointing
earnings announcements by publicly-traded competitors, may have an adverse
impact on the market price of the Company's Common Stock.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex, as virtually every computer operation
will be affected in the same way by the rollover of the two digit year value to
00. The issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its systems for Year 2000 compliance. As of
September 30, 1998, the estimated costs of these reprogramming efforts have been
approximately $250,000. It is currently expected that the remaining costs to
complete these reprogramming efforts will be less than $100,000. It is
anticipated that all of the Company's
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<PAGE> 11
reprogramming efforts will be completed by March 31, 1999, allowing adequate
time for testing. This process includes obtaining confirmations from the
Company's primary vendors that plans are being developed or are already in place
to address processing of transactions in the year 2000. These confirmations are
expected to be obtained in writing by the Company prior to June 30, 1999.
However, there can be no assurance that the systems of other companies on which
the Company's systems rely will also be converted in a timely manner, or that
any such failure to convert by another company would not have a material adverse
effect on the Company's business, financial conditions or results of operations.
The Company believes that it does not have a Year 2000 problem with its
products that have been sold in the past, however, the Company has not performed
an extensive review of these systems and is unlikely to be able to complete a
review prior to January 1, 2000. In addition, the Company is designing a new
product to replace its existing LTK System that is being designed to properly
recognize date-sensitive information for the Year 2000 and beyond. Although the
Company plans to perform extensive testing of its new product, there can be no
assurance that the new system will function properly until it is deployed in the
field and subjected to extensive use. Any malfunction of a deployed system could
have a material adverse effect on the Company's business, financial condition or
results of operations.
The Company is not expecting to have a material accounts receivable
exposure, or significant amount of revenues with any one customer after December
31, 1999 and, therefore, verification of customer Year 2000 compliance is not
being pursued by the Company at this time. Any failure to pay in a timely
manner, or place orders for the Company's products, by a significant number of
individual customers or by a customer with a material accounts receivable
balance, due to Year 2000 compliance issues would have material adverse effects
on the Company's business, financial condition or results of operations.
The Company is currently developing a contingency plan to evaluate business
disruption scenarios, coordinate the establishment of Year 2000 contingency
plans, and identify and implement the strategies. This detailed contingency plan
is expected to be completed by June 30, 1999.
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SELECTED FINANCIAL INFORMATION
The statement of operations data set forth below with respect to the fiscal
years ended December 31, 1995, 1996 and 1997 and the balance sheet data at
December 31, 1996 and 1997 are derived from, and are qualified by reference to
the Company's audited financial statements included elsewhere in this Prospectus
and should be read in conjunction with those financial statements and the notes
thereto. The statement of operations data for the years ended December 31, 1993
and 1994 and the balance sheet data at December 31, 1993, 1994 and 1995 are
derived from audited financial statements not included in this Prospectus. The
statements of operations data for the nine months ended September 30, 1997 and
1998 and the balance sheet data at September 30, 1998 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,
1998 are not necessarily indicative of results to be expected for the full
fiscal year.
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<PAGE> 13
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF
OPERATIONS DATA:
Net revenues............ $11,860 $ 7,578 $ 5,294 $ 5,654 $ 2,839 $ 2,539 $ 504
Gross profit............ 5,009 1,340 1,637 1,638 293 380 (995)
Loss from operations.... (6,452) (6,917) (4,187) (6,020) (7,075) (4,842) (10,002)
Gain on sale of dental
assets(1)............ -- -- -- -- 1,740 1,740 --
Interest income......... 82 7 69 65 99 74 289
Interest expense........ (22) -- (12) (13) (1,376) (1,080) (3,222)
Other expense........... -- -- (6) -- --
Tax expense............. (232) -- -- -- -- -- --
Net loss................ (6,624) (6,910) (4,130) (5,968) (6,618) (4,108) (12,935)
Net loss per share,
basic and
diluted(2)........... (0.74) (0.68) (0.28) (0.23) (0.23) (0.15) (0.38)
Shares used in
calculation of basic
and diluted net loss
per share(2)......... 8,955 10,129 14,935 26,414 28,550 27,896 33,707
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Working capital............... $1,965 $1,101 $4,541 $1,073 $1,382 $ 3,727
Total assets.................. 5,511 3,822 6,689 3,741 2,949 7,233
Long-term obligations......... 18 -- -- -- 945 6,867
Total stockholders' equity.... 2,708 1,357 4,745 1,272 849 (2,587)
</TABLE>
- ---------------
(1) See Note 6 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements.
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<PAGE> 14
BUSINESS
OVERVIEW
Sunrise Technologies International, Inc. (the "Company") develops,
manufactures and markets laser systems for applications in ophthalmology. All of
the Company's business activities, including engineering and development,
manufacturing, assembly and testing, take place at the Company's facility in
Fremont, California. Prior to June 26, 1997, the Company developed, manufactured
and marketed lasers and air abrasion cavity preparation systems for use in
dentistry. On June 26, 1997, the Company sold its dental business and assets to
Lares Research of Chico, California for $4,000,000 in cash and $1,500,000 in
interest-bearing notes due in June 2000 and June 2001.
Since mid-1992, the Company has focused a significant portion of its
efforts on engineering and development of its holmium laser corneal shaping
product or process, known as Laser Thermal Keratoplasty (the "LTK System"), for
the treatment of refractive error of the eye, such as hyperopia (farsightedness)
and presbyopia (age-related loss of near focusing ability). The LTK System is
based on patented technology acquired in the Company's acquisitions of
in-process technology from Laser Biotech, Inc. ("Laser Biotech") and Emmetropix
Corporation ("Emmetropix") in 1992. See "Products -- LTK System" in this
Section.
The Company has incurred substantial losses in the past seven years, which
have seriously depleted its working capital. Sales of its existing ophthalmic
products at current levels will not be sufficient to sustain the continued
development and regulatory licensing of the LTK System. The Company has been
able to raise additional working capital for all aspects of its business through
the private placement of its Common Stock and convertible notes with warrants.
These private placements raised $15,296,000 in 1994, 1995 and 1996 in new equity
for the Company, approximately $3,700,000 in the form of promissory notes with
warrants in 1997 (the "1997 Notes Placement"), approximately $9,300,000, net of
offering costs, in the form of promissory notes with warrants in January 1998
(the "1998 Notes Placement") and approximately $11,800,000, net of offering
costs, from the sale of Common Stock in December 1998 (the "1998 Equity
Offering").
The Company was incorporated in 1987 under the laws of the State of
California and was reincorporated in 1993 under the laws of the State of
Delaware.
PRODUCTS
LTK System
In April 1992, the Company acquired Laser Biotech through a merger of a
wholly-owned subsidiary of the Company with Laser Biotech (the "Merger"). Laser
Biotech was founded in 1986 by Bruce J. Sand, M.D., FACS, to research and
develop a precision laser instrument for eye surgery. In connection with the
Merger, the Company also acquired certain patent and patent applications held by
Dr. Sand covering a patented technique for reshaping the cornea using a laser.
The LTK System alters the shape of the cornea to correct refractive disorders
such as hyperopia and presbyopia without removing corneal tissue. The procedure
employs a laser to shrink, selectively, the collagen in the cornea, changing the
curvature of the cornea and thereby changing the refractive power of the eye. By
comparison, excimer laser systems for corneal reshaping developed by Summit and
VISX remove parts of the cornea to achieve changes in refraction. Laser Biotech
conducted pre-clinical studies to gain preliminary information on the efficacy
and safety of the product, which resulted in positive indications that the LTK
System could be applied successfully and safely to correct certain refractive
error.
In May 1992, the Company acquired substantially all of the in-process
technology of Emmetropix, including an assignment of certain patent applications
and related technology from an Emmetropix shareholder which the Company believes
may be useful in the further development of the LTK System.
The Company received an Investigational Device Exemption ("IDE") from the
FDA to begin Phase I clinical trials of the LTK System on human subjects in the
first quarter of 1992. Phase I trials commenced in June 1992 using a prototype
LTK System designed and developed by the Company. The Company completed
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<PAGE> 15
Phase I of the clinical work for the LTK System and filed its results with the
FDA in June 1993. In September 1993, the Company received clearance to begin
Phase IIa clinical trials for the treatment of hyperopia. The trials were
conducted at the Doheny Eye Institute at the University of Southern California
and Baylor University and were completed in November 1994. In February 1995, the
Company filed its request with the FDA to commence Phase IIb clinical trials. In
a March 1995 letter, the FDA cited various deficiencies in the Company's
February letter and requested additional information. In December 1995, the
Company submitted the requested additional information. In January 1996, the FDA
responded to the Company's submittal by requesting current follow-up data on all
Phase IIa patients. In March 1996, the Company provided the FDA with current
follow-up data on the Phase IIa patients. On September 5, 1996, the FDA
authorized the Company to treat an additional 100 subjects at five United States
locations in a continuation of Phase IIa clinical trials using a treatment
algorithm developed by the Company in the course of the initial Phase IIa
clinical trials and in the course of studies conducted by ophthalmologists in
Mexico, Germany, Belgium, Italy and Canada. On March 31, 1997, the Company added
three new investigators to its Phase IIa clinical study for hyperopia. On July
18, 1997, the Company received FDA approval to treat the fellow eye of patients
who had one eye treated as part of the clinical trial for hyperopia six months
after the first eye was treated. On August 7, 1997, the Company received
approval from the FDA to treat an additional 100 patients as part of its Phase
IIa clinical trial for hyperopia, bringing the total patients approved for
treatment to 228.
On November 19, 1997, the Company completed enrollment in its Phase IIa
clinical trial for hyperopia and also received approval to begin Phase III of
its clinical trial for hyperopia with an additional 200 patients to be treated
at the existing eight clinical sites and up to seven additional clinical sites.
The Company has added three clinical sites, bringing the total to 11 sites. On
February 24, 1998, the Company announced that it had received approval to treat
the fellow eye of patients enrolled in its clinical study for hyperopia on the
same day, as opposed to the earlier requirement to wait six months before
treating fellow eyes. On June 30, 1998, the Company announced that it had
completed enrollment for the Phase III investigation, the final phase of the
study for treatment of low to moderate hyperopia. As of December 4, 1998, 400
primary eyes and 274 fellow eyes have been treated on 400 patients.
On March 24, 1998, the Company announced that it had received approval to
initiate a new clinical study to treat patients with the LTK System who were
overcorrected after receiving treatment for myopia (nearsightedness) from other
companies' excimer laser systems. The Company has treated two eyes of two
patients under this clinical study.
On October 8, 1997, the Company received approval to re-treat patients in
its clinical study. As of December 4, 1998, seven eyes of seven patients have
been re-treated.
On September 25, 1997, the Company received approval to treat 60 patients
at four sites for the condition known as presbyopia. Presbyopia is the
age-related loss of near vision. The Company's clinical trial will employ a
technique known as monovision to treat presbyopia. A patient with monovision
utilizes one eye primarily for distance vision and the other eye primarily for
reading, or near vision. A fifth site was added on March 30, 1998. On October 8,
1998, the Company received approval to treat an additional 20 patients in its
expanded clinical trial for presbyopia. As of December 4, 1998, the Company has
treated 53 patients under this clinical study.
In addition, clinical trials were initiated outside the United States in
early 1993 and are ongoing. The Company has obtained FDA clearance to export the
LTK System to most European countries, Turkey, Saudi Arabia, Canada, Mexico,
Brazil, China, Korea, Hong Kong, the Bahamas, South Africa and other countries,
although such sales are subject to the individual regulatory authority of each
country. Following regulatory approvals, the Company commenced marketing the LTK
System overseas, primarily in Europe, for the treatment of hyperopia and
astigmatism in December 1993.
As of the December 4, 1998, the Company has treated approximately 750 eyes
with the LTK System in its United States clinical trials. On December 14, 1998,
the Company submitted its PMA to the FDA. See "Government Regulation" and
"Patents and Licenses" in this Section and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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<PAGE> 16
The LTK System incorporates the Sun 1000, a holmium laser system, into a
delivery system that is built into a standard slit-lamp to perform the LTK
procedure. A slit-lamp is a binocular microscope used regularly by
ophthalmologists to examine an eye binocularly under high magnification. The LTK
System delivers eight simultaneous laser beams disposed in a circle of varying
diameter. This system allows for easy alignment on the patient's eye and the
delivery of two exposures, each less than two seconds. To date, international
sales of the LTK System have been limited. Revenue in the United States cannot
reasonably be expected before the second half of 1999, at the earliest.
Ophthalmic Laser System for Glaucoma
In 1990, the Company developed the gLase 210 ophthalmic system (the "gLase
210 system"), a holmium laser system designed to perform a filtering procedure
for the treatment of glaucoma. The gLase 210 system is not currently marketed
actively in the United States or internationally. Sales of the gLase 210 system
have been limited and have never represented more than 11% of the Company's
revenues in any year. From 1995 through November 30, 1998, sales of the gLase
210 system resulted in a loss to the Company of approximately $51,000.
GOVERNMENT REGULATION
The Company's products are subject to significant government regulation in
the United States and other countries. In order to test clinically, produce and
market products for human diagnostic and therapeutic use, the Company must
comply with mandatory procedures and safety standards established by the FDA and
comparable foreign regulatory agencies. Typically, such standards require
products to be approved by the government agency as safe and effective for their
intended use before being marketed for human applications. The clearance process
is expensive and time consuming, and no assurance can be given that any agency
will grant clearance to the Company to sell its products for routine clinical
applications or that the time for the clearance process will not be extensive.
No clinical testing of the Company's products on humans may be undertaken
without first obtaining an IDE from the FDA. To date, sales of the LTK System in
the United States for clinical testing on humans have been pursuant to approved
IDEs.
Devices such as the LTK System may be marketed in the United States only
after the FDA has approved a PMA for the device. Under the PMA procedure, the
applicant must obtain an IDE before beginning the substantial clinical testing
required to determine the safety, efficacy and potential hazards of the
products. The preparation of a PMA is significantly complex and time consuming.
The review period under a PMA is 180 days from the date of filing. The FDA often
responds with requests for additional information or clinical reports that can
extend the review period substantially beyond 180 days. The Company submitted
its PMA with the FDA for approval to sell its LTK System in the United States
for hyperopia on December 14, 1998 and expects to file its PMA for the treatment
of presbyopia in the second half of 1999. The Company has, and will continue, to
focus its efforts and limited resources on its technology for the treatment of
hyperopia and presbyopia.
The FDA imposes various requirements on manufacturers and sellers of
products under its jurisdiction, such as labeling, manufacturing practices,
record keeping and reporting requirements. The FDA also may require postmarket
testing and surveillance programs to monitor a product's effects. All of the
Company's products will require regulatory approval from the FDA. There can be
no assurance that the appropriate approvals from the FDA will be granted for the
Company's products, that the process to obtain such approvals will not be
excessively expensive or lengthy or that the Company will have sufficient funds
to pursue such approvals. The failure to receive requisite approvals for the
Company's products or processes, when and if developed, or significant delays in
obtaining such approvals, will prevent the Company from commercializing its
products as anticipated and will have a material, adverse effect on the business
of the Company.
The Company is also subject to regulation under the provisions of the Food,
Drug and Cosmetic Act relating to Product Radiation Control which, among other
things, requires laser manufacturers to: (i) file new product and annual
reports; (ii) maintain quality control, product testing and sales records; (iii)
incorporate
15
<PAGE> 17
certain design and operating features in lasers sold to end-users; and (iv)
certify and label each laser sold to conform to all applicable standards for
such lasers. Various warning labels must be affixed and certain protective
devices installed, depending on the class of the product. The FDA's Center for
Devices and Radiological Health is empowered to seek fines and other remedies
for violations of the regulatory requirements.
MARKETING AND SALES
The Company's strategy is to market its products through established
medical equipment distributors overseas. In the United States, the Company plans
to sell its products through a small direct sales force. The Company has
established relationships with distributors in Great Britain, Belgium, France,
the Netherlands and South Africa.
The extent and nature of the Company's marketing efforts are determined by
a number of factors, including the number of specialists in the area and the
characteristics of the laser applications. The establishment of a successful
distributor network requires providing the distributors with sales instruments
(brochures, clinical data, research papers, educational videos, etc.). Such
marketing efforts are expected to include presentations at conventions and trade
shows, customer training by Company personnel and sponsorship of teaching
seminars, clinical presentations, and research by others. The Company also hires
additional marketing and sales consultants from time to time to assist in the
introduction of its products.
On July 15, 1998, the Company announced that it had entered into an
agreement with Harrison Wilson & Associates, and Ketchum Public Relations of
Omnicom Group, Inc. for work associated with the launch of the LTK System in the
United States. Omnicom is comprised of more than 200 specialty agencies and has
a market capitalization of over $9 billion, with expertise in the areas of
public relations, medical education, investor relations and the promotion of
medical devices to both physicians and consumers. There can be no assurance,
however, that the Company can effectively market its existing and planned new
products.
ENGINEERING AND DEVELOPMENT
The Company's success will depend substantially upon its ability to
develop, produce and market innovative new products.
For the nine months ended September 30, 1998, the Company expended
$1,618,000 on engineering and development relating to the LTK System. The
Company continues to explore several other types of lasers with varying
characteristics in order to find the optimal interactions with tissues in
specific medical applications. Since the sale of the Company's dental business
and assets in June 1997, to an unaffiliated party, the Company no longer expends
any of its funds on the engineering and development of dental laser or other
dental products. Clinical testing and sale of the Company's products are subject
to obtaining applicable regulatory approvals, of which there can be no
assurance. The Company's research and development activities are conducted
in-house as well as by outside sources, including consultants and universities.
