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As filed with the Securities and Exchange Commission on September 29, 1998
Registration No. 333-______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
77-0148208
(I.R.S. Employer Identification Number)
47265 FREMONT BOULEVARD
FREMONT, CALIFORNIA 94538
(510) 623-9001
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
THE PRENTICE HALL CORPORATION
1013 CENTRE ROAD
WILMINGTON, DELAWARE 19805
(302) 998-0595
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
with copies to:
DON S. HERSHMAN, ESQ.
BETH M. GOTTLIEB, ESQ.
HOLLEB & COFF
55 EAST MONROE, SUITE 4100
CHICAGO, ILLINOIS 60603
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [x]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1) of
this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]__________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
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<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================================
Proposed maximum Proposed maximum
Title of each class of securities Amount to be offering price aggregate Amount of
to be registered registered per unit(1) offering price(1) registration fee
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock..................... 6,807,915 $5.00 $34,039,575 $6,807.92
========================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as
amended. The above calculation is based on the average of the reported
bid and asked prices of the common stock on the Nasdaq National Market
System on September 25, 1998.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 3
SUBJECT TO COMPLETION, DATED SEPTEMBER 29, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
6,807,915 SHARES
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
COMMON STOCK
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The common stock, par value $0.001 per share ("Common Stock"), of
Sunrise Technologies International, Inc., a Delaware corporation ("Sunrise" and,
together with its subsidiaries, the "Company"), offered hereby (the "Offered
Shares") may be sold by certain stockholders, note holders and warrant holders
of the Company (collectively, the "Selling Securityholders"). The Company will
not receive any of the proceeds from the sale of the Offered Shares. Information
regarding the Selling Securityholders is set forth herein under the heading
"Selling Securityholders."
The Common Stock currently is traded on the Nasdaq National Market
System under the symbol "SNRS". On September 25, 1998, the closing price
reported on the Nasdaq National Market System was $5.00 per share. See
"Description of Capital Stock -- Price Range of Common Stock."
ACQUISITION OF THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
Some or all of the Offered Shares may be offered for sale and sold from
time to time by the Selling Securityholders in transactions on the Nasdaq
National Market System (or any national securities exchange or interdealer
quotation system on which the Common Stock may be listed), or in privately
negotiated transactions (which may include block transactions) or otherwise. In
addition, the Selling Securityholders may engage in short sales and other
transactions in the Common Stock or derivatives thereof, and may pledge, sell,
deliver or otherwise transfer the Offered Shares in connection therewith. This
Prospectus may be used by the Selling Securityholders or by any broker-dealer
who may participate in sales of the Offered Shares. Participating broker-dealers
may act as agents or principals or both and may receive commissions, discounts
or concessions in connection with sales or other transfers of Offered Shares.
See "Selling Securityholders." The Company has agreed to pay the expenses of
registering the Offered Shares on behalf of the Selling Securityholders, other
than broker-dealer commissions, discounts or concessions and any legal fees
incurred by the Selling Securityholders in connection with sales of the Offered
Shares.
No person is authorized by the Company or the Selling Securityholders to
give any information or to make any representations other than those contained
in this Prospectus. Neither the delivery of this Prospectus nor any sale made
hereunder shall create any implication that there has not been a change in the
information contained herein since the date hereof.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER ___, 1998.
<PAGE> 4
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-2 (together with any
amendments, supplements, exhibits, annexes and schedules thereto, the
"Registration Statement") pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), and the rules and regulations thereunder, with respect
to the Offered Shares. This Prospectus does not include all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements made in
the Prospectus as to the contents of any contract, agreement or other document
referred to in the Registration Statement are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed by
the Company may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices located
at Seven World Trade Center, Suite 1300, New York, New York 10048, and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material can be obtained by mail from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, reports, proxy
statements and other information that the Company files with the Commission
electronically are contained in the Internet Web site maintained by the
Commission at http://www.sec.gov.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, as it may be amended or supplemented, and certain
documents incorporated by reference herein contain or may contain both
statements of historical fact and "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Examples of forward-looking statements include: (i) projections of revenue,
income, earnings, capital expenditures, dividends, capital structure and other
financial items; (ii) statements of the plans and objectives of the Company or
its management; (iii) statements of the future economic performance of the
Company; and (iv) the assumptions underlying statements regarding the Company or
its business. Important factors, risks and uncertainties that could cause actual
results to differ materially from any forward-looking statements ("Cautionary
Statements") are disclosed herein, under the caption "Risk Factors" and
elsewhere, and in certain documents incorporated by reference herein. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information contained elsewhere in this Prospectus.
THE COMPANY
The Company develops, manufactures and markets laser systems for
applications in ophthalmology. All of the Company's business activities,
including engineering and development, manufacturing, assembly and testing take
place at the Company's facility in Fremont, California.
Since mid-1992, the Company has focused a significant portion of its
efforts on engineering and development of its holmium laser corneal shaping
product or process, known as Laser Thermal Keratoplasty (the "LTK System"), for
the treatment of refractive errors of the eye, such as hyperopia
(farsightedness) and presbyopia (age-related loss of near focusing ability). The
LTK System, which is based upon patented technology acquired in the Company's
acquisitions of in-process technology from Laser Biotech, Inc. and Emmetropix
Corporation in 1992, currently is undergoing premarket clinical studies in the
United States, as required by the Food and Drug Administration (the "FDA").
Prior to this time the Company was primarily a developer and manufacturer of
dental laser systems. See "Business."
The Company has incurred substantial losses in the past seven years,
which have seriously depleted its working capital. Sales of its existing
ophthalmic products at current levels will not be sufficient to sustain the
continued development and regulatory licensing of the LTK System. The Company
has been able to raise additional working capital for all aspects of its
business through the private placement of its Common Stock and convertible notes
with warrants. These private placements raised $15,296,000 in 1994, 1995 and
1996 in new equity for the Company, approximately $3,700,000 in the form of
promissory notes with warrants in 1997 (the "1997 Notes Placement") and
approximately $9,300,000, net of offering costs, in the form of promissory notes
with warrants in January 1998 (the "1998 Notes Placement").
The Company was incorporated in 1987 under the laws of the State of
California and was reincorporated in 1993 under the laws of the State of
Delaware. The principal executive offices of the Company are located at 47265
Fremont Boulevard, Fremont, California 94538; telephone (510) 623-9001.
RECENT DEVELOPMENTS
ISSUANCE OF CONVERTIBLE NOTES
In January 1998, the Company issued and sold, without registration under
the Securities Act in the 1998 Notes Placement, an aggregate gross principal
amount of approximately $9,300,000 of its redeemable convertible notes due 2001
(collectively, the "1998 Notes") and accompanying warrants to purchase Common
Stock (collectively, the "1998 Warrants").
The 1998 Notes are convertible at any time, at the option of the holder,
bear interest at the rate of 12%, payable in-kind semi-annually (additional
convertible notes), and convert at a price of $3.00 per share. The Company has
an option to extend the 1998 Notes for an additional two years for additional
warrant consideration. Warrants to purchase 1,870,000 shares of the Company's
Common Stock were issued as part of the 1998 Notes Placement with an exercise
price of $3.00 per share and an expiration
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date of January 2003. The 1998 Warrants issued had a fair value of approximately
$1.87 per Warrant, at the time of issuance. The fair value of the 1998 Warrants
has been reflected as additional consideration for the 1998 Notes, recorded as a
discount on the debt and accreted as interest expense to be amortized over the
life of the 1998 Notes.
SALE OF DENTAL BUSINESS
On June 26, 1997, the Company sold substantially all of its assets
associated with its dental laser, air abrasion and composite curing systems to
Lares Research, a California corporation ("Lares"). At closing, Lares delivered
to the Company $4,000,000 in cash and a promissory note in the amount of
$1,500,000 (the "Lares Note"). Although the Company anticipates collecting
interest and principal on the Lares Note, collection is not reasonably assured
due to the subordination of the Lares Note to Lares' bank and the Company
intends to recognize proceeds from the sale and interest on the Lares Note as
cash is received. Prior to the sale of the dental assets, a substantial portion
of the Company's revenues (98% in 1996 and 80% for the first six months of 1997)
were derived from the domestic and international sales of the Company's dental
products. However, operation of the dental business had contributed to the
Company's substantial losses in each of the five years ending December 31, 1997.
The Company used the net proceeds from the sale of the dental assets
primarily for clinical trials for its ophthalmic products, including the LTK
System.
THE SELLING SECURITYHOLDERS
The Offered Shares were acquired by the Selling Securityholders through
warrant grants subsequent to October 1997 or investment in the 1998 Notes
Placement. Absent registration under the Securities Act, the Offered Shares are
subject to certain limitations on resale. The Registration Statement of which
this Prospectus forms a part has been filed in satisfaction of certain
registration rights granted by the Company to the Selling Securityholders.
As of the date of this Prospectus, 6,664,582 of the Offered Shares have
not been issued by the Company but may be issued at any time upon conversion of
the Notes or exercise of the Warrants by certain Selling Securityholders. See
"Selling Securityholders."
PLAN OF DISTRIBUTION
The Offered Shares may be offered for sale and sold from time to time by
the Selling Securityholders in transactions on the Nasdaq National Market System
(or any national securities exchange or interdealer quotation system on which
the Common Stock may be listed), or in privately negotiated transactions (which
may include block transactions) or otherwise. In addition, the Selling
Securityholders may engage in short sales and other transactions in the Common
Stock or derivatives thereof, and may pledge, sell, deliver or otherwise
transfer the Offered Shares in connection therewith. This Prospectus may be used
by the Selling Securityholders or by any broker-dealer who may participate in
sales of the Offered Shares. Participating broker-dealers may act as agents or
principals or both and may receive commissions, discounts or concessions in
connection with sales or other transfers of the Offered Shares.
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<PAGE> 7
RISK FACTORS
The following factors should be considered carefully in evaluating an
acquisition of Common Stock.
HISTORY OF LOSSES; PROFITABILITY UNCERTAIN; CASH FLOW DEFICITS
The Company has incurred substantial losses, which have depleted its
working capital and reduced its stockholders' equity. In addition, the Company's
business will continue to be a significant consumer of cash, as the revenues
from its business will not be sufficient to cover its operating costs, unless
and until FDA approval is obtained to permit domestic sale of the LTK System.
