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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 0-17816
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 77-0148208
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
47265 FREMONT BOULEVARD, FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 623-9001
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $197,512,748 as of March 26,
1998 based upon the price on the over-the-counter market for that date.
There were 33,265,305 shares of the Registrant's Common Stock issued and
outstanding on March 26, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed prior to April 30,
1998, pursuant to Regulation 14A of the Securities Exchange Act of 1934 are
incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Sunrise Technologies International, Inc. (the "Company") develops,
manufactures and markets laser systems for applications in ophthalmology. 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. 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 laser corneal shaping product,
known as Laser Thermal Keratoplasty (the "LTK system") for the treatment of
refractive error of the eye, such as hyperopia and presbyopia. The LTK system is
based on patented technology acquired in the Company's acquisitions of
in-process technology from Laser Biotech, Inc. and Emmetropix Corporation in
1992. (See "Products -- LTK system" in this Section.)
The Company has incurred substantial losses in the past six 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 and $3,700,000 in the form of promissory notes with warrants in
1997 (the "1997 Notes Placement"). The Company recently completed a private
placement of promissory notes with warrants in January 1998 that raised
$9,300,000, net of offering costs (the "1998 Note Offering" ). 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. There can be no assurance that additional funds
can be raised on terms acceptable to the Company, if at all.
PRODUCTS
LTK system
In April 1992, the Company acquired Laser Biotech, Inc., a California
corporation ("Laser Biotech"), through a merger of a wholly owned subsidiary of
the Company with Laser Biotech (the "Merger"). Laser Biotech was founded in 1986
by Bruce J. Sand, M.D., FACS, to research and develop a precision laser
instrument for eye surgery. In connection with the Merger, the Company also
acquired certain patent and patent applications held by Dr. Sand covering a
patented technique for reshaping the cornea using a laser. The LTK system alters
the shape of the cornea to correct refractive disorders such as hyperopia
(farsightedness) and presbyopia (loss of near vision) without removing corneal
tissue. The procedure employs a laser to shrink, selectively, the collagen in
the cornea, changing the curvature of the cornea and thereby changing the
refractive power of the eye. By comparison, excimer laser systems for corneal
reshaping developed by Summit Technologies, Inc. ("Summit") and VISX, Inc.
("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 Corporation, a Texas corporation ("Emmetropix"),
including an assignment of certain patent applications and related technology
from an Emmetropix shareholder which the Company believes will be useful in
further developing the LTK system.
The Company received an Investigational Device Exemption ("IDE") from the
United States Food and Drug Administration ("FDA") to begin Phase I clinical
trials of the LTK system on human subjects in the
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first quarter of 1992. Phase I trials commenced in June 1992 using a prototype
LTK system designed and developed by the Company. The Company completed Phase I
of the clinical work for the LTK system and filed its results with the FDA in
June 1993. In September 1993, the Company received clearance to begin Phase IIa
clinical trials for the treatment of hyperopia and these clinical trials have
commenced. The trials were conducted at the Doheny Eye Institute at the
University of Southern California and Baylor University and completed in
November 1994. In February 1995, the Company filed its request with the FDA to
commence Phase IIb clinical trials. In 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 current follow-up data on all Phase IIa patients. On
September 5, 1996, the FDA authorized the Company to treat an additional 100
subjects at five United States locations in a continuation of Phase IIa clinical
trials using a treatment algorithm developed by the Company in the course of the
initial Phase IIa clinical trials and in the course of studies conducted by
ophthalmologists in Mexico, 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 October 8, 1997, the Company received FDA
approval to re-treat patients in its clinical study. To date, no patients have
been re-treated. On November 19, 1997, the Company completed enrollment in its
Phase IIa clinical trial for hyperopia and also received FDA approval to begin
Phase III of its clinical trial for hyperopia with an additional 200 patients to
be treated by the existing eight clinical sites and up to seven additional
clinical sites.
On February 24, 1998, the Company announced that it had received FDA
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 March 24, 1998, the Company announced
that it had received FDA approval for 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. (See "Government
Regulation" and "Patents and Licenses" in this Section and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".)
In addition, clinical trials were initiated outside the United States in
early 1993 and are ongoing. The Company has obtained FDA export clearance to
market the LTK system in most European countries, Turkey, Saudi Arabia, Canada,
Mexico, Brazil, 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.
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.
The LTK system incorporates the Sun 1000, a modified gLase 210 system, as
described below, as the laser source, into a delivery system that is built into
a standard slit-lamp to perform the LTK procedure. A slit-lamp is a binocular
microscope used regularly by ophthalmologists to examine an eye binocularly
under high magnification. The LTK system delivers eight simultaneous laser beams
disposed in a circle of varying diameter. This system allows for easy alignment
on the patient's eye and the delivery of a less than two-second exposure for the
treatment. 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.
There can be no assurance the FDA will approve the pre-market approval
application ("PMA") which summarizes the results of continued clinical trials,
or that the Company will successfully develop or market the LTK system.
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Ophthalmic Laser System for Glaucoma
In 1990, the Company developed the gLase 210 ophthalmic system (the "gLase
210 system"), a holmium laser system designed to perform a filtering procedure
for the treatment of glaucoma. Conventional filtering procedures, whereby a
permanent drainage duct is created to relieve the pressure in the eye, is a
difficult surgical procedure and is currently being performed only by a limited
number of glaucoma specialists. The gLase 210 system emits radiation at a
wavelength that is highly absorbed by water and, therefore, by all tissues in
the body because water is the main constituent of all body tissues. The goal of
a filtering procedure is to relieve the pressure inside the eye by making a
small hole in the sclera, the strong wall of the eye. The pulsed nature of the
holmium laser combined with the wavelength provide an effective and efficient
way of creating a hole in the sclera with minimal disturbance to surrounding
tissues. The laser beam is brought to the target inside the eye with a
200-micron fiber built into a special probe that emits the laser beam at a right
angle to the fiber axis.
The design characteristics and the unique delivery device of the gLase 210
system enable the ophthalmologist to perform this procedure on an outpatient
basis, thus avoiding the use of an operating room and the hospitalization
sometimes required with traditional filtering surgery. Foreign sales of the
gLase 210 system commenced on a limited basis during the second quarter of 1990;
domestic sales commenced in December 1990 when the Company received FDA
clearance to begin commercial sale of the product line in the United States for
the filtering procedure. The gLase 210 system is 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.
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 state and 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.
There are two principal methods by which FDA-regulated products may be
marketed in the United States. One method is an FDA premarket notification
filing under Section 510(k) of the Food, Drug and Cosmetics Act. Applicants
under the 510(k) procedure must demonstrate the device for which clearance is
sought is substantially equivalent to devices on the market before May 1976. The
review period for a 510(k) application is 90 days from the date of filing the
application. Applications filed pursuant to 510(k) are often subject to
questions and requests for clarification that often extend the review period
beyond 90 days. Marketing of the product must be deferred until written
clearance is received from the FDA. In some instances, an IDE is required for
clinical trials for a 510(k) notification.
The alternate method, when Section 510(k) is not available, is to obtain a
PMA from the FDA. 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 more complex and time consuming than the 510(k) application.
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 FDA also imposes various requirements on manufacturers and sellers of
products under its jurisdiction, such as labeling, manufacturing practices,
record keeping and reporting requirements. The FDA
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also may require postmarket testing and surveillance programs to monitor a
product's effects. All of the Company's products will require filing of an IDE,
and a 510(k) application or PMA. There can be no assurance that the appropriate
approvals from the FDA will be granted for the Company's products, the process
to obtain such approvals will not be excessively expensive or lengthy or 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 Radiation Control for
Health and Safety Act administered by the FDA which requires laser
manufacturers: (i) to file new product and annual reports; (ii) to maintain
quality control, product testing and sales records; (iii) to incorporate certain
design and operating features in lasers sold to end-users; and (iv) to certify
and label each laser sold to an end-user as belonging to one of four classes,
based on the level of radiation from the laser that is accessible to users.
Various warning labels must be affixed and certain protective devices installed,
depending on the class of the product. The Center for Devices and Radiological
Health is empowered to seek fines and other remedies for violations of the
regulatory requirements.
Foreign sales of the Company's ophthalmic laser systems are subject in each
case to clearance by the FDA for export to the recipient country. Regulatory
requirements vary widely among the countries, from electrical approvals to
clinical applications similar to the PMA filed with the FDA for sales in the
United States. There can be no assurance that the Company will be successful in
obtaining such approvals for its products in the future.
MARKETING AND SALES
The Company's strategy is to market its products through established
medical equipment distributors overseas. In the United States, the Company sells
its products through a small direct sales force. In 1990, the Company completed
development and obtained regulatory clearance to market the gLase 210 system for
sclerostomy. A modified gLase 210 system is used together with the LTK device to
produce the LTK system to treat hyperopia. The Company has established
relationships with distributors in Great Britain, Canada, France, Mexico, South
Africa and Central and South America for sale of its ophthalmic systems.
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 ophthalmic market for the gLase
210 system has been impacted by reimbursement pricing pressures, the continued
need for publication of long term follow-up data, and increased educational
requirements on the part of the practitioner regarding follow-up requirements
and patient monitoring. 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.
There can be no assurance 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 years ended December 31, 1997, 1996 and 1995, the Company expended
$964,000, $1,326,000 and $1,218,000, respectively, on engineering and
development, relating to dental and ophthalmic lasers, and MicroPrep (an air
abrasive cavity preparation system for dentistry), as well as research on a
variety of medical and dental applications. 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
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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
all the parts and components used by the Company are available from multiple
sources, several are currently being purchased from only one source to obtain
volume discounts. Lack of availability of certain components could require minor
redesign of the products resulting in production delays.
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.
POTENTIAL LIABILITY
The testing and use of human healthcare 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 ultimately prevail.
PATENTS AND LICENSES
In the acquisition of Laser Biotech, the Company acquired a United States
patent and pending United States and foreign patent applications previously
licensed to Laser Biotech by Dr. Bruce Sand, its founder. The issued patent
covers a method for using a laser to shrink collagen in the human body, with
specific reference to the cornea. Since the acquisition, two more patents filed
by Dr. Sand have been allowed, and have been assigned to the Company. In the
Emmetropix acquisition, the Company acquired three United States patent
applications as well as foreign patent applications previously licensed to
Emmetropix, which the Company believes will be useful in 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 has been granted 23 patents on the LTK system and method
for shrinking collagen in the United States and internationally. 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 2007 and are currently
pledged as collateral for the 1997 Notes Placement.
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COMPETITION
The vision correction industry is subject to intense competition. The
significant competitive factors in the industry include price, convenience,
success relative to vision correction, acceptance of new technologies, patient
satisfaction and government approval. Patients with hyperopia (farsightedness)
can achieve vision correction with eyeglasses, contact lenses and possibly with
other technologies and surgical techniques currently under development, such as
corneal implants, lens replacement and surgery using different types of lasers.
The success of any competing alternative to 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, although it is not currently approved to treat hyperopia
in the United States or Japan, other than in limited clinical trials. In the
United States, VISX and Summit are the leading manufacturers of excimer
refractive surgical systems. 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. 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 VISX and 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
In 1997, approximately 38% of the Company's revenues were international as
compared to approximately 47% in 1996 and 69% in 1995.
BACKLOG
On December 31, 1997, the Company had a backlog of approximately $1,000,
all of which the Company expects to ship to its customers in 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 in the United States. The Company's
laser products include microprocessors and software that perform self-checks
upon startup 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.
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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.
EMPLOYEES
At December 31, 1997, the Company had 23 full-time employees (including its
executive officers); ten in manufacturing, two in engineering and development,
five in marketing, sales and regulatory, and six in administration. In addition,
the Company has retained a number of consultants to assist with its product
development and regulatory activities during 1997 and beyond.
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 experiences good employee relations.
CAUTIONARY STATEMENTS -- RISK FACTORS
In the interest of providing the Company's stockholders and potential
investors with certain Company information, including management's assessment of
the Company's future potential, certain statements set forth herein contain or
are based on projections of revenue, income, earnings per share and other
financial items or relate to management's future plans and objectives or to the
Company's future economic performance. Such statements are "forward-looking
statements" within the meaning of Section 27A(I) of the Securities Act of 1933,
as amended, and in Section 21E(I) of the Securities Exchange Act of 1934, as
amended.
Although any forward-looking statements contained herein or otherwise
expressed by or on behalf of the Company are, to the knowledge and in the
judgment of the officers and directors of the Company, expected to prove true
and to come to pass, management is not able to predict the future with absolute
certainty. Accordingly, stockholders and potential investors are hereby
cautioned that certain events or circumstances could cause actual results to
differ materially from those projected or predicted. In addition,
forward-looking statements are based on management's knowledge and judgment as
of the date hereof, and the Company does not intend to update any
forward-looking statements to reflect events occurring or circumstances existing
hereafter.