The laser industry is characterized by extensive research and rapid
technological change. Development by others of new or improved products,
processes or technologies may make product development by the Company obsolete
or less competitive. The Company will be required to devote continuing efforts
and funds to further developments and enhancements for its existing products and
for its research and development of new technologies and products. There can be
no assurance the Company will be able to successfully adapt its operations to
evolving markets and technologies and fund the development of new medical
products to achieve possible technological advantages.
PRODUCTION
The Company manufactures its ophthalmic lasers from parts, components and
subassemblies obtained from a number of unaffiliated suppliers, and the Company
designs the software incorporated into a microprocessor purchased from an
unaffiliated third party. Prototype production and all manufacturing, assembly
and testing activities take place at its Fremont, California facility. Although
some of the parts and
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<PAGE> 18
components used by the Company in producing its products are available from
multiple sources, the Company currently purchases each of its components from a
single source in an effort to obtain volume discounts. Lack of availability of
any of these parts and components could result in production delays, increased
costs or costly redesign of the Company's products. The Company continually
evaluates ways to minimize any impact to its business from any potential part or
component shortage through inventory stockpiling and design changes to afford
opportunities for multiple sources of supply for these key components.
The Company's ophthalmic laser systems have been designed in a modular
fashion to facilitate the assembly process. The Company intends to utilize
modular design and construction concepts in connection with its future products.
The Company will require additional engineering and manufacturing staffing as
new products are introduced into the marketplace. Any loss of availability of a
key system component could result in a material adverse change to the Company's
business, financial condition and results of operations.
POTENTIAL LIABILITY
The testing and use of human health care products entail an inherent risk
of physical injury to patients and resultant product liability or malpractice
litigation. While the Company has obtained product liability coverage in the
amount of $5,000,000 with an umbrella policy for an additional $5,000,000, such
coverage is limited, and there can be no assurance that such coverage will be
sufficient to protect it from all risks to which it may be subject. Those costs
of defending a product liability or malpractice action could have a material
adverse impact on the Company, even if the Company were to prevail ultimately.
PATENTS AND LICENSES
In the merger of Laser Biotech into the Company, the Company acquired an
issued United States patent and pending United States and foreign patent
applications previously assigned to Laser Biotech by Dr. Bruce Sand, the
inventor of the patent and founder of Laser Biotech. The issued patent covers a
method for using a laser to shrink collagen in the human body, with specific
application to the cornea. Since the merger, five more patents filed by Dr.
Sand, as the inventor, have been allowed, and have been assigned to the Company.
As a result of the Emmetropix acquisition, the Company now has one issued United
States patent and one pending European regional patent application based on the
issued United States patent, which the Company believes may be useful in further
developing its laser thermal keratoplasty product. In addition, the Company has
filed a patent application covering the LTK System it developed to make use of
the LTK procedure. The Company owns 22 issued patents on the LTK System and
method for shrinking collagen in the United States and internationally, six of
which have been assigned for collateral purposes pursuant to the terms of the
1997 Notes Placement. These patents protect the Company's technology while the
LTK System is undergoing clinical trials for approval to market the LTK System
in the United States and encompass both the apparatus for treatment with the LTK
System and the method of shrinking collagen in the cornea. These patents begin
to expire in 2009. The Company also owns 15 pending patent applications on the
LTK System and the method for shrinking collagen in the United States and
internationally.
COMPETITION
The vision correction industry is subject to intense competition. The
significant competitive factors in the industry include price, convenience,
success relative to vision correction, acceptance of new technologies, patient
satisfaction and government approval. Patients with hyperopia can achieve vision
correction with eyeglasses, contact lenses and possibly with other technologies
and surgical techniques currently under development, such as corneal implants,
human lens replacement, intra-ocular implantable contact lenses and surgery
using different types of lasers. The success of any competing alternative to the
LTK System for treating hyperopia could have a material adverse effect on the
Company's business, financial condition and results of operations. Most of the
Company's competitors have substantially greater financial capabilities for
product development and marketing than the Company, which may enable such
competitors to market their products or procedures to the consumer and to the
ophthalmic community in a more effective manner.
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The excimer laser is the dominant laser used for the treatment of
refractive disorders. In the United States, VISX and Summit are the leading
manufacturers of excimer refractive surgical systems. While the Company believes
the LTK System offers several distinct advantages over the use of excimer lasers
for treating hyperopia, including ease of use and decreased invasiveness, both
VISX and Summit have significantly greater financial resources than the Company
and have received FDA approval for their respective excimer laser products for
treating myopia (nearsightedness) and astigmatism. In addition, certain of the
Company's competitors, including Summit, have developed LTK devices for the
treatment of hyperopia and one of the Company's competitors, VISX, has received
FDA approval to treat hyperopia (farsightedness) in the United States with its
excimer laser. The Company believes its LTK System is superior to those of its
competitors and that use of Summit's holmium laser system for LTK may violate
certain of the Company's patents. None of the Company's competitors is currently
engaged in United States clinical trials to approve their LTK devices for
treating hyperopia. Although neither the Summit excimer laser products nor the
Summit LTK devices are currently approved for treating hyperopia in the United
States, and Summit discontinued its clinical trials for treating hyperopia with
its holmium laser system in 1996, any alternative treatment offered by VISX or
Summit may have a competitive advantage because of the name recognition being
created by the current promotion of excimer laser products for correcting myopia
using lasers, and the fact that VISX and Summit have been able to establish a
base of customers that are currently using their products.
The Company believes the potential use of its process of shrinking collagen
is more attractive than competitive methods of treating certain refractive
errors because it can address refractive error with minimal invasiveness to the
cornea. There can be no assurance, however, that the method can be reduced to
practice using a reliable laser system, or that the Company will receive
regulatory approvals or successfully market such a product.
EXPORT SALES
For the nine months ended September 30, 1998, approximately 73% of the
Company's revenues were international as compared to approximately 38% in 1997,
47% in 1996 and 69% in 1995, respectively, for the three prior calendar years.
BACKLOG
On September 30, 1998, the Company had a backlog of approximately $3,000,
all of which the Company expects to ship to its customers prior to the end of
1998.
WARRANTY AND SERVICE
The Company provides a limited warranty on its laser systems. This warranty
is limited to 12 months from date of shipment by the Company. The Company
provides services to systems out of warranty worldwide. The Company's laser
products include microprocessors and software that perform self-checks upon
start-up and during operation. In addition, the systems feature software that
allows service personnel to perform diagnostic checks in the field. The Company
currently provides support services by telephone to customers with operational
and service problems and makes necessary repairs at its plant or at the laser
site.
To date, actual costs incurred related to warranty work have been minimal.
In the case of sales by distributors, all product service will be provided by
such distributor.
FACILITIES AND EMPLOYEES
The Company leases a 55,000 square foot facility at 3400 West Warren
Avenue, Fremont, California, which currently serves as its executive offices and
research and production facility. The facility lease expires in April 2004 and
requires base payments on average of approximately $80,000 per month, subject to
standard pass-throughs and escalations. Management of the Company believes that
this space can accommodate the Company's expected increases in operations and
additional full-time employees.
18
<PAGE> 20
At September 30, 1998, the Company had 32 full-time employees (including
its executive officers); 15 in manufacturing, two in engineering and
development, six in marketing, sales and regulatory, and nine in administration.
In addition, the Company has retained a number of consultants to assist with its
product development, regulatory activities and investor relations.
The Company is primarily dependent upon its engineering and development
employees and consultants for the development and improvement of existing and
proposed products. The Company's future success will depend in a large part upon
its ability to attract and retain highly qualified scientific and management
personnel, and its ability to continue to train and retain highly skilled
technical and marketing personnel. None of the Company's employees are
represented by a labor organization. The Company maintains various benefit plans
and has good employee relations.
LITIGATION
Danville Manufacturing, Inc. (d.b.a. Danville Engineering) ("Danville")
filed a suit in the Superior Court of California, County of Contra Costa,
against the Company, claiming monetary damages for disputed invoices of
approximately $200,000 and alleging misappropriation of intellectual property,
the dollar amount of such claim has not yet been determined (Danville
Manufacturing, Inc. d.b.a. Danville Engineering v. Sunrise Technologies
International, Inc. C98-02123). The Company is vigorously defending against this
lawsuit. The Company does not believe that the outcome of this matter will have
a material adverse effect on the financial condition and results of operations
of the Company. There can be no assurance, however, that the Company will
prevail in its defense of the claims asserted by Danville.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
OVERVIEW
The Company develops, manufactures and markets laser systems for
applications in ophthalmology. Prior to June 26, 1997, the Company developed,
manufactured and marketed lasers and air abrasion cavity preparation systems for
use in dentistry.
In June 1997, the Company completed the sale of the Company's assets
associated with its dental laser, air abrasive and composite curing systems (the
"Dental Assets") to Lares Research. The purchase price paid for the Dental
Assets was $5,500,000, consisting of $4,000,000 in cash paid at closing and
$1,500,000 in the form of a promissory note, with two installments due in June
2000 and 2001, respectively (the "Lares Note"). Collection is not reasonably
assured due to subordination of the Lares Note to Lares' bank and the Company
intends to recognize proceeds from the sale and interest on the Lares Note as
cash is received. The gain on sale of the Dental Assets is comprised as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<S> <C>
Cash proceeds from sale of dental assets.................... $ 4,000
Less:
Inventory and equipment sold.............................. (1,498)
ADT transfer fee.......................................... (275)
Transaction fees.......................................... (237)
Other costs............................................... (250)
-------
Gain on sale of dental assets............................... $ 1,740
=======
</TABLE>
Revenues from the dental business were $1,968,000 through June 1997. Cost
of revenues were approximately $1,738,000, and operating expenses through June
1997 were $1,980,000. Interest expense and interest income were $11,000 and
$10,000, respectively, through June 1997. The operating loss from the dental
business and the gain on the sale of the dental business were $1,750,000 and
$1,740,000, respectively, in 1997.
The Company has incurred substantial losses in the past seven years which
have seriously depleted its working capital. Sales of its existing ophthalmic
products at current levels will not be sufficient to sustain the continued
development and regulatory licensing of the LTK System. The Company has been
able to raise additional working capital for all aspects of its business through
the private placement of its common stock and convertible notes with warrants.
These private placements raised $15,296,000 in 1994, 1995 and 1996 in new equity
for the Company, approximately $3,700,000 from the 1997 Notes Placement and
approximately $9,300,000, net of offering costs, from the 1998 Notes Placement.
If the Company 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.
20
<PAGE> 22
The following table sets forth certain operations data as a percentage of
net revenue for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net revenues................................................ 100% 100% 100%
Cost of revenues............................................ 90 71 69
---- ---- ---
Gross profits............................................... 10 29 31
---- ---- ---
Other costs and expenses:
Engineering and development.......................... 33 24 23
Sales, marketing and regulatory...................... 96 64 43
General and administration........................... 130 48 44
---- ---- ---
Total other costs and expenses.................... 259 135 110
---- ---- ---
Loss from operations........................................ (249) (106) (79)
Gain on sale of Dental Assets............................... 61 -- --
Interest income (expense), net.............................. (45) 1 1
---- ---- ---
Net Loss.................................................... (233)% (105)% (78)%
==== ==== ===
</TABLE>
REVENUES
The Company's revenues have historically been comprised primarily of sales
related to its dental products (69% in 1997, 98% in 1996 and 76% in 1995).
Revenues of $2,839,000 in 1997 reflect sales of its ophthalmic and dental
products through June 26, 1997 and ophthalmic products only during the second
half of 1997 due to the sale of the Company's dental business effective June 26,
1997. Revenues decreased from $5,654,000 in 1996, approximately a 50% reduction,
due to the effective elimination of any revenue from dental products in the
second half of 1997 as a result of the sale of the dental business. Revenues of
$5,654,000 in 1996 represented an increase of approximately 7% from 1995
revenues, attributable to a slight increase in sales of the Company's dental
products.
GROSS PROFITS
Gross profit margins were 10%, 29% and 31% in 1997, 1996 and 1995,
respectively. The major factors contributing to the significant reduction in
gross profit margins in 1997 from the 1996 levels include lower revenues of the
Company's products, under-utilization of manufacturing capacity due to decreased
product shipments and increased reserves for excess and obsolete inventory.
Management of the Company decided to increase inventory reserves for excess
and obsolete inventory during 1997 due to the fact that certain components
included in inventory at year-end were not compatible for use in the re-designed
LTK System. In addition, at year-end, the Company had a surplus of finished LTK
Systems of the obsolete design as compared to the anticipated demand for these
obsolete systems during 1998. Under-utilization of manufacturing capacity is
expected to continue to adversely affect gross profit margins in 1998.
The 1996 decrease in gross profit margin when compared to 1995 was
attributed to an increase in the percentage of sales through distributors and a
decrease in sales of the LTK System which carried a higher gross margin than the
Company's dental products.
ENGINEERING AND DEVELOPMENT
Engineering and development expenses were $964,000, $1,326,000 and
$1,218,000 for the years ended 1997, 1996 and 1995, respectively. Engineering
and development expenses decreased to $964,000 in 1997, an approximately 27%
reduction from the 1996 level of expense, principally due to the effect of the
sale of the dental business and subsequent elimination of the engineering and
development expenses relating to the dental business subsequent to the sale.
21
<PAGE> 23
The increase in engineering and development expenses for 1996 from 1995 of
approximately 9% was attributed to development costs associated with a new
dental product launched in the first calendar quarter of 1997.
SALES, MARKETING AND REGULATORY
Sales, marketing and regulatory expenses were $2,718,000, $3,632,000 and
$2,277,000 for the years ended 1997, 1996, and 1995, respectively. The reduction
in sales, marketing and regulatory expenses in 1997 from 1996 of approximately
25% was attributable to the elimination of such expenses after the sale of the
dental business in June 1997, offset by an increase of 225% in regulatory
expenses associated with the Company's expansion of its clinical studies for
hyperopia and presbyopia as compared to 1996. In addition, the Company added
personnel to its ophthalmic sales and marketing organization during the second
half of 1997, an increase of 79%, in support of its international sales and
international and domestic marketing activities.
The increase in sales, marketing and regulatory expenses of approximately
60% in 1996 from 1995 was attributed to the launch expenses for the MicroPrep in
the first quarter of 1996 and the expenses associated with the expansion of the
Phase IIa clinical study for the LTK System and the FDA review of the Company's
PMA submitted for use of its dental lasers for hard tissue applications.
The Company currently markets its ophthalmic lasers through an indirect
sales organization. Distribution for all products internationally is handled
through distributors. The Company will not be able to market its LTK System in
the United States until the FDA approves the product for sale in the United
States. The Company is unable to predict when, if at all, the FDA will approve
the LTK System for sale in the United States.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $3,686,000, $2,700,000 and
$2,329,000 for the years ended 1997, 1996, and 1995, respectively. The increase
in general and administrative expenses for 1997 from 1996 of approximately 37%
was primarily due to expenses associated with severance pay for certain
officers, nonstatutory option expenses of approximately $949,000 in 1997, and an
increase in investor relations expenses.
The increase in general and administrative expenses of approximately 16% in
1996 from 1995 was attributed to costs associated with the Company's proposed
acquisition of EyeSys Technologies, which was not consummated, and the expenses
associated with the hiring of a new management team for the Company's ophthalmic
business.
The Company's general and administrative expenses consist primarily of: (i)
salaries and benefits of administrative and certain executive personnel; (ii)
product liability, officer and director liability and other corporate insurance
premiums; (iii) accounting, legal and other fees related to patent and general
corporate matters; and (iv) provisions for the Company's allowance for bad debts
and non-cash expenses associated with the issuance of certain warrants and
non-statutory stock options.
INTEREST INCOME AND EXPENSE
Interest income was $99,000, $65,000 and $69,000 for the years ended 1997,
1996 and 1995, respectively. The increase in interest income between 1997 and
1996 was due to higher average balances in the Company's interest bearing
accounts. Interest expense was $1,376,000, $13,000 and $12,000 for the years
ended 1997, 1996 and 1995, respectively. The increase in interest expense for
1997 was due to the interest accrued on the notes issued by the Company in
connection with the 1997 Notes Placement (the "1997 Notes"), at the rate of 5%
according to the terms of the 1997 Notes, non-cash interest expense accrued for
the fair value of the warrants and the conversion features of such notes, as
well as placement costs that were partially amortized as additional interest
expense.
22
<PAGE> 24
INCOME TAXES
At December 31, 1997, 1996 and 1995, all deferred tax assets computed in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" have been fully offset by a valuation allowance.
As of December 31, 1997, the Company had federal net operating loss
carry-forwards of approximately $30,000,000. The ownership provisions of the
Internal Revenue Code of 1986 would limit the utilization of the carry-forwards
should there be a substantial change in the Company's ownership.
NET LOSSES
The Company reported losses of $6,618,000, $5,968,000 and $4,130,000 in
1997, 1996, and 1995, respectively. The net loss in 1997 was due principally to
the low level of revenue, excess manufacturing capacity and inventory, the
Company's continuing clinical trials for hyperopia and presbyopia, expenses
associated with the Company's issuance of convertible debt with warrants and
certain non-statutory stock options, and the Company's need to maintain its
basic corporate infrastructure, partially offset by the gain from the sale of
the Company's dental business in June 1997. Although total operating expenses
were reduced by 4% from 1996, the reduction was not sufficient to return the
Company to profitability in 1997.