The Company currently anticipates submitting its premarket approval application
("PMA") to the FDA by the end of 1998, however, FDA approval is not expected
until the second-half of 1999, at the earliest.
The negative cash flows for the Company have been funded during 1996,
1997 and 1998 by the sale of additional equity and convertible debt with
warrants. At December 31, 1997, cash and cash equivalents for the Company were
approximately $1,958,000, and at June 30, 1998, after consummation of the 1998
Notes Placement (approximate net proceeds of $9,300,000), cash and cash
equivalents of the Company were approximately $8,448,000. 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
will mostly likely dilute the holdings of 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 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 will not be sufficient to cover the cost of the
approval process or the general operating expenses of the Company.
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 must have a PMA approved by the FDA
prior to commercial sale in the United States. The PMA process (and underlying
clinical studies) is lengthy, the outcome is difficult to predict and requires
substantial commitments of the Company's financial resources and management's
time and effort. Delays in obtaining or failure to obtain required regulatory
approvals or clearances in the United States and other countries would postpone
or prevent the marketing of the LTK System and other devices and would impair
the Company's ability to generate funds from operations, which in turn would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition to analyzing the LTK System itself,
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the FDA may also evaluate public disclosures made by the Company regarding the
LTK System, as part of the review and approval process. In this regard, the
Company received in early September 1998 a letter from the FDA stating that
recent press releases contained certain prohibited representations. The FDA did
not require the Company to respond to the letter, however, the Company no longer
includes the items described in the FDA letter in its public disclosures.
There can be no assurance that the Company will be able to obtain in a
timely manner, if at all, the required approval of its PMA in the United States
for intended uses of the LTK System, or for any other devices which the Company
may seek approvals or clearances. Any products manufactured or distributed by
the Company will be subject to pervasive and continuing regulation by the FDA.
The Company currently expects that it will submit its PMA by the end of
1998. If it is delayed in doing so until February 2, 1999, a new FDA regulation
will require the Company to disclose, with its PMA, the financial interests of
its clinical investigators in the Company. This new regulation will apply to all
marketing applications submitted on or after February 2, 1999. The purpose of
this new regulation is to assist the FDA in determining if, and to what extent,
the clinical studies supporting the marketing applications may have been subject
to investigator bias. Six of the Company's 11 current clinical investigators of
the LTK System have financial interests in the Company that the Company would
have to disclose under the new regulation. The Company believes that the results
of its clinical investigations have not been biased by these interests; however,
it is not possible to predict what impact, if any, the disclosure of these
interests would have on FDA's review of the PMA the Company submits for the LTK
System. The Company intends to submit all of its clinical data used to support
the PMA submission to an independent audit to determine if any investigation
bias exists.
The Company has received a CE (European Community) mark of approval on
its LTK device which allows for sale of the device in these countries. In
addition to the CE Mark, however, some foreign countries may require separate
individual foreign regulatory clearances. Although the Company's products have
been sold in approximately 15 countries, sales of the LTK System require
rigorous regulatory approvals before being sold in the United States and Japan.
There can be no assurance that the Company will be able to obtain regulatory
clearances for its products in the United States or foreign markets.
UNCERTAIN MARKET ACCEPTANCE OF THE LTK SYSTEM
Although the Company has another ophthalmic laser product, the gLase
210, the Company has and intends to continue to concentrate its efforts
primarily on the development of the LTK System and will be dependent upon the
successful development of that system to generate revenues. The LTK System has
not yet been introduced commercially in the United States, and there can be no
assurance that if approved by the FDA, such system will be accepted by either
the ophthalmic community or the general population as an alternative to existing
methods of treating refractive vision disorders. Many ophthalmologists may have
already invested significant time and resources in developing expertise in other
corrective ophthalmic techniques. Acceptance of the LTK System may be affected
adversely by its costs, concerns related to its safety and efficacy, the general
resistance to use of laser products on the eye, the effectiveness of alternative
methods of correcting refractive vision disorders, the lack of long-term
follow-up data and the possibility of unknown side effects. Promotional efforts
by suppliers of products or procedures which are alternatives to the LTK System,
including eyeglasses, contact lenses and laser and non-laser surgical
procedures, may also adversely affect the marketplace for the LTK System.
Failure by the Company to achieve broad market acceptance of the LTK System will
have a material adverse effect on the Company's business, financial condition
and results of operations.
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SAFETY AND EFFICACY CONCERNS; LACK OF LONG-TERM FOLLOW-UP
The Company has developed limited clinical data to date on the safety
and efficacy of the LTK System in correcting hyperopia (farsightedness), and
related long-term safety and efficacy data. The FDA has not yet determined
whether the LTK System will prove to be safe or effective for the predictable
and reliable treatment of hyperopia or other common vision problems. Potential
complications and side effects reported in studies to date from the use of the
LTK System include mild foreign body sensation, temporary increased light
sensitivity, modest fluctuations in refractive capabilities during healing,
unintended over or under-corrections, regression of effect and induced
astigmatism. There can be no assurance that long-term safety and efficacy data
when collected will be consistent with the clinical trial results previously
obtained or will demonstrate that the LTK System can be used safely and
successfully to treat hyperopia in a broad segment of the population on a
long-term basis.
PATENT CONCERNS
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. Generally, an apparatus patent contains claims to a new
and useful machine or device. A process patent, generally, contains claims to a
new and useful process, art or method, which may include a new use of a known
process, machine, manufacture, composition of matter or material. The Company
believes it is not infringing on any patents held by others; however, if patents
held by others were adjudged valid and interpreted broadly in an adversarial
proceeding, they could be deemed to cover one or more aspects of the Company's
holmium laser corneal shaping systems or use of the LTK System or other
procedures. Any claims for patent infringement could be time-consuming, result
in costly litigation, divert technical and management personnel or require the
Company to develop non-infringing technology or to enter into royalty or
licensing agreements. There can be no assurance that the Company will not be
subject to one or more claims for patent infringement, that the Company would
prevail in any such action or that its patents will afford protection against
competitors with similar technology.
In the event the LTK System is adjudged to infringe, directly or
indirectly, a patent in a particular market, the Company may be enjoined from
making, using and selling such system, be required to pay damages, or be
required to obtain a royalty-bearing license, if available, on acceptable terms.
Alternatively, in the event a license is not offered or available, the Company
may be required to redesign those aspects of the LTK System held to infringe,
directly or indirectly, so as to avoid such infringement. Any redesign could
delay reintroduction of the Company's products into certain markets, or may be
so significant as to be impractical. If redesign efforts were impractical, the
Company could be prevented from manufacturing and selling the infringing
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
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 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.
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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, human lens replacement, intra-ocular implantable contact
lenses and surgery using different types of lasers. The success of any competing
alternative to the LTK System for treating hyperopia would have a material
adverse effect on the Company's business, financial condition and results of
operations. Most of the Company's competitors have substantially greater
financial capabilities for product development and marketing than the Company,
which may enable such competitors to market their products or procedures to the
consumer and to the ophthalmic community in a more effective manner.
The excimer laser is the dominant laser used for the treatment of
refractive disorders, although it is not currently approved to treat hyperopia
in the United States or Japan, other than in limited clinical trials. In the
United States, VISX, Inc. ("VISX") and Summit Technologies, Inc. ("Summit") are
the leading manufacturers of excimer refractive surgical systems. While the
Company believes the LTK 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). 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 will have a competitive
advantage because of the name recognition being created by the current promotion
of their excimer laser products for correcting myopia (nearsightedness) using
lasers and the fact that VISX and Summit have been able to establish a base of
customers that are currently using their products. The FDA Ophthalmic Devices
Advisory Panel recommended approval of the VISX STAR Excimer Laser System(TM)
("VISX System") for use in the treatment of hyperopia on July 23, 1998. Although
the FDA accords significant weight to advisory panel recommendations, the FDA is
not bound by the recommendations of the panel and, accordingly, there can be no
assurance as to whether or when PMA approval will be received for use of the
VISX System for treatment of hyperopia. See "Business -- Competition."
RELIANCE ON KEY PERSONNEL
The Company's principal executive officers have extensive experience in
ophthalmic research, development and sales. The loss of the services of any of
the Company's executive officers or other key personnel, or the failure of the
Company to attract and retain other skilled and experienced personnel on
acceptable terms, could have a material adverse effect on the Company's
business, results of operations and financial condition.
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Any transactions and loans by and between the Company and an affiliate
will be made or entered into on terms that are no less favorable to the Company
than those that can be obtained from unaffiliated third parties. All such
material affiliated transactions and loans, and any forgiveness of loans, will
be approved by a majority of the Company's directors, including a majority of
the disinterested directors, that do not have an interest in the transaction and
who have access, at the Company's expense, to the Company's or independent legal
counsel.
LOSS OF DENTAL REVENUES
Prior to the sale of the dental assets in June 1997, the Company's
revenues were substantially derived from the sale of its dental laser and air
abrasive products. These sales represented 98% and 69% of the Company's revenues
in 1996 and 1997, respectively. By selling the dental assets, the Company lost a
significant source of continued revenue, although the dental assets made a
negative contribution to the Company's financial results.
POTENTIAL ANTI-TAKEOVER EFFECTS
The provisions of the Company's Certificate of Incorporation, as
amended, the Company's Bylaws, as amended, and the Delaware General Corporation
Law (the "Delaware Law") may have the effect of delaying, discouraging,
inhibiting, preventing or rendering more difficult an attempt to obtain control
of the Company by means of a tender offer, business combination, proxy contest
or otherwise. These provisions include the charter authorization of "blank
check" preferred stock, classification of the Board of Directors, a restriction
on the ability of the stockholders to take actions by written consent and a
Delaware Law provision imposing restrictions on business combinations with
certain interested parties.