In particular, the Company believes the following facts could impact
forward-looking statements made herein or in future written or oral releases and
by hindsight, prove such statements to be overly optimistic and unachievable.
History of Losses; Profitability Uncertain; Cash Flow Deficits
Since 1992, the Company has incurred substantial losses, which have
depleted its working capital and reduced its stockholders' equity. In addition,
the Company's business will continue to be a significant consumer of cash, as
the revenues from its business are not expected to be sufficient to cover its
operating costs, unless and until FDA approval is obtained to permit domestic
sale of the LTK system, which 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 and
1997 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 February 28, 1998, after consummation of the 1998 Note
Offering (approximate net proceeds of $9,300,000), cash and cash equivalents of
the Company was approximately $10,500,000. The Company anticipates that it will
be required to raise additional working capital to fund its activities for late
1999 and beyond. Any additional equity or debt offerings may be dilutive to the
Company's stockholders. 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
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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. (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 are not expected to be sufficient to cover the
cost of the approval process.
Regulatory Matters -- FDA Approval of 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 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 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.
Uncertain Market Acceptance of the LTK System
Although the Company has another ophthalmic laser product, the gLase 210,
the Company has and intends to concentrate its efforts primarily on the
development of the LTK system and will be dependent upon the successful
development of that system to generate increased 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 adversely affect the marketplace for the LTK system. The
Company's failure 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.
8
<PAGE> 10
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 (farsightedness) or other common vision problems.
Potential complications and side effects from the use of the LTK system include
mild foreign body sensation, temporary increased light sensitivity, modest
fluctuations in refractive capabilities during healing, unintended over or
under-corrections, regression of effect and induced astigmatism. There can be no
assurance that long-term safety and efficacy data when collected will be
consistent with the clinical trial results previously obtained or will
demonstrate that the LTK system can be used safely and successfully to treat
hyperopia (farsightedness) in a broad segment of the population on a long-term
basis.
Loss of Dental Revenues
Prior to the sale of the dental assets in June 1997, the Company's revenues
were substantially derived from the sale of its dental laser and air abrasive
products. These sales represented 98% and 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.
Patent Concerns
Although the Company believes it holds dominant United States process
patents for the use of holmium lasers in non-destructive cornea shaping, process
and apparatus patents relating to shaping the cornea with holmium lasers have
been issued to others. An apparatus patent, generally, is a patent on a machine
or device. A process patent is a patent on an act or a method, and includes a
new use of a known process, machine, manufacture, composition of matter or
material. Because patent applications are maintained in secrecy in the United
States until such patents are issued, and are maintained in secrecy for a period
of time outside the United States, the Company can conduct only limited searches
to determine whether its technology infringes any patent or patent applications.
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. The Company believes it is not infringing on any patents held by
others, however, if patents held by others were adjudged valid and interpreted
broadly in an adversarial proceeding, they could be deemed to cover one or more
aspects of the Company's holmium laser corneal shaping systems or use of such
systems to perform LTK or other procedures. There can be no assurance that the
Company will not be subject to one or more claims for patent infringement, that
the Company would prevail in any such action or that its patents will afford
protection against competitors with similar technology.
In the event the LTK system is adjudged to infringe a patent in a
particular market, the Company and its customers may be enjoined from making,
selling and using such system or be required to obtain a royalty-bearing
license, if available, on acceptable terms. Alternatively, in the event a
license is not offered or available, the Company might be required to redesign
those aspects of the LTK system held to infringe so as to avoid infringement.
Any redesign could delay reintroduction of the Company's products into certain
markets, or may be so significant as to be impractical. If redesign efforts were
impractical, the Company could be prevented from manufacturing and selling the
infringing products, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition, the Company has attempted to negotiate with the University of
Miami to reach agreement regarding the non-exclusive use of a component of the
delivery system used in the LTK system which was jointly developed by the
Company and the University. The Company believes that it will be able to make
reasonable arrangements with the University. If, however, the Company is unable
to conclude negotiations with the University successfully, the Company may have
no rights in the delivery system presently configured
9
<PAGE> 11
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.
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 the systems for year 2000 compliance. It is
anticipated that all reprogramming efforts will be completed by December 31,
1998, allowing adequate time for testing. This process includes getting
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.
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 an adverse effect
on the Company's systems. Management is in the process of completing its
assessment of the year 2000 compliance costs; however, based on information to
date (excluding the possible impact of vendor systems), management does not
believe that it will have a material effect on the Company's earnings.
ITEM 2. FACILITIES
The Company leases 10,400 square feet for all its business activities
including executive offices as well as engineering and development,
manufacturing, assembly and testing activities in Fremont, California for
approximately $12,300 per month, including expenses. The lease expires in
January 2001. The Company is currently in lease negotiations for larger space in
the Fremont area.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not Applicable
10
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Market Information
As of December 31, 1997, there were 673 holders of record of the Company's
Common Stock. Price information for the Company's Common Stock may be obtained
from the OTC Bulletin Board. The table below sets forth the reported high and
low bid quotations of the Company's Common Stock as reported on the OTC Bulletin
Board for the periods indicated.
PRICES FOR COMMON STOCK
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ----- -----
<S> <C> <C>
March 31, 1996.............................................. $2.88 $1.09
June 30, 1996............................................... $2.31 $1.06
September 30, 1996.......................................... $2.00 $0.88
December 31, 1996........................................... $2.13 $0.81
March 31, 1997.............................................. $1.75 $0.75
June 30, 1997............................................... $1.44 $0.88
September 30, 1997.......................................... $3.94 $1.00
December 31, 1997........................................... $5.13 $3.13
</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.
On March 26, 1998, the closing price of the Company's Common Stock as
reported on the OTC Bulletin Board was $5.9375 per share. The over-the-counter
market quotations provided herein may reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions.
Dividends
In the past three years, the Company has not declared or paid any cash
dividends on its 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 its Common Stock in the foreseeable
future.
Recent Sales of Unregistered Securities
The Company did not sell any unregistered securities during the fourth
quarter of 1997. The Company has approximately 75 warrant holders of record for
its warrants as of March 26, 1998.
11
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data derived from
the audited financial statements for the years ended December 31, 1993, 1994,
1995, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net revenues............................. $11,860 $ 7,578 $ 5,294 $ 5,654 $ 2,839
Gross profit............................. 5,009 1,340 1,637 1,638 293
Operating costs and expenses............. 11,461 8,257 5,824 7,658 7,368
Loss from operations..................... (6,452) (6,917) (4,187) (6,020) (7,075)
Gain on sale of dental assets............ -- -- -- -- 1,740
Interest income(expense), net............ (232) 7 57 52 (1,283)
Net loss................................. (6,624) (6,910) (4,130) (5,968) (6,618)
Net loss per share, basic and diluted.... (0.74) (0.68) (0.28) (0.23) (0.23)
Shares used in calculation of basic and
diluted net loss per share............. 8,955 10,129 14,935 26,414 28,550
Total assets............................. 5,511 3,822 6,689 3,741 2,949
Long term obligations.................... 18 -- -- -- 945
Total stockholders' equity............... 2,708 1,357 4,745 1,272 849
Working capital.......................... 1,965 1,101 4,541 1,073 1,382
</TABLE>
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for information regarding the Company's disposition of dental
business and assets.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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>
The Company has incurred substantial losses in the past six 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 and $3,700,000 from the 1997 Notes Placement. The Company
recently completed
12
<PAGE> 14
the 1998 Note Offering that raised $9,300,000, net of offering costs. 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.
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.
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.
13
<PAGE> 15
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 in regulatory expenses
associated with the Company's 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 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 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 (EXPENSE), NET
Interest income was $98,000, $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 $1,381,000, $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.
14
<PAGE> 16
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 $3,600,000 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 $201,000 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 $4,837,000 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
15
<PAGE> 17
with the 1997 Notes Placement would convert into 2,538,328 shares of Common
Stock and have an exercise price of $1.00 per share.
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 January 1998, the Company completed
the 1998 Note Offering. The Company believes it has sufficient working capital
to continue its existing operations through 1998 and into 1999. In order to
continue its current level of operations beyond 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 or suspend
operations in their entirety.
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 the systems for year 2000 compliance. It is
anticipated that all reprogramming efforts will be completed by December 31,
1998, allowing adequate time for testing. This process includes getting
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.
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 an adverse effect
on the Company's systems. Management is in the process of completing its
assessment of the year 2000 compliance costs; however, based on information to
date (excluding the possible impact of vendor systems), management does not
believe that it will have a material effect on the Company's earnings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in any hedge transactions or derivative
financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated balance sheets at December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years ended December 31, 1997, 1996 and 1995 and the notes
thereto appear beginning at page 22.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 9, 1997, the Company dismissed Ernst & Young LLP ("E&Y") as its
independent accounting firm. E&Y's report on the financial statements for the
past two years did not contain an adverse opinion or a disclaimer of opinion,
however, the report was modified to include an explanatory paragraph with
respect to the Company's ability to continue as a going concern. During the
Company's two most recent fiscal years and the subsequent interim period
preceding such dismissal, there were no disagreements with E&Y on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. The decision to change accountants was recommended and
approved by the Audit Committee of the Company's Board of Directors.
On December 10, 1997, the Company engaged Coopers & Lybrand L.L.P. ("C&L")
as the new independent accountant to audit the Company's financial statements.
During the Company's two most recent fiscal years and the subsequent interim
period prior to engaging C&L, the Company had not consulted C&L
16
<PAGE> 18
regarding either: (i) the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit opinion that
might be rendered on the Company's financial statements, and no written report
was provided to the Company and no oral advice was provided that C&L concluded
was an important factor considered by the Company in reaching a decision as to
the accounting, auditing or financial reporting issue; or (ii) any matter that
was either the subject of a disagreement (as defined in paragraph 304(a)(1)(iv)
of Regulation S-K) or a reportable event (as described in paragraph 304(a)(1)(v)
of Regulation S-K).
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors will be set forth under the
caption "Election of Directors -- Nominees/Continuing Directors," and
information regarding the Company's executive officers will be set forth under
the caption "Executive Compensation -- Executive Officers" in the Company's
proxy statement for use in connection with the 1998 Annual Meeting of
Stockholders (the "Proxy Statement"), and is incorporated herein by reference.
The Proxy Statement will be filed with the Securities and Exchange Commission
within 120 days after the end of the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions" in
the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
(A) 1. FINANCIAL STATEMENTS
The following documents are filed as part of this report:
<TABLE>
<CAPTION>
PAGE IN THIS
ANNUAL REPORT ON
FORM 10-K
----------------
<S> <C>
Report of Coopers & Lybrand L.L.P., Independent
Accountants........................................ 20
Report of Ernst & Young LLP, former Independent
Auditors........................................... 21
Consolidated Balance Sheets -- December 31, 1997 and
1996............................................... 22
Consolidated Statements of Operations*............... 23
Consolidated Statement of Stockholders' Equity*...... 24
Consolidated Statements of Cash Flows*............... 25
Notes to Consolidated Financial Statements........... 26
- ---------------
*For the years ended December 31, 1997, 1996 and 1995
</TABLE>
17
<PAGE> 19
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules are filed as part of this
report:
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying
Accounts........................................ 36
</TABLE>
All other schedules have been omitted as they are not required, not
applicable, or the required information is included in the financial statements
or notes thereto.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
2.1 Asset Purchase Agreement dated as of March 26, 1997, by and
between the Company and Lares Research, a California
corporation(6)
3.1 Certificate of Incorporation, as amended(1)
3.2 Bylaws(1)
4.1 Form of 5% Convertible Notes due 1999(7)
4.2 Form of Security Agreement relating to 5% Convertible Notes
due 1999(7)
4.3 Form of Registration Rights Agreement(7)
4.4 Form of Warrant issued to Pennsylvania Merchant Group(4)
4.5 Form of Rights Agreement, dated as of October 24, 1997,
between the Company and ChaseMellon Shareholder Services,
L.L.C., as rights agent(8)
4.6 Form of 12% Subordinated Pay-In-Kind Note Due 2001(9)
4.7 Form of Registration Rights Agreement(9)
10.1 Lease Agreement with Bayside Spinnaker Partners III, as
lessor, for the lease of facilities at 47265 Fremont
Boulevard, Fremont, California, dated January 23, 1998
10.2 Patent License Agreement between the Company and Patlex
Corporation dated January 1, 1990(3)
10.3 Agreement between the Company and the University of Miami,
Department of Ophthalmology, dated October 28, 1991(2)
10.4 Joint Development and Exclusive Manufacturing Agreement
dated April 17, 1993 between the Company and Danville
Engineering, Inc.(1)
10.5 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)
10.6 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)
10.7 Settlement Agreement between the Company and American Dental
Technologies, dated July 30, 1996(6)
*10.8 Form of Indemnification Agreement between the Company and
each of its officers and directors(3)
*10.9 1988 Stock Option Plan, as amended(5)
*10.10 Employment Agreement, entered into between the Company and
Joseph W. Shaffer, dated April 5, 1989(5)
10.11 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)
10.12 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)
*10.13 Form of Change of Control Agreement by and between the
Company and its President and Chief Executive Officer(8)
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
*10.14 Form of Change of Control Agreement by and between the
Company and its executive officers (other than the President
and Chief Executive Officer)(8)
*10.15 Form of Indemnification Agreement by and between the Company
and its executive officers(8)
10.16 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)
21.1 Subsidiaries of the Company
22 Power of Attorney (included on the signature pages to this
Form 10-K)
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants
23.2 Consent of Ernst & Young LLP, Former Independent Auditors
27 Financial Data Schedule
</TABLE>
- ---------------
* Compensatory plan or management contract
(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 Annual Report on Form 10-K
for the year ended December 31, 1996 (File No. 1-10428)
(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)
REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated October 24, 1997, to
report its adoption of a stockholder's right plan and the adoption of change of
control and indemnification agreements for each of the Company's executive
officers. The Company also filed a Current Report on Form 8-K dated December 9,
1997, to report a change in its certifying accountant from Ernst & Young LLP to
Coopers & Lybrand L.L.P.