The net loss in 1996 was due primarily to increased selling, marketing and
product development expenses associated with the attempt to grow the dental and
ophthalmic businesses, compounded by the continued low level of revenue and
excess manufacturing capacity. Total operating expenses increased 31% from 1995
while gross profit was essentially the same in both years. This increase in
operating expenses accounts for essentially all of the $1,800,000 increase in
net loss in 1996 from 1995.
The net loss in 1995 was due principally to the continued low level of
sales, excess manufacturing capacity and the Company's need to maintain the
basic sales, marketing, regulatory and corporate infrastructure.
The Company expects to report net losses during 1998 and beyond. The losses
will come primarily from the expenses of the FDA approval process and underlying
clinical studies related to the LTK System and the expenses associated with
maintaining the Company's basic corporate infrastructure. The Company will not
have any material domestic revenues from this product line unless and until FDA
approval is obtained. The Company's international revenues are not projected to
be sufficient to cover the expenses of maintaining the basic corporate
infrastructure and the Company's costs of the continuing clinical trials for
hyperopia and presbyopia.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had $1,958,000 in cash and cash
equivalents. The Company's operating activities used $6,774,000 in cash during
1997. A substantial portion of the 1997 loss was funded by the $3,449,000 of net
proceeds received from the sale of its dental business in June 1997 and proceeds
of $3,700,000 from the 1997 Notes.
Working capital amounted to $1,073,000 at December 31, 1996 and increased
to $1,382,000 at December 31, 1997. Working capital, including the proceeds from
the 1997 Notes Placement and the sale of the Dental Assets, was used to fund the
Company's 1997 operating loss and to reduce accounts payable.
During 1997, the Company used $98,000 in investing activities for the
purchase of fixed assets and generated $3,449,000 from the sale of the Dental
Assets. Net cash provided from financing activities was $4,734,000 during 1997
and was primarily comprised of the issuance of the Company's Common Stock and
the issuance of the 1997 Notes.
The 1997 Notes Placement was completed in March 1997 and consisted of
convertible promissory notes with warrants. The promissory notes held by
domestic purchasers convert at a rate of $0.875 per share and the promissory
notes held by international purchasers convert at a rate of $1.00 per share. The
warrants associated with the 1997 Notes Placement would convert into 2,538,328
shares of Common Stock and have an exercise
23
<PAGE> 25
price of $1.00 per share. The warrants had a fair value of approximately $1.25
per warrant at the time of issuance. The fair value of these warrants has been
reflected as additional consideration for the 1997 Notes, recorded as a discount
on the debt and accreted as interest expense to be amortized over the life of
the 1997 Notes.
The 1997 Notes are convertible at any time prior to maturity, at the option
of the holders thereof, at the respective conversion prices discussed above,
subject to adjustment for any stock dividends, certain distributions, stock
splits or combinations or reclassifications of the Common Stock. The Notes
mature two years from their respective issue dates, and interest on the Notes is
cumulative from the respective issue date at an annual rate of 5%, payable at
maturity or conversion in cash, or in-kind. The effective rate of interest of
the 1997 Notes, which includes the amortization of the fair value of the
warrants, is approximately 21%. The Notes are secured by a first lien on all of
the ophthalmic patents and patent applications of the Company. The Warrants may
be exercised at any time within five years from the respective date of their
issuance.
The Company's current operations continue to be cash flow negative, further
straining the Company's working capital resources. At the Company's current rate
of cash expenditures, the Company anticipates that it will be required to raise
additional working capital during the second quarter of 1999 to fund operations.
The Company expects to spend approximately $750,000 for capital expenditures in
calendar year 1998. Any additional equity or debt offerings will dilute the
holdings of the Company's stockholders, however, the potential dilution to the
Company's stockholders cannot be determined at this time. No assurance can be
given that additional financing will be available, or if available, that it will
be available on terms favorable to the Company and its stockholders. If funds
are not available to satisfy the Company's short-term and long-term operating
requirements, the Company may be required to limit or suspend its operations in
their entirety or, under certain circumstances, be forced to seek protection
from creditors. The Company's long-term ability to continue as a going concern
is dependent upon performing profitably or obtaining further financing. In
January 1998, the Company completed the 1998 Notes Placement. See "-- For the
Nine Months Ended September 30, 1998" below.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
RESULTS OF OPERATIONS
Revenues for the nine-month period ended September 30, 1998 totaled
$504,000 compared to $2,539,000 for the same period in 1997. This decrease was
primarily due to the lack of revenues from the dental operations in 1998. The
Company sold its dental business in June 1997.
Cost of revenues for the nine-month period ended September 30, 1998 totaled
$1,499,000, compared to $2,159,000 for the same period in 1997. This decrease
was primarily due to the lack of cost of revenues of $1,738,000 from the dental
business, which was sold in June 1997. The decrease was offset by the increase
in manufacturing overhead in the first nine months of 1998. The Company had
insufficient revenues to cover the costs of its manufacturing operations.
Engineering and development expenses totaled $1,618,000 for the nine-month
period ended September 30, 1998, compared to $570,000 for the same period in
1997, a 184% increase. The increase was primarily due to the increase in
expenditures related to the development of the LTK System.
Sales, marketing and regulatory expenses increased 21% to $2,480,000 for
the nine-month period ended September 30, 1998, compared to $2,046,000 for the
same period in 1997. The increase was due primarily to increased marketing and
regulatory spending for the ophthalmic products, as the clinical studies have
progressed towards the filing of the PMA with the FDA.
General and administrative expenses were $4,909,000 for the nine-month
period ended September 30, 1998, compared to $2,606,000 for the same period of
1997. This 88% increase was primarily due to the expenses associated with the
issuance of warrants and stock options to consultants, increased compensation
costs for certain executive officers, legal fees, and filing fees with the
Nasdaq NMS. Approximately $2,623,000
24
<PAGE> 26
of the $4,909,000 was attributable to non-cash expenses in connection with stock
and warrants issued to consultants.
Gain on sale of dental assets for the nine-month period ended September 30,
1997 of $1,740,000 was due to the cash proceeds of $4,000,000 from the sale,
less cost of assets sold and the transfer fee, transaction fees and other costs
of approximately $762,000. Approximately $211,000 of the total costs remain
unpaid as of September 30, 1998. The Company intends to recognize the gain on
the remaining $1,500,000 of the sale price as cash is collected.
Interest income was $289,000 for the nine-month period ended September 30,
1998, an increase of 291%, compared to $74,000 for the same period in 1997. The
increase was due to higher average balances in the Company's interest bearing
accounts.
Interest expense was $3,222,000 for the nine-month period ended September
30, 1998 compared to $1,080,000 for the same period in 1997. The increase was
due to the interest expense from the 1998 Notes, at a stated interest rate of
12% per annum, and non-cash interest expense for the fair value of the warrants
issued in connection with the 1997 Notes Placement and the 1998 Notes, and the
placement costs attendant to the 1997 Notes. The effective rates of interest of
the 1997 Notes and 1998 Notes, which include the amortization of the fair value
of the warrants, are approximately 21% and 26%, respectively.
Net loss for the nine-month period ended September 30, 1998 of $12,935,000,
an increase of 215% compared to $4,108,000 for the same period in 1997. This
increase was due to the lack of revenue from the Company's ophthalmic products
to offset the expenses associated with the development and regulatory approval
of the LTK System and the general expenses associated with the operations of the
Company, including the non-cash expenses associated with the various convertible
notes, warrants and options issued by the Company to fund its operations while
awaiting FDA approval to market the LTK System in the United States.
Revenues from the dental business were $1,968,000 through June 1997. Cost
of revenues were approximately $1,738,000, and operating expenses through June
1997 were $1,980,000. Interest expense and interest income were $11,000 and
$10,000 respectively, through June 1997. The operating loss from the dental
business and the gain on the sale of the dental business were $1,750,000 and
$1,740,000 respectively, in 1997.
The Company's current operations continue to be cash flow negative, further
straining the Company's working capital resources. The level of current product
sales is not sufficient to provide enough cash to support the ongoing
development and regulatory approval of the LTK System, as well as maintain the
Company's basic corporate infrastructure. In order to continue its current level
of operations beyond early 1999 and have sufficient funds to launch the LTK
System in the United States, it will be necessary for the Company to obtain
additional working capital resources, whether from debt or equity sources. 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
may be necessary for the Company to curtail spending or suspend operations in
their entirety.
FINANCIAL CONDITION
As of September 30, 1998, the Company had $5,783,000 in cash and cash
equivalents. The Company's operating activities used $6,216,000 in cash during
the nine-months ended September 30, 1998 and $5,469,000 during the same period
in 1997. Substantial portions of the 1997 and 1998 losses were funded with the
proceeds of a series of private placements. The 1997 Notes Placement had
aggregate net proceeds of approximately $3,700,000 and the 1998 Notes Placement
generated aggregate proceeds of approximately $9,300,000.
The Company's debt service obligations consist of interest, payable in cash
or in-kind, accruing at a rate of 5% per annum on the remaining $927,000 in
principal and interest on the 1997 Notes as of September 30, 1998, and 12% per
annum on the $9,751,000 of principal and interest on the 1998 Notes as of
September 30, 1998. The Company also pays $3,270 per month on a lease for
computer equipment. The warrants issued in connection with the 1998 Notes
Placement had a fair value of approximately $1.87 per warrant at the time of
issuance. The fair value of these warrants has been reflected as additional
consideration for the convertible
25
<PAGE> 27
notes, recorded as a discount on the debt and accreted as interest expense to be
amortized over the life of the convertible notes. This amortization of interest
expense associated with the warrants will reduce net income through the term of
the 1998 Notes, but will have no effect on future cash flows from operations.
The Company's current operations continue to be cash flow negative,
limiting the Company's working capital resources. Working capital at September
30, 1998 amounted to approximately $3,727,000. At December 31, 1997, working
capital amounted to approximately $1,382,000. At the Company's current rate of
cash expenditures, the Company anticipates that it will be required to raise
additional working capital during the second quarter of 1999 to fund operations.
The Company expects to spend approximately $750,000 for capital expenditures in
calendar year 1998 and an additional $900,000 for capital expenditures in
calendar year 1999. Any additional equity or debt offerings will dilute the
holdings of the Company's stockholders, however, the potential dilution to the
Company's stockholders cannot be determined at this time. No assurance can be
given that additional financing will be available, or if available, that it will
be available on terms favorable, to the Company and its Stockholders. If funds
are not available to satisfy the Company's short-term and long-term operating
requirements, the Company may be required to limit or suspend its operations in
their entirety or, under certain circumstances, be forced to seek protection
from creditors. The Company's long-term ability to continue as a going concern
is dependent upon performing profitably or obtaining further financing.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex, as virtually every computer operation
will be affected in the same way by the rollover of the two digit year value to
00. The issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its systems for Year 2000 compliance. As of
September 30, 1998, the estimated costs of these reprogramming efforts have been
approximately $250,000. It is currently expected that the remaining costs to
complete these reprogramming efforts will be less than $100,000. It is
anticipated that all of the Company's reprogramming efforts will be completed by
March 31, 1999, allowing adequate time for testing. This process includes
obtaining confirmations from the Company's primary vendors that plans are being
developed or are already in place to address processing of transactions in the
year 2000. These confirmations are expected to be obtained in writing by the
Company prior to June 30, 1999. However, there can be no assurance that the
systems of other companies on which the Company's systems rely will also be
converted in a timely manner, or that any such failure to convert by another
company would not have a material adverse effect on the Company's business,
financial conditions or results of operations.
The Company believes that it does not have a Year 2000 problem with its
products that have been sold in the past, however, the Company has not performed
an extensive review of these systems and is unlikely to be able to complete a
review prior to January 1, 2000. In addition, the Company is designing a new
product to replace its existing LTK System that is being designed to properly
recognize date-sensitive information for the Year 2000 and beyond. Although the
Company plans to perform extensive testing of its new product, there can be no
assurance that the new system will function properly until it is deployed in the
field and subjected to extensive use. Any malfunction of a deployed system could
have a material adverse effect on the Company's business, financial condition or
results of operations.
The Company is not expecting to have a material accounts receivable
exposure, or significant amount of revenues with any one customer after December
31, 1999 and, therefore, verification of customer Year 2000 compliance is not
being pursued by the Company at this time. Any failure to pay in a timely
manner, or place orders for the Company's products, by a significant number of
individual customers or by a customer with a material accounts receivable
balance, due to Year 2000 compliance issues would have material adverse effects
on the Company's business, financial condition or results of operations.
26
<PAGE> 28
The Company is currently developing a contingency plan to evaluate business
disruption scenarios, coordinate the establishment of Year 2000 contingency
plans, and identify and implement the strategies. This detailed contingency plan
is expected to be completed by June 30, 1999.
EURO CONVERSION
A single currency called the euro will be introduced in Europe on January
1, 1999. Eleven of the 15 member countries of the European Union have agreed to
adopt the euro as their common legal currency on that date. Fixed conversion
rates between these participating countries' existing currencies (the "Legal
Currencies") and the euro will be established as of that date. The Legal
Currencies are scheduled to remain legal tender as denominations of the euro
until at least January 1, 2002 (but not later than July 1, 2002). During this
transition period, parties may settle transactions using either the euro or a
participating country's legal currency.
The Company does not expect the conversion to the euro will have a material
impact on the Company's financial position or results of operations since the
majority of the Company's business transactions are recorded in U.S. currency.
NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for disclosure about
operating segments in annual financial statements and selected information in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. This
statement supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise." The new standard
becomes effective for the Company's 1999 fiscal year, and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company is evaluating the requirements of
SFAS 131 and the effects, if any, on the Company's current reporting and
disclosures.
27
<PAGE> 29
MANAGEMENT
The following persons serve as the current executive officers and directors
of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
C. Russell Trenary, III......... 41 President and Chief Executive Officer and Director
Timothy A. Marcotte............. 41 Vice President, Finance and Chief Financial Officer
and Director
Jeannie G. Cecka................ 35 Vice President, Clinical and Regulatory Affairs
Paul M. Malin................... 45 Vice President, International Sales and Marketing and
Worldwide Business Development
Robert A. Haddad................ 51 Vice President, Operations and Product Development
Richard T. VanRyne.............. 52 Vice President, U.S. Sales and Marketing
Joseph D. Koenig................ 68 Chairman of the Board and Director
Michael S. McFarland, M.D. ..... 47 Director
R. Dale Bowerman................ 58 Director
</TABLE>
Mr. Trenary was appointed the Chief Executive Officer of the Company in
June 1997. In November 1996, Mr. Trenary was appointed President and Chief
Operating Officer of the Company and was also appointed to the Board of
Directors of the Company. Mr. Trenary was appointed President and Chief
Operating Officer of Laser Biotech, Inc., a wholly owned subsidiary of the
Company, in April 1996. From 1995 until the time he joined the Company, Mr.
Trenary served as Senior Vice President of Sales and Marketing for Vidamed, Inc.
Prior to 1995, Mr. Trenary served in various positions with Allergan, Inc., most
recently as Senior Vice President, General Manager of AMO Surgical Products, an
ophthalmic business. Mr. Trenary has an M.B.A. degree from Michigan State
University and a B.S. degree from Miami University (Ohio).
Mr. Marcotte was appointed Vice President, Finance and Chief Financial
Officer of the Company in August 1997. He was also appointed to the Board of
Directors of the Company in November 1997. From December 1996 to August 1997,
Mr. Marcotte was Vice President and Chief Financial Officer of InfoGain
Corporation, an information technology consulting firm. From June 1996 to
December 1996, Mr. Marcotte was the Vice President and Chief Financial Officer
of IRIDEX Corporation, a medical device manufacturer of ophthalmic laser
products. From May 1995 to June 1996, Mr. Marcotte served as the Executive Vice
President of Finance and Operations and Chief Financial Officer and Secretary
for Now Software, Inc., a desktop software developer, and from May 1993 to May
1995, he served as Vice President of Finance and Operations and Chief Financial
Officer at the same company. Mr. Marcotte has an M.B.A. degree and a B.S. degree
from the University of Michigan.
Ms. Cecka was appointed Vice President, Clinical and Regulatory Affairs of
the Company in August 1996. From February 1996 to August 1996, Ms. Cecka was
Quality Systems Auditor at Tuv Product Service. From March 1995 to February
1996, Ms. Cecka was Director of Clinical and Regulatory Affairs at MedAcoustics,
Inc. From September 1992 to March 1995, Ms. Cecka was Manager of Clinical
Research for Baxter Novacor, a developer and marketer of left ventricular assist
devices. Prior to September 1992, Ms. Cecka spent seven years at Allergan, Inc.
holding positions ranging from Manager, Clinical Affairs to Director, Worldwide
Clinical Research. Ms. Cecka has an M.B.A. degree from Pepperdine University and
a B.S. degree from UC Irvine.
Mr. Malin was appointed Vice President, International Sales and Marketing
and Worldwide Business Development, of the Company in September 1998. Prior to
joining the Company in May 1996, Mr. Malin was the Director of Marketing at
IRIDEX Corporation, a medical device manufacturer of ophthalmic laser products
from July 1995 to May 1996. From October 1983 to July 1995, Mr. Malin held
various senior sales and marketing positions at Allergan, Inc. Mr. Malin has an
M.B.A. from Pepperdine University and a B.A. degree from Washington and Lee
University.