In addition, the Company has adopted a Stockholder Rights Plan (the
"Rights Plan") in which each issued and outstanding share of the Company's
Common Stock has associated with it one right to purchase a share of the
Company's Common Stock from the Company (the "Rights") at a price of $20,
subject to adjustment. The Rights will be exercisable if a person or group: (i)
acquires beneficial ownership of 15% or more of the Company; or (ii) commences a
tender or exchange offer upon consummation of which such person or group would
beneficially own 15% or more of the Common Stock. The Company will be entitled
to redeem the Rights at $.001 per Right at any time until ten days following a
public announcement that a 15% position has been acquired. See "Description of
Capital Stock."
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock may be affected by
quarterly fluctuations in the Company's operating results, announcements by the
Company or its competitors of technological innovations or new product
introductions and other factors. If revenue or earnings in any quarter fail to
meet expectations of the investment community, there could be an immediate
impact on the Company's stock price. In addition, the stock market has from time
to time experienced extreme price and volume fluctuations, particularly among
stocks of high technology companies, which on occasion have been unrelated to
the operating performance of particular companies. Factors not directly related
to the Company's performance, such as negative industry reports or disappointing
earnings announcements by publicly-traded competitors, may have an adverse
impact on the market price of the Company's Common Stock.
8
<PAGE> 12
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex, as virtually every computer operation
will be affected in the same way by the rollover of the two digit year value to
00. The issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its systems for Year 2000 compliance. It is
anticipated that all of the Company's reprogramming efforts will be completed by
March 31, 1999, allowing adequate time for testing. This process includes
obtaining confirmations from the Company's primary vendors that plans are being
developed or are already in place to address processing of transactions in the
year 2000. However, there can be no assurance that the systems of other
companies on which the Company's systems rely will also be converted in a timely
manner, or that any such failure to convert by another company would not have a
material adverse effect on the Company's business, financial conditions or
results of operations.
The Company believes that it does not have a Year 2000 problem with its
products that have been sold in the past, however, the Company has not performed
an extensive review of these systems and is unlikely to be able to complete a
review prior to January 1, 2000. In addition, the Company is designing a new
product to replace its existing LTK System that is being designed to properly
recognize date-sensitive information for the year 2000 and beyond. Although the
Company plans to perform extensive testing of its new product, there can be no
assurance that the new system will function properly until it is deployed in the
field and subjected to extensive use. Any malfunction of a deployed system could
have a material adverse effect on the Company's business, financial condition or
results of operations.
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<PAGE> 13
SELECTED FINANCIAL INFORMATION
The statement of operations data set forth below with respect to the
fiscal years ended December 31, 1995, 1996 and 1997 and the balance sheet data
at December 31, 1996 and 1997 are derived from, and are qualified by reference
to the Company's audited financial statements included elsewhere in this
Prospectus and should be read in conjunction with those financial statements and
the notes thereto. The statement of operations data for the years ended December
31, 1993 and 1994 and the balance sheet data at December 31, 1993, 1994 and 1995
are derived from audited financial statements not included in this Prospectus.
The statements of operations data for the six months ended June 30, 1997 and
1998 and the balance sheet data at June 30, 1998 are derived from unaudited
financial statements. The unaudited financial statements have been prepared on
the same basis as the audited financial statements and, in the opinion of
management, contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
such periods. The results of operations for the six months ended June 30, 1998
are not necessarily indicative of results to be expected for the full fiscal
year.
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<PAGE> 14
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT
OF OPERATIONS DATA:
Net revenues ..................... $ 11,860 $ 7,578 $ 5,294 $ 5,654 $ 2,839 $ 2,463 $ 324
Gross profit ..................... 5,009 1,340 1,637 1,638 293 504 (560)
Loss from operations ............. (6,452) (6,917) (4,187) (6,020) (7,075) (3,380) (7,064)
Gain on sale of dental assets .... -- -- -- -- 1,740 1,740 --
Interest income (expense), net ... 60 7 57 52 (1,283) (911) (2,303)
Tax expense ...................... (232) -- -- -- -- -- --
Net loss ......................... (6,624) (6,910) (4,130) (5,968) (6,618) (2,551) (9,367)
Net loss per share, basic and
diluted(1) ..................... (0.74) (0.68) (0.28) (0.23) (0.23) (0.09) (0.28)
Shares used in calculation of
basic and diluted net loss per
share(1) ........................ 8,955 10,129 14,935 26,414 28,550 27,879 33,404
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, June 30,
------------------------------------------------- --------
1993 1994 1995 1996 1997 1998
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE
SHEET DATA:
Working capital ............ $1,965 $1,101 $4,541 $1,073 $1,382 $7,545
Total assets ............... 5,511 3,822 6,689 3,741 2,949 9,621
Long-term obligations ...... 18 -- -- -- 945 7,205
Total stockholders' equity.. 2,708 1,357 4,745 1,272 849 838
</TABLE>
- ----------
(1) See Note 1 of Notes to Consolidated Financial Statements.
11
<PAGE> 15
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 errors of the eye, such as hyperopia and presbyopia (age-related loss
of near focusing ability). The LTK System is based on patented technology
acquired in the Company's acquisitions of in-process technology from Laser
Biotech, Inc. ("Laser Biotech") and Emmetropix Corporation ("Emmetropix") in
1992. See "Products - LTK System" in this Section.
The Company has incurred substantial losses in the past seven years,
which have seriously depleted its working capital. Sales of its existing
ophthalmic products at current levels will not be sufficient to sustain the
continued development and regulatory licensing of the LTK System. The Company
has been able to raise additional working capital for all aspects of its
business through the private placement of its Common Stock and convertible notes
with warrants. These private placements raised $15,296,000 in 1994, 1995 and
1996 in new equity for the Company, $3,700,000 from the 1997 Notes Placement and
approximately $9,300,000, net of offering costs, from the 1998 Notes Placement.
If the Company is unable to obtain additional working capital, it may be forced
to substantially curtail its activities and could, under certain circumstances,
be forced to eliminate or suspend operations. 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 through a merger of a
wholly-owned subsidiary of the Company with Laser Biotech (the "Merger"). Laser
Biotech was founded in 1986 by Bruce J. Sand, M.D., FACS, to research and
develop a precision laser instrument for eye surgery. In connection with the
Merger, the Company also acquired certain patent and patent applications held by
Dr. Sand covering a patented technique for reshaping the cornea using a laser.
The LTK System alters the shape of the cornea to correct refractive disorders
such as hyperopia and presbyopia without removing corneal tissue. The procedure
employs a laser to shrink, selectively, the collagen in the cornea, changing the
curvature of the cornea and thereby changing the refractive power of the eye. By
comparison, excimer laser systems for corneal reshaping developed by Summit and
VISX remove parts of the cornea to achieve changes in refraction. Laser Biotech
conducted pre-clinical studies to gain preliminary information on the efficacy
and safety of the product, which resulted in positive indications that the LTK
System could be applied successfully and safely to correct certain refractive
error.
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<PAGE> 16
In May 1992, the Company acquired substantially all of the in-process
technology of Emmetropix, including an assignment of certain patent applications
and related technology from an Emmetropix shareholder which the Company believes
may be useful in the further development of the LTK System.
The Company received an Investigational Device Exemption ("IDE") from
the FDA to begin Phase I clinical trials of the LTK System on human subjects in
the first quarter of 1992. Phase I trials commenced in June 1992 using a
prototype LTK System designed and developed by the Company. The Company
completed Phase I of the clinical work for the LTK System and filed its results
with the FDA in June 1993. In September 1993, the Company received clearance to
begin Phase IIa clinical trials for the treatment of hyperopia. The trials were
conducted at the Doheny Eye Institute at the University of Southern California
and Baylor University and were completed in November 1994. In February 1995, the
Company filed its request with the FDA to commence Phase IIb clinical trials. In
a March 1995 letter, the FDA cited various deficiencies in the Company's
February letter and requested additional information. In December 1995, the
Company submitted the requested additional information. In January 1996, the FDA
responded to the Company's submittal by requesting current follow-up data on all
Phase IIa patients. In March 1996, the Company provided the FDA with current
follow-up data on the Phase IIa patients. On September 5, 1996, the FDA
authorized the Company to treat an additional 100 subjects at five United States
locations in a continuation of Phase IIa clinical trials using a treatment
algorithm developed by the Company in the course of the initial Phase IIa
clinical trials and in the course of studies conducted by ophthalmologists in
Mexico, Germany, Belgium, Italy and Canada. On March 31, 1997, the Company added
three new investigators to its Phase IIa clinical study for hyperopia. On July
18, 1997, the Company received FDA approval to treat the fellow eye of patients
who had one eye treated as part of the clinical trial for hyperopia six months
after the first eye was treated. On August 7, 1997, the Company received
approval from the FDA to treat an additional 100 patients as part of its Phase
IIa clinical trial for hyperopia, bringing the total patients approved for
treatment to 228.
On November 19, 1997, the Company completed enrollment in its Phase IIa
clinical trial for hyperopia and also received approval to begin Phase III of
its clinical trial for hyperopia with an additional 200 patients to be treated
at the existing eight clinical sites and up to seven additional clinical sites.
The Company has added three clinical sites, bringing the total to 11 sites. On
February 24, 1998, the Company announced that it had received approval to treat
the fellow eye of patients enrolled in its clinical study for hyperopia on the
same day, as opposed to the earlier requirement to wait six months before
treating fellow eyes. On June 30, 1998, the Company announced that it had
completed enrollment for the Phase III investigation, the final phase of the
study for treatment of low to moderate hyperopia. As of August 31, 1998, 400
primary eyes and 257 fellow eyes have been treated on 400 patients.
On March 24, 1998, the Company announced that it had received approval
to initiate a new clinical study to treat patients with the LTK System who were
overcorrected after receiving treatment for myopia (nearsightedness) from other
companies' excimer laser systems. The Company has treated two eyes of two
patients under this clinical study.
On October 8, 1997, the Company received approval to re-treat patients
in its clinical study. As of August 31, 1998, six eyes of six patients have been
re-treated.
On September 25, 1997, the Company received approval to treat 60
patients at four sites for the condition known as presbyopia. Presbyopia is the
age-related loss of near vision. The Company's clinical trial will employ a
technique known as monovision to treat presbyopia. A patient with monovision
utilizes one eye primarily for distance vision and the other eye primarily for
reading, or near vision. A fifth site
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<PAGE> 17
was added on March 30, 1998. As of August 31, 1998, the Company has treated 45
patients under this clinical study.