19
<PAGE> 21
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
listed in Item 14(a) of this Form 10-K 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
20
<PAGE> 22
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 sheets of Sunrise
Technologies International, Inc. as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sunrise Technologies International, Inc. at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that Sunrise Technologies International, Inc. will continue as a going
concern. 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
San Jose, California
March 10, 1997
21
<PAGE> 23
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
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; 40,000,000 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.
22
<PAGE> 24
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 expenses....................... 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 (expense), net............................ (1,283) 52 57
------- ------- -------
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.
23
<PAGE> 25
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 ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION TREASURY 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..... 25,279,716 25 29,196 -- -- (24,476) 4,745
Sale of common stock, net of
offering costs.............. 2,333,412 3 2,242 -- -- -- 2,245
Exercise of warrants and
options..................... 243,252 -- 243 -- -- -- 243
Other.......................... 12,233 -- 7 -- -- -- 7
Net loss....................... -- -- -- -- -- (5,968) (5,968)
---------- --- ------- ----- ----- -------- -------
Balance at December 31, 1996..... 27,868,613 28 31,688 -- -- (30,444) 1,272
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.
24
<PAGE> 26
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.......................... (201) (65) (50)
Proceeds from sale of dental assets, net of costs........... 3,449 -- --
------- ------- -------
Net cash provided by (used in) investing activities....... 3,248 (65) (50)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on capital lease obligations........................ (5) -- (18)
Proceeds from issuance of capital lease obligation.......... 103 -- --
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................... 4,837 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.
25
<PAGE> 27
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
26
<PAGE> 28
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>
27
<PAGE> 29
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Most components used in the Company's laser systems are purchased from
outside sources. The Company has at least two suppliers for all of its
components used to manufacture its laser systems.
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) (2,655)
----- ------
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.
28
<PAGE> 30
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.
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.
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.
29
<PAGE> 31
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
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.
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.
30
<PAGE> 32
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. and with Danville Engineering, Inc. The
settlement called for certain payments to be made by the Company to American
Dental Technologies, Inc. upon the sale of the dental assets of the Company. The
Company made such payments during 1997 and believes it has no further obligation
to pay American Dental Technologies, Inc.
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 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.
As of December 31, 1997, the Company's long-term debt consisted of
$1,499,000 of the 1997 Notes, net 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.
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
31
<PAGE> 33
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 they were exercised in full
during 1997.
In September 1996, the Company completed a private placement of 2,334,420
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. 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.
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
32
<PAGE> 34
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 rate.......................... 6.15% 5.70%
Expected life.................................... 4.8years 4.8years
Volatility....................................... 95.5% 95.5%
Dividend yield................................... -- --
</TABLE>
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 OPTION
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 854,620 (854,620) $ 0.75 - $2.87 $ 1.18
Exercised -- (251,663) $ 0.75 - $1.06 $ 1.01
---------- ----------- -------------- ------
BALANCE -- 12/31/1997 1,197,258 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.
33
<PAGE> 35
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 WEIGHTED REMAINING WEIGHTED
CONTRACTUAL AVERAGE CONTRACTUAL AVERAGE
NUMBER LIFE EXERCISE NUMBER LIFE EXERCISE
OUTSTANDING (YEARS) PRICE EXERCISABLE (YEARS) 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
$2.76 - $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.
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:
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<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, with two installments due in three
and four years, respectively (the "Lares Note"). Although the Company
anticipates collecting interest and principal on the Lares Note, collection is
not
34
<PAGE> 36
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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. 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, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues from dental business....................... $1,968 $ 5,514 $ 4,008
Loss from dental business........................... $ (11) $(2,504) $(3,488)
</TABLE>
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>
Acquisition of equipment pursuant to capital lease
obligations......................................... $103 -- $ 8
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.
35
<PAGE> 37
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OTHER OF PERIOD
---------- ---------- ---------- ----- ----------
(IN THOUSANDS)
<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
receivable......................... -- $1,500 -- -- $1,500
</TABLE>
36
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of Fremont, State of
California, on the 6th day of April, 1998.
SUNRISE TECHNOLOGIES
INTERNATIONAL, INC.
By: /s/ C. RUSSELL TRENARY, III
------------------------------------
President and Chief Executive
Officer
POWER OF ATTORNEY
Each of the officers and directors of Sunrise Technologies International,
Inc. whose signature appears below hereby constitutes and appoints C. Russell
Trenary, III and Timothy A. Marcotte, and each of them, their true and lawful
attorneys-in-fact and agents, with full power and substitution, each with power
to act alone, to sign and execute on behalf of the undersigned any amendment or
amendments to this Report on Form 10-K, and to perform any acts necessary to be
done in order to file such amendment, and each of the undersigned does hereby
ratify and confirm all that such attorneys-in-fact and agents, or their or his
substitutes, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ C. RUSSELL TRENARY, III President and Chief Executive April 6, 1998
- --------------------------------------------------- Officer
C. Russell Trenary, III
/s/ TIMOTHY A. MARCOTTE Vice President, Finance and Chief April 6, 1998
- --------------------------------------------------- Financial Officer (Principal
Timothy A. Marcotte Financial and Accounting Officer)
and Director
/s/ JOSEPH D. KOENIG Director and Chairman of the Board April 6, 1998
- ---------------------------------------------------
Joseph D. Koenig
/s/ R. DALE BOWERMAN Director April 6, 1998
- ---------------------------------------------------
R. Dale Bowerman
/s/ MICHAEL S. MCFARLAND, M.D. Director April 6, 1998
- ---------------------------------------------------
Michael S. McFarland, M.D.
</TABLE>
37
<PAGE> 39
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
2.1 Asset Purchase Agreement dated as of March 26, 1997, by and
between the Company and Lares Research, a California
corporation(6)
3.1 Certificate of Incorporation, as amended(1)
3.2 Bylaws(1)
4.1 Form of 5% Convertible Notes due 1999(7)
4.2 Form of Security Agreement relating to 5% Convertible Notes
due 1999(7)
4.3 Form of Registration Rights Agreement(7)
4.4 Form of Warrant issued to Pennsylvania Merchant Group(4)
4.5 Form of Rights Agreement, dated as of October 24, 1997,
between the Company and ChaseMellon Shareholder Services,
L.L.C., as rights agent(8)
4.6 Form of 12% Subordinated Pay-In-Kind Note Due 2001(9)
4.7 Form of Registration Rights Agreement(9)
10.1 Lease Agreement with Bayside Spinnaker Partners III, as
lessor, for the lease of facilities at 47265 Fremont
Boulevard, Fremont, California, dated January 23, 1998
10.2 Patent License Agreement between the Company and Patlex
Corporation dated January 1, 1990(3)
10.3 Agreement between the Company and the University of Miami,
Department of Ophthalmology, dated October 28, 1991(2)
10.4 Joint Development and Exclusive Manufacturing Agreement
dated April 17, 1993 between the Company and Danville
Engineering, Inc.(1)
10.5 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)
10.6 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)
10.7 Settlement Agreement between the Company and American Dental
Technologies, dated July 30, 1996(6)
*10.8 Form of Indemnification Agreement between the Company and
each of its officers and directors(3)
*10.9 1988 Stock Option Plan, as amended(5)
*10.10 Employment Agreement, entered into between the Company and
Joseph W. Shaffer, dated April 5, 1989(5)
10.11 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)
10.12 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)
10.13 Form of Change of Control Agreement by and between the
Company and its President and Chief Executive Officer(8)
*10.14 Form of Change of Control Agreement by and between the
Company and its executive officers (other than the President
and Chief Executive Officer)(8)
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
*10.15 Form of Indemnification Agreement by and between the Company
and its executive officers(8)
10.16 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)
21.1 Subsidiaries of the Company
22 Power of Attorney (included on the signature pages to this
Form 10-K)
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants
23.2 Consent of Ernst & Young LLP, Former Independent Auditors
27 Financial Data Schedule
</TABLE>
- ---------------
* Compensatory plan or management contract
(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 Annual Report on Form 10-K
for the year ended December 31, 1996 (File No. 1-10428)
(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)
39
<PAGE> 1
EXHIBIT 10.1
[California Net Lease]
LEASE AGREEMENT
THIS LEASE AGREEMENT is made this ______________day of
_____________________, ______________, between SCI Limited Partnership-I, a
Delaware Limited Partnership ("Landlord"), and the Tenant named below.
<TABLE>
<S> <C>
TENANT: Sunrise Technologies International, Inc., a
Delaware Corporation
TENANT'S REPRESENTATIVE, Tim Marcotte
ADDRESS, AND PHONE NO.: 47265 Fremont Boulevard
Fremont, CA 94538
(510) 623-9001
PREMISES: That portion of the Building, containing approximately 10,400 rentable square feet,
as determined by Landlord and commonly known as 47265 Fremont Boulevard, Fremont, CA
as shown on Exhibit A.
PROJECT: Bayside Commons
BUILDING: Shoreline Business Center Building #7 (14507)
TENANT'S PROPORTIONATE
SHARE OF PROJECT: 13.77%
TENANT'S PROPORTIONATE SHARE 30.23%
OF BUILDING:
LEASE TERM: Beginning on the Commencement Date and ending on the last day of the 36th full
calendar month thereafter.
COMMENCEMENT DATE: February 1, 1998
INITIAL MONTHLY BASE RENT:
Ten Thousand Four Hundred $10,400
INITIAL ESTIMATED MONTHLY 1. Utilities: ($46)
Operating Expense Payments:
estimates only and subject 2. Common Area Charges: $429
to adjustment to actual
costs and expenses 3. Taxes: $1,414
according to the provisions
of this Lease) 4. Insurance: $35
INITIAL ESTIMATED MONTHLY
OPERATING EXPENSE PAYMENTS: $1,924
INITIAL MONTHLY BASE RENT
AND OPERATING EXPENSE
PAYMENTS: $12,324
SECURITY DEPOSIT: $11,440 ($18,200 IS CURRENTLY ON ACCOUNT WITH LESSOR. $6,760 SHALL BE REFUNDED
UPON COMMENCEMENT OF THIS LEASE RENEWAL).
BROKER: N/A
ADDENDA: Addendum I and II, Exhibit A, B and C
</TABLE>
1. GRANTING CLAUS. In consideration of the obligation of Tenant to pay
rent as herein provided and in consideration of the other terms, covenants, and
conditions hereof, Landlord leases to Tenant, and Tenant takes from Landlord,
the Premises, to have and to hold for the Lease Term, subject to the terms,
covenants and conditions of this Lease.
2. ACCEPTANCE OF PREMISES. Tenant shall accept the Premises in its
condition as of the Commencement Date, subject to all applicable laws,
ordinances, regulations, covenants and restrictions. Landlord has made no
representation or warranty as to the suitability of the Premises for the conduct
of Tenant's business, and Tenant waives any implied warranty that the Premises
are suitable for Tenant's intended purposes. Except as provided in Paragraph 10,
in no event shall Landlord have any obligation for any defects in the Premises
or any limitation on its use. The taking of possession of the Premises shall be
conclusive evidence that Tenant accepts the Premises and that the Premises were
in good condition at the time possession was taken except for items that are
Landlord's responsibility under Paragraph 10 and any punchlist items agreed to
in writing by Landlord and Tenant.