Mr. Haddad joined the Company in March 1997 as Vice President, Operations
and Product Development. From March 1991 to March 1997, Mr. Haddad was Vice
President, Operations, of IRIDEX
28
<PAGE> 30
Corporation, a medical device manufacturer of ophthalmic laser products. Mr.
Haddad has an M.B.A. degree from Sacramento State University and a B.S. degree
from California State Polytechnic University.
Mr. VanRyne was appointed Vice President, U.S. Sales and Marketing, of the
Company in September 1998. From August 1997 to September 1998, Mr. VanRyne was
the Company's Director of Sales and Marketing for the Americas. Prior to joining
the Company, Mr. VanRyne was the Director of New Business Development at
MedLogic Global Corporation, a manufacturer of wound healing products from April
1996 to August 1997. From April 1995 to April 1996, Mr. VanRyne was a consultant
for medical device marketing and educational strategy. From 1986 to April 1995,
Mr. VanRyne was employed by Allergan, Inc. in a variety of senior sales and
marketing positions.
Mr. Koenig was appointed to the Board of Directors of the Company in
December 1994. Mr. Koenig had also served as a director of the Company from
August 1991 through January 1994. He has been a consultant for Koenig
Associates, a management consulting firm, since October 1985. Mr. Koenig is also
a director of Ancot Corporation, Hench Controls Corporation and ORISA
Technologies, Inc. Mr. Koenig has a B.S. degree in Electrical Engineering from
the University of Illinois.
Dr. McFarland was appointed to the Board of Directors of the Company in
October 1997. From 1980, Dr. McFarland has been a practicing ophthalmologist in
Arkansas. Dr. McFarland was the recipient of the Innovators Award of the Irish
American Ophthalmological Association in 1992 for his development of sutureless
cataract surgery. Dr. McFarland has a B.S. degree from Hendrix College and a
M.D. degree from the University of Arkansas.
Mr. Bowerman was appointed to the Board of Directors of the Company in
November 1997. From 1994 until his retirement in 1997, Mr. Bowerman had been
employed by SHA, LLC d/b/a Firstcare, a Texas health maintenance organization,
most recently as President and Chief Executive Officer. From 1973 to 1994, Mr.
Bowerman was Vice President, Finance and Chief Financial Officer at High Plains
Baptist Health Systems. Mr. Bowerman is also a director of Carrington
Laboratories, Inc., a pharmaceutical research company. Mr. Bowerman has a B.B.A.
degree in Accounting from West Texas State University.
The Board adopted separate amended and restated change of control
agreements (collectively, the "Change of Control Agreements") with the Company's
executive officers. The Change of Control Agreements provide these executives
with separation pay and benefits following a "change of control" in the Company
and: (i) the executive's subsequent termination of employment by the Company
(unless such termination is for "cause") or such termination results from the
executive's death, disability or retirement; or (ii) the executive resigns for
"good reason." An eligible termination must occur within two years of the change
of control or the agreement entered into with the executive is void. Each Change
of Control Agreement will continue until May 8, 2001 and renew for three year
periods from that date unless the executive receives written notice of
termination of the Change of Control Agreement at least 120 days prior to the
renewal date. See "Description of Capital Stock."
DESCRIPTION OF CAPITAL STOCK
The current authorized capitalization of the Company consists of 75,000,000
shares of Common Stock and 2,000,000 shares of Preferred Stock, par value $0.001
per share ("Preferred Stock"). As of November 30, 1998, there were 34,514,690
issued and outstanding shares of Common Stock. No shares of Preferred Stock have
been issued or reserved for issuance by the Board of Directors of the Company
(the "Board").
The following summary of the terms of the Company's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
terms set forth in the Company's Certificate of Incorporation, as amended to
date (the "Sunrise Certificate").
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders of the Company. Stockholders do not have
cumulative voting rights. In the event of a liquidation,
29
<PAGE> 31
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share equally and ratably in any assets remaining after the payment
of all debts and liabilities of the Company, subject to the prior rights, if
any, of the holders of Preferred Stock. Holders of Common Stock do not have
preemptive or other subscription or conversion rights. Common Stock is not
subject to redemption and the outstanding shares, including the Offered Shares,
are fully paid and nonassessable.
PREFERRED STOCK
Preferred Stock may be issued from time to time in one or more series, as
determined by the Board. The directors may fix or alter from time to time the
designation, powers, preferences and rights of the shares of each series of
Preferred Stock, provided that the directors may alter the qualifications,
limitations or restrictions of any series of Preferred Stock only prior to the
issuance of any shares of such series. The directors may also establish from
time to time the number of shares constituting any series of Preferred Stock.
The directors may increase or decrease the number of shares subsequent to the
issuance of shares of a series, so long as the directors do not decrease the
number of authorized shares of a series below the number of shares of such
series then outstanding. The issuance of shares of Preferred Stock may have
voting and conversion rights which could adversely affect the holders of shares
of Common Stock. Under certain circumstances, the issuance of shares of
Preferred Stock may render more difficult or tend to discourage a merger, tender
offer or proxy contest, the assumption of control by a holder of a large block
of the Company's securities or the removal of incumbent management. The Company
will not issue Preferred Stock unless such issuance is approved by a majority of
the Company's independent directors who do not have an interest in the
transaction and who will have access, at the Company's expense, to the Company's
or independent legal counsel. As of the date hereof, the Board has not
designated any series of Preferred Stock.
CHANGE OF CONTROL AGREEMENTS
The Change of Control Agreements provide the Company's executive officers
with separation pay and benefits following a "change of control" in the Company
and: (i) the executive's subsequent termination of employment by the Company
(unless such termination is for "cause") or such termination results from the
executive's death, disability or retirement; or (ii) the executive resigns for
"good reason." An eligible termination must occur within two years of the change
of control or the agreement entered into with the executive is void. Each Change
of Control Agreement will continue until May 8, 2001 and renew for three year
periods from that date, unless the executive receives written notice of
termination of the Change of Control Agreement at least 120 days prior to the
renewal date.
Under the Change of Control Agreements, the separation pay equals: (i) for
the President and Chief Executive Officer, one and one-half times his annualized
base salary and, for the other executives, one times their respective annualized
base salaries; plus (ii) the target cash bonus for the year of termination. The
executives are also entitled to health, disability and life insurance in
accordance with the plans maintained for executives. In the case of the
President and Chief Executive Officer, these benefits are for a period of one
and one-half years from the date of termination, and for the other executives,
for a period of one year (provided that such benefits shall cease if the
executive becomes employed during such period and receives similar benefits). In
the event of a change of control of the Company, stock options granted to the
executives shall fully vest on such date and become immediately exercisable. If
the total payments to any executive constitutes an "excess parachute payment"
within the meaning of Section 280G of the Internal Revenue Code, then the
Company shall reimburse the executive for certain income and excise taxes.
A "change of control" for purposes of the Change of Control Agreements is
deemed to occur if: (a) the beneficial ownership of securities representing more
than 33% of the combined voting power of the Company is acquired by any "person"
as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934;
(b) the stockholders of the Company approve a definitive agreement to merge or
consolidate the Company with or into another corporation, to sell or otherwise
dispose of all or substantially all of its assets, or to adopt a plan of
liquidation; or (c) during any period of three consecutive years, individuals
who at the beginning of such period were members of the Board cease for any
reason to constitute at least a majority thereof. The Change of Control
Agreements were designed to attract and retain valued executives of the Company
and to
30
<PAGE> 32
ensure that the performance of these executives is not undermined by the
possibility, threat or occurrence of a change of control.
PRICE RANGE OF COMMON STOCK
As of November 30, 1998, there were 655 holders of record of the Common
Stock. Price information for the Common Stock may be obtained from the Nasdaq
National Market System. Prior to August 13, 1998, the Common Stock was traded in
the over-the-counter market. The table below sets forth the reported high and
low bid quotations of the Common Stock as reported on the OTC Bulletin Board for
the periods indicated.
<TABLE>
<CAPTION>
HIGH ASK(1) LOW BID(1)
----------- ----------
<S> <C> <C>
1996
First Quarter............................................. $ 1.44 $1.34
Second Quarter............................................ $ 2.31 $1.13
Third Quarter............................................. $ 2.00 $0.88
Fourth Quarter............................................ $ 2.13 $0.81
1997
First Quarter............................................. $ 1.72 $0.75
Second Quarter............................................ $ 1.41 $0.94
Third Quarter............................................. $ 3.94 $1.00
Fourth Quarter............................................ $ 5.13 $3.13
1998
First Quarter............................................. $ 7.53 $2.91
Second Quarter............................................ $10.38 $5.56
Third Quarter............................................. $ 8.19 $3.91
Fourth Quarter (to December 16, 1998)..................... $ 7.38 $3.75
</TABLE>
- ---------------
(1) Bid and ask prices are quoted on the OTC Bulletin Board in increments of
1/32. Certain of the bid and ask prices set forth in this table have been
rounded to the nearest cent.
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. On December 16, 1998, the closing
price of the Common Stock as reported on the Nasdaq National Market System was
$6.75 per share.
DIVIDENDS
In the past three years, the Company has not declared or paid any cash
dividend on the Common Stock. The Company currently intends to retain any and
all future earnings to finance its business. Accordingly, the Company does not
anticipate paying cash or other dividends on the Common Stock in the foreseeable
future.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Sunrise Certificate contains the following special provisions that may
delay, defer or prevent a change in control of the Company:
The Board is divided into three classes, with members serving three-year
terms ending in successive years. An objective of the classified Board is to
facilitate continuity and stability of the Company's management and policies,
since a majority of the Directors at any given time will have prior experience
as Directors of the Company. However, classification also makes it more
difficult for the stockholders to change a majority of the Board. It would take
at least two annual meetings to elect a majority of the Board of Directors,
unless the Sunrise Certificate was amended to eliminate provisions for a
classified Board of Directors.
The Sunrise Certificate also provides that Directors may only be removed
with cause by the vote of the holders of a majority of the voting power of the
outstanding voting stock of the Company. In addition, the
31
<PAGE> 33
Sunrise Certificate provides that the Board may, from time to time, fix the
number of Directors constituting the Board and fill vacancies on the Board.
The Sunrise Certificate authorizes the Board to fix or alter from time to
time the designation, powers, preferences and rights of the Preferred Stock of
each series and the qualifications, limitations or restrictions of any unissued
series of Preferred Stock, and to establish the number of shares constituting
any such series.
The Company is subject to the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "Delaware Law"). In general,
Section 203 prohibits certain publicly-held Delaware corporations from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person or entity
became an interested stockholder, unless the business combination is approved in
a prescribed manner or certain other exceptions apply. For purposes of Section
203, a "business combination" is defined broadly to include mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person or entity who, together with affiliates and associates, owns, or within
the three immediately preceding years of a business combination did own, 15% or
more of the corporation's outstanding voting stock.
In accordance with the Sunrise Certificate and the Bylaws, for nominations
for the Board or for other business to properly brought by a stockholder before
an annual meeting of stockholders, the stockholder must first have given timely
notice thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice generally must be delivered not less than 60 days nor more
than 90 days prior to the annual meeting. The notice must contain, among other
things, certain information about the stockholder delivering the notice and as
applicable, background about the nominee or a description of the proposed
business to be brought before the meeting.
The Sunrise Certificate and the Bylaws provide that no action is permitted
to be taken by the stockholders of the Company by written consent. Special
meetings may be called only by the Board of Directors, the Chairman of the Board
or the Chief Executive Officer of the Company. These provisions could have the
effect of delaying until the next annual stockholders' meeting stockholder
actions which are favored by the holders of a majority of the outstanding voting
securities of the Company. These provisions may also discourage another person
or entity from making a tender offer for the Common Stock, because such person
or entity, even if it acquired a majority of the outstanding voting securities
of the Company, would be able to take action as a stockholder (such as electing
new Directors or approving a merger) only at a duly called stockholders'
meeting, and not by written consent.
The Delaware Law provides generally that the affirmative vote of a majority
of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. The affirmative vote of the holders of at least sixty-six and
two-thirds percent (66 2/3%) of the outstanding voting stock of the Company is
required to: (a) alter, amend or adopt new Bylaws; and (b) to alter, amend or
repeal Article V, VI or VII of the Sunrise Certificate. Such stockholder vote
would be in addition to any separate class vote that might in the future be
required pursuant to the terms of any Preferred Stock that might be outstanding
at the time any such amendments are submitted to stockholders. See "Risk
Factors -- Potential Anti-Takeover Effects."
STOCKHOLDER RIGHTS PLAN
Each issued and outstanding share of Common Stock has associated with it
one right to purchase from the Company a share of Common Stock (the "Rights") at
a price of $20 (the "Purchase Price"), subject to adjustment. The description
and terms of the Rights are set forth in the rights agreement (the "Rights
Agreement") between the Company and ChaseMellon Shareholder Services, L.L.C., as
rights agent (the "Rights Agent"). The Rights will be evidenced by the Common
Stock certificates. The Rights will be exercisable upon the earlier to occur of:
(i) ten business days following a public announcement that a person or group of
affiliated or associated persons has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the outstanding shares of Common Stock,
or any person who acquires beneficial ownership
32
<PAGE> 34
in a Permitted Transaction, as defined below (an "Acquiring Person"); or (ii)
ten business days (or such later date as may be determined by action of the
Board of Directors prior to any person becoming an Acquiring Person) following
the commencement of, or announcement of an intention to make, a tender offer or
exchange offer, the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of such outstanding shares of
Common Stock (the earlier of such dates being the "Distribution Date").
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with the shares of Common Stock. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
shares of Common Stock certificates issued upon transfer or new issuances of
shares of Common Stock will contain the notation incorporating the Rights
Agreement by reference. As soon as practicable following the Distribution Date,
separate certificates evidencing the Rights (the "Rights Certificates") will be
mailed to holders of record of the shares of Common Stock as of the close of
business on the Distribution Date and such separate Rights Certificates alone
will evidence the Rights. The Rights are not exercisable until the Distribution
Date and will expire on October 24, 2007 (the "Final Expiration Date"), unless
extended or unless the Rights are earlier redeemed by the Company.
The Purchase Price payable and the number of shares of Common Stock or
other securities or property issuable upon exercise of the Rights are subject to
adjustment in certain circumstances. In the event any person or entity becomes
an Acquiring Person and one of the following events has occurred, then proper
provision will be made so that each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will then be void), will have
the right to receive upon exercise that number of shares of Common Stock having
a market value of two times the applicable exercise price of the Right: (i) the
Company is the surviving corporation in a merger with an Acquiring Person and
the shares of Common Stock are not changed or exchanged; (ii) the Acquiring
Person engages in certain self-dealing transactions with the Company; (iii) any
person becomes the beneficial owner of 15% or more of the outstanding shares of
Common Stock (unless the event in which such person acquired 15% or more of the
outstanding shares of Common Stock is a Permitted Transaction); or (iv) the
Company engages in a reclassification or recapitalization that results in an
increase of 1% or more in the Acquiring Person's percentage of ownership of the
Company.
A Permitted Transaction is a stock acquisition, tender or exchange offer
pursuant to a definitive agreement that would result in a person beneficially
owning 50% or more of the outstanding shares of shares of Common Stock and that
was approved by the directors (including a majority of the directors not in
association with an Acquiring Person) prior to the execution of the agreement or
the public announcement of the offer. In the event that the Company is acquired
in a merger or other business combination transaction or 50% or more of its
consolidated assets or earning power are sold, unless such event is a Permitted
Transaction, proper provisions will be made so that each holder of a Right will
have the right to receive, upon the exercise of the Right at the then applicable
exercise price, that number of shares of common stock of the acquiring company
that at the time of such transaction will have a market value of two times the
applicable exercise price of the Right. At any time prior to the tenth business
day following an Acquiring Person's acquisition of 15% or more of the
outstanding shares of Common Stock, the Board of Directors, with concurrence of
a majority of the directors in office at the time the Rights Agreement was
adopted or whose initial election or nomination for election by the Company's
stockholders was approved by a majority of the such directors then serving on
the Board of Directors (the "Continuing Directors"), may redeem the Rights in
whole, but not in part, at a price of $0.001 per Right. In addition, the Board
of Directors may extend or reduce the period during which the Rights are
redeemable, so long as the Rights are redeemable at the time of such extension
or reduction. Immediately upon any redemption of the Rights, the right to
exercise the Rights will terminate and the only right of the holders of Rights
will be to receive the Redemption Price. The terms of the Rights may be amended
by the Board of Directors, with concurrence of a majority of the Continuing
Directors, without the consent of the holders of the Rights, including an
amendment to extend the Final Expiration Date, except that from and after the
Distribution Date no such amendment may adversely affect the economic interests
of the holders of the Rights. See "Risk Factors -- Potential Anti-Takeover
Effects."
33
<PAGE> 35
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Common Stock
as of November 30, 1998 by: (i) each person known by the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock; (ii)
each of the Company's directors; (iii) each of the Company's executive officers;
and (iv) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
-----------------------
NUMBER OF PERCENT OF
NAME AND ADDRESS(2) SHARES SHARES
------------------- --------- ----------
<S> <C> <C>
C. Russell Trenary, III(3).................................. 707,962 2.0
Timothy A. Marcotte(4)...................................... 150,718 *
Paul M. Malin(5)............................................ 178,717 *
Jeannie G. Cecka(6)......................................... 174,047 *
Robert A. Haddad(7)......................................... 225,285 *
Richard T. VanRyne(8)....................................... 84,735 *
Joseph D. Koenig(9)......................................... 110,971 *
Michael S. McFarland, M.D.(10).............................. 45,166 *
R. Dale Bowerman(11)........................................ 45,349 *
Alan B. Aker
1445 Boca Raton Blvd
Boca Raton, Florida 33432................................. 1,823,160 5.1
David C. Brown
4101 Evans Avenue
Ft. Myers, Florida 33901.................................. 2,361,037 6.7
Donald R. Sanders
180 West Park Avenue
Suite 150
Elmhurst, Illinois 60126.................................. 2,123,269 5.8
All executive officers and directors as a group (9
persons)(12).............................................. 1,722,950 5.0%
</TABLE>
- ---------------
* Less than one percent
(1) Based on information provided by each of the identified officers and
directors.