On April 7, 1998, the Company received approval to treat 20 eyes at two
clinical sites for moderate hyperopia 2.75-4.0 diopters. As of August 31, 1998,
the Company has treated 17 eyes of the 20 eyes allowed under this clinical
study.
In addition, clinical trials were initiated outside the United States in
early 1993 and are ongoing. The Company has obtained FDA clearance to export the
LTK System to most European countries, Turkey, Saudi Arabia, Canada, Mexico,
Brazil, China, Korea, Hong Kong, the Bahamas, South Africa and other countries,
although such sales are subject to the individual regulatory authority of each
country. Following regulatory approvals, the Company commenced marketing the LTK
System overseas, primarily in Europe, for the treatment of hyperopia and
astigmatism in December 1993.
As of the date of this Prospectus, the Company has treated over 700 eyes
with the LTK System in its United States clinical trials. The Company believes
that the total number of patients now enrolled exceeds FDA requirements for the
study sample size needed for the PMA submission. On July 28, 1998, the Company
announced that its PMA will most likely be submitted to the FDA in the fourth
quarter of 1998. See "Government Regulation" and "Patents and Licenses" in this
Section and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The LTK System incorporates the Sun 1000, a holmium laser system, into a
delivery system that is built into a standard slit-lamp to perform the LTK
procedure. A slit-lamp is a binocular microscope used regularly by
ophthalmologists to examine an eye binocularly under high magnification. The LTK
System delivers eight simultaneous laser beams disposed in a circle of varying
diameter. This system allows for easy alignment on the patient's eye and the
delivery of two exposures, each less than two seconds. To date, international
sales of the LTK System have been limited. Revenue in the United States cannot
reasonably be expected before the second half of 1999, at the earliest.
Ophthalmic Laser System for Glaucoma
In 1990, the Company developed the gLase 210 ophthalmic system (the
"gLase 210 system"), a holmium laser system designed to perform a filtering
procedure for the treatment of glaucoma. The gLase 210 system is not currently
marketed actively in the United States or internationally. Sales of the gLase
210 system have been limited and have never represented more than 11% of the
Company's revenues in any year. From 1995 through August 31, 1998, sales of the
gLase 210 system resulted in a loss to the Company of approximately $51,000.
GOVERNMENT REGULATION
The Company's products are subject to significant government regulation
in the United States and other countries. In order to test clinically, produce
and market products for human diagnostic and therapeutic use, the Company must
comply with mandatory procedures and safety standards established by the FDA and
comparable foreign regulatory agencies. Typically, such standards require
products to be approved by the government agency as safe and effective for their
intended use before being marketed for human applications. The clearance process
is expensive and time consuming, and no assurance can be given that any agency
will grant clearance to the Company to sell its products for routine clinical
applications or that the time for the clearance process will not be extensive.
14
<PAGE> 18
No clinical testing of the Company's products on humans may be
undertaken without first obtaining an IDE from the FDA. To date, sales of the
LTK System in the United States for clinical testing on humans have been
pursuant to approved IDEs.
Devices such as the LTK System may be marketed in the United States only
after the FDA has approved a PMA for the device. Under the PMA procedure, the
applicant must obtain an IDE before beginning the substantial clinical testing
required to determine the safety, efficacy and potential hazards of the
products. The preparation of a PMA is significantly complex and time consuming.
The review period under a PMA is 180 days from the date of filing. The FDA often
responds with requests for additional information or clinical reports that can
extend the review period substantially beyond 180 days.
The 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 also may require postmarket
testing and surveillance programs to monitor a product's effects. All of the
Company's products will require regulatory approval from the FDA. There can be
no assurance that the appropriate approvals from the FDA will be granted for the
Company's products, that the process to obtain such approvals will not be
excessively expensive or lengthy or that the Company will have sufficient funds
to pursue such approvals. The failure to receive requisite approvals for the
Company's products or processes, when and if developed, or significant delays in
obtaining such approvals, will prevent the Company from commercializing its
products as anticipated and will have a material, adverse effect on the business
of the Company.
The Company is also subject to regulation under the provisions of the
Food, Drug and Cosmetic Act relating to Product Radiation Control which, among
other things, requires laser manufacturers to: (i) file new product and annual
reports; (ii) maintain quality control, product testing and sales records; (iii)
incorporate certain design and operating features in lasers sold to end-users;
and (iv) certify and label each laser sold to conform to all applicable
standards for such lasers. Various warning labels must be affixed and certain
protective devices installed, depending on the class of the product. The FDA's
Center for Devices and Radiological Health is empowered to seek fines and other
remedies for violations of the regulatory requirements.
MARKETING AND SALES
The Company's strategy is to market its products through established
medical equipment distributors overseas. In the United States, the Company plans
to sell its products through a small direct sales force. The Company has
established relationships with distributors in Great Britain, 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 establishment of a successful
distributor network requires providing the distributors with sales instruments
(brochures, clinical data, research papers, educational videos, etc.). Such
marketing efforts are expected to include presentations at conventions and trade
shows, customer training by Company personnel and sponsorship of teaching
seminars, clinical presentations, and research by others. The Company also hires
additional marketing and sales consultants from time to time to assist in the
introduction of its products.
On July 15, 1998, the Company announced that it had entered into an
agreement with Harrison Wilson & Associates, and Ketchum Public Relations of
Omnicom Group, Inc. for work associated with
15
<PAGE> 19
the launch of the LTK System in the United States. Omnicom is comprised of more
than 200 specialty agencies and has a market capitalization of over $9 billion,
with expertise in the areas of public relations, medical education, investor
relations and the promotion of medical devices to both physicians and consumers.
There can be no assurance, however, that the Company can effectively market its
existing and planned new products.
ENGINEERING AND DEVELOPMENT
The Company's success will depend substantially upon its ability to
develop, produce and market innovative new products.
For the six months ended June 30, 1998, the Company expended $997,000 on
engineering and development relating to the LTK System. The Company continues to
explore several other types of lasers with varying characteristics in order to
find the optimal interactions with tissues in specific medical applications.
Since the sale of the Company's dental business and assets in June 1997, to an
unaffiliated party, the Company no longer expends any of its funds on the
engineering and development of dental laser or other dental products. Clinical
testing and sale of the Company's products are subject to obtaining applicable
regulatory approvals, of which there can be no assurance. The Company's research
and development activities are conducted in-house as well as by outside sources,
including consultants and universities.
The laser industry is characterized by extensive research and rapid
technological change. Development by others of new or improved products,
processes or technologies may make product development by the Company obsolete
or less competitive. The Company will be required to devote continuing efforts
and funds to further developments and enhancements for its existing products and
for its research and development of new technologies and products. There can be
no assurance the Company will be able to successfully adapt its operations to
evolving markets and technologies and fund the development of new medical
products to achieve possible technological advantages.
PRODUCTION
The Company manufactures its ophthalmic lasers from parts, components
and subassemblies obtained from a number of unaffiliated suppliers, and the
Company designs the software incorporated into a microprocessor purchased from
an unaffiliated third party. Prototype production and all manufacturing,
assembly and testing activities take place at its Fremont, California facility.
Although 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 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 health care products entail an inherent
risk of physical injury to patients and resultant product liability or
malpractice litigation. While the Company has obtained product
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<PAGE> 20
liability coverage in the amount of $5,000,000 with an umbrella policy for an
additional $5,000,000, such coverage is limited, and there can be no assurance
that such coverage will be sufficient to protect it from all risks to which it
may be subject. Those costs of defending a product liability or malpractice
action could have a material adverse impact on the Company, even if the Company
were to prevail ultimately.
PATENTS AND LICENSES
In the merger of Laser Biotech into the Company, the Company acquired an
issued United States patent and pending United States and foreign patent
applications previously assigned to Laser Biotech by Dr. Bruce Sand, the
inventor of the patent and founder of Laser Biotech. The issued patent covers a
method for using a laser to shrink collagen in the human body, with specific
application to the cornea. Since the merger, five more patents filed by Dr.
Sand, as the inventor, have been allowed, and have been assigned to the Company.
As a result of the Emmetropix acquisition, the Company now has one issued United
States patent and one pending European regional patent application based on the
issued United States patent, which the Company believes may be useful in further
developing its laser thermal keratoplasty product. In addition, the Company has
filed a patent application covering the LTK System it developed to make use of
the LTK procedure. The Company owns 22 issued patents on the LTK System and
method for shrinking collagen in the United States and internationally, six of
which have been assigned for collateral purposes pursuant to the terms of the
1997 Notes Placement. These patents protect the Company's technology while the
LTK System is undergoing clinical trials for approval to market the LTK System
in the United States and encompass both the apparatus for treatment with the LTK
System and the method of shrinking collagen in the cornea. These patents begin
to expire in 2009. The Company also owns 15 pending patent applications on the
LTK System and the method for shrinking collagen in the United States and
internationally.
COMPETITION
The vision correction industry is subject to intense competition. The
significant competitive factors in the industry include price, convenience,
success relative to vision correction, acceptance of new technologies, patient
satisfaction and government approval. Patients with hyperopia can achieve vision
correction with eyeglasses, contact lenses and possibly with other technologies
and surgical techniques currently under development, such as corneal implants,
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
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<PAGE> 21
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 FDA Ophthalmic Devices Advisory Panel
recommended approval of the VISX System for use in the treatment of hyperopia on
July 23, 1998. Although the FDA accords significant weight to advisory panel
recommendations, the FDA is not bound by the recommendations of the panel and,
accordingly, there can be no assurance as to whether or when PMA approval for
use of the VISX System for treatment of hyperopia will be received.
The Company believes the potential use of its process of shrinking
collagen is more attractive than competitive methods of treating certain
refractive errors because it can address refractive error with minimal
invasiveness to the cornea. There can be no assurance, however, that the method
can be reduced to practice using a reliable laser system, or that the Company
will receive regulatory approvals or successfully market such a product.