3. USE. The Premises shall be used only for the purpose of receiving,
storing, shipping and selling (but limited to wholesale sales) products,
materials and merchandise made and/or distributed by Tenant and for such other
lawful purposes as may be incidental thereto; provided, however, with Landlord's
prior written consent, Tenant may also use the Premises for light manufacturing
AND R&D. Tenant shall not conduct or give
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notice of any auction, liquidation, or going out of business sale on the
Premises. Tenant will use the Premises in a careful, safe and proper manner and
will not commit waste, overload the floor or structure of the Premises or
subject the Premises to use that would damage the Premises. Tenant shall not
permit any objectionable or unpleasant odors, smoke, dust, gas, noise, or
vibrations to emanate from the Premises, or take any other action that would
constitute a nuisance or would disturb, unreasonably interfere with, or endanger
Landlord or any tenants of the Project. Outside storage, including without
limitation, storage of trucks and other vehicles, is prohibited without
Landlord's prior written consent. Tenant, at its sole expense, shall use and
occupy the Premises in compliance with all laws, including, without limitation,
the Americans With Disabilities Act, orders, judgments, ordinances, regulations,
codes, directives, permits, licenses, covenants and restrictions now or
hereafter applicable to the Premises (collectively, "Legal Requirements"). The
Premises shall not be used as a place of public accommodation under the
Americans With Disabilities Act or similar state statutes or local ordinances or
any regulations promulgated thereunder, all as may be amended from time to time.
Tenant shall, at its expense, make any alterations or modifications, within or
without the Premises, that are required by Legal Requirements related to
Tenant's use or occupation of the Premises. Tenant will not use or permit the
Premises to be used for any purpose or in any manner that would void Tenant's or
Landlord's insurance, increase the insurance risk, or cause the disallowance of
any sprinkler credits. If any increase in the cost of any insurance on the
Premises or the Project is caused by Tenant's use or occupation of the Premises,
or because Tenant vacates the Premises, then Tenant shall pay the amount of such
increase to Landlord. Any occupation of the Premises by Tenant prior to the
Commencement Date shall be subject to all obligations of Tenant under this Lease
SUBJECT TO EXISTING LEASE TAKING PRECEDENCE.
4. BASE RENT. Tenant shall pay Base Rent in the amount set forth above.
The first month's Base Rent, the Security Deposit, and the first monthly
installment of estimated Operating Expenses (as hereafter defined) shall be due
and payable, ON THE LEASE COMMENCEMENT DATE and Tenant promises to pay to
Landlord in advance, without demand, deduction or set-off, monthly installments
of Base Rent on or before the first day of each calendar month succeeding the
Commencement Date. Payments of Base Rent for any fractional calendar month shall
be prorated. All payments required to be made by Tenant to Landlord hereunder
shall be payable at such address as Landlord may specify from time to time by
written notice delivered in accordance herewith. The obligation of Tenant to pay
Base Rent and other sums to Landlord and the obligations of Landlord under this
Lease are independent obligations. Tenant shall have no right at any time to
abate, reduce, or set-off any rent due hereunder except as may be expressly
provided in this Lease. Tenant waives and releases all statutory liens and
offset rights as to rent. If Tenant is delinquent in any monthly installment of
Base Rent or of estimated Operating Expenses for more than 5 days, Tenant shall
pay to Landlord on demand a late charge equal to 5 percent of such delinquent
sum. The provision for such late charge shall be in addition to all of
Landlord's other rights and remedies hereunder or at law and shall not be
construed as a penalty.
5. SECURITY DEPOSIT. The Security Deposit shall be held by Landlord as
security for the performance of Tenant's obligations under this Lease. The
Security Deposit is not an advance rental deposit or a measure of Landlord's
damages in case of Tenant's default. Upon each occurrence of an Event of Default
(hereinafter defined), Landlord may use all or part of the Security Deposit to
pay delinquent payments due under this Lease, and the cost of any damage,
injury, expense or liability caused by such Event of Default, without prejudice
to any other remedy provided herein or provided by law. Tenant shall pay
Landlord on demand the amount that will restore the Security Deposit to its
original amount. Landlord's obligation respecting the Security Deposit is that
of a debtor, not a trustee; no interest shall accrue thereon. The Security
Deposit shall be the property of Landlord, but shall be paid to Tenant when
Tenant's obligations under this Lease have been completely fulfilled. Landlord
shall be released from any obligation with respect to the Security Deposit upon
transfer of this Lease and the Premises to a person or entity assuming
Landlord's obligations under this Paragraph 5.
6. OPERATING EXPENSE PAYMENTS. During each month of the Lease Term, on
the same date that Base Rent is due, Tenant shall pay Landlord an amount equal
to 1/12 of the annual cost, as estimated by Landlord from time to time, of
Tenant's Proportionate Share (hereinafter defined) of Operating Expenses for the
Project. Payments thereof for any fractional calendar month shall be prorated.
The term "Operating Expenses" means all costs and expenses incurred by Landlord
with respect to the ownership, maintenance, and operation of the Project
including, but not limited to costs of: Taxes (hereinafter defined) and fees
payable to tax consultants and attorneys for consultation and contesting taxes;
insurance; utilities; maintenance, repair and replacement of all portions of the
Project, including without limitation, paving and parking areas, roads, roofs,
alleys, and driveways, mowing, landscaping, exterior painting, utility lines,
heating, ventilation and air conditioning systems, lighting, electrical systems
and other mechanical and building systems; amounts paid to contractors and
subcontractors for work or services performed in connection with any of the
foregoing; charges or assessments of any association to which the Project is
subject; property management fees payable to a property manager, including any
affiliate of Landlord, or if there is no property manager, an administration fee
of 15 percent of Operating Expenses payable to Landlord; security services, if
any; trash collection, sweeping and removal; and additions or alterations made
by Landlord to the Project or the Building in order to comply with Legal
Requirements (other than those expressly required herein to be made by Tenant)
or that are appropriate to the continued operation of the Project or the
Building as a bulk warehouse facility in the market area, provided that the cost
of additions or alterations that are required to be capitalized for federal
income tax purposes shall be amortized on a straight line basis over a period
equal to the lesser of the useful life thereof for federal income tax purposes
or 10 years. Operating Expenses do not include costs, or expenses, depreciation
or amortization for capital repairs and capital replacements required to be made
by Landlord under Paragraph 10 of this Lease, debt service under mortgages or
ground rent under ground leases, costs of restoration to the extent of net
insurance proceeds received by Landlord with respect
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<PAGE> 3
thereto, leasing commissions, or the costs of renovating space for tenants.
If Tenant's total payments of Operating Expenses for any year are
less than Tenant's Proportionate Share of actual Operating Expenses for such
year, then Tenant shall pay the difference to Landlord within 30 days after
demand, and if more, then Landlord shall retain such excess and credit it
against Tenant's next payments. For purposes of calculating Tenant's
Proportionate Share of Operating Expenses, a year shall mean a calendar year
except the first year, which shall begin on the Commencement Date, and the last
year, which shall end on the expiration of this Lease. With respect to Operating
Expenses which Landlord allocates to the entire Project, Tenant's "Proportionate
Share" shall be the percentage set forth on the first page of this Lease as
Tenant's Proportionate Share of the Project as reasonably adjusted by Landlord
in the future for changes in the physical size of the Premises or the Project;
and, with respect to Operating Expenses which Landlord allocates only to the
Building, Tenant's "Proportionate Share" shall be the percentage set forth on
the first page of this Lease as Tenant's Proportionate Share of the Building as
reasonably adjusted by Landlord in the future for changes in the physical size
of the Premises or the Building. Landlord may equitably increase Tenant's
Proportionate Share for any item of expense or cost reimbursable by Tenant that
relates to a repair, replacement, or service that benefits only the Premises or
only a portion of the Project or Building that includes the Premises or that
varies with occupancy or use OF THE TENANT. The estimated Operating Expenses for
the Premises set forth on the first page of this Lease are only estimates, and
Landlord makes no guaranty or warranty that such estimates will be accurate.
7. UTILITIES. Tenant shall pay for all water, gas, electricity, heat,
light, power, telephone, sewer, sprinkler services, refuse and trash collection,
and other utilities and services used on the Premises, all maintenance charges
for utilities, and any storm sewer charges or other similar charges for
utilities imposed by any governmental entity or utility provider, together with
any taxes, penalties, surcharges or the like pertaining to Tenant's use of the
Premises. Landlord may cause at Tenant's expense any utilities to be separately
metered or charged directly to Tenant by the provider. Tenant shall pay its
share of all charges for jointly metered utilities based upon consumption, as
reasonably determined by Landlord. No interruption or failure of utilities shall
result in the termination of this Lease or the abatement of rent. Tenant agrees
to limit use of water and sewer for normal restroom use AND CAFETERIA.
8. TAXES. Landlord shall pay all taxes, assessments and governmental
charges (collectively referred to as "Taxes") that accrue against the Project
during the Lease Term, which shall be included as part of the Operating Expenses
charged to Tenant. Landlord may contest by appropriate legal proceedings the
amount, validity, or application of any Taxes or liens thereof. All capital
levies or other taxes assessed or imposed on Landlord upon the rents payable to
Landlord under this Lease and any franchise tax, any excise, transaction, sales
or privilege tax, assessment, levy or charge measured by or based, in whole or
in part, upon such rents from the Premises and/or the Project or any portion
thereof shall be paid by Tenant to Landlord monthly in estimated installments or
upon demand, at the option of Landlord, as additional rent; provided, however,
in no event shall Tenant be liable for any net income taxes imposed on Landlord
unless such net income taxes are in substitution for any Taxes payable
hereunder. If any such tax or excise is levied or assessed directly against
Tenant, then Tenant shall be responsible for and shall pay the same at such
times and in such manner as the taxing authority shall require. Tenant shall be
liable for all taxes levied or assessed against any personal property or
fixtures placed in the Premises, whether levied or assessed against Landlord or
Tenant.
9. INSURANCE. Landlord shall maintain all risk property insurance
covering the full replacement cost of the Building. Landlord may, but is not
obligated to, maintain such other insurance and additional coverages as it may
deem necessary, including, but not limited to, commercial liability insurance
and rent loss insurance. All such insurance shall be included as part of the
Operating Expenses charged to Tenant. The Project or Building may be included in
a blanket policy (in which case the cost of such insurance allocable to the
Project or Building will be determined by Landlord based upon the insurer's cost
calculations). Tenant shall also reimburse Landlord for any increased premiums
or additional insurance which Landlord reasonably deems necessary as a result of
Tenant's use of the Premises.
Tenant, at its expense, shall maintain during the Lease Term: all
risk property insurance covering the full replacement cost of all property and
improvements installed or placed in the Premises by Tenant at Tenant's expense;
worker's compensation insurance with no less than the minimum limits required by
law; employer's liability insurance with such limits as required by law; and
commercial liability insurance, with a minimum limit of $1,000,000 per
occurrence and a minimum umbrella limit of $1,000,000, for a total minimum
combined general liability and umbrella limit of $2,000,000 (together with such
additional umbrella coverage as Landlord may reasonably require) for property
damage, personal injuries, or deaths of persons occurring in or about the
Premises. Landlord may from time to time require reasonable increases in any
such limits. The commercial liability policies shall name Landlord as an
additional insured, insure on an occurrence and not a claims-made basis, be
issued by insurance companies which are reasonably acceptable to Landlord, not
be cancelable unless 30 days' prior written notice shall have been given to
Landlord, contain a hostile fire endorsement and a contractual liability
endorsement and provide primary coverage to Landlord (any policy issued to
Landlord providing duplicate or similar coverage shall be deemed excess over
Tenant's policies). Such policies or certificates thereof shall be delivered to
Landlord by Tenant upon commencement of the Lease Term and upon each renewal of
said insurance.
The all risk property insurance obtained by Landlord and Tenant
shall include a waiver of subrogation by the insurers and all rights based upon
an assignment from its insured, against Landlord or Tenant,
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<PAGE> 4
their officers, directors, employees, managers, agents, invitees and
contractors, in connection with any loss or damage thereby insured against.
Neither party nor its officers, directors, employees, managers, agents, invitees
or contractors shall be liable to the other for loss or damage caused by any
risk coverable by all risk property insurance, and each party waives any claims
against the other party, and its officers, directors, employees, managers,
agents, invitees and contractors for such loss or damage. The failure of a party
to insure its property shall not void this waiver. Landlord and its agents,
employees and contractors shall not be liable for, and Tenant hereby waives all
claims against such parties for, business interruption and losses occasioned
thereby sustained by Tenant or any person claiming through Tenant resulting from
any accident or occurrence in or upon the Premises or the Project from any cause
whatsoever, including without limitation, damage caused in whole or in part,
directly or indirectly, by the negligence of Landlord or its agents, employees
or contractors.