(2) Unless otherwise indicated, the persons named in the table above have the
sole voting and investment power with respect to all shares beneficially
owned by them, subject to applicable community property laws. Unless
otherwise indicated, the address of each beneficial owner is: c/o Sunrise
Technologies International, Inc., 3400 West Warren Avenue, Fremont,
California 94538.
(3) Includes 623,364 shares that Mr. Trenary does not currently own, but which
he has the right to acquire within 60 days of November 30, 1998, pursuant
to outstanding options granted under the Company's stock option plan
("Options") and 72,598 shares associated with convertible notes and
warrants purchased in February 1997.
(4) Consists of 150,718 shares that Mr. Marcotte does not currently own, but
which he has the right to acquire within 60 days of November 30, 1998,
pursuant to Options.
(5) Includes 175,717 shares that Mr. Malin does not currently own, but which he
has the right to acquire within 60 days of November 30, 1998, pursuant to
Options.
(6) Includes 168,947 shares that Ms. Cecka does not currently own, but which
she has the right to acquire within 60 days of November 30, 1998, pursuant
to Options.
(7) Includes 166,343 shares that Mr. Haddad does not currently own, but which
he has the right to acquire within 60 days of November 30, 1998, pursuant
to Options, and 56,942 shares associated with the indirect ownership of
convertible notes and warrants purchased in January 1998.
34
<PAGE> 36
(8) Includes 26,250 shares that Mr. VanRyne does not currently own, but which
he has the right to acquire within 60 days of November 30, 1998, pursuant
to Options, and 56,942 shares associated with the indirect ownership of
convertible notes and warrants purchased in January 1998.
(9) Consists of 82,500 shares that Mr. Koenig does not currently own, but which
he has the right to acquire within 60 days of November 30, 1998, pursuant
to Options, and 28,471 shares associated with convertible notes and
warrants purchased in January 1998.
(10) Includes 39,166 shares that Dr. McFarland does not currently own, but which
he has the right to acquire within 60 days of November 30, 1998, pursuant
to Options.
(11) Includes 23,333 shares that Mr. Bowerman does not currently own, but which
he has the right to acquire within 60 days of November 30, 1998, pursuant
to Options.
(12) Includes 1,456,338 shares that such persons do not currently own, but which
they have the right to acquire within 60 days of November 30, 1998 pursuant
to Options, and 214,953 shares associated with the ownership of convertible
notes and warrants purchased by such persons.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Offered
Shares by the Selling Securityholders.
SELLING SECURITYHOLDERS
The Offered Shares were acquired by the Selling Securityholders through
warrant grants subsequent to October 1997 or in the 1998 Notes Placement. Absent
registration under the Securities Act, the Offered Shares are subject to certain
limitations on resale. The Registration Statement of which this Prospectus forms
a part has been filed in satisfaction of certain registration rights granted by
the Company to the Selling Securityholders.
Certain of the Selling Securityholders and M.J. Meehan & Co., are or are
affiliated with members of the National Association of Securities Dealers, Inc.
("NASD"). M.J. Meehan & Co. and its affiliates may engage in market-making
activities with respect to the Common Stock. M.J. Meehan & Co. and its
affiliates have engaged from time to time, and in the future may engage, in
purchase and sale transactions involving Common Stock, including transactions
with other NASD member firms. The Selling Securityholders, including M.J. Meehan
& Co., and any participating broker or dealer may be deemed to be "underwriters"
within the meaning of the Securities Act. Any commissions, discounts or
concessions and any gain realized by a person deemed to be an underwriter may be
deemed to be underwriting compensation to such person.
35
<PAGE> 37
The following table assumes that each of the Selling Securityholders will
sell all of the Offered Shares set forth opposite such Selling Securityholder's
name. However, one or more of the Selling Securityholders may sell only a
portion or may sell none of the Offered Shares set forth opposite such Selling
Securityholder's name.
<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES
COMMON SHARES SHARES BENEFICIALLY
BENEFICIALLY OWNED PRIOR HELD OF OWNED AFTER THE
TO THE OFFERING(1) RECORD TO OFFERING(1)
------------------------- BE SOLD IN ---------------------
NUMBER OF PERCENT THE NUMBER OF PERCENT
SHARES OF CLASS OFFERING SHARES OF CLASS
----------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
The Haddad Family Trust............... 203,834 * 67,284 136,550 *
Joseph D. Koenig...................... 113,642 * 33,642 80,000 *
Robert Gale Martin.................... 677,840 1.9 677,840 -- *
David C. Brown........................ 2,464,406 7.0 677,840 1,786,566 5.1
Cranshire Capital, LP................. 134,568 * 134,568 -- *
Donald R. Sanders, IRA, CIBC
Oppenheimer Corp. as Trustee........ 2,433,519 6.6 2,273,519 160,000 *
J.L. Gayton (Eyesight Associates 401k
Plan)............................... 167,284 * 67,284 100,000 *
Alan B. Aker.......................... 1,948,109 5.5 677,840 1,270,269 3.6
Regina Stancel........................ 219,925 * 100,925 119,000 *
Salomon Melgen & Flor Melgen.......... 1,783,697 5.0 672,840 1,110,857 3.1
Susan Smith Longan Trustee UTD
7/21/97 FBO Susan Smith Longan 1997
Revocable Trust..................... 220,000 * 220,000 -- *
M.J. Meehan & Co. LLC................. 375,296 1.1 100,925 274,371 *
Hank Asher............................ 386,420 1.1 336,420 50,000 *
Manus C. Kraff........................ 1,003,931 2.9 336,420 667,511 1.9
Pacific National Bank Custodian for
benefit of Richard T. VanRyne IRA... 89,452 * 67,284 22,168 *
David A. Brewer....................... 33,642 * 33,642 -- *
Hanabusa Investments, Inc............. 33,642 * 33,642 -- *
Sandra C. Belmont..................... 7,500 * 7,500 -- *
Paul H. Ernest........................ 77,353 * 5,000 72,353 *
Donald G. Johnson..................... 5,000 * 5,000 -- *
Douglas G. Koch....................... 13,500 * 13,500 -- *
Thomas Kohnen......................... 5,000 * 5,000 -- *
Peter J. McDonnell.................... 5,000 * 5,000 -- *
Hugo Nano............................. 5,000 * 5,000 -- *
Emanuel S. Rosen...................... 5,000 * 5,000 -- *
Rogelio Villareal..................... 5,000 * 5,000 -- *
George Griffin........................ 240,000 * 240,000 -- *
</TABLE>
PLAN OF DISTRIBUTION
Some or all of the Offered Shares may be offered for sale and sold from
time to time by the Selling Securityholders in the over-the-counter market (or
any national securities exchange or interdealer quotation system on which the
Common Stock may then be listed), or in privately negotiated transactions (which
may include block transactions) or otherwise. In addition, the Selling
Securityholders may engage in short sales and other transactions in the Common
Stock or derivatives thereof, and may pledge, sell, deliver or otherwise
transfer the Offered Shares in connection therewith. This Prospectus may be used
by the Selling Securityholders or by any broker-dealer who may participate in
sales of the Offered Shares. Participating broker-
36
<PAGE> 38
dealers may act as agents or principals or both and may receive commissions,
discounts or concessions in connection with sales or other transfers of Offered
Shares. The Company has not entered into any agreements or arrangements relating
to the sale of the Offered Shares.
The Company has agreed to pay the expenses of registering the Offered
Shares on behalf of the Selling Securityholders, other than broker-dealer
commissions, discounts or concessions and any legal fees incurred by the Selling
Securityholders in connection with sales of the Offered Shares. The Company and
the Selling Securityholders have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and for each of the two years in the period ended December 31, 1996, appearing
in this Prospectus and Registration Statement, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated balance sheet as of December 31, 1997 and the consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1997 included in this Prospectus have been included herein in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Offered Shares
will be passed upon for the Company by Holleb & Coff, Chicago, Illinois. Eric M.
Fogel, a partner with the law firm of Holleb & Coff, is presently the Secretary
of the Company and certain of such firm's partners own shares of Common Stock.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents heretofore filed by the Company with the Commission
pursuant to Section 13(a) or 15(d) of the Exchange Act (File No. 0-17816) are
hereby incorporated herein by reference: (i) current report on Form 8-K dated
June 26, 1997 (filed July 11, 1997); (ii) amendment to the current report on
Form 8-K dated June 26, 1997 (filed August 13, 1997); (iii) annual report on
Form 10-K for the year ended December 31, 1997 (filed April 6, 1998); and (iv)
quarterly reports on Form 10-Q for the quarters ended March 31, 1998 (filed May
14, 1998), June 30, 1998 (filed August 14, 1998), and September 30, 1998 (filed
November 16, 1998); and (v) current report on Form 8-K dated December 4, 1998
(filed December 4, 1998).
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is incorporated or deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, UPON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY
OF ANY OR ALL OF THE FOREGOING DOCUMENTS INCORPORATED BY REFERENCE HEREIN (OTHER
THAN EXHIBITS TO ANY SUCH DOCUMENT UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO SUCH DOCUMENT). REQUESTS FOR SUCH COPIES SHOULD
BE DIRECTED TO THE SECRETARY OF SUNRISE, 3400 WEST WARREN AVENUE, FREMONT,
CALIFORNIA 94538; TELEPHONE (510) 623-9001.
37
<PAGE> 39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Coopers & Lybrand L.L.P.(1), Independent
Accountants............................................... F-2
Report of Ernst & Young LLP, Former Independent Auditors.... F-3
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-5
Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 1997, 1996
and 1995.................................................. F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
Schedule II Valuation and Qualifying Accounts............... F-19
Condensed Consolidated Statements of Operations -- Three and
Nine Months ended September 30, 1998 and 1997
(unaudited)............................................... F-20
Condensed Consolidated Balance Sheets -- September 30, 1998
(unaudited) and December 31, 1997......................... F-21
Condensed Consolidated Statements of Cash Flows -- Nine
Months ended September 30, 1998 and 1997 (unaudited)...... F-22
Notes to Condensed Consolidated Financial Statements........ F-23
</TABLE>
- ---------------
(1) Coopers & Lybrand L.L.P. is now known as PricewaterhouseCoopers LLP.
F-1
<PAGE> 40
REPORT OF COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS
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, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. We have also audited the financial statement schedule for
the year ended December 31, 1997. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit. The consolidated
financial statements of Sunrise Technologies International, Inc. for the years
ended December 31, 1996 and 1995, were audited by other auditors, whose report,
dated March 10, 1997, included an explanatory paragraph that described the
Company's ability to continue as a going concern.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sunrise
Technologies International, Inc. and its subsidiaries as of December 31, 1997,
and the consolidated results of their operations and their cash flows for the
year then ended, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
March 6, 1998
F-2
<PAGE> 41
REPORT OF ERNST & YOUNG LLP, FORMER 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, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sunrise Technologies International, Inc. at December 31, 1996, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Sunrise Technologies International, Inc. will continue as a going
concern. The Company has incurred recurring operating losses which condition
raises substantial doubt about the Company's ability to continue as a going
concern. 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 10, 1997
F-3
<PAGE> 42
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
(IN THOUSANDS,
<CAPTION>
EXCEPT SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,958 $ 647
Accounts receivable, net of allowance of $85 and $140 in
1997 and 1996.......................................... 312 472
Inventories, net.......................................... 127 2,135
Prepaid and other expenses................................ 140 288
-------- --------
Total current assets.............................. 2,537 3,542
Property and equipment, net................................. 204 199
Other non-current assets.................................... 208 --
-------- --------
Total assets...................................... $ 2,949 $ 3,741
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 31 $ --
Accounts payable.......................................... 284 1,586
Accrued payroll and related expenses...................... 221 209
Accrued warranty.......................................... 25 199
Other accrued expenses.................................... 594 475
-------- --------
Total current liabilities......................... 1,155 2,469
Long term debt, net of current portion...................... 945 --
-------- --------
Total liabilities................................. 2,100 2,469
-------- --------
Commitments and contingencies (Note 3)
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares
authorized, none issued or outstanding................. -- --
Common stock, $0.001 par value; 75,000,000 shares
authorized, 32,307,990 and 27,868,613 shares issued and
outstanding at December 31, 1997 and 1996,
respectively........................................... 32 28
Additional paid-in-capital................................ 38,151 31,688
Deferred compensation..................................... (272) --
Accumulated deficit....................................... (37,062) (30,444)
-------- --------
Total stockholders' equity........................ 849 1,272
-------- --------
Total liabilities and stockholders' equity........ $ 2,949 $ 3,741
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 43
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net revenues................................................ $ 2,839 $ 5,654 $ 5,294
Cost of revenues............................................ 2,546 4,016 3,657
------- ------- -------
Gross profit................................................ 293 1,638 1,637
------- ------- -------
Other costs and expenses:
Engineering and development............................... 964 1,326 1,218
Sales, marketing and regulatory........................... 2,718 3,632 2,277
General and administrative................................ 3,686 2,700 2,329
------- ------- -------
Total other costs and expense..................... 7,368 7,658 5,824
------- ------- -------
Loss from operations........................................ (7,075) (6,020) (4,187)
Gain on sale of dental assets............................... 1,740 -- --
Interest income............................................. 99 65 69
Interest expense............................................ (1,376) (13) (12)
Other....................................................... (6) -- --
------- ------- -------
Net Loss.................................................... $(6,618) $(5,968) $(4,130)
======= ======= =======
Net loss per share, basic and diluted....................... $ (0.23) $ (0.23) $ (0.28)
======= ======= =======
Shares used in calculation of basic and diluted net loss per
share..................................................... 28,550 26,414 14,935
======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 44
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN DEFERRED TREASURY ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION STOCK DEFICIT EQUITY
---------- ------ ---------- ------------ -------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
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..... 25,297,716 25 29,196 -- -- (24,476) 4,745
Sale of common stock, net of
offering costs............... 2,333,412 3 2,242 -- -- -- 2,245
Exercise of warrants and
options...................... 243,252 -- 243 -- -- -- 243
Other.......................... 12,233 -- 7 -- -- -- 7
Net loss....................... -- -- -- -- -- (5,968) (5,968)
---------- --- ------- ----- ----- -------- -------
Balance at December 31, 1996..... 27,868,613 28 31,688 -- -- (30,444) 1,272
Issuance of warrants and
beneficial conversion
features in association with
1997 Notes................... -- 1,838 -- -- -- 1,838
Conversion of 1997 Notes....... 2,902,566 3 2,599 -- -- -- 2,602
Exercise of warrants........... 1,270,531 1 1,073 -- -- -- 1,074
Exercise of options............ 247,913 -- 279 -- -- -- 279
Sale of shares under Employee
Stock Purchase Plan.......... 18,367 -- 15 -- -- -- 15
Deferred compensation related
to stock option grants....... -- -- 659 (659) -- -- --
Amortization of deferred
compensation................. -- -- -- 387 -- -- 387
Net loss....................... -- -- -- -- -- (6,618) (6,618)
---------- --- ------- ----- ----- -------- -------
Balance at December 31, 1997..... 32,307,990 $32 $38,151 $(272) $ $(37,062) $ 849
========== === ======= ===== ===== ======== =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 45
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(6,618) $(5,968) $(4,130)
------- ------- -------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 77 438 102
Amortization of deferred compensation..................... 387 -- --
Amortization of debt issuance costs....................... 150 -- --
Warrant accretion and beneficial conversion features
associated with 1997 Notes............................. 1,066 -- --
Issuance of common stock for services..................... 371 -- --
Provision for doubtful accounts........................... 176 115 25
Provision for obsolete inventory.......................... 397 -- --
Gain on sale of dental assets............................. (1,740) -- --
Changes in assets and liabilities:
Accounts receivable.................................... (16) 461 (303)
Inventories............................................ 233 (837) 289
Other current assets................................... 148 (31) 25
Accounts payable....................................... (1,302) 489 (278)
Other accrued liabilities.............................. (258) 36 (225)
Other long-term liabilities............................ 155 -- --
------- ------- -------
Total Adjustments................................. (156) 671 (365)
------- ------- -------
Net cash used in operating activities....................... (6,774) (5,297) (4,495)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.......................... (98) (65) (50)
Proceeds from sale of dental assets, net of costs........... 3,449 -- --
------- ------- -------
Net cash provided by (used in) investing activities......... 3,351 (65) (50)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on capital lease obligations........................ (5) -- (18)
Issuance of common stock, net of offering costs............. 996 2,495 7,518
Issuance of 1997 Notes...................................... 4,101 -- --
Capitalization of debt issuance costs....................... (358) -- --
------- ------- -------
Net cash provided by financing activities................... 4,734 2,495 7,500
------- ------- -------
Net increase (decrease) in cash and equivalents............. 1,311 (2,867) 2,955
Cash and cash equivalents at beginning of year.............. 647 3,514 559
------- ------- -------
Cash and cash equivalents at end of year.................... $ 1,958 $ 647 $ 3,514
======= ======= =======
</TABLE>
See accompanying notes.