EXPORT SALES
For the six months ended June 30, 1998, approximately 60% of the
Company's revenues were international as compared to approximately 38% in 1997,
47% in 1996 and 69% in 1995.
BACKLOG
On June 30, 1998, the Company had a backlog of approximately $47,000,
all of which the Company expects to ship to its customers prior to the end of
1998.
WARRANTY AND SERVICE
The Company provides a limited warranty on its laser systems. This
warranty is limited to 12 months from date of shipment by the Company. The
Company provides services to systems out of warranty worldwide. The Company's
laser products include microprocessors and software that perform self-checks
upon start-up and during operation. In addition, the systems feature software
that allows service personnel to perform diagnostic checks in the field. The
Company currently provides support services by telephone to customers with
operational and service problems and makes necessary repairs at its plant or at
the laser site.
To date, actual costs incurred related to warranty work have been
minimal. In the case of sales by distributors, all product service will be
provided by such distributor.
FACILITIES AND EMPLOYEES
The Company leases a 10,400 square foot facility at 47265 Fremont
Boulevard, Fremont, California, which currently serves as its executive offices
and research and production facility. The facility lease expires in January
2001. The Company recently entered into a lease for a 55,000 square foot
facility at 3400 West Warren Avenue, Fremont, California, which will serve as
its executive offices and
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<PAGE> 22
research and production facility. The facility lease will expire in April 2004
and requires base payments on average of approximately $80,000 per month,
subject to standard pass-throughs and escalations. Management of the Company
believes that this new space will accommodate the Company's expected increases
in operations and additional full-time employees.
At June 30, 1998, the Company had 31 full-time employees (including its
executive officers); 15 in manufacturing, two in engineering and development,
six in marketing, sales and regulatory, and eight in administration. In
addition, the Company has retained a number of consultants to assist with its
product development, regulatory activities and investor relations.
The Company is primarily dependent upon its engineering and development
employees and consultants for the development and improvement of existing and
proposed products. The Company's future success will depend in a large part upon
its ability to attract and retain highly qualified scientific and management
personnel, and its ability to continue to train and retain highly skilled
technical and marketing personnel. None of the Company's employees are
represented by a labor organization. The Company maintains various benefit plans
and has good employee relations.
LITIGATION
Danville Manufacturing, Inc. (d.b.a. Danville Engineering) ("Danville")
filed a suit against the Company alleging misappropriation of intellectual
property and claims for monetary damages for unpaid invoices (Danville
Manufacturing, Inc. d.b.a Danville Engineering v. Sunrise Technologies
International, Inc., C98-02123). The Company is vigorously defending against
this lawsuit. The Company does not believe that the outcome of this matter will
have a material adverse effect on the financial condition and results of
operations of the Company. There can be no assurance, however, that the Company
will prevail in its defense of the claims asserted by Danville.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
FOR THE YEAR ENDED DECEMBER 31, 1997
Overview
The Company develops, manufactures and markets laser systems for
applications in ophthalmology. Prior to June 26, 1997, the Company developed,
manufactured and marketed lasers and air abrasion cavity preparation systems for
use in dentistry. In June 1997, the Company completed the sale of the Company's
assets associated with its dental laser, air abrasive and composite curing
systems (the "Dental Assets") to Lares Research. The purchase price paid for the
Dental Assets was $5,500,000, consisting of $4,000,000 in cash paid at closing
and $1,500,000 in the form of a promissory note, with two installments due in
June 2000 and 2001, respectively (the "Lares Note"). Collection is not
reasonably assured due to subordination of the Lares Note to Lares' bank and the
Company intends to recognize proceeds from the sale and interest on the Lares
Note as cash is received. The gain on sale of the Dental Assets is comprised as
follows:
19
<PAGE> 23
<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 seven years
which have seriously depleted its working capital. Sales of its existing
ophthalmic products at current levels will not be sufficient to sustain the
continued development and regulatory licensing of the LTK System. The Company
has been able to raise additional working capital for all aspects of its
business through the private placement of its common stock and convertible notes
with warrants. These private placements raised $15,296,000 in 1994, 1995 and
1996 in new equity for the Company, approximately $3,700,000 from the 1997 Notes
Placement and approximately $9,300,000, net of offering costs, from the 1998
Notes Placement. If the Company is unable to obtain additional working capital,
it may be forced to substantially curtail its activities and could, under
certain circumstances, be forced to eliminate or suspend operations.
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.
20
<PAGE> 24
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.
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.
21
<PAGE> 25
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.
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.
22
<PAGE> 26
The net loss in 1996 was due primarily to increased selling, marketing
and product development expenses associated with the attempt to grow the dental
and ophthalmic businesses, compounded by the continued low level of revenue and
excess manufacturing capacity. Total operating expenses increased 31% from 1995
while gross profit was essentially the same in both years. This increase in
operating expenses accounts for essentially all of the $1,800,000 increase in
net loss in 1996 from 1995.
The net loss in 1995 was due principally to the continued low level of
sales, excess manufacturing capacity and the Company's need to maintain the
basic sales, marketing, regulatory and corporate infrastructure.
The Company expects to report net losses during 1998 and beyond. The
losses will come primarily from the expenses of the FDA approval process and
underlying clinical studies related to the LTK System and the expenses
associated with maintaining the Company's basic corporate infrastructure. The
Company will not have any material domestic revenues from this product line
unless and until FDA approval is obtained. The Company's international revenues
are not projected to be sufficient to cover the expenses of maintaining the
basic corporate infrastructure and the Company's costs of the continuing
clinical trials for hyperopia and presbyopia.
Liquidity and Capital Resources
As of December 31, 1997, the Company had $1,958,000 in cash and cash
equivalents. The Company's operating activities used $6,774,000 in cash during
1997. A substantial portion of the 1997 loss was funded by the $3,449,000 of net
proceeds received from the sale of its dental business in June 1997 and proceeds
of $3,700,000 from the 1997 Notes.
Working capital amounted to $1,073,000 at December 31, 1996 and
increased to $1,382,000 at December 31, 1997. Working capital, including the
proceeds from the 1997 Notes Placement and the sale of the Dental Assets, was
used to fund the Company's 1997 operating loss and to reduce accounts payable.
During 1997, the Company used $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 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 1997 Notes are convertible at any time prior to maturity, at the
option of the holders thereof, at the respective conversion prices discussed
above, subject to adjustment for any stock dividends, certain distributions,
stock splits or combinations or reclassifications of the Common Stock. The Notes
mature two years from their respective issue dates, and interest on the Notes is
cumulative from the respective issue date at an annual rate of 5%, payable at
maturity or conversion. The Notes are secured by a first lien on all of the
ophthalmic patents and patent applications of the Company. The Warrants may be
exercised at any time within five years from the respective date of their
issuance.
23
<PAGE> 27
The Company's current operations continue to be cash flow negative,
further straining the Company's working capital resources. In January 1998, the
Company completed the 1998 Notes Placement. See "-- For the Six Months Ended
June 30, 1998" below.
FOR THE SIX MONTHS ENDED JUNE 30, 1998
Results of Operations
Revenues for the three and six-month periods ended June 30, 1998 totaled
$222,000 and $324,000, respectively, compared to $1,454,000 and $2,463,000,
respectively, for the same periods in 1997. The vast majority of this revenue
decline was due to the fact that the Company had no revenue from dental
operations in the first half of 1998 since it sold the Dental Assets during the
second quarter of 1997. In addition, ophthalmic revenues for the first half of
1998 were approximately $169,000 lower, or 34%, as compared to the same period
in 1997. This reduction was primarily due to the deferral from revenue
recognition of certain international shipments with trade-in rights.
Costs of revenues and related negative margins for the three- and
six-month periods ended June 30, 1998 resulted from the underabsorption of
manufacturing overhead due to the Company's low revenue levels. Gross profits as
a percentage of revenue for the first six months in 1997 were 20%.
Engineering and development expenses totaled $515,000 and $997,000,
respectively, for the three- and six-month periods ended June 30, 1998, compared
to $262,000 and $535,000, respectively, for the same periods in 1997. The
increase in the engineering and development expenses was due to the increase in
expenditures related to the development of the LTK System partially offset by
the elimination of expenditures related to the development of dental products
during the first six months of 1997.
Sales, marketing and regulatory costs were $1,165,000 and $1,658,000,
respectively, for the three- and six-month periods ended June 30, 1998, compared
to $784,000 and $1,443,000, respectively, for the same periods in 1997. The
increase for the three- and six-month periods was due primarily to increased
marketing and regulatory spending for the ophthalmic products partially offset
by the elimination of marketing expenses for dental products.
General and administrative expenses were $2,917,000 and $3,849,000,
respectively, for the three- and six-month periods ended June 30, 1998, compared
to $1,200,000 and $1,906,000, respectively, for the same periods of 1997. The
increase in general and administrative expenses for the three- and six-month
periods ended June 30, 1998 as compared to the same periods in 1997 was
primarily due to the expenses associated with the issuance of warrants and stock
options to consultants of the Company, and increased compensation costs for
certain executive officers.
Interest income was $99,000 and $200,000, respectively, for the three-
and six-month periods ending June 30, 1998 and $21,000 and $32,000,
respectively, for the same periods in 1997. The increase in interest income
between the three- and six-month periods ending June 30, 1998 and June 30, 1997
was due to higher average balances in the Company's interest bearing accounts.
Interest expense was $712,000 and $2,503,000, respectively, for the
three- and six-month periods ending June 30, 1998 and $131,000 and $943,000,
respectively, for the same periods in 1997. The increase in interest expense for
the three- and six-month periods ending June 30, 1998 as compared to the same
periods in 1997 was due to the interest accrued by the Company in connection
with the 1998 Notes
24
<PAGE> 28
Placement (the "1998 Notes"), at a rate of 12% per annum, non-cash interest
expense accrued for the fair value of the warrants and conversion features of
such notes, and placement costs that were partially amortized as additional
interest expense.
The net loss for the three- and six-month periods ended June 30, 1998 of
$5,613,000 and $9,367,000, respectively, was primarily due to the lack of
revenue from the Company's ophthalmic products to offset the expenses associated
with the development and regulatory approval of the LTK System and the general
expenses associated with the operations of the Company, including the non-cash
expenses associated with the various convertible notes, warrants and options
issued by the Company to fund its operations while awaiting FDA approval to
market the LTK System in the United States.