10. LANDLORD'S REPAIRS. Landlord shall maintain, at its expense, the
structural soundness of the roof, foundation, and exterior walls of the Building
in good repair, reasonable wear and tear and uninsured losses and damages caused
by Tenant, its agents and contractors excluded. The term "walls" as used in this
Paragraph 10 shall not include windows, glass or plate glass, doors or overhead
doors, special store fronts, dock bumpers, dock plates or levelers, or office
entries. Tenant shall promptly give Landlord written notice of any repair
required by Landlord pursuant to this Paragraph 10, after which Landlord shall
have a reasonable opportunity to repair.
11. TENANT'S REPAIRS. Landlord, at Tenant's expense as provided in
Paragraph 6, shall maintain in good repair and condition the parking areas and
other common areas of the Building, including, but not limited to driveways,
alleys, landscape and grounds surrounding the Premises. Subject to Landlord's
obligation in Paragraph 10 and subject to Paragraphs 9 and 15, Tenant, at its
expense, shall repair, replace and maintain in good condition all portions of
the Premises and all areas, improvements and systems exclusively serving the
Premises including, without limitation, dock and loading areas, truck doors,
plumbing, water, and sewer lines up to points of common connection, fire
sprinklers and fire protection systems, entries, doors, ceilings and roof
membrane, windows, interior walls, and the interior side of demising walls, and
heating, ventilation and air conditioning systems. Such repair and replacements
include capital expenditures and repairs whose benefits may extend beyond the
Term. Heating, ventilation and air conditioning systems and other mechanical and
building systems serving the Premises shall be maintained at Tenant's expense
pursuant to maintenance service contracts entered into by Tenant or, at
Landlord's election, by Landlord. The scope of services and contractors under
such maintenance contracts shall be reasonably approved by Landlord. At
Landlord's request, Tenant shall enter into a joint maintenance agreement with
any railroad that services the Premises. If Tenant fails to perform any repair
or replacement for which it is responsible, Landlord may perform such work and
be reimbursed by Tenant within 10 days after demand therefor. Subject to
Paragraphs 9 and 15, Tenant shall bear the full cost of any repair or
replacement to any part of the Building or Project that results from damage
caused by Tenant, its agents, contractors, or invitees and any repair that
benefits only the Premises.
12. TENANT-MADE ALTERATIONS AND TRADE FIXTURES. Any alterations,
additions, or improvements made by or on behalf of Tenant to the Premises
("Tenant-Made Alterations") shall be subject to Landlord's prior written
consent. Tenant shall cause, at its expense, all Tenant-Made Alterations to
comply with insurance requirements and with Legal Requirements and shall
construct at its expense any alteration or modification required by Legal
Requirements as a result of any Tenant-Made Alterations. All Tenant-Made
Alterations shall be constructed in a good and workmanlike manner by contractors
reasonably acceptable to Landlord and only good grades of materials shall be
used. All plans and specifications for any Tenant-Made Alterations shall be
submitted to Landlord for its approval. Landlord may monitor construction of the
Tenant-Made Alterations. Tenant shall reimburse Landlord for its costs in
reviewing plans and specifications and in monitoring construction. Landlord's
right to review plans and specifications and to monitor construction shall be
solely for its own benefit, and Landlord shall have no duty to see that such
plans and specifications or construction comply with applicable laws, codes,
rules and regulations. Tenant shall provide Landlord with the identities and
mailing addresses of all persons performing work or supplying materials, prior
to beginning such construction, and Landlord may post on and about the Premises
notices of non-responsibility pursuant to applicable law. Tenant shall furnish
security or make other arrangements satisfactory to Landlord to assure payment
for the completion of all work free and clear of liens and shall provide
certificates of insurance for worker's compensation and other coverage in
amounts and from an insurance company satisfactory to Landlord protecting
Landlord against liability for personal injury or property damage during
construction. Upon completion of any Tenant- Made Alterations, Tenant shall
deliver to Landlord sworn statements setting forth the names of all contractors
and subcontractors who did work on the Tenant-Made Alterations and final lien
waivers from all such contractors and subcontractors. Upon surrender of the
Premises, all Tenant-Made Alterations and any leasehold improvements constructed
by Landlord or Tenant shall remain on the Premises as Landlord's property,
except to the extent Landlord requires removal at Tenant's expense of any such
items or Landlord and Tenant have otherwise agreed in writing in connection with
Landlord's consent to any Tenant-Made Alterations. Tenant shall repair any
damage caused by such removal.
Tenant, at its own cost and expense and without Landlord's prior
approval, may erect such shelves, bins, machinery and trade fixtures
(collectively "Trade Fixtures") in the ordinary course of its business provided
that such items do not alter the basic character of the Premises, do not
overload or damage the Premises, and may be removed without injury to the
Premises, and the construction, erection, and installation thereof complies with
all Legal Requirements and with Landlord's requirements set forth above. Tenant
shall remove its Trade Fixtures and shall repair any damage caused by such
removal.
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13. SIGNS. Tenant shall not make any changes to the exterior of the
Premises, install any exterior lights, decorations, balloons, flags, pennants,
banners, or painting, or erect or install any signs, windows or door lettering,
placards, decorations, or advertising media of any type which can be viewed from
the exterior of the Premises, without Landlord's prior written consent. Upon
surrender or vacation of the Premises, Tenant shall have removed all signs and
repair, paint, and/or replace the building facia surface to which its signs are
attached. Tenant shall obtain all applicable governmental permits and approvals
for sign and exterior treatments. All signs, decorations, advertising media,
blinds, draperies and other window treatment or bars or other security
installations visible from outside the Premises shall be subject to Landlord's
approval and conform in all respects to Landlord's requirements.
14. PARKING. Tenant shall be entitled to park in common with other
tenants of the Project in those areas designated for nonreserved parking.
Landlord may allocate parking spaces among Tenant and other tenants in the
Project if Landlord determines that such parking facilities are becoming
crowded. Landlord shall not be responsible for enforcing Tenant's parking rights
against any third parties.
15. RESTORATION. If at any time during the Lease Term the Premises are
damaged by a fire or other casualty, Landlord shall notify Tenant within 60 days
after such damage as to the amount of time Landlord reasonably estimates it will
take to restore the Premises. If the restoration time is estimated to exceed 6
months, either Landlord or Tenant may elect to terminate this Lease upon notice
to the other party given no later than 30 days after Landlord's notice. If
neither party elects to terminate this Lease or if Landlord estimates that
restoration will take 6 months or less, then, subject to receipt of sufficient
insurance proceeds, Landlord shall promptly restore the Premises excluding the
improvements installed by Tenant or by Landlord and paid by Tenant, subject to
delays arising from the collection of insurance proceeds or from Force Majeure
events. Tenant at Tenant's expense shall promptly perform, subject to delays
arising from the collection of insurance proceeds, or from Force Majeure events,
all repairs or restoration not required to be done by Landlord and shall
promptly re-enter the Premises and commence doing business in accordance with
this Lease. Notwithstanding the foregoing, either party may terminate this Lease
if the Premises are damaged during the last year of the Lease Term and Landlord
reasonably estimates that it will take more than one month to repair such
damage. Tenant shall pay to Landlord with respect to any damage to the Premises
the amount of the commercially reasonable deductible under Landlord's insurance
policy (currently $10,000) within 10 days after presentment of Landlord's
invoice. If the damage involves the premises of other tenants, Tenant shall pay
the portion of the deductible that the cost of the restoration of the Premises
bears to the total cost of restoration, as determined by Landlord. Base Rent and
Operating Expenses shall be abated for the period of repair and restoration in
the proportion which the area of the Premises, if any, which is not usable by
Tenant bears to the total area of the Premises. Such abatement shall be the sole
remedy of Tenant, and except as provided herein, Tenant waives any right to
terminate the Lease by reason of damage or casualty loss.
16. CONDEMNATION. If any part of the Premises or the Project should be
taken for any public or quasi-public use under governmental law, ordinance, or
regulation, or by right of eminent domain, or by private purchase in lieu
thereof (a "Taking" or "Taken"), and the Taking would prevent or materially
interfere with Tenant's use of the Premises or in Landlord's judgment would
materially interfere with or impair its ownership or operation of the Project,
then upon written notice by Landlord this Lease shall terminate and Base Rent
shall be apportioned as of said date. If part of the Premises shall be Taken,
and this Lease is not terminated as provided above, the Base Rent payable
hereunder during the unexpired Lease Term shall be reduced to such extent as may
be fair and reasonable under the circumstances. In the event of any such Taking,
Landlord shall be entitled to receive the entire price or award from any such
Taking without any payment to Tenant, and Tenant hereby assigns to Landlord
Tenant's interest, if any, in such award. Tenant shall have the right, to the
extent that same shall not diminish Landlord's award, to make a separate claim
against the condemning authority (but not Landlord) for such compensation as may
be separately awarded or recoverable by Tenant for moving expenses and damage to
Tenant's Trade Fixtures, if a separate award for such items is made to Tenant.
17. ASSIGNMENT AND SUBLETTING. Without Landlord's prior written consent,
which Landlord shall not unreasonably withhold, Tenant shall not assign this
Lease or sublease the Premises or any part thereof or mortgage, pledge, or
hypothecate its leasehold interest or grant any concession or license within the
Premises and any attempt to do any of the foregoing shall be void and of no
effect. For purposes of this paragraph, a transfer of the ownership interests
controlling Tenant shall be deemed an assignment of this Lease unless such
ownership interests are publicly traded. Notwithstanding the above, Tenant may
assign or sublet the Premises, or any part thereof, to any entity controlling
Tenant, controlled by Tenant or under common control with Tenant (a "Tenant
Affiliate"), without the prior written consent of Landlord. Tenant shall
reimburse Landlord for all of Landlord's reasonable out-of-pocket expenses in
connection with any assignment or sublease. Upon Landlord's receipt of Tenant's
written notice of a desire to assign or sublet the Premises, or any part thereof
(other than to a Tenant Affiliate), Landlord may, by giving written notice to
Tenant within 30 days after receipt of Tenant's notice, terminate this Lease
with respect to the space described in Tenant's notice, as of the date specified
in Tenant's notice for the commencement of the proposed assignment or sublease.
If Landlord so terminates the Lease, Landlord may enter into a lease directly
with the proposed sublessee or assignee. Tenant may withdraw its notice to
sublease or assign by notifying Landlord within 10 days after Landlord has given
Tenant notice of such termination, in which case the Lease shall not terminate
but shall continue.
It shall be reasonable for the Landlord to withhold its consent
to any assignment or sublease in any of the following instances: (i) an Event of
Default has occurred and is continuing that would not be cured
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upon the proposed sublease or assignment; (ii) the assignee or sublessee does
not have a net worth calculated according to generally accepted accounting
principles at least equal to the greater of the net worth of Tenant immediately
prior to such assignment or sublease or the net worth of the Tenant at the time
it executed the Lease; (iii) the intended use of the Premises by the assignee or
sublessee is not reasonably satisfactory to Landlord; (iv) the intended use of
the Premises by the assignee or sublessee would materially increase the
pedestrian or vehicular traffic to the Premises or the Project; (v) occupancy of
the Premises by the assignee or sublessee would, in Landlord's opinion, violate
an agreement binding upon Landlord or the Project with regard to the identity of
tenants, usage in the Project, or similar matters; (vi) the identity or business
reputation of the assignee or sublessee will, in the good faith judgment of
Landlord, tend to damage the goodwill or reputation of the Project; (vii) the
assignment or sublet is to another tenant in the Project and is at rates which
are below those charged by Landlord for comparable space in the Project; (viii)
in the case of a sublease, the subtenant has not acknowledged that the Lease
controls over any inconsistent provision in the sublease; (ix) the proposed
assignee or sublessee is a governmental agency; or (x) there is vacant space in
the Premises suitable for lease to the proposed sublessee or assignee. Tenant
and Landlord acknowledge that each of the foregoing criteria are reasonable as
of the date of execution of this Lease. The foregoing criteria shall not exclude
any other reasonable basis for Landlord to refuse its consent to such assignment
or sublease. Any approved assignment or sublease shall be expressly subject to
the terms and conditions of this Lease. Tenant shall provide to Landlord all
information concerning the assignee or sublessee as Landlord may request.
Notwithstanding any assignment or subletting, Tenant and any
guarantor or surety of Tenant's obligations under this Lease shall at all times
remain fully responsible and liable for the payment of the rent and for
compliance with all of Tenant's other obligations under this Lease (regardless
of whether Landlord's approval has been obtained for any such assignments or
sublettings). In the event that the rent due and payable by a sublessee or
assignee (or a combination of the rental payable under such sublease or
assignment plus any bonus or other consideration therefor or incident thereto)
exceeds the rental payable under this Lease, then Tenant shall be bound and
obligated to pay Landlord as additional rent hereunder 50% such excess rental
and other excess consideration within 10 days following receipt thereof by
Tenant.