F-7
<PAGE> 46
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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 intercompany balances
and transactions.
The Company has incurred significant losses for the last several years and
at December 31, 1997 has an accumulated deficit of $37,062,000. 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 recognized the need for infusion of cash
during the fiscal year 1998 and in January 1998, the Company completed a
$9,300,000 private placement of convertible notes with warrants, net of offering
costs. There can be no assurance that additional funds can be raised on terms
acceptable to the Company, if at all.
Industry Segment and Concentration of Risks
The Company, which operates in a single industry segment, designs,
manufactures, markets and services medical laser systems. The Company sells its
products to customers in the field of ophthalmology 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.
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.
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 levels
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 late in a quarter. Any such shortfall could have an
immediate and material adverse effect on the Company's operating results.
The Company's activities are subject to extensive regulation by the FDA and
similar health authorities in certain foreign countries. The LTK System is
regulated as a Class III medical device by the FDA under the Food, Drug &
Cosmetic Act. Class III medical devices require a PMA by the FDA prior to
commercial sale in the United States. The PMA process (and underlying clinical
studies) is lengthy, the outcome is difficult to predict and requires
substantial commitments of the Company's financial resources and management's
time and effort. Delays in obtaining or failure to obtain required regulatory
approvals or clearances in the United States and other countries would postpone
or prevent the marketing of the LTK System and other devices and would impair
the Company's ability to generate funds from operations, which in turn would
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no
F-8
<PAGE> 47
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assurance that the Company will be able to obtain in a timely manner, if at all,
the required PMA in the United States for intended uses of the LTK System, or
for any other devices which the Company may seek approvals or clearances. Any
products manufactured or distributed by the Company will be subject to pervasive
and continuing regulation by the FDA.
In addition, the introduction of the Company's products in foreign
countries may require obtaining individual foreign regulatory clearances in
numerous countries. Although the Company's products have been sold in
approximately 15 countries, sales of the LTK System require rigorous regulatory
approvals before being sold in the United States and Japan. There can be no
assurance that the Company will be able to obtain regulatory clearances for its
products in the United States or foreign markets.
The Company's international business is an important contributor to the
Company's net revenues and gross profits. Substantially all of the Company'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.
The Company has developed only limited clinical data to date on the safety
and efficacy of the LTK System in correcting hyperopia (farsightedness), and
related long-term safety and efficacy data. The FDA has not yet determined
whether the LTK System will prove to be safe or effective for the predictable
and reliable treatment of hyperopia or other common vision problems. There can
be no assurance that long-term safety and efficacy data when collected will be
consistent with the clinical trial results previously obtained or will
demonstrate that the LTK System can be used safely and successfully to treat
hyperopia in a broad segment of the population on a long-term basis.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on deposit with the Company's
bank and highly liquid investments with a maturity from the date of purchase of
90 days or less. As of December 31, 1997 and 1996, the Company did not hold any
investments in debt or equity securities.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventories at December 31, consist of:
<TABLE>
<CAPTION>
1997 1996
----- ------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.............................................. $ 416 $1,468
Work-in-process............................................ 167 299
Finished goods............................................. 190 718
----- ------
773 2,485
Less reserves.............................................. (646) (350)
----- ------
Inventory, net............................................. $ 127 $2,135
===== ======
</TABLE>
F-9
<PAGE> 48
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Most components used in the Company's laser systems are purchased from
outside sources. Although some of the parts and components used by the Company
in producing its products are available from multiple sources, the Company
currently purchases each of its components from a single source in an effort to
obtain volume discounts.
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:
<TABLE>
<CAPTION>
1997 1996
----- -------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment..................................... $ 257 $ 1,644
Computer Equipment.......................................... 231 611
Furniture and fixtures...................................... 27 207
Leasehold improvements...................................... 0 392
----- -------
515 2,854
Less accumulated depreciation and amortization.............. (311) (1,655)
----- -------
Property and equipment, net................................. $ 204 $ 199
===== =======
</TABLE>
Other Non-Current Assets
Other non-current assets are comprised principally of note placement costs
and are being amortized over the life of the notes issued in the 1997 Notes
Placement (the "1997 Notes") (two years). The amortization of the note placement
costs into interest expense for 1997, 1996 and 1995 was $149,000, $0 and $0,
respectively.
Net Loss Per Share
Effective December 31, 1997, the Company adopted Financial Accounting
Standards Board No. 128 "Earnings Per Share" (EPS) and accordingly all prior
periods have been restated. Basic EPS is computed as net income (loss) divided
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from common shares
issuable through stock options, warrants and other convertible securities.
Common equivalent shares are excluded from the computation of net loss per share
if their effect is anti-dilutive.
F-10
<PAGE> 49
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of the numerator (net loss) and
denominator (number of shares) used in the basic and diluted EPS calculation:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
BASIC EPS:
Net loss.............................................. $(6,618) $(5,968) $(4,130)
Average Common Shares Outstanding..................... 28,550 26,414 14,935
------- ------- -------
Basic EPS............................................. $ (0.23) $ (0.23) $ (0.28)
======= ======= =======
DILUTED EPS:
Net loss.............................................. $(6,618) $(5,968) $(4,130)
Average Common Shares Outstanding..................... 28,550 26,414 14,935
Convertible Notes..................................... -- -- --
Warrants.............................................. -- -- --
Stock Options......................................... -- -- --
Total Shares.......................................... 28,550 26,414 14,935
------- ------- -------
Diluted EPS........................................... $ (0.23) $ (0.23) $ (0.28)
======= ======= =======
</TABLE>
7,303,537 shares in 1997, 989,637 shares in 1996 and 739,446 shares in 1995
were excluded from the shares used to calculate diluted EPS as their effect is
anti-dilutive.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the market price of the Company's stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. For grants of options or warrants to non-employees, compensation
expense is measured using the intrinsic value method and the resulting
compensation is deferred and amortized to expense over the vesting period. The
Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation."
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.
Research and Development
Research and development expenditures are charged to operations as
incurred.
F-11
<PAGE> 50
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segment Information
The Company had export sales by region as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Europe........................................... $ 152 $1,036 $1,948
Pacific Rim...................................... 409 1,602 1,192
Canada........................................... 180 -- 248
Other............................................ 324 -- 282
------ ------ ------
Total.................................. $1,065 $2,638 $3,670
====== ====== ======
</TABLE>
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts payable and
other accrued liabilities approximate fair value due to their short maturities.
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of its debt obligations approximates fair
value.
Reclassifications:
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
2. TAXES ON INCOME
The Company uses the liability method to calculate deferred income taxes.
The realization of deferred tax assets is based on historical tax positions and
expectations about future taxable income. The Company's effective tax rate
differs from the statutory federal income tax rate as shown in the following
schedule:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory Rate........................................ (34)% (34)% (34)%
NOL's not benefited which have been reserved.......... 34% 34% 34%
--- --- ---
0% 0% 0%
=== === ===
</TABLE>
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities for 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS: 1997 1996
-------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards..................... $ 11,100 $ 9,000
Research credits (expire 2005-2009).................. 700 600
Other................................................ 500 600
-------- --------
Total deferred tax asset............................... 12,300 10,200
Valuation allowance for deferred tax assets............ (12,300) (10,200)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========
</TABLE>
As of December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $30,000,000 and $11,000,000, respectively.
The change in the Company's valuation allowance from 1996 to 1997 was an
increase of $2,100,000. The net operating loss and credit carryforwards will
expire at various dates through 2012 if not utilized.
F-12
<PAGE> 51
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
3. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain of its facilities and equipment under a
noncancellable operating lease. Rent expense was $233,000, $290,000 and $281,000
in 1997, 1996 and 1995, respectively.
The following is a schedule by year of future minimum lease payments at
December 31, 1997:
<TABLE>
<CAPTION>
OPERATING
LEASES
--------------
(IN THOUSANDS)
<S> <C>
Year ending December 31,
1998...................................................... $147
1999...................................................... 155
2000...................................................... 162
2001...................................................... 14
----
Total minimum payments required............................. $478
====
</TABLE>
Contingencies
During 1997, the Company settled all of its outstanding disputes with
American Dental Technologies, Inc. ("ADT") and with Danville Engineering, Inc.
The settlement called for certain payments to be made by the Company to ADT upon
the sale of the dental assets of the Company. The Company made a payment of
$275,000 to ADT during 1997 and believes it has no further obligation to pay
ADT.
4. LONG-TERM DEBT
Long-term debt consists primarily of the 1997 Notes and associated
discounts on those notes. In March 1997, the Company completed a private
placement of convertible notes with warrants raising gross proceeds of
$4,101,000. In connection with this private placement, the placement agent
received warrants to purchase 230,756 shares of common stock at an exercise
price of $1.00 per share with expiration dates of February and March 2002. In
addition, the notes were convertible into 4,615,143 shares of common stock and
the warrants attached to the notes were convertible into 2,307,572 shares of
common stock with an exercise price of $1.00 per share and expiration dates of
February and March 2002. As of December 31, 1997, certain of the notes were
converted into 2,902,573 shares of common stock and certain warrants were
converted into 702,857 shares of common stock. As of December 31, 1997, there
remained warrants outstanding convertible into 1,835,471 common stock, including
the placement agent warrants, and 1,712,570 shares convertible from the notes.
The 1997 Notes consist of $1,499,000 in principal at December 31, 1997, bear
interest at 5% per annum, and are due and payable in February and March of 1999.
The 1997 Notes are collateralized by a lien against the Company's ophthalmic
patents and have no significant performance covenants. The majority of the 1997
Notes, which are immediately convertible, were issued with a beneficial
conversion feature. The resulting discount of approximately $515,000 increased
the effective interest rate and has been charged to interest expense.
The Company also leases certain equipment under noncancellable capital
leases. The cost of equipment under capital leases was $103,000 and accumulated
amortization was $8,500 at December 31, 1997.
F-13
<PAGE> 52
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1997, the Company's long-term debt consisted of
$1,499,000 of the 1997 Notes, net of a discount related to the warrants of
$772,000, interest of $155,000 on the 1997 Notes and capital lease obligations
of $94,000. Future payments of $32,000, $1,686,000 and $30,000 are due in fiscal
years 1998, 1999 and 2000, respectively. The effective rate of interest of the
1997 Notes, which includes the amortization of the fair value of the warrants,
is approximately 21%.
Warrants
The Company has granted the note holders participating in the 1997 Notes
Placement warrants to purchase 2,538,328 shares of common stock. The warrants
are exercisable at a purchase price of $1.00 per share and expire in February
and March 2002. The warrants issued had a fair value of approximately $1.25 per
warrant, at the time of issuance. The fair value of these warrants has been
reflected as additional consideration for the 1997 Notes, recorded as a discount
on the debt and accreted as interest expense to be amortized over the life of
the 1997 Notes.
5. STOCKHOLDERS' EQUITY
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 warrants to purchase 62,500 shares of common stock. The exercise
price for the warrants is $6.00 per share and the warrants expire February 1999.
In June 1995, the Company completed a private placement of 2,100,000 shares
of common stock.
In September 1995, the Company completed a private placement of 13,000,000
shares of common stock. In connection with the private placement, the placement
agent received a warrant to purchase 675,000 shares of common stock. The
exercise price for these warrants was $0.55 and only 567,674 shares were
exercised in full during 1997. The remaining 107,326 shares were cancelled.
In September 1996, the Company completed a private placement of 2,333,412
shares of common stock. In connection with the private placement, the placement
agent received warrants to purchase 116,721 shares of common stock with an
exercise price of $1.0625 per share and an expiration date of August 2001.
In March 1997, the Company completed a private placement of convertible
notes with warrants. In connection with this private placement, the placement
agent received warrants to purchase 230,756 shares of common stock at an
exercise price of $1.00 per share with expiration dates of February and March
2002. In addition, the notes were convertible into 4,615,143 shares and the
warrants attached to the notes were convertible into 2,307,572 shares with an
exercise price of $1.00 per share and an expiration date of February and March
2002. The Company also issued 276,000 warrants to consultants and members of its
Scientific Advisory Board in November 1997 to purchase shares of common stock at
exercise prices ranging from $1.00 to $3.60. These warrants terminate in
November 2002. As of December 31, 1997, certain of the notes were converted into
2,902,573 shares and certain warrants were converted into 702,857 shares of
common stock. As of December 31, 1997, there remained warrants outstanding
convertible into 1,835,471 common shares, including the placement agent
warrants, and 1,712,570 shares convertible from the notes.
As of December 31, 1997, there were warrants outstanding to purchase
2,290,692 shares of common stock.
In January 1998, the Company completed a private placement of convertible
notes with warrants. The notes are convertible into 3,116,666 shares of common
stock and the warrants are convertible into 1,870,000 shares of common stock
with an exercise price of $3.00 and an expiration date of January 2003.
F-14
<PAGE> 53
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Option Plans
In 1988, the Company adopted the 1988 Stock Option Plan (the "1988 Plan")
under which employees, directors and consultants may be granted incentive or
nonstatutory stock options. Under the 1988 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 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 1988 Plan expires in
November 1998.
In 1997, the Company adopted the 1997 Stock Option Plan (the "1997 Plan")
under which employees, directors and consultants may be granted incentive or
nonstatutory stock options. Under the 1997 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 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 1/48 of the shares subject to the option become exercisable each
month after the grant. The 1997 Plan expires in 2007.
The Company recognized approximately $949,000 of stock-based compensation
expense associated with the issuance of stock options and warrants to
consultants in 1997.
The fair value of each option grant is estimated at the date of grant using
the Black-Scholes pricing model with the following weighted average assumptions
for grants in 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Risk-free interest................................... 6.15% 5.70%
Expected life........................................ 4.8 years 4.8 years
Volatility........................................... 95.5% 95.5%
Dividend yield....................................... -- --
</TABLE>
F-15
<PAGE> 54
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the Company's option activity as of December 31, 1997, 1996,
and 1995 and changes during the year ending on those dates are as follows:
<TABLE>
<CAPTION>
SHARES OUTSTANDING OPTIONS
AVAILABLE ------------------------- WEIGHTED AVERAGE
FOR GRANT SHARES SHARE PRICE EXERCISE PRICE
---------- --------- ------------ ----------------
<S> <C> <C> <C> <C>
BALANCE -- 12/31/1994........ 346,770 1,183,858 $0.85-$4.375 $2.032
Reserved................... 1,550,000
Granted.................... (605,000) 605,000 $0.91-$2.50 $1.290
Cancelled.................. 336,194 (336,194) $1.50-$4.375 $2.776
Exercised.................. -- (20,000) $4.375 $4.375
---------- --------- ------------ ------
BALANCE -- 12/31/1995........ 1,627,964 1,432,664 $0.91-$2.50 $1.064
Reserved................... --
Granted.................... (1,711,000) 1,711,000 $1.03-$2.87 $ 1.10
Cancelled.................. 379,974 (379,974) $0.91-$1.00 $ 0.99
Exercised.................. -- (251,252) $1.00-$1.25 $ 1.02
---------- --------- ------------ ------
BALANCE -- 12/31/1996........ 296,938 2,512,438 $0.91-$2.87 $ 1.09
Reserved................... 3,000,000
Granted.................... (2,954,300) 2,954,300 $1.00-$4.44 $ 2.69
Cancelled.................. 858,370 (858,370) $0.75-$2.87 $ 1.18
Exercised.................. -- (247,913) $0.75-$1.06 $ 1.01
---------- --------- ------------ ------
BALANCE -- 12/31/1997........ 1,201,008 4,360,455 $1.00-$4.44 $ 2.16
</TABLE>
As of December 31, 1997 and 1996, vested options to purchase 1,476,112 and
680,248 shares, respectively, were exercisable. The weighted average fair value
of those options granted in 1997, 1996 and 1995 was $2.08, $0.74 and $0.89,
respectively.
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
REMAINING REMAINING
CONTRACTUAL WEIGHTED CONTRACTUAL WEIGHTED
NUMBER LIFE AVERAGE NUMBER LIFE AVERAGE
OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE (YEARS) EXERCISE PRICE
----------- ----------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$0.75-$1.75 2,788,155 6.8 $1.15 1,404,816 6.5 $1.05
$1.76-$3.75 8,000 8.3 $2.87 7,664 8.3 $2.87
$3.76-$4.75 1,564,300 9.7 $3.97 63,632 9.6 $3.89
--------- --- ----- --------- --- -----
4,360,455 7.9 $2.16 1,476,112 6.6 $1.18
========= === ===== ========= === =====
</TABLE>
Employee Stock Purchase Plan
During 1992, the 1992 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Board of Directors. As of December 31, 1997, a total of
200,000 shares of common stock have been reserved for issuance under the
Purchase Plan. The Purchase Plan provides for eligible employees to purchase
common stock at a price equal to 85% of the fair market value at certain
specified dates. Purchases are limited to 10 percent of each employee's
compensation. There were 59,023 and 40,656 shares issued under the plan as of
December 31, 1997 and 1996, respectively.
F-16
<PAGE> 55
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair value for the purchase rights issued under the Purchase Plan is
determined under the Black-Scholes valuation model using the following
assumptions for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Risk-free Interest Rates.......................... 6.15% 5.70% 5.60%
Expected Life..................................... 6 months 6 months 6 months
Volatility........................................ 95.5% 95.5% 95.5%
Dividend Yield.................................... -- -- --
</TABLE>
The weighted average fair market value of those purchase rights granted in
1997 and 1996 was $0.76 and $0.96, respectively.