The Company's current operations continue to be cash flow negative,
further straining the Company's working capital resources. The level of current
product sales is not sufficient to provide enough cash to support the ongoing
development and regulatory approval of the LTK System, as well as maintain the
Company's basic corporate infrastructure. In order to continue its current level
of operations beyond mid-1999 and have sufficient funds to launch the LTK System
in the United States, it will be necessary for the Company to obtain additional
working capital resources, whether from debt or equity sources. If the Company
is unable to obtain additional working capital resources from the placement of
debt or equity instruments or the sale of some of its assets, it may be
necessary for the Company to curtail spending or suspend operations in their
entirety.
Financial Condition
As of June 30, 1998, the Company had $8,448,000 in cash and cash
equivalents. The Company's operating activities used $3,632,000 in the six
months ended June 30, 1998 and used $4,040,000 in cash during the same period in
1997. Substantial portions of the 1997 and 1998 losses were funded with the
proceeds of a series of private placements. The 1997 Notes Placement had
aggregate net proceeds of approximately $3,700,000 and the 1998 Notes Placement
generated aggregate proceeds of approximately $9,300,000.
The Company's current operations continue to be cash flow negative,
limiting the Company's working capital resources. Working capital at June 30,
1998 amounted to approximately $7,545,000. At December 31, 1997, working capital
amounted to approximately $1,382,000. Although the Company's management believes
existing working capital will provide sufficient funds for the Company's planned
operations through mid-1999, the Company's long-term ability to continue as a
going concern is dependent upon performing profitably or obtaining further
financing. See "Risk Factors -- History of Losses; Profitability Uncertain; Cash
Flow Deficits" and "-- Continuing Losses Expected."
25
<PAGE> 29
MANAGEMENT
The following persons serve as the current executive officers and
directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
C. Russell Trenary, III 41 President and Chief Executive Officer and Director
Timothy A. Marcotte 41 Vice President, Finance and Chief Financial Officer and
Director
Jeannie G. Cecka 35 Vice President, Clinical and Regulatory Affairs
Paul M. Malin 45 Vice President, International Sales and Marketing
and Worldwide Business Development
Robert A. Haddad 51 Vice President, Operations and Product Development
Richard T. VanRyne 52 Vice President, U.S. Sales and Marketing
Joseph D. Koenig 68 Chairman of the Board and Director
Michael S. McFarland, M.D. 47 Director
R. Dale Bowerman 58 Director
</TABLE>
Mr. Trenary was appointed the Chief Executive Officer of the Company in
June 1997. In November 1996, Mr. Trenary was appointed President and Chief
Operating Officer of the Company and was also appointed to the Board of
Directors of the Company. Mr. Trenary was appointed President and Chief
Operating Officer of Laser Biotech, Inc., a wholly owned subsidiary of the
Company, in April 1996. From 1995 until the time he joined the Company, Mr.
Trenary served as Senior Vice President of Sales and Marketing for Vidamed, Inc.
Prior to 1995, Mr. Trenary served in various positions with Allergan, Inc., most
recently as Senior Vice President, General Manager of AMO Surgical Products, an
ophthalmic business. Mr. Trenary has an M.B.A. degree from Michigan State
University and a B.S. degree from Miami University (Ohio).
Mr. Marcotte was appointed Vice President, Finance and Chief Financial
Officer of the Company in August 1997. He was also appointed to the Board of
Directors of the Company in November 1997. From December 1996 to August 1997,
Mr. Marcotte was Vice President and Chief Financial Officer of InfoGain
Corporation, an information technology consulting firm. From June 1996 to
December 1996, Mr. Marcotte was the Vice President and Chief Financial Officer
of IRIDEX Corporation, a medical device manufacturer of ophthalmic laser
products. From May 1995 to June 1996, Mr. Marcotte served as the Executive Vice
President of Finance and Operations and Chief Financial Officer and Secretary
for Now Software, Inc., a desktop software developer, and from May 1993 to May
1995, he served as Vice President of Finance and Operations and Chief Financial
Officer at the same company. Mr. Marcotte has an M.B.A. degree and a B.S. degree
from the University of Michigan.
Ms. Cecka was appointed Vice President, Clinical and Regulatory Affairs of
the Company in August 1996. From February 1996 to August 1996, Ms. Cecka was
Quality Systems Auditor at Tuv Product Service. From March 1995 to February
1996, Ms. Cecka was Director of Clinical and Regulatory Affairs
26
<PAGE> 30
at MedAcoustics, Inc. From September 1992 to March 1995, Ms. Cecka was Manager
of Clinical Research for Baxter Novacor, a developer and marketer of left
ventricular assist devices. Prior to September 1992, Ms. Cecka spent seven years
at Allergan, Inc. holding positions ranging from Manager, Clinical Affairs to
Director, Worldwide Clinical Research. Ms. Cecka has an M.B.A. degree from
Pepperdine University and a B.S. degree from UC Irvine.
Mr. Malin was appointed Vice President, International Sales and Marketing
and Worldwide Business Development, of the Company in September 1998. Prior to
joining the Company in May 1996, Mr. Malin was the Director of Marketing at
IRIDEX Corporation, a medical device manufacturer of ophthalmic laser products
from July 1995 to May 1996. From October 1983 to July 1995, Mr. Malin held
various senior sales and marketing positions at Allergan, Inc. Mr. Malin has an
M.B.A. from Pepperdine University and a B.A. degree from Washington and Lee
University.
Mr. Haddad joined the Company in March 1997 as Vice President, Operations
and Product Development. From March 1991 to March 1997, Mr. Haddad was Vice
President, Operations, of IRIDEX Corporation, a medical device manufacturer of
ophthalmic laser products. Mr. Haddad has an M.B.A. degree from Sacramento State
University and a B.S. degree from California State Polytechnic University.
Mr. VanRyne was appointed Vice President, U.S. Sales and Marketing, of the
Company in September 1998. From August 1997 to September 1998, Mr. VanRyne was
the Company's Director of Sales and Marketing for the Americas. Prior to joining
the Company, Mr. VanRyne was the Director of New Business Development at
MedLogic Global Corporation, a manufacturer of wound healing products from April
1996 to August 1997. From April 1995 to April 1996, Mr. VanRyne was a consultant
for medical device marketing and educational strategy. From 1986 to April 1995,
Mr. VanRyne was employed by Allergan, Inc. in a variety of senior sales and
marketing positions.
Mr. Koenig was appointed to the Board of Directors of the Company in
December 1994. Mr. Koenig had also served as a director of the Company from
August 1991 through January 1994. He has been a consultant for Koenig
Associates, a management consulting firm, since October 1985. Mr. Koenig is also
a director of Ancot Corporation, Hench Controls Corporation and ORISA
Technologies, Inc. Mr. Koenig has a B.S. degree in Electrical Engineering from
the University of Illinois.
Dr. McFarland was appointed to the Board of Directors of the Company in
October 1997. From 1980, Dr. McFarland has been a practicing ophthalmologist in
Arkansas. Dr. McFarland was the recipient of the Innovators Award of the Irish
American Ophthalmological Association in 1992 for his development of sutureless
cataract surgery. Dr. McFarland has a B.S. degree from Hendrix College and a
M.D. degree from the University of Arkansas.
Mr. Bowerman was appointed to the Board of Directors of the Company in
November 1997. From 1994 until his retirement in 1997, Mr. Bowerman had been
employed by SHA, LLC d/b/a Firstcare, a Texas health maintenance organization,
most recently as President and Chief Executive Officer. From 1973 to 1994, Mr.
Bowerman was Vice President, Finance and Chief Financial Officer at High Plains
Baptist Health Systems. Mr. Bowerman is also a director of Carrington
Laboratories, Inc., a pharmaceutical research company. Mr. Bowerman has a B.B.A.
degree in Accounting from West Texas State University.
The Board adopted separate amended and restated change of control
agreements (collectively, the "Change of Control Agreements") with the Company's
executive officers. The Change of Control Agreements provide these executives
with separation pay and benefits following a "change of control" in the Company
and: (i) the executive's subsequent termination of employment by the Company
(unless such termination is for "cause") or such termination results from the
executive's death, disability or retirement; or (ii) the executive resigns for
"good reason." An eligible termination must occur within two years of the change
of control or the agreement entered into with the executive is void. Each Change
of Control Agreement will continue until May 8, 2001 and renew for three year
periods from that date unless the executive receives written notice of
termination of the Change of Control Agreement at least 120 days prior to the
renewal date. See "Description of Capital Stock."
27
<PAGE> 31
DESCRIPTION OF CAPITAL STOCK
The current authorized capitalization of the Company consists of
75,000,000 shares of Common Stock and 2,000,000 shares of Preferred Stock, par
value $0.001 per share ("Preferred Stock"). As of August 31, 1998, there were
34,400,219 issued and outstanding shares of Common Stock. No shares of Preferred
Stock have been issued or reserved for issuance by the Board of Directors of the
Company (the "Board").
The following summary of the terms of the Company's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
terms set forth in the Company's Certificate of Incorporation, as amended to
date (the "Sunrise Certificate").
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders of the Company. Stockholders do not have
cumulative voting rights. In the event of a liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share equally and
ratably in any assets remaining after the payment of all debts and liabilities
of the Company, subject to the prior rights, if any, of the holders of Preferred
Stock. Holders of Common Stock do not have preemptive or other subscription or
conversion rights. Common Stock is not subject to redemption and the outstanding
shares, including the Offered Shares, are fully paid and nonassessable.
PREFERRED STOCK
Preferred Stock may be issued from time to time in one or more series, as
determined by the Board. The directors may fix or alter from time to time the
designation, powers, preferences and rights of the shares of each series of
Preferred Stock, provided that the directors may alter the qualifications,
limitations or restrictions of any series of Preferred Stock only prior to the
issuance of any shares of such series. The directors may also establish from
time to time the number of shares constituting any series of Preferred Stock.