If this Lease be assigned or if the Premises be subleased
(whether in whole or in part) or in the event of the mortgage, pledge, or
hypothecation of Tenant's leasehold interest or grant of any concession or
license within the Premises or if the Premises be occupied in whole or in part
by anyone other than Tenant, then upon a default by Tenant hereunder Landlord
may collect rent from the assignee, sublessee, mortgagee, pledgee, party to whom
the leasehold interest was hypothecated, concessionee or licensee or other
occupant and, except to the extent set forth in the preceding paragraph, apply
the amount collected to the next rent payable hereunder; and all such rentals
collected by Tenant shall be held in trust for Landlord and immediately
forwarded to Landlord. No such transaction or collection of rent or application
thereof by Landlord, however, shall be deemed a waiver of these provisions or a
release of Tenant from the further performance by Tenant of its covenants,
duties, or obligations hereunder.
18. INDEMNIFICATION. Except for the negligence of Landlord, its agents,
employees or contractors, and to the extent permitted by law, Tenant agrees to
indemnify, defend and hold harmless Landlord, and Landlord's agents, employees
and contractors, from and against any and all losses, liabilities, damages,
costs and expenses (including attorneys' fees) resulting from claims by third
parties for injuries to any person and damage to or theft or misappropriation or
loss of property occurring in or about the Project and arising from the use and
occupancy of the Premises or from any activity, work, or thing done, permitted
or suffered by Tenant in or about the Premises or due to any other act or
omission of Tenant, its subtenants, assignees, invitees, employees, contractors
and agents. The furnishing of insurance required hereunder shall not be deemed
to limit Tenant's obligations under this Paragraph 18.
19. INSPECTION AND ACCESS. Landlord and its agents, representatives, and
contractors may enter the Premises at any reasonable time to inspect the
Premises and to make such repairs as may be required or permitted pursuant to
this Lease and for any other business purpose WITH 24 HOUR PRIOR NOTICE EXCEPT
IN CASES OF EMERGENCY. Landlord and Landlord's representatives may enter the
Premises during business hours for the purpose of showing the Premises to
prospective purchasers and, during the last year of the Lease Term, to
prospective tenants. Landlord may erect a suitable sign on the Premises stating
the Premises are available to let or that the Project is available for sale.
Landlord may grant easements, make public dedications, designate common areas
and create restrictions on or about the Premises, provided that no such
easement, dedication, designation or restriction materially interferes with
Tenant's use or occupancy of the Premises. At Landlord's request, Tenant shall
execute such instruments as may be necessary for such easements, dedications or
restrictions.
20. QUIET ENJOYMENT. If Tenant shall perform all of the covenants and
agreements herein required to be performed by Tenant, Tenant shall, subject to
the terms of this Lease, at all times during the Lease Term, have peaceful and
quiet enjoyment of the Premises against any person claiming by, through or under
Landlord.
21. SURRENDER. Upon termination of the Lease Term or earlier termination
of Tenant's right of possession, Tenant shall surrender the Premises to Landlord
in the same condition as received, broom clean, ordinary wear and tear and
casualty loss and condemnation covered by Paragraphs 15 and 16 excepted. Any
Trade Fixtures, Tenant-Made Alterations and property not so removed by Tenant as
permitted or required herein shall be deemed abandoned and may be stored,
removed, and disposed of by Landlord at Tenant's
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expense, and Tenant waives all claims against Landlord for any damages resulting
from Landlord's retention and disposition of such property. All obligations of
Tenant hereunder not fully performed as of the termination of the Lease Term
shall survive the termination of the Lease Term, including without limitation,
indemnity obligations, payment obligations with respect to Operating Expenses
and obligations concerning the condition and repair of the Premises.
22. HOLDING OVER. If Tenant retains possession of the Premises after the
termination of the Lease Term, unless otherwise agreed in writing, such
possession shall be subject to immediate termination by Landlord at any time,
and all of the other terms and provisions of this Lease (excluding any expansion
or renewal option or other similar right or option) shall be applicable during
such holdover period, except that Tenant shall pay Landlord from time to time,
upon demand, as Base Rent for the holdover period, an amount equal to 150% the
Base Rent in effect on the termination date, computed on a monthly basis for
each month or part thereof during such holding over. All other payments shall
continue under the terms of this Lease. In addition, Tenant shall be liable for
all damages incurred by Landlord as a result of such holding over. No holding
over by Tenant, whether with or without consent of Landlord, shall operate to
extend this Lease except as otherwise expressly provided, and this Paragraph 22
shall not be construed as consent for Tenant to retain possession of the
Premises.
23. EVENTS OF DEFAULT. Each of the following events shall be an event of
default ("Event of Default") by Tenant under this Lease:
(i) Tenant shall fail to pay any installment of Base Rent or any
other payment required herein when due, and such failure shall continue
for a period of 5 days from the date such payment was due.
(ii) Tenant or any guarantor or surety of Tenant's obligations
hereunder shall (A) make a general assignment for the benefit of
creditors; (B) commence any case, proceeding or other action seeking to
have an order for relief entered on its behalf as a debtor or to
adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it
or its debts or seeking appointment of a receiver, trustee, custodian or
other similar official for it or for all or of any substantial part of
its property (collectively a "proceeding for relief"); (C) become the
subject of any proceeding for relief which is not dismissed within 60
days of its filing or entry; or (D) die or suffer a legal disability (if
Tenant, guarantor, or surety is an individual) or be dissolved or
otherwise fail to maintain its legal existence (if Tenant, guarantor or
surety is a corporation, partnership or other entity).
(iii) Any insurance required to be maintained by Tenant pursuant
to this Lease shall be cancelled or terminated or shall expire or shall
be reduced or materially changed, except, in each case, as permitted in
this Lease.
(iv) Tenant shall not occupy or shall vacate the Premises or
shall fail to continuously operate its business at the Premises for the
permitted use set forth herein, whether or not Tenant is in monetary or
other default under this Lease. (SEE ADDENDUM II)
(v) Tenant shall attempt or there shall occur any assignment,
subleasing or other transfer of Tenant's interest in or with respect to
this Lease except as otherwise permitted in this Lease.
(vi) Tenant shall fail to discharge any lien placed upon the
Premises in violation of this Lease within 30 days after any such lien
or encumbrance is filed against the Premises THAT RESULTS FROM TENANTS
ACTIVITIES.
(vii) Tenant shall fail to comply with any provision of this
Lease other than those specifically referred to in this Paragraph 23,
and except as otherwise expressly provided herein, such default shall
continue for more than 30 days after Landlord shall have given Tenant
written notice of such default.
24. LANDLORD'S REMEDIES. Upon each occurrence of an Event of Default and
so long as such Event of Default shall be continuing, Landlord may at any time
thereafter at its election: terminate this Lease or Tenant's right of possession
(but Tenant shall remain liable as hereinafter provided), and/or pursue any
other remedies at law or in equity. Upon the termination of this Lease or
termination of Tenant's right of possession, it shall be lawful for Landlord,
without formal demand or notice of any kind, to re-enter the Premises by summary
dispossession proceedings or any other action or proceeding authorized by law
and to remove Tenant and all persons and property therefrom. If Landlord
re-enters the Premises, Landlord shall have the right to keep in place and use,
or remove and store, all of the furniture, fixtures and equipment at the
Premises.
Except as otherwise provided in the next paragraph, if Tenant
breaches this Lease and abandons the Premises prior to the end of the term
hereof, or if Tenant's right to possession is terminated by Landlord because of
an Event of Default by Tenant under this Lease, this Lease shall terminate. Upon
such termination, Landlord may recover from Tenant the following, as provided in
Section 1951.2 of the Civil Code of California: (i) the worth at the time of
award of the unpaid Base Rent and other charges under this Lease that had been
earned at the time of termination; (ii) the worth at the time of award of the
amount by which the reasonable value of the
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unpaid Base Rent and other charges under this Lease which would have been earned
after termination until the time of award exceeds the amount of such rental loss
that Tenant proves could have been reasonably avoided; (iii) the worth at the
time of award by which the reasonable value of the unpaid Base Rent and other
charges under this Lease for the balance of the term of this Lease after the
time of award exceeds the amount of such rental loss that Tenant proves could
have been reasonably avoided; and (iv) any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to perform
its obligations under this Lease or that in the ordinary course of things would
be likely to result therefrom. As used herein, the following terms are defined:
(a) The "worth at the time of award" of the amounts referred to in Sections (i)
and (ii) is computed by allowing interest at the lesser of 18 percent per annum
or the maximum lawful rate. The "worth at the time of award" of the amount
referred to in Section (iii) is computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of award
plus one percent; (b) The "time of award" as used in clauses (i), (ii), and
(iii) above is the date on which judgment is entered by a court of competent
jurisdiction; (c) The "reasonable value" of the amount referred to in clause
(ii) above is computed by determining the mathematical product of (1) the
"reasonable annual rental value" (as defined herein) and (2) the number of
years, including fractional parts thereof, between the date of termination and
the time of award. The "reasonable value" of the amount referred to in clause
(iii) is computed by determining the mathematical product of (1) the annual Base
Rent and other charges under this Lease and (2) the number of years including
fractional parts thereof remaining in the balance of the term of this Lease
after the time of award.
Even though Tenant has breached this Lease and abandoned the
Premises, this Lease shall continue in effect for so long as Landlord does not
terminate Tenant's right to possession, and Landlord may enforce all its rights
and remedies under this Lease, including the right to recover rent as it becomes
due. This remedy is intended to be the remedy described in California Civil Code
Section 1951.4, and the following provision from such Civil Code Section is
hereby repeated: "The Lessor has the remedy described in California Civil Code
Section 1951.4 (lessor may continue lease in effect after lessee's breach and
abandonment and recover rent as it becomes due, if lessee has right to sublet or
assign, subject only to reasonable limitations)." Any such payments due Landlord
shall be made upon demand therefor from time to time and Tenant agrees that
Landlord may file suit to recover any sums falling due from time to time.
Notwithstanding any such reletting without termination, Landlord may at any time
thereafter elect in writing to terminate this Lease for such previous breach.
Exercise by Landlord of any one or more remedies hereunder
granted or otherwise available shall not be deemed to be an acceptance of
surrender of the Premises and/or a termination of this Lease by Landlord,
whether by agreement or by operation of law, it being understood that such
surrender and/or termination can be effected only by the written agreement of
Landlord and Tenant. Any law, usage, or custom to the contrary notwithstanding,
Landlord shall have the right at all times to enforce the provisions of this
Lease in strict accordance with the terms hereof; and the failure of Landlord at
any time to enforce its rights under this Lease strictly in accordance with same
shall not be construed as having created a custom in any way or manner contrary
to the specific terms, provisions, and covenants of this Lease or as having
modified the same. Tenant and Landlord further agree that forbearance or waiver
by Landlord to enforce its rights pursuant to this Lease or at law or in equity,
shall not be a waiver of Landlord's right to enforce one or more of its rights
in connection with any subsequent default. A receipt by Landlord of rent or
other payment with knowledge of the breach of any covenant hereof shall not be
deemed a waiver of such breach, and no waiver by Landlord of any provision of
this Lease shall be deemed to have been made unless expressed in writing and
signed by Landlord. To the greatest extent permitted by law, Tenant waives the
service of notice of Landlord's intention to r enter as provided for in any
statute, or to institute legal proceedings to that end, and also waives all
right of redemption in case Tenant shall be dispossessed by a judgment or by
warrant of any court or judge. The terms "enter," "re-enter," "entry" or
"re-entry," as used in this Lease, are not restricted to their technical legal
meanings. Any reletting of the Premises shall be on such terms and conditions as
Landlord in its sole discretion may determine (including without limitation a
term different than the remaining Lease Term, rental concessions, alterations
and repair of the Premises, lease of less than the entire Premises to any tenant
and leasing any or all other portions of the Project before reletting the
Premises). Landlord shall not be liable, nor shall Tenant's obligations
hereunder be diminished, because of Landlord's failure to relet the Premises or
collect rent due in respect of such reletting.