The Company has adopted the disclosure-only provisions of the Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation." Had compensation cost for the Stock Plans been determined based
on the fair market value at the grant date for awards in 1997, 1996 and 1995
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per share for the years ended December 31, 1997, 1996 and 1995 would have
been increased as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS EXCEPT
<CAPTION>
PER SHARE DATA)
<S> <C> <C> <C>
Net loss -- as reported........................... $(6,618) $(5,968) $(4,130)
Net loss -- pro forma............................. $(7,322) $(6,390) $(4,220)
Net loss per share -- as reported................. $ (0.23) $ (0.23) $ (0.28)
Net loss per share -- proforma.................... $ (0.26) $ (0.24) $ (0.28)
</TABLE>
6. SALE OF DENTAL ASSETS
In June 1997, the Company completed the sale of the Company's assets
associated with its dental laser, air abrasive and composite curing systems (the
"Dental Assets") to Lares Research. The purchase price paid for the Dental
Assets was $5,500,000, consisting of $4,000,000 in cash paid at closing and
$1,500,000 in the form of a promissory note, bearing interest at 8% per annum,
with installments of $1,000,000 of principal plus accrued interest and $500,000
of principal plus accrued interest, due in June 2000 and June 2001, respectively
(the "Lares Note"). Although the Company anticipates collecting interest and
principal on the Lares Note, collection is not reasonably assured due to the
subordination of the Lares Note to Lares' bank and the Company intends to
recognize proceeds from the sale and interest on the note as cash is received.
The gain on sale of the Dental Assets is comprised as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<S> <C>
Cash proceeds from the sale of the dental assets............ $ 4,000
Less: Inventory and equipment sold.......................... (1,498)
ADT transfer fee.......................................... (275)
Transaction fees.......................................... (237)
Other costs............................................... (250)
-------
Gain on sale of dental assets............................. $ 1,740
=======
</TABLE>
F-17
<PAGE> 56
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company sold the Dental Assets as of June 1997 and as a consequence,
had effectively no revenues or earnings from the Dental Assets during the second
half of 1997. Approximately $211,000 of the estimated costs remain unpaid as of
December 31, 1997. On a pro-forma basis, the Company had the following revenues
and earnings from the dental business during the first half of 1997, 1996 and
1995, including the gain on sale of the Dental Assets of $1,740,000 in 1997:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from dental business.................. $1,968 $ 5,514 $ 4,008
Loss from dental business...................... $ (11) $(2,504) $(3,488)
</TABLE>
Revenues from the dental business were $1,968,000 through June 1997. Cost
of revenues were approximately $1,738,000, and operating expenses through June
1997 were $1,980,000. Interest expense and interest income were $11,000 and
$10,000, respectively, through June 1997. The operating loss from the dental
business and the gain on the sale of the dental business were $1,750,000 and
$1,740,000, respectively, in 1997.
Substantially all of the Company's resources to-date were being derived
from the dental business. The Company is not expecting significant revenues from
ophthalmic sales until the FDA approves the LTK System for sale in the United
States.
7. SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH PAID DURING THE YEAR FOR:
Interest................................................ $13 $5 $--
Income taxes............................................ $ 6 $9 $--
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
1997 1996 1995
------ ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Conversion of notes payable to common stock........... $2,602 $-- $--
</TABLE>
8. EMPLOYEE BENEFIT PLAN
During 1993, the Company established a 401(k) tax-deferred savings plan
under which all employees meeting certain age and service requirements may
contribute up to 15% of their eligible compensation (up to a maximum allowed
under IRS rules). Contributions may be made by the Company at the discretion of
the Board of Directors. Contributions by the Company amounted to $20,000,
$24,000 and $7,000 in 1997, 1996, and 1995, respectively.
9. SUBSEQUENT EVENTS
In January 1998, the Company completed a $9,300,000 private placement of
convertible notes (convertible into the Company's common stock) with warrants,
net of offering costs. The promissory notes are convertible at any time, at the
option of the holder. The notes bear an interest rate of 12%, payable-in-kind
semi-annually (additional convertible notes), and convert at a price of $3.00
per share. There were warrants to purchase 1,870,000 shares of the Company's
common stock issued as part of this private placement with an exercise price of
$3.00 per share and an expiration date of January 2003. The notes have a
maturity date of January 2001 and the Company has an option to extend the notes
for an additional two years for additional warrant consideration.
F-18
<PAGE> 57
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OTHER OF PERIOD
---------- ---------- ---------- ----- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Reserves and allowances deducted from
assets accounts:
Allowance for uncollectible accounts... $450 $ 25 $(450) $-- $ 25
Allowance for inventory................ $513 $ 250 $(295) $-- $ 468
Year ended December 31, 1996
Reserves and allowances deducted from
assets accounts:
Allowance for uncollectible accounts... $ 25 $ 115 $ -- $-- $ 140
Allowance for inventory................ $468 $ -- $(118) $-- $ 350
Year ended December 31, 1997
Reserves and allowances deducted from
assets accounts:
Allowance for uncollectible accounts... $140 $ 176 $(232) $-- $ 84
Allowance for inventory................ $350 $ 397 $(100) $-- $ 647
Allowance for uncollectible notes...... -- $1,500 -- $-- $1,500
</TABLE>
F-19
<PAGE> 58
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net revenues....................................... $ 180 $ 76 $ 504 $ 2,539
Cost of revenues................................... 615 200 1,499 2,159
------- ------- -------- -------
Gross profit............................. (435) (124) (995) 380
Other costs and expenses:
Engineering and development...................... 621 226 1,618 570
Sales, marketing and regulatory.................. 822 413 2,480 2,046
General and administrative....................... 1,060 704 4,909 2,606
------- ------- -------- -------
Total other costs and expenses........... 2,503 1,343 9,007 5,222
------- ------- -------- -------
Loss from operations............................... (2,938) (1,467) (10,002) (4,842)
Gain on sale of dental assets...................... -- -- -- 1,740
Interest income.................................... 89 42 289 74
Interest expense................................... (719) (132) (3,222) (1,080)
------- ------- -------- -------
Net loss................................. $(3,568) $(1,557) $(12,935) $(4,108)
======= ======= ======== =======
Net loss per share, basic and diluted.... $ (0.10) $ (0.06) $ (0.38) $ (0.15)
======= ======= ======== =======
Shares used in calculation of basic and diluted net
loss per share................................... 34,311 27,932 33,707 27,896
======= ======= ======== =======
</TABLE>
See accompanying notes.
F-20
<PAGE> 59
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 5,783 $ 1,958
Accounts receivable, net.................................. 196 312
Inventories, net.......................................... -- 127
Other current assets...................................... 457 140
-------- --------
Total current assets.............................. 6,436 2,537
Property and equipment, net............................... 552 204
Other non-current assets.................................. 245 208
-------- --------
Total assets...................................... $ 7,233 $ 2,949
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 688 $ 31
Accounts payable.......................................... 549 284
Deferred revenues......................................... 160 --
Accrued payroll and related expenses...................... 302 221
Other accrued expenses.................................... 1,010 619
-------- --------
Total current liabilities......................... 2,709 1,155
Long-term debt, net of current portion...................... 6,867 945
Other long term liabilities................................. 244 --
-------- --------
Total liabilities................................. 9,820 2,100
-------- --------
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value, 2,000,000 shares
authorized, none issued or outstanding................. -- --
Common Stock, $0.001 par value, 75,000,000 shares
authorized, 34,499,000 and 32,308,000 shares issued and
outstanding at September 30, 1998 and December 31,
1997, respectively..................................... 34 32
Additional paid-in capital................................ 47,595 38,151
Deferred compensation..................................... (219) (272)
Accumulated deficit....................................... (49,997) (37,062)
-------- --------
Total stockholders' equity (deficit).............. (2,587) 849
-------- --------
Total liabilities and stockholders' equity
(deficit)....................................... $ 7,233 $ 2,949
======== ========
</TABLE>
See accompanying notes.
F-21
<PAGE> 60
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FOR OPERATING ACTIVITIES:
Net loss.................................................. $(12,935) $(4,108)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 121 120
Amortization of deferred compensation.................. 2,815 --
Amortization of debt issuance costs.................... 195 --
Gain on sale of dental assets.......................... -- (1,740)
Warrant accretion and beneficial conversion features
associated with 1997 and 1998 Notes................... 2,186 991
Issuance of common stock for services.................. 150 --
Provision for excess and obsolete inventory............ (161) 210
Provision for doubtful accounts........................ -- 176
Conversion of accrued interest to notes payable........ 403 --
Changes in assets and liabilities:
Accounts receivable.................................... 116 92
Inventories............................................ 288 120
Other current assets................................... (317) 41
Other non-current assets............................... (218) --
Accounts payable....................................... 265 (1,446)
Other accrued liabilities and deferred revenues........ 632 75
Other long term liabilities............................ 244 --
-------- -------
Total adjustments........................................... 6,719 (1,361)
-------- -------
Net cash used in operating activities....................... (6,216) (5,469)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (469) (75)
-------- -------
Net cash used in investing activities....................... (469) (75)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on capital lease obligations...................... (26) --
Issuance of common stock, net of offering costs........... 1,200 256
Issuance of redeemable convertible notes.................. 9,350 3,743
Proceeds from sale of dental assets....................... -- 4,000
Costs associated with sale of dental assets............... -- (411)
Capitalization of debt issuance costs..................... (14) --
-------- -------
Net cash provided by financing activities................... 10,510 7,588
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 3,825 2,044
Cash and cash equivalents at beginning of period............ 1,958 647
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 5,783 $ 2,691
======== =======
</TABLE>
See accompanying notes.
F-22
<PAGE> 61
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The Company develops, manufactures and markets laser systems for
applications in ophthalmology. Prior to June 26, 1997, the Company had also
developed, manufactured and marketed lasers and air abrasive cavity preparation
systems for use in dentistry. A substantial portion of the Company's revenues
(80% for the first six months of 1997) were derived from the domestic and
international sales of the Company's dental laser and air abrasive products.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries after elimination of all material
intercompany balances and transactions. Certain reclassifications have been made
to prior year amounts in order to conform to the current presentation.
The condensed consolidated financial data for the three and nine-month
periods ended September 30, 1998 and 1997 are unaudited, but include all
adjustments (consisting only of normal recurring adjustments) that management of
the Company believes to be necessary for fair presentation of the financial
position and results of operations for 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, 1997 included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
The preparation of unaudited financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. NET LOSS PER COMMON SHARE
Effective December 31, 1997, the Company adopted the Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") and,
accordingly, all prior periods have been restated. Basic earnings per share is
computed as net income or loss divided by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur from common shares issuable through stock
options, warrants and other convertible securities. As of September 30, 1998 and
1997, common equivalent shares of 6,889,621 and 2,964,124, respectively, have
been excluded from the shares used to calculate diluted earnings per share as
their effect is anti-dilutive.
3. REVENUE RECOGNITION
Revenues are recognized at time of shipment, net of any allowances for
future obligations or trade-in rights. A provision for the estimated future cost
of warranty is made at the time a sale is recorded.
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and consisted of the following on the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials...................................... $ 210 $ 416
Work-in-process.................................... 41 167
Finished goods..................................... 235 190
----- -----
486 773
Less reserves...................................... (486) (646)
----- -----
Inventory, net..................................... $ -- $ 127
===== =====
</TABLE>
F-23
<PAGE> 62
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1998
5. COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," ("SFAS 130") effective
January 1, 1998. This statement requires the disclosure of comprehensive income
and its components in a full set of general purpose financial statements.
Comprehensive income is defined as net income plus revenues, expenses, gains and
losses that, under generally accepted accounting principles, are excluded from
net income. The Company does not have any components of comprehensive income
which are excluded from net income for the three and nine months ended September
30, 1998 and 1997 and, as such, no separate statement of comprehensive income
has been presented.
6. ISSUANCE OF REDEEMABLE CONVERTIBLE NOTES
In January 1998, the Company completed a private placement of convertible
notes (convertible into the Company's common stock) with warrants, raising
approximately $9,300,000. The promissory notes (the "Primary Notes") are
convertible at any time, at the option of the holder. The notes bear a stated
interest rate of 12%, payable-in-kind semi-annually (additional convertible
notes) and convert at a price of $3.00 per share. The resulting discount of
approximately $779,000 increased the effective interest rate and has been
charged to interest expense in 1998. The effective interest rate, which includes
the amortization of the fair value of the warrants, is approximately 26%. The
Primary Notes have a maturity date of January 2001 and the Company has an option
to extend the maturity date of the notes for an additional two years for
additional warrant consideration. On July 15, 1998, the Company issued
additional convertible notes in the amount of approximately $557,000 (the
"Secondary Notes") to the holders of the Primary Notes to fulfil its interest
obligations pursuant to the terms of the Primary Notes. The Secondary Notes also
bear interest at the rate of 12%, payable-in-kind semi-annually and contain the
same features as the Primary Notes, including a maturity date of January 2001.
Warrants to purchase 1,870,000 shares of the Company's common stock were
issued as part of this private placement with an exercise price of $3.00 per
share and an expiration date of January 2003. The warrants issued had a fair
value of approximately $1.87 per warrant at the time of issuance. The fair value
of these warrants has been reflected as additional consideration for the
convertible notes, recorded as a discount on the debt and accreted as interest
expense to be amortized over the life of the convertible notes.
On September 29, 1998, the Company filed a Registration Statement on Form
S-2 for the registration of 6,807,915 shares of its common stock, par value
$0.001, to be sold by certain stockholders, noteholders and warrantholders of
the Company (collectively, the "Selling Securityholders"). The Company will not
receive any of the proceeds from the sale of the offered shares by the Selling
Securityholders. These shares were acquired by the Selling Securityholders.
These shares were acquired by the Selling Securityholders through warrant grants
subsequent to October 1997 or an investment in the convertible notes with
warrants the Company issued in January 1998.
7. SALE OF DENTAL ASSETS
In June 1997, the Company completed the sale of the Company's assets
associated with the Company's dental laser, air abrasive and composite curing
systems (the "Dental Assets") to Lares Research. The purchase price paid for the
Dental Assets was $5,500,000, consisting of $4,000,000 in cash paid at closing
and $1,500,000 in the form of a promissory note, bearing interest at 8% per
annum, with installments of $1,000,000 of principal plus accrued interest and
$500,000 of principal plus accrued interest, due in June 2000 and June 2001,
respectively (the "Lares Note"). Although the Company anticipates collecting
interest and principal on the Lares Note, due to subordination of the Lares Note
to Lares' Bank, collection is not reasonably assured and the Company intends to
recognize proceeds from the sale and interest on the Lares Note as cash is
received.
F-24
<PAGE> 63
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1998
Revenues from the dental business were $1,968,000 through June 1997. Cost
of revenues were approximately $1,738,000, and operating expenses through June
1997 were $1,980,000. Interest expense and interest income were $11,000 and
$10,000 respectively, through June 1997. The operating loss from the dental
business and the gain on the sale of the dental business were $1,750,000 and
$1,740,000 respectively, in 1997.
8. FACILITY LEASE
In July 1998, the Company entered into a sublease for additional office
space to accommodate the anticipated growth in the Company's operations. The
sublease encompasses a facility of an approximately 55,000 square feet in
Fremont, California. The Company is responsible for rent, property taxes and
other expenses. The sublease term commenced on August 15, 1998 and is expected
to run through April 7, 2004, and the total expected lease payments, excluding
operating costs, will total approximately $5,359,000 through this period. The
Company also leases a facility of approximately 10,400 square feet in Fremont,
California and the lease expires on this property in January 2001.
9. NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for disclosure about
operating segments in annual financial statements and selected information in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. This
statement supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise." The new standard
becomes effective for the Company's 1999 fiscal year, and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company is evaluating the requirements of
SFAS 131 and the effects, if any, on the Company's current reporting and
disclosures.
10. LITIGATION
Danville Manufacturing, Inc. (d.b.a. Danville Engineering) ("Danville")
filed a suit in the Superior Court of California, County of Contra Costa,
against the Company, claiming monetary damages for disputed invoices of
approximately $200,000 and alleging misappropriation of intellectual property,
the dollar amount of such claim has not yet been determined (Danville
Manufacturing, Inc. d.b.a. Danville Engineering v. Sunrise Technologies
International, Inc. C98-02123). The Company is vigorously defending against this
lawsuit. The Company does not believe that the outcome of this matter will have
a material adverse effect on the financial condition and results of operations
of the Company. There can be no assurance, however, that the Company will
prevail in its defense of the claims asserted by Danville.
F-25
<PAGE> 64
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE SELLING SECURITYHOLDERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS NOT BEEN A CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Disclosure Regarding Forward-Looking
Statements.......................... 2
Prospectus Summary.................... 3
Risk Factors.......................... 5
Selected Financial Information........ 11
Business.............................. 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Management............................ 28
Description of Capital Stock.......... 29
Share Ownership by Principal
Stockholders and Management......... 34
Use of Proceeds....................... 35
Selling Securityholders............... 35
Plan of Distribution.................. 36
Experts............................... 37
Legal Matters......................... 37
Incorporation of Certain Information
by Reference........................ 37
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
6,807,915 SHARES
SUNRISE TECHNOLOGIES
INTERNATIONAL, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
December , 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 65
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company and the Selling
Securityholders in connection with the sale of the Common Stock being
registered. All amounts are estimates except the registration fee.