The directors may increase or decrease the number of shares subsequent to the
issuance of shares of a series, so long as the directors do not decrease the
number of authorized shares of a series below the number of shares of such
series then outstanding. The issuance of shares of Preferred Stock may have
voting and conversion rights which could adversely affect the holders of shares
of Common Stock. Under certain circumstances, the issuance of shares of
Preferred Stock may render more difficult or tend to discourage a merger, tender
offer or proxy contest, the assumption of control by a holder of a large block
of the Company's securities or the removal of incumbent management. The Company
will not issue Preferred Stock unless such issuance is approved by a majority of
the Company's independent directors who do not have an interest in the
transaction and who will have access, at the Company's expense, to the Company's
or independent legal counsel. As of the date hereof, the Board has not
designated any series of Preferred Stock.
CHANGE OF CONTROL AGREEMENTS
The Change of Control Agreements provide the Company's executive officers
with separation pay and benefits following a "change of control" in the Company
and: (i) the executive's subsequent termination of employment by the Company
(unless such termination is for "cause") or such termination results from the
executive's death, disability or retirement; or (ii) the executive resigns for
"good reason." An eligible termination must occur within two years of the change
of control or the agreement entered
28
<PAGE> 32
into with the executive is void. Each Change of Control Agreement will continue
until May 8, 2001 and renew for three year periods from that date, unless the
executive receives written notice of termination of the Change of Control
Agreement at least 120 days prior to the renewal date.
Under the Change of Control Agreements, the separation pay equals: (i) for
the President and Chief Executive Officer, one and one-half times his annualized
base salary and, for the other executives, one times their respective annualized
base salaries; plus (ii) the target cash bonus for the year of termination. The
executives are also entitled to health, disability and life insurance in
accordance with the plans maintained for executives. In the case of the
President and Chief Executive Officer, these benefits are for a period of one
and one-half years from the date of termination, and for the other executives,
for a period of one year (provided that such benefits shall cease if the
executive becomes employed during such period and receives similar benefits). In
the event of a change of control of the Company, stock options granted to the
executives shall fully vest on such date and become immediately exercisable. If
the total payments to any executive constitutes an "excess parachute payment"
within the meaning of Section 280G of the Internal Revenue Code, then the
Company shall reimburse the executive for certain income and excise taxes.
A "change of control" for purposes of the Change of Control Agreements is
deemed to occur if: (a) the beneficial ownership of securities representing more
than 33% of the combined voting power of the Company is acquired by any "person"
as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934;
(b) the stockholders of the Company approve a definitive agreement to merge or
consolidate the Company with or into another corporation, to sell or otherwise
dispose of all or substantially all of its assets, or to adopt a plan of
liquidation; or (c) during any period of three consecutive years, individuals
who at the beginning of such period were members of the Board cease for any
reason to constitute at least a majority thereof. The Change of Control
Agreements were designed to attract and retain valued executives of the Company
and to ensure that the performance of these executives is not undermined by the
possibility, threat or occurrence of a change of control.
PRICE RANGE OF COMMON STOCK
As of August 31, 1998, there were 642 holders of record of the Common
Stock. Price information for the Common Stock may be obtained from the Nasdaq
National Market System. Prior to August 13, 1998, the Common Stock was traded in
the over-the-counter market. The table below sets forth the reported high and
low bid quotations of the Common Stock as reported on the OTC Bulletin Board for
the periods indicated.
<TABLE>
<CAPTION>
HIGH ASK (1) LOW BID (1)
------------ -----------
<S> <C> <C>
1996
First Quarter...................... $1.44 $1.34
Second Quarter..................... $2.31 $1.13
Third Quarter...................... $2.00 $0.88
Fourth Quarter..................... $2.13 $0.81
</TABLE>
29
<PAGE> 33
<TABLE>
<S> <C> <C>
1997
First Quarter...................... $ 1.72 $0.75
Second Quarter..................... $ 1.41 $0.94
Third Quarter...................... $ 3.94 $1.00
Fourth Quarter .................... $ 5.13 $3.13
1998
First Quarter...................... $ 7.53 $2.91
Second Quarter..................... $10.38 $5.56
Third Quarter (to September 25, 1998) $ 8.19 $3.91
</TABLE>
(1) Bid and ask prices are quoted on the OTC Bulletin Board in increments of
1/32. Certain of the bid and ask prices set forth in this table have been
rounded to the nearest cent.
The over-the-counter market quotations provided herein may reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. On September 25, 1998, the closing
price of the Common Stock as reported on the Nasdaq National Market System was
$5.00 per share.
DIVIDENDS
In the past three years, the Company has not declared or paid any cash
dividend on the Common Stock. The Company currently intends to retain any and
all future earnings to finance its business. Accordingly, the Company does not
anticipate paying cash or other dividends on the Common Stock in the foreseeable
future.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Sunrise Certificate contains the following special provisions that may
delay, defer or prevent a change in control of the Company:
The Board is divided into three classes, with members serving three-year
terms ending in successive years. An objective of the classified Board is to
facilitate continuity and stability of the Company's management and policies,
since a majority of the Directors at any given time will have prior experience
as Directors of the Company. However, classification also makes it more
difficult for the stockholders to change a majority of the Board. It would take
at least two annual meetings to elect a majority of the Board of Directors,
unless the Sunrise Certificate was amended to eliminate provisions for a
classified Board of Directors.
The Sunrise Certificate also provides that Directors may only be removed
with cause by the vote of the holders of a majority of the voting power of the
outstanding voting stock of the Company. In addition, the Sunrise Certificate
provides that the Board may, from time to time, fix the number of Directors
constituting the Board and fill vacancies on the Board.
The Sunrise Certificate authorizes the Board to fix or alter from time to
time the designation, powers, preferences and rights of the Preferred Stock of
each series and the qualifications, limitations or
30
<PAGE> 34
restrictions of any unissued series of Preferred Stock, and to establish the
number of shares constituting any such series.
The Company is subject to the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "Delaware Law"). In general,
Section 203 prohibits certain publicly-held Delaware corporations from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person or entity
became an interested stockholder, unless the business combination is approved in
a prescribed manner or certain other exceptions apply. For purposes of Section
203, a "business combination" is defined broadly to include mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person or entity who, together with affiliates and associates, owns, or within
the three immediately preceding years of a business combination did own, 15% or
more of the corporation's outstanding voting stock.
In accordance with the Sunrise Certificate and the Bylaws, for nominations
for the Board or for other business to properly brought by a stockholder before
an annual meeting of stockholders, the stockholder must first have given timely
notice thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice generally must be delivered not less than 60 days nor more
than 90 days prior to the annual meeting. The notice must contain, among other
things, certain information about the stockholder delivering the notice and as
applicable, background about the nominee or a description of the proposed
business to be brought before the meeting.
The Sunrise Certificate and the Bylaws provide that no action is permitted
to be taken by the stockholders of the Company by written consent. Special
meetings may be called only by the Board of Directors, the Chairman of the Board
or the Chief Executive Officer of the Company. These provisions could have the
effect of delaying until the next annual stockholders' meeting stockholder
actions which are favored by the holders of a majority of the outstanding voting
securities of the Company. These provisions may also discourage another person
or entity from making a tender offer for the Common Stock, because such person
or entity, even if it acquired a majority of the outstanding voting securities
of the Company, would be able to take action as a stockholder (such as electing
new Directors or approving a merger) only at a duly called stockholders'
meeting, and not by written consent.
The Delaware Law provides generally that the affirmative vote of a majority
of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. The affirmative vote of the holders of at least sixty-six and
two-thirds percent (66 2/3%) of the outstanding voting stock of the Company is
required to: (a) alter, amend or adopt new Bylaws; and (b) to alter, amend or
repeal Article V, VI or VII of the Sunrise Certificate. Such stockholder vote
would be in addition to any separate class vote that might in the future be
required pursuant to the terms of any Preferred Stock that might be outstanding
at the time any such amendments are submitted to stockholders.
See "Risk Factors -- Potential Anti-Takeover Effects."
STOCKHOLDER RIGHTS PLAN
Each issued and outstanding share of Common Stock has associated with it
one right to purchase from the Company a share of Common Stock (the "Rights") at
a price of $20 (the "Purchase Price"), subject to adjustment. The description
and terms of the Rights are set forth in the rights agreement (the "Rights
Agreement") between the Company and ChaseMellon Shareholder Services, L.L.C., as
rights agent (the
31
<PAGE> 35
"Rights Agent"). The Rights will be evidenced by the Common Stock certificates.
The Rights will be exercisable upon the earlier to occur of: (i) ten business
days following a public announcement that a person or group of affiliated or
associated persons has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of the outstanding shares of Common Stock, or any
person who acquires beneficial ownership in a Permitted Transaction, as defined
below (an "Acquiring Person"); or (ii) ten business days (or such later date as
may be determined by action of the Board of Directors prior to any person
becoming an Acquiring Person) following the commencement of, or announcement of
an intention to make, a tender offer or exchange offer, the consummation of
which would result in the beneficial ownership by a person or group of 15% or
more of such outstanding shares of Common Stock (the earlier of such dates being
the "Distribution Date").
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with the shares of Common Stock. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
shares of Common Stock certificates issued upon transfer or new issuances of
shares of Common Stock will contain the notation incorporating the Rights
Agreement by reference. As soon as practicable following the Distribution Date,
separate certificates evidencing the Rights (the "Rights Certificates") will be
mailed to holders of record of the shares of Common Stock as of the close of
business on the Distribution Date and such separate Rights Certificates alone
will evidence the Rights. The Rights are not exercisable until the Distribution
Date and will expire on October 24, 2007 (the "Final Expiration Date"), unless
extended or unless the Rights are earlier redeemed by the Company.