25 TENANT'S REMEDIES/LIMITATION OF LIABILITY. Landlord shall not be in
default hereunder unless Landlord fails to perform any of its obligations
hereunder within 30 days after written notice from Tenant specifying such
failure (unless such performance will, due to the nature of the obligation,
require a period of time in excess of 30 days, then after such period of time as
is reasonably necessary). All obligations of Landlord hereunder shall be
construed as covenants, not conditions; and, except as may be otherwise
expressly provided in this Lease, Tenant may not terminate this Lease for breach
of Landlord's obligations hereunder. All obligations of Landlord under this
Lease will be binding upon Landlord only during the period of its ownership of
the Premises and not thereafter. The term "Landlord" in this Lease shall mean
only the owner, for the time being of the Premises, and in the event of the
transfer by such owner of its interest in the Premises, such owner shall
thereupon be released and discharged from all obligations of Landlord thereafter
accruing, but such obligations shall be binding during the Lease Term upon each
new owner for the duration of such owner's ownership. Any liability of Landlord
under this Lease shall be limited solely to its interest in the Project, and in
no event shall any personal liability be asserted against Landlord in connection
with this Lease nor shall any recourse be had to any other property or assets of
Landlord.
26 WAIVER OF JURY TRIAL. TENANT AND LANDLORD WAIVE ANY RIGHT TO TRIAL BY
JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING OUT OF THIS
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LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO.
27 SUBORDINATION. This Lease and Tenant's interest and rights hereunder
are and shall be subject and subordinate at all times to the lien of any first
mortgage, now existing or hereafter created on or against the Project or the
Premises, and all amendments, restatements, renewals, modifications,
consolidations, refinancing, assignments and extensions thereof, without the
necessity of any further instrument or act on the part of Tenant. Tenant agrees,
at the election of the holder of any such mortgage, to attorn to any such
holder. Tenant agrees upon demand to execute, acknowledge and deliver such
instruments, confirming such subordination and such instruments of attornment as
shall be requested by any such holder. Tenant hereby appoints Landlord attorney
in fact for Tenant irrevocably (such power of attorney being coupled with an
interest) to execute, acknowledge and deliver any such instrument and
instruments for and in the name of the Tenant and to cause any such instrument
to be recorded. Notwithstanding the foregoing, any such holder may at any time
subordinate its mortgage to this Lease, without Tenant's consent, by notice in
writing to Tenant, and thereupon this Lease shall be deemed prior to such
mortgage without regard to their respective dates of execution, delivery or
recording and in that event such holder shall have the same rights with respect
to this Lease as though this Lease had been executed prior to the execution,
delivery and recording of such mortgage and had been assigned to such holder.
The term "mortgage" whenever used in this Lease shall be deemed to include deeds
of trust, security assignments and any other encumbrances, and any reference to
the "holder" of a mortgage shall be deemed to include the beneficiary under a
deed of trust.
28 MECHANIC'S LIENS. Tenant has no express or implied authority to
create or place any lien or encumbrance of any kind upon, or in any manner to
bind the interest of Landlord or Tenant in, the Premises or to charge the
rentals payable hereunder for any claim in favor of any person dealing with
Tenant, including those who may furnish materials or perform labor for any
construction or repairs. Tenant covenants and agrees that it will pay or cause
to be paid all sums legally due and payable by it on account of any labor
performed or materials furnished in connection with any work performed on the
Premises and that it will save and hold Landlord harmless from all loss, cost or
expense based on or arising out of asserted claims or liens against the
leasehold estate or against the interest of Landlord in the Premises or under
this Lease. Tenant shall give Landlord immediate written notice of the placing
of any lien or encumbrance against the Premises and cause such lien or
encumbrance to be discharged within 30 days of the filing or recording thereof;
provided, however, Tenant may contest such liens or encumbrances as long as such
contest prevents foreclosure of the lien or encumbrance and Tenant causes such
lien or encumbrance to be bonded or insured over in a manner satisfactory to
Landlord within such 30 day period.
29 ESTOPPEL CERTIFICATES. Tenant agrees, from time to time, within 10
days after request of Landlord, to execute and deliver to Landlord, or
Landlord's designee, any estoppel certificate requested by Landlord, stating
that this Lease is in full force and effect, the date to which rent has been
paid, that Landlord is not in default hereunder (or specifying in detail the
nature of Landlord's default), the termination date of this Lease and such other
matters pertaining to this Lease as may be requested by Landlord. Tenant's
obligation to furnish each estoppel certificate in a timely fashion is a
material inducement for Landlord's execution of this Lease. No cure or grace
period provided in this Lease shall apply to Tenant's obligations to timely
deliver an estoppel certificate.
30 ENVIRONMENTAL REQUIREMENTS. Except for Hazardous Material contained
in products used by Tenant in de minimis quantities for ordinary cleaning and
office purposes, Tenant shall not permit or cause any party to bring any
Hazardous Material upon the Premises or transport, store, use, generate,
manufacture or release any Hazardous Material in or about the Premises without
Landlord's prior written consent. Tenant, at its sole cost and expense, shall
operate its business in the Premises in strict compliance with all Environmental
Requirements and shall remediate in manner satisfactory to Landlord any
Hazardous Materials released on or from the Project by Tenant, its agents,
employees, contractors, subtenants or invitees. Tenant shall complete and
certify to disclosure statements as requested by Landlord from time to time
relating to Tenant's transportation, storage, use, generation, manufacture, or
release of Hazardous Materials on the Premises. The term "Environmental
Requirements" means all applicable present and future statutes, regulations,
ordinances, rules, codes, judgments, orders or other similar enactments of any
governmental authority or agency regulating or relating to health, safety, or
environmental conditions on, under, or about the Premises or the environment,
including without limitation, the following: the Comprehensive Environmental
Response, Compensation and Liability Act; the Resource Conservation and Recovery
Act; and all state and local counterparts thereto, and any regulations or
policies promulgated or issued thereunder. The term "Hazardous Materials" means
and includes any substance, material, waste, pollutant, or contaminant listed or
defined as hazardous or toxic, under any Environmental Requirements, asbestos
and petroleum, including crude oil or any fraction thereof, natural gas, or
synthetic gas usable for fuel (or mixtures of natural gas and such synthetic
gas). As defined in Environmental Requirements, Tenant is and shall be deemed to
be the "operator" of Tenant's "facility" and the "owner" of all Hazardous
Materials brought on the Premises by Tenant, its agents, employees, contractors
or invitees, and the wastes, by-products, or residues generated, resulting, or
produced therefrom.
Tenant shall indemnify, defend, and hold Landlord harmless from
and against any and all losses (including, without limitation, diminution in
value of the Premises or the Project and loss of rental income from the
Project), claims, demands, actions, suits, damages (including, without
limitation, punitive damages), expenses
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(including, without limitation, remediation, removal, repair, corrective action,
or cleanup expenses), and costs (including, without limitation, actual
attorneys' fees, consultant fees or expert fees and including, without
limitation, removal or management of any asbestos brought into the Premises or
disturbed in breach of the requirements of this Paragraph 30, regardless of
whether such removal or management is required by law) which are brought or
recoverable against, or suffered or incurred by Landlord as a result of any
release of Hazardous Materials for which Tenant is obligated to remediate as
provided above or any other breach of the requirements under this Paragraph 30
by Tenant, its agents, employees, contractors, subtenants, assignees or
invitees, regardless of whether Tenant had knowledge of such noncompliance. The
obligations of Tenant under this Paragraph 30 shall survive any termination of
this Lease.
Landlord shall have access to, and a right to perform inspections
and tests of, the Premises to determine Tenant's compliance with Environmental
Requirements, its obligations under this Paragraph 30, or the environmental
condition of the Premises. Access shall be granted to Landlord upon Landlord's
PRIOR notice to Tenant and at such times so as to minimize, so far as may be
reasonable under the circumstances, any disturbance to Tenant's operations. Such
inspections and tests shall be conducted at Landlord's expense, unless such
inspections or tests reveal that Tenant has not complied with any Environmental
Requirement, in which case Tenant shall reimburse Landlord for the reasonable
cost of such inspection and tests. Landlord's receipt of or satisfaction with
any environmental assessment in no way waives any rights that Landlord holds
against Tenant.
31 RULES AND REGULATIONS. Tenant shall, at all times during the Lease
Term and any extension thereof, comply with all reasonable rules and regulations
at any time or from time to time established by Landlord covering use of the
Premises and the Project. The current rules and regulations are attached hereto.
In the event of any conflict between said rules and regulations and other
provisions of this Lease, the other terms and provisions of this Lease shall
control. Landlord shall not have any liability or obligation for the breach of
any rules or regulations by other tenants in the Project.
32 SECURITY SERVICE. Tenant acknowledges and agrees that, while Landlord
may patrol the Project, Landlord is not providing any security services with
respect to the Premises and that Landlord shall not be liable to Tenant for, and
Tenant waives any claim against Landlord with respect to, any loss by theft or
any other damage suffered or incurred by Tenant in connection with any
unauthorized entry into the Premises or any other breach of security with
respect to the Premises.
33 FORCE MAJEURE. Landlord shall not be held responsible for delays in
the performance of its obligations hereunder when caused by strikes, lockouts,
labor disputes, acts of God, inability to obtain labor or materials or
reasonable substitutes therefor, governmental restrictions, governmental
regulations, governmental controls, delay in issuance of permits, enemy or
hostile governmental action, civil commotion, fire or other casualty, and other
causes beyond the reasonable control of Landlord ("Force Majeure").
34 ENTIRE AGREEMENT. This Lease constitutes the complete agreement of
Landlord and Tenant with respect to the subject matter hereof. No
representations, inducements, promises or agreements, oral or written, have been
made by Landlord or Tenant, or anyone acting on behalf of Landlord or Tenant,
which are not contained herein, and any prior agreements, promises,
negotiations, or representations are superseded by this Lease. This Lease may
not be amended except by an instrument in writing signed by both parties hereto.
35 SEVERABILITY. If any clause or provision of this Lease is illegal,
invalid or unenforceable under present or future laws, then and in that event,
it is the intention of the parties hereto that the remainder of this Lease shall
not be affected thereby. It is also the intention of the parties to this Lease
that in lieu of each clause or provision of this Lease that is illegal, invalid
or unenforceable, there be added, as a part of this Lease, a clause or provision
as similar in terms to such illegal, invalid or unenforceable clause or
provision as may be possible and be legal, valid and enforceable.
36 BROKERS. Tenant represents and warrants that it has dealt with no
broker, agent or other person in connection with this transaction and that no
broker, agent or other person brought about this transaction, other than the
broker, if any, set forth on the first page of this Lease, and Tenant agrees to
indemnify and hold Landlord harmless from and against any claims by any other
broker, agent or other person claiming a commission or other form of
compensation by virtue of having dealt with Tenant with regard to this leasing
transaction.
37 MISCELLANEOUS. (a) Any payments or charges due from Tenant to
Landlord hereunder shall be considered rent for all purposes of this Lease.
(b) If and when included within the term "Tenant," as used in this
instrument, there is more than one person, firm or corporation, each shall be
jointly and severally liable for the obligations of Tenant.
(c) All notices required or permitted to be given under this Lease shall
be in writing and shall be sent by registered or certified mail, return receipt
requested, or by a reputable national overnight courier service, postage
prepaid, or by hand delivery addressed to the parties at their addresses below,
and with a copy sent to Landlord at 14100 East 35th Place, Aurora, Colorado
80011. Either party may by notice given aforesaid change its address for all
subsequent notices. Except where otherwise expressly provided to the contrary,
notice shall be deemed given upon delivery.
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(d) Except as otherwise expressly provided in this Lease or as otherwise
required by law, Landlord retains the absolute right to withhold any consent or
approval.
(e) At Landlord's request from time to time Tenant shall furnish
Landlord with true and complete copies of its most recent annual and quarterly
financial statements prepared by Tenant or Tenant's accountants and any other
financial information or summaries that Tenant typically provides to its lenders
or shareholders.
(f) Neither this Lease nor a memorandum of lease shall be filed by or on
behalf of Tenant in any public record. Landlord may prepare and file, and upon
request by Landlord Tenant will execute, a memorandum of lease.
(g) The normal rule of construction to the effect that any ambiguities
are to be resolved against the drafting party shall not be employed in the
interpretation of this Lease or any exhibits or amendments hereto.
(h) The submission by Landlord to Tenant of this Lease shall have no
binding force or effect, shall not constitute an option for the leasing of the
Premises, nor confer any right or impose any obligations upon either party until
execution of this Lease by both parties.
(i) Words of any gender used in this Lease shall be held and construed
to include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires. The captions inserted
in this Lease are for convenience only and in no way define, limit or otherwise
describe the scope or intent of this Lease, or any provision hereof, or in any
way affect the interpretation of this Lease.