<TABLE>
<CAPTION>
AMOUNT TO BE PAID
-----------------
<S> <C>
SEC Registration Fee........................................ $ 6,808
Printing.................................................... 25,000
Legal Fees and Expenses..................................... 75,000
Accounting Fees and Expenses................................ 15,000
Blue Sky Fees and Expenses.................................. 15,000
Transfer Agent and Registrar Fees........................... 5,000
Miscellaneous............................................... 18,192
--------
Total............................................. $160,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the General Corporation Law of the State of Delaware
(the "Delaware Law") grants corporations the right to limit or eliminate the
personal liability of their directors in certain circumstances in accordance
with provisions therein set forth. The Sunrise Certificate contains a provision
eliminating director liability to the Company and its stockholders for monetary
damages for breach of fiduciary duty as a director. The provision does not,
however, eliminate or limit the personal liability of a director: (i) for any
breach of such director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) under the Delaware statutory
provision making directors personally liable, for improper payment of dividends
or improper stock purchases or redemptions; or (iv) for any transaction from
which the director derived an improper personal benefit. This provision offers
persons who serve on the Company's Board protection against awards of monetary
damages resulting from breaches of their duty of care (except as indicated
above). As a result of this provision, the ability of the Company or a
stockholder thereof to successfully prosecute an action against a director for a
breach of his duty of care is limited. However, the provision does not affect
the availability of equitable remedies such as an injunction or rescission based
upon a director's breach of his duty of care. The Commission has taken the
position that the provision will have no effect on claims arising under federal
securities laws.
Section 145 of the Delaware Law grants corporations the right to indemnify
their directors, officers, employees and agents in accordance with the
provisions therein set forth. The Company's By-laws provide that the corporation
shall, subject to limited exceptions, indemnify its directors and executive
officers to the fullest extent not prohibited by the Delaware Law. The Company's
By-laws provide further that the Company shall have the power to indemnify its
other officers, employees and other agents as set forth in the Delaware Law.
Such indemnification rights include reimbursement for expenses incurred by such
director, executive officer, other officer, employee or agent in advance of the
final disposition of such proceeding in accordance with the applicable
provisions of the Delaware Law.
The Company has entered into agreements with certain of its directors and
officers pursuant to which the Company has agreed to indemnify such directors
and officers to the fullest extent permitted under applicable law. In addition,
the Company has purchased insurance containing customary terms and conditions as
permitted by law on behalf of its directors and officers, which may cover
liabilities under the Securities Act of 1933, as amended (the "Securities Act").
II-1
<PAGE> 66
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
4.1 Form of Rights Agreement, dated as of October 24, 1997,
between the Company and ChaseMellon Shareholder Services,
L.L.C., as rights agent(8)
4.2 Form of 12% Subordinated Pay-In-Kind Note Due 2001(9)
4.3 Form of Registration Rights Agreement(9)
5.1 Opinion of Holleb & Coff as to the legality of the Offered
Shares being registered
10.1 Patent License Agreement between the Company and Patlex
Corporation dated January 1, 1990(3)
10.2 Agreement between the Company and the University of Miami,
Department of Ophthalmology, dated October 28, 1991(2)
10.3 Joint Development and Exclusive Manufacturing Agreement
dated April 17, 1993 between the Company and Danville
Engineering, Inc.(1)
10.4 Settlement Agreement between the Company and American Dental
Laser, Inc., dated February 4, 1993 (confidential treatment
has previously been granted for portions of this exhibit)(4)
10.5 License Agreement between the Company and American Dental
Laser, Inc., dated February 4, 1993 (confidential treatment
has previously been granted for portions of this exhibit)(4)
10.6 Settlement Agreement between the Company and American Dental
Technologies, dated July 30, 1996(6)
10.7* Form of Indemnification Agreement between the Company and
each of its officers and directors(3)
10.8* 1988 Stock Option Plan, as amended(5)
10.9 Form of U.S. Note and Warrant Purchase Agreement relating to
the Regulation D private placement of 5% convertible notes
due 1999 and warrants in February and March 1997(7)
10.10 Form of Offshore Note and Warrant Purchase Agreement
relating to the Regulation S private placement of 5%
convertible notes due 1999 and warrants in March 1997(7)
10.11 Form of Change of Control Agreement by and between the
Company and its President and Chief Executive Officer(8)
10.12 Form of Change of Control Agreement by and between the
Company and its executive officers (other than the President
and Chief Executive Officer)(8)
10.13 Form of Indemnification Agreement by and between the Company
and its executive officers(8)
10.14 Form of U.S. Note and Warrant Purchase Agreement related to
the Regulation D private placement of 12% Convertible
Subordinated Pay-In-Kind Notes Due 2001 and accompanying
Warrants in January 1998(9)
10.15 Form of Amended and Restated Change of Control Agreement by
and between the Company and its President and Chief
Executive Officer(11)
10.16 Form of Amended and Restated Change of Control Agreement by
and between the Company and its executive officers (other
than the President and Chief Executive Officer)(11)
10.17 Lease Agreement with Bayside Spinnaker Partners III, as
lessor, for the lease of facilities at 47265 Fremont
Boulevard, Fremont, California, dated January 23, 1998(10)
</TABLE>
II-2
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
10.18 Sublease between Avant! Corporation, as sub-sublandlord, the
Company, as sub-subtenant, Cirrus Logic, Inc., as
sublandlord, Avant! Corporation, as subtenant, Renco
Investment Company, as landlord, and Cirrus Logic, Inc., as
tenant for the lease of facilities at
3400 West Warren Avenue, Fremont, California**
23.1 Consent of PricewaterhouseCoopers L.L.P., Independent
Accountants
23.2 Consent of Ernst & Young LLP, Former Independent Auditors
23.3 Consent of Holleb & Coff (included in Exhibit 5.1)
24 Power of Attorney (Included on the Signature Page)
</TABLE>
- ---------------
* Compensatory plan or management contract
** Previously filed.
(1) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1994 (File No. 0-17816)
(2) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 (File No. 0-17816)
(3) Incorporated by reference from the registrant's Registration Statement on
Form S-1, as amended (File No. 33-36768)
(4) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1992 (File No. 0-17816)
(5) Incorporated by reference from the registrant's Registration Statement on
Form S-18, as amended (File No. 33-27029-LA)
(6) Incorporated by reference from the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996 (File No. 0-17816)
(7) Incorporated by reference from the registrant's Current Report on Form 8-K
dated March 12, 1997 (File No. 0-17816)
(8) Incorporated by reference from the registrant's Current Report on Form 8-K
dated October 24, 1997 (File No. 0-17816)
(9) Incorporated by reference from the registrant's Current Report on Form 8-K
dated January 26, 1998 (File No. 0-17816)
(10) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1997 (File No. 0-17816)
(11) Incorporated by reference from the registrant's Current Report on Form 8-K
dated May 8, 1998 (File No. 0-17816)
ITEM 17. UNDERTAKINGS
PURSUANT TO ITEM 512(A) OF REGULATION S-K
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any
II-3
<PAGE> 68
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
PURSUANT TO ITEM 512(H) OF REGULATION S-K
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 69
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this amended
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of Fremont, state of California, on December 17,
1998.
Sunrise Technologies International,
Inc.
By: /s/ C. RUSSELL TRENARY, III
------------------------------------
C. Russell Trenary, III
President and Chief Executive
Officer
II-5
<PAGE> 70
POWERS OF ATTORNEY
Each person whose signature appears below hereby appoints C. Russell
Trenary and Timothy A. Marcotte, and each of them severally, acting alone and
without the other, his true and lawful attorney-in-fact with authority to
execute in the name of each such person, and to file with the Securities and
Exchange Commission, together with any exhibits thereto and other documents
therewith, any and all amendments (including without limitation post-effective
amendments) to this registration statement, and to sign any registration
statement for the same offering covered by this registration statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act,
necessary or advisable to enable the registrant to comply with the Securities
Act and any rules, regulations and requirements of the Securities and Exchange
Commission in respect thereof, which amendments may make such changes in this
registration statement as the aforesaid attorney-in-fact deems appropriate.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: December 17, 1998 /s/ C. RUSSELL TRENARY, III
---------------------------------------------
C. Russell Trenary, III
President, Chief Executive Officer and
Director
(Principal Executive Officer)
Date: December 17, 1998 /s/ TIMOTHY A. MARCOTTE
---------------------------------------------
Timothy A. Marcotte
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
and Director
Date: December 17, 1998 /s/ JOSEPH D. KOENIG
---------------------------------------------
Joseph D. Koenig
Chairman of the Board and Director
Date: December 17, 1998 /s/ R. DALE BOWERMAN
---------------------------------------------
R. Dale Bowerman
Director
Date: December 17, 1998 /s/ MICHAEL S. MCFARLAND, M.D.
---------------------------------------------
Michael S. McFarland, M.D.
Director
</TABLE>
II-6
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
4.1 Form of Rights Agreement, dated as of October 24, 1997,
between the Company and ChaseMellon Shareholder Services,
L.L.C., as rights agent(8)
4.2 Form of 12% Subordinated Pay-In-Kind Note Due 2001(9)
4.3 Form of Registration Rights Agreement(9)
5.1 Opinion of Holleb & Coff as to the legality of the Offered
Shares being registered
10.1 Patent License Agreement between the Company and Patlex
Corporation dated January 1, 1990(3)
10.2 Agreement between the Company and the University of Miami,
Department of Ophthalmology, dated October 28, 1991(2)
10.3 Joint Development and Exclusive Manufacturing Agreement
dated April 17, 1993 between the Company and Danville
Engineering, Inc.(1)
10.4 Settlement Agreement between the Company and American Dental
Laser, Inc., dated February 4, 1993 (confidential treatment
has previously been granted for portions of this exhibit)(4)
10.5 License Agreement between the Company and American Dental
Laser, Inc., dated February 4, 1993 (confidential treatment
has previously been granted for portions of this exhibit)(4)
10.6 Settlement Agreement between the Company and American Dental
Technologies, dated July 30, 1996(6)
*10.7 Form of Indemnification Agreement between the Company and
each of its officers and directors(3)
*10.8 1988 Stock Option Plan, as amended(5)
10.9 Form of U.S. Note and Warrant Purchase Agreement relating to
the Regulation D private placement of 5% convertible notes
due 1999 and warrants in February and March 1997(7)
10.10 Form of Offshore Note and Warrant Purchase Agreement
relating to the Regulation S private placement of 5%
convertible notes due 1999 and warrants in March 1997(7)
10.11 Form of Change of Control Agreement by and between the
Company and its President and Chief Executive Officer(8)
10.12 Form of Change of Control Agreement by and between the
Company and its executive officers (other than the President
and Chief Executive Officer)(8)
10.13 Form of Indemnification Agreement by and between the Company
and its executive officers(8)
10.14 Form of U.S. Note and Warrant Purchase Agreement related to
the Regulation D private placement of 12% Convertible
Subordinated Pay-In-Kind Notes Due 2001 and accompanying
Warrants in January 1998(9)
10.15 Form of Amended and Restated Change of Control Agreement by
and between the Company and its President and Chief
Executive Officer(11)
10.16 Form of Amended and Restated Change of Control Agreement by
and between the Company and its executive officers (other
than the President and Chief Executive Officer)(11)
10.17 Lease Agreement with Bayside Spinnaker Partners III, as
lessor, for the lease of facilities at 47265 Fremont
Boulevard, Fremont, California, dated January 23, 1998(10)
10.18 Sublease between Avant! Corporation, as sub-sublandlord, the
Company, as sub-subtenant, Cirrus Logic, Inc., as
sublandlord, Avant! Corporation, as subtenant, Renco
Investment Company, as landlord, and Cirrus Logic, Inc., as
tenant for the lease of facilities at 3400 West Warren
Avenue, Fremont, California**
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
23.1 Consent of PricewaterhouseCoopers L.L.P., Independent
Accountants
23.2 Consent of Ernst & Young LLP, Former Independent Auditors
23.3 Consent of Holleb & Coff (included in Exhibit 5.1)
24 Power of Attorney (Included on the Signature Page)
</TABLE>
- ---------------
* Compensatory plan or management contract
** Previously filed.
(1) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1994 (File No. 0-17816)
(2) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 (File No. 0-17816)
(3) Incorporated by reference from the registrant's Registration Statement on
Form S1, as amended (File No. 33-36768)
(4) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1992 (File No. 0-17816)
(5) Incorporated by reference from the registrant's Registration Statement on
Form S18, as amended (File No. 33-27029-LA)
(6) Incorporated by reference from the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996 (File No. 0-17816)
(7) Incorporated by reference from the registrant's Current Report on Form 8-K
dated March 12, 1997 (File No. 0-17816)
(8) Incorporated by reference from the registrant's Current Report on Form 8-K
dated October 24, 1997 (File No. 0-17816)
(9) Incorporated by reference from the registrant's Current Report on Form 8-K
dated January 26, 1998 (File No. 0-17816)
(10) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1997 (File No. 0-17816)
(11) Incorporated by reference from the registrant's Current Report on Form 8-K
dated May 8, 1998 (File No. 0-17816)
<PAGE> 1
EXHIBIT 5.1
HOLLEB & COFF
ATTORNEYS AT LAW
55 EAST MONROE STREET
SUITE 4100
CHICAGO, ILLINOIS 60603-5896
(312) 807-4600
TELECOPIER (312) 807-3900
OPINION OF HOLLEB & COFF
December 17, 1998
Sunrise Technologies International, Inc.
3400 West Warren Avenue
Fremont, California 94538
Ladies and Gentlemen:
We have acted as special counsel for Sunrise Technologies International,
Inc., a Delaware corporation (the "Company"), in connection with the Company's
Registration Statement on Form S-2, as amended (the "Registration Statement")
being filed by the Company under the Securities Act of 1933, as amended, with
respect to 6,807,914 shares (the "Shares") of the Company's common stock, par
value $.001 per share (the "Common Stock"), which may be disposed of from time
to time by the selling securityholders (the "Selling Securityholders") named
therein.
In connection with the preparation of the Registration Statement and this
letter, we have examined, considered and relied solely upon the following
documents (collectively, the "Documents"): the Registration Statement; the
Company's Amended and Restated Certificate of Incorporation as filed with the
Secretary of State of the State of Delaware; Bylaws; a Certificate of Good
Standing of the Company issued on December 17, 1998 by the Secretary of State
of the State of Delaware; the forms of U.S. Note and Warrant Purchase Agreements
between certain of the Selling Securityholders and the Company (collectively,
the "1998 Warrant Agreement"); certain minutes of the meetings of the Company's
Board of Directors; a certificate of the Company's president; and such matters
of law as we have considered necessary or appropriate for the expression of the
opinions contained herein.
In rendering the opinions set forth below, we have assumed without
investigation the genuineness of all signatures and the authenticity of all
documents submitted to us as originals, the conformity to authentic original
documents of all documents submitted to us as copies, and the veracity of the
Documents. As to questions of fact material to the opinions hereinafter
expressed, we have relied upon the representations and warranties of the Company
made in the
<PAGE> 2
HOLLEB & COFF
ATTORNEYS AT LAW
Sunrise Technologies International, Inc.
December 17, 1998
Page 2
Documents. We would call your attention to the fact that Eric M. Fogel, a
partner of this law firm, also acts as the Secretary of the Company and certain
of our firm's partners own shares of the Company's Common Stock.
Based solely upon and subject to the Documents, and subject to the
qualification set forth below, we are of the opinion that the Shares have been
duly authorized and when the Shares have been duly delivered against payment
therefor, as contemplated in the 1998 Warrant Agreement, the Shares will be
validly issued, fully paid and nonassessable.
Although we have acted as counsel to the Company in connection with certain
other matters, our engagement is limited only to matters which have been
specifically referred to us. Consequently, there may exist matters of a legal
nature involving the Company in connection with which we have not been consulted
and have not represented the Company. This opinion letter is limited to the
matters stated herein and no opinions may be implied or inferred beyond the
matters expressly stated herein. The opinions expressed herein are as of the
date hereof, and we assume no obligation to update or supplement such opinions
to reflect any facts or circumstances that may hereafter come to our attention
or any changes in law that may hereafter occur.
This opinion is solely for the information of the addressee hereof and the
purchasers of the Shares, and is not to be quoted in whole or in part or
otherwise referred to, nor is it to be filed with any governmental agency or
other person without a prior written consent. Other than the addressee, the
purchasers of the Shares and ChaseMellon Shareholder Services, L.P., no one is
entitled to rely on this opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the prospectus contained in the Registration Statement.
Very truly yours,
/s/ Holleb & Coff
-----------------------------
HOLLEB & COFF
/ks
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration
statement on Amendment No. 1 Form S-2 of Sunrise Technologies International,
Inc. of our report dated March 6, 1998, on our audits of the financial
statements and financial statement schedule of Sunrise Technologies
International, Inc. as of December 31, 1997 and for the year then ended which
report is incorporated by reference in the annual report on Form 10-K. We also
consent to the reference to our firm under the caption "Experts."
PricewaterhouseCoopers LLP
San Jose, CA
December 17, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, FORMER INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated March 10, 1997, in the Registration Statement
(Form S-2 No. 333-64975), as amended and related Prospectus of Sunrise
Technologies International, Inc. for the registration of 6,807,915 shares of its
common stock.
/S/ Ernst & Young LLP
Palo Alto, California
December 17, 1998