(j) Any amount not paid by Tenant within 5 days after its due date in
accordance with the terms of this Lease shall bear interest from such due date
until paid in full at the lesser of the highest rate permitted by applicable law
or 15 percent per year. It is expressly the intent of Landlord and Tenant at all
times to comply with applicable law governing the maximum rate or amount of any
interest payable on or in connection with this Lease. If applicable law is ever
judicially interpreted so as to render usurious any interest called for under
this Lease, or contracted for, charged, taken , reserved, or received with
respect to this Lease, then it is Landlord's and Tenant's express intent that
all excess amounts theretofore collected by Landlord be credited on the
applicable obligation (or, if the obligation has been or would thereby be paid
in full, refunded to Tenant), and the provisions of this Lease immediately shall
be deemed reformed and the amounts thereafter collectible hereunder reduced,
without the necessity of the execution of any new document, so as to comply with
the applicable law, but so as to permit the recovery of the fullest amount
otherwise called for hereunder.
(k) Construction and interpretation of this Lease shall be governed by
the laws of the state in which the Project is located, excluding any principles
of conflicts of laws.
(l) Time is of the essence as to the performance of Tenant's obligations
under this Lease.
(m) All exhibits and addenda attached hereto are hereby incorporated
into this Lease and made a part hereof. In the event of any conflict between
such exhibits or addenda and the terms of this Lease, such exhibits or addenda
shall control.
39 LIMITATION OF LIABILITY OF TRUSTEES, SHAREHOLDERS, AND OFFICERS OF
SECURITY CAPITAL INDUSTRIAL TRUST. Any obligation or liability whatsoever of
Security Capital Industrial Trust, a Maryland real estate investment trust,
which may arise at any time under this Lease or any obligation or liability
which may be incurred by it pursuant to any other instrument, transaction, or
undertaking contemplated hereby shall not be personally binding upon, nor shall
resort for the enforcement thereof be had to the property of, its trustees,
directors, shareholders, officers, employees or agents, regardless of whether
such obligation or liability is in the nature of contract, tort, or otherwise.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the day and year first above written.
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<TABLE>
<S> <C>
TENANT: LANDLORD:
Sunrise Technologies International, Inc., a SCI Limited Partnership-I, a
Delaware Corporation Delaware Limited Partnership
By: Security Capital Industrial Trust, a
Maryland Real Estate Investment Trust,
General Partner
By: By:
------------------------------- -------------------------------
Title: Ned K. Anderson
----------------------------
Title: Senior Vice President
Address: Address:
47265 Fremont Boulevard 47775 Fremont Boulevard
Fremont, CA 94538 Fremont, CA 94538
</TABLE>
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<PAGE> 13
Rules and Regulations
1 The sidewalk, entries, and driveways of the Project shall not be
obstructed by Tenant, or its agents, or used by them for any purpose
other than ingress and egress to and from the Premises.
2. Tenant shall not place any objects, including antennas, outdoor
furniture, etc., in the parking areas, landscaped areas or other areas
outside of its Premises, or on the roof of the Project.
3. Except for seeing-eye dogs, no animals shall be allowed in the offices,
halls, or corridors in the Project.
4. Tenant shall not disturb the occupants of the Project or adjoining
buildings by the use of any radio or musical instrument or by the making
of loud or improper noises.
5. If Tenant desires telegraphic, telephonic or other electric connections
in the Premises, Landlord or its agent will direct the electrician as to
where and how the wires may be introduced; and, without such direction,
no boring or cutting of wires will be permitted. Any such installation
or connection shall be made at Tenant's expense.
6. Tenant shall not install or operate any steam or gas engine or boiler,
or other mechanical apparatus in the Premises, except as specifically
approved in the Lease. The use of oil, gas or inflammable liquids for
heating, lighting or any other purpose is expressly prohibited.
Explosives or other articles deemed extra hazardous shall not be brought
into the Project.
7. Parking any type of recreational vehicles is specifically prohibited on
or about the Project. Except for the overnight parking of operative
vehicles, no vehicle of any type shall be stored in the parking areas at
any time. In the event that a vehicle is disabled, it shall be removed
within 48 hours. There shall be no "For Sale" or other advertising signs
on or about any parked vehicle. All vehicles shall be parked in the
designated parking areas in conformity with all signs and other
markings. All parking will be open parking, and no reserved parking,
numbering or lettering of individual spaces will be permitted except as
specified by Landlord.
8. Tenant shall maintain the Premises free from rodents, insects and other
pests.
9. Landlord reserves the right to exclude or expel from the Project any
person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs or who shall in any manner do any act in
violation of the Rules and Regulations of the Project.
10 Tenant shall not cause any unnecessary labor by reason of Tenant's
carelessness or indifference in the preservation of good order and
cleanliness. Landlord shall not be responsible to Tenant for any loss of
property on the Premises, however occurring, or for any damage done to
the effects of Tenant by the janitors or any other employee or person.
11 Tenant shall give Landlord prompt notice of any defects in the water,
lawn sprinkler, sewage, gas pipes, electrical lights and fixtures,
heating apparatus, or any other service equipment affecting the
Premises.
12 Tenant shall not permit storage outside the Premises, including without
limitation, outside storage of trucks and other vehicles, or dumping of
waste or refuse or permit any harmful materials to be placed in any
drainage system or sanitary system in or about the Premises.
13 All moveable trash receptacles provided by the trash disposal firm for
the Premises must be kept in the trash enclosure areas, if any, provided
for that purpose.
14 No auction, public or private, will be permitted on the Premises or the
Project.
15 No awnings shall be placed over the windows in the Premises except with
the prior written consent of Landlord.
16 The Premises shall not be used for lodging, sleeping or cooking or for
any immoral or illegal purposes or for any purpose other than that
specified in the Lease. No gaming devices shall be operated in the
Premises.
17 Tenant shall ascertain from Landlord the maximum amount of electrical
current which can safely be used in the Premises, taking into account
the capacity of the electrical wiring in the Project and the Premises
and the needs of other tenants, and shall not use more than such safe
capacity. Landlord's consent to the installation of electric equipment
shall not relieve Tenant from the obligation not to use more electricity
than such safe capacity.
18 Tenant assumes full responsibility for protecting the Premises from
theft, robbery and pilferage.
19 Tenant shall not install or operate on the Premises any machinery or
mechanical devices of a nature not directly related to Tenant's ordinary
use of the Premises and shall keep all such machinery free of vibration,
noise and air waves which may be transmitted beyond the Premises.
-13-
<PAGE> 14
HVAC Maintenance/Service Contract Requirements
A service contract with a Landlord approved HVAC contractor must become
effective within thirty (30) days of occupancy and service visits should be
performed on a quarterly basis. The following are the approved HVAC contractors:
Thermoscape 510/445-0700
Phoenix Heating and Air Conditioning 408/487-0390
Cal-Air Conditioning 408/947-0155
We suggest that you send the following list to one of the above HVAC contractors
to be assured that these items are included in the maintenance contract:
1. Adjust belt tension;
2. Lubricate all moving parts, as necessary;
3. Inspect and adjust all temperature and safety controls;
4. Check refrigeration system for leaks and operation;
5. Check refrigeration system for moisture;
6. Inspect compressor oil level and crank case heaters;
7. Check head pressure, suction pressure and oil pressure;
8. Inspect air filters and replace when necessary;
9. Check space conditions;
10. Check condensate drains and drain pans and clean, if necessary;
11. Inspect and adjust all valves;
12. Check and adjust dampers;
13. Run machine through complete cycle.
Note: A certificate must be provided for our files not later than thirty (30)
days after mutual execution hereof. Failure to provide such certificate
or perform said services, when required, shall constitute material
default of this lease.
-14-
<PAGE> 15
ADDENDUM I
BASE RENT ADJUSTMENTS
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED _______________________, BETWEEN
SCI Limited Partnership-I
and
Sunrise Technologies International, Inc.
Base Rent shall equal the following amounts for the respective periods
set forth below:
<TABLE>
<CAPTION>
Period Monthly Base Rent
------ -----------------
<S> <C>
02/01/98 - 01/31/99 $10,400
02/01/99 - 01/31/00 $10,920
01/01/00 - 01/31/01 $11,440
</TABLE>
-15-
<PAGE> 16
ADDENDUM II
VACATION OF PREMISES
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED ________________, BETWEEN
SCI Limited Partnership-I
and
Sunrise Technologies International, Inc.
Tenant's vacating of the Premises shall not constitute an Event of
Default if, prior to vacating the Premises, Tenant has made arrangements
reasonably acceptable to Landlord to (a) insure that Tenant's insurance for the
Premises will not be voided or cancelled with respect to the Premises as a
result of such vacancy, (b) insure that the Premises are secured and not subject
to vandalism, and (c) insure that the Premises will be properly maintained after
such vacation. Tenant shall inspect the Premises at least once each month and
report monthly in writing to Landlord on the condition of the Premises.
-16-
<PAGE> 17
EXHIBIT C
SIGN CRITERIA
BAYSIDE COMMONS
WINDOW SIGNS IDENTIFICATION:
Each Tenant will be allowed one window sign placed either to the left or to the
right of the entrance door, whichever provides the best visibility.
Company names, logos or symbols will be allowed in this area - color and size to
be determined by the Tenant. all other copy in this area except for logos or
symbols will be white pressure sensitive letters.
Copy should start at 5' from grade working down to no more than 3 1/2' from
grade. sign layout including copy, sizes and color must be approved by the
building management.
One security decal only may be applied to the front door glass in the lower
corner if the Tenant so desires. All exterior alarm bells are to be mounted to
the rear of the building only.
DIRCTORY SIGN IDENTIFICATION:
A monument directory sign has been provided for each building. If only one
tenant occupies an entire building, that Tenant shall be allowed to utilize the
entire directory sign area for its sensitive vinyl letters in the Handel Gothic
style with a letter height suitable for the area allowed, and a logo may be
used. Layout is to be approved by building management.
If two Tenants occupy a building, signs shall consist of 4: Handel Gothic,
Spar-Cal Forest Green pressure sensitive vinyl letters condensed to 60.4%.
Directory signs shall list the street number and the company names only, no
slogans or symbols allowed.
If three Tenants occupy a building, signs shall consist of 4: Handel Gothic,
Spar-Cal dark Forest Green sensitive vinyl letters condensed to 60.4%. Directory
signs shall list the street number and the company names only, no slogans or
symbols allowed.
REAR LOADING SIGNS:
Each Tenant will be allowed to identify its rear door for shipping and receiving
purposes. the company name shall be placed on a 36" x 24" aluminum panel
adjacent to the rear doors.
Copy shall consist of 3" vinyl capital letters only in the Spar-Cal Forest Green
Handel Gothic style. Company names and logos only are allowed.
MANAGEMENT RESERVES THE RIGHT TO DENY ANY COPY IT CONSIDERS UNSUITABLE. LAYOUT
IS TO BE APPROVED BY BUILDING MANAGEMENT. THE COST OF ALL LETTERING AND LOGOS
WILL BE THE RESPONSIBILITY OF THE TENANT. NO OTHER SIGNS ARE ALLOWED IN THE
WINDOWS OR DOORS.
-17-
<PAGE> 1
EXHIBIT 21.1
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Laser Biotech, Inc. (a California corporation)
Sunrise Acquisition Corporation (a Delaware corporation)
Sunrise Technologies, Ltd. (a Barbados corporation)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Sunrise Technologies International, Inc. on Form S-8 (File No. 33-82314,
33-53466 and 33-53448) of our report dated March 6, 1998 on our audit of the
consolidated 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 included in this Annual Report on Form 10-K.
San Jose, California
April 6, 1998
<PAGE> 1
EXHIBIT 23.2
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSENT OF ERNST & YOUNG LLP, FORMER INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement (Form
S-8, No. 33-82314) and Registration Statement (Form S-8, No. 33-53466)
pertaining to the 1988 Stock Option Plan and in the Registration Statement (Form
S-8, No. 33-53448) pertaining to the 1992 Employee Stock Purchase Plan of
Sunrise Technologies International, Inc. of our report dated March 10, 1997 with
respect to the consolidated financial statements and schedule of Sunrise
Technologies International, Inc. included in the Annual Report (Form 10-K) for
the year ended December 31, 1996.
/s/ ERNST & YOUNG LLP.
April 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,958,000
<SECURITIES> 0
<RECEIVABLES> 312,000
<ALLOWANCES> 85,000
<INVENTORY> 127,000
<CURRENT-ASSETS> 2,537,000
<PP&E> 515,000
<DEPRECIATION> 311,000
<TOTAL-ASSETS> 2,949,000
<CURRENT-LIABILITIES> 1,155,000
<BONDS> 0
0
0
<COMMON> 32,000
<OTHER-SE> 817,000
<TOTAL-LIABILITY-AND-EQUITY> 2,949,000
<SALES> 2,839,000
<TOTAL-REVENUES> 2,839,000
<CGS> 2,546,000
<TOTAL-COSTS> 2,546,000
<OTHER-EXPENSES> 7,368,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,376,000
<INCOME-PRETAX> (6,618,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,618,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,618,000)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