The Purchase Price payable and the number of shares of Common Stock or
other securities or property issuable upon exercise of the Rights are subject to
adjustment in certain circumstances. In the event any person or entity becomes
an Acquiring Person and one of the following events has occurred, then proper
provision will be made so that each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will then be void), will have
the right to receive upon exercise that number of shares of Common Stock having
a market value of two times the applicable exercise price of the Right: (i) the
Company is the surviving corporation in a merger with an Acquiring Person and
the shares of Common Stock are not changed or exchanged; (ii) the Acquiring
Person engages in certain self-dealing transactions with the Company; (iii) any
person becomes the beneficial owner of 15% or more of the outstanding shares of
Common Stock (unless the event in which such person acquired 15% or more of the
outstanding shares of Common Stock is a Permitted Transaction); or (iv) the
Company engages in a reclassification or recapitalization that results in an
increase of 1% or more in the Acquiring Person's percentage of ownership of the
Company.
A Permitted Transaction is a stock acquisition, tender or exchange offer
pursuant to a definitive agreement that would result in a person beneficially
owning 50% or more of the outstanding shares of shares of Common Stock and that
was approved by the directors (including a majority of the directors not in
association with an Acquiring Person) prior to the execution of the agreement or
the public announcement of the offer. In the event that the Company is acquired
in a merger or other business combination transaction or 50% or more of its
consolidated assets or earning power are sold, unless such event is a Permitted
Transaction, proper provisions will be made so that each holder of a Right will
have the right to receive, upon the exercise of the Right at the then applicable
exercise price, that number of shares of common stock of the acquiring company
that at the time of such transaction will have a market value of two times the
applicable exercise price of the Right. At any time prior to the tenth business
day following an Acquiring Person's acquisition of 15% or more of the
outstanding shares of Common Stock, the Board of Directors, with concurrence of
a majority of the directors in office at the time the Rights Agreement was
adopted or whose initial election or nomination for election by the Company's
32
<PAGE> 36
stockholders was approved by a majority of the such directors then serving on
the Board of Directors (the "Continuing Directors"), may redeem the Rights in
whole, but not in part, at a price of $0.001 per Right. In addition, the Board
of Directors may extend or reduce the period during which the Rights are
redeemable, so long as the Rights are redeemable at the time of such extension
or reduction. Immediately upon any redemption of the Rights, the right to
exercise the Rights will terminate and the only right of the holders of Rights
will be to receive the Redemption Price. The terms of the Rights may be amended
by the Board of Directors, with concurrence of a majority of the Continuing
Directors, without the consent of the holders of the Rights, including an
amendment to extend the Final Expiration Date, except that from and after the
Distribution Date no such amendment may adversely affect the economic interests
of the holders of the Rights. See "Risk Factors -- Potential Anti-Takeover
Effects."
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Common Stock
as of August 31, 1998 by: (i) each person known by the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock; (ii)
each of the Company's directors; (iii) each of the Company's executive officers;
and (iv) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP (1)
--------------------------------
NUMBER OF PERCENT OF
NAME AND ADDRESS (2) SHARES SHARES
--------------------------------
<S> <C> <C>
C. Russell Trenary, III (3)............................ 605,985 1.7
Timothy A. Marcotte (4)................................ 118,925 *
Paul M. Malin (5)...................................... 146,924 *
Jeannie G. Cecka (6)................................... 142,253 *
Robert A. Haddad (7)................................... 192,392 *
Richard T. VanRyne (8)................................. 78,010 *
Joseph D. Koenig (9)................................... 107,921 *
Michael S. McFarland, M.D. (10)........................ 37,666 *
R. Dale Bowerman (11).................................. 40,349 *
Alan B. Aker
1445 Boca Raton Blvd.
Boca Raton, Florida 33432........................... 1,808,603 5.1
David C. Brown
4101 Evans Avenue
Ft. Myers, Florida 33901............................ 2,342,341 6.6
Donald R. Sanders
180 West Park Avenue
Suite 150
Elmhurst, Illinois 60126............................ 1,940,287 5.3
All executive officers and directors as a group
(9 persons) (12)..................................... 1,470,425 4.1%
</TABLE>
- ----------
*Less than one percent
33
<PAGE> 37
(1) Based on information provided by each of the identified officers and
directors.
(2) Unless otherwise indicated, the persons named in the table above have the
sole voting and investment power with respect to all shares beneficially
owned by them, subject to applicable community property laws. Unless
otherwise indicated, the address of each beneficial owner is: c/o Sunrise
Technologies International, Inc., 47265 Fremont Boulevard, Fremont,
California 94538.
(3) Includes 521,958 shares that Mr. Trenary does not currently own, but which
he has the right to acquire within 60 days of August 31, 1998, pursuant to
outstanding options granted under the Company's stock option plan
("Options") and 72,027 shares associated with convertible notes and
warrants purchased in February 1997.
(4) Consists of 118,925 shares that Mr. Marcotte does not currently own, but
which he has the right to acquire within 60 days of August 31, 1998,
pursuant to Options.
(5) Includes 143,924 shares that Mr. Malin does not currently own, but which
he has the right to acquire within 60 days of August 31, 1998, pursuant to
Options.
(6) Includes 137,153 shares that Ms. Cecka does not currently own, but which
she has the right to acquire within 60 days of August 31, 1998, pursuant
to Options.
(7) Includes 134,550 shares that Mr. Haddad does not currently own, but which
he has the right to acquire within 60 days of August 31, 1998, pursuant to
Options, and 55,842 shares associated with the indirect ownership of
convertible notes and warrants purchased in January 1998.
(8) Includes 20,625 shares that Mr. VanRyne does not currently own, but which
he has the right to acquire within 60 days of August 31, 1998, pursuant to
Options, and 55,842 shares associated with the indirect ownership of
convertible notes and warrants purchased in January 1998.
(9) Consists of 80,000 shares that Mr. Koenig does not currently own, but
which he has the right to acquire within 60 days of August 31, 1998,
pursuant to Options, and 27,921 shares associated with convertible notes
and warrants purchased in January 1998.
(10) Includes 31,666 shares that Dr. McFarland does not currently own, but
which he has the right to acquire within 60 days of August 31, 1998,
pursuant to Options.
(11) Includes 18,333 shares that Mr. Bowerman does not currently own, but which
he has the right to acquire within 60 days of August 31, 1998, pursuant to
Options.
(12) Includes 1,207,134 shares that such persons do not currently own, but
which they have the right to acquire within 60 days of August 31, 1998
pursuant to Options, and 211,632 shares associated with the ownership of
convertible notes and warrants purchased by such persons.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Offered
Shares by the Selling Securityholders.
34
<PAGE> 38
SELLING SECURITYHOLDERS
The Offered Shares were acquired by the Selling Securityholders through
warrant grants subsequent to October 1997 or in the 1998 Notes Placement. Absent
registration under the Securities Act, the Offered Shares are subject to certain
limitations on resale. The Registration Statement of which this Prospectus forms
a part has been filed in satisfaction of certain registration rights granted by
the Company to the Selling Securityholders.
Certain of the Selling Securityholders and M.J. Meehan & Co., are or are
affiliated with members of the National Association of Securities Dealers, Inc.
("NASD"). M.J. Meehan & Co. and its affiliates may engage in market-making
activities with respect to the Common Stock. M.J. Meehan & Co. and its
affiliates have engaged from time to time, and in the future may engage, in
purchase and sale transactions involving Common Stock, including transactions
with other NASD member firms. The Selling Securityholders, including M.J. Meehan
& Co., and any participating broker or dealer may be deemed to be "underwriters"
within the meaning of the Securities Act. Any commissions, discounts or
concessions and any gain realized by a person deemed to be an underwriter may be
deemed to be underwriting compensation to such person.
The following table assumes that each of the Selling Securityholders will
sell all of the Offered Shares set forth opposite such Selling Securityholder's
name. However, one or more of the Selling Securityholders may sell only a
portion or may sell none of the Offered Shares set forth opposite such Selling
Securityholder's name.
<TABLE>
<CAPTION>
COMMON SHARES NUMBER OF
BENEFICIALLY OWNED PRIOR SHARES COMMON SHARES BENEFICIALLY
TO THE OFFERING (1) HELD OF OWNED AFTER THE OFFERING (1)
RECORD TO
BE SOLD IN
NUMBER OF PERCENT THE NUMBER OF PERCENT
SHARES OF CLASS OFFERING SHARES OF CLASS
<S> <C> <C> <C> <C> <C>
The Haddad Family Trust 203,834 * 67,284 136,550 *
Joseph D. Koenig 113,642 * 33,642 80,000 *
Robert Gale Martin 677,840 1.9 677,840 --- *
David C. Brown 2,481,847 7.0 677,840 1,804,007 5.1
Cranshire Capital, LP 134,568 * 134,568 --- *
Donald R. Sanders, IRA, CIBC
Oppenheimer Corp. as Trustee 2,283,519 6.2 2,273,519 10,000 *
J.L. Gayton (Eyesight Associates
401k Plan) 167,284 * 67,284 100,000 *
Alan B. Aker 1,948,109 5.5 677,840 1,270,269 3.6
Regina Stancel 219,925 * 100,925 119,000 *
Salomon Melgen & Flor Melgen 1,783,697 5.0 672,840 1,110,857 3.1
</TABLE>
35
<PAGE> 39
<TABLE>
<CAPTION>
COMMON SHARES NUMBER OF
BENEFICIALLY OWNED PRIOR SHARES COMMON SHARES BENEFICIALLY
TO THE OFFERING (1) HELD OF OWNED AFTER THE OFFERING (1)
RECORD TO
BE SOLD IN
NUMBER OF PERCENT THE NUMBER OF PERCENT
SHARES OF CLASS OFFERING SHARES OF CLASS
<S> <C> <C> <C> <C> <C>
Susan Smith Longan Trustee UTD
7/21/97 FBO Susan Smith Longan
1997 Revocable Trust 220,000 * 220,000 --- *
M.J. Meehan & Co. LLC 375,296 1.1 100,925 274,371 *
Hank Asher 386,420 1.1 336,420 50,000 *
Manus C. Kraff 1,003,931 2.9 336,420 667,511 1.9
Pacific National Bank Custodian for
benefit of Richard T. VanRyne IRA 89,452 * 67,284 22,168 *
David A. Brewer 33,642 * 33,642 --- *
Hanabusa Investments, Inc. 33,642 * 33,642 --- *
Sandra C. Belmont 7,500 * 7,500 --- *
Paul H. Ernest 77,353 * 5,000 72,353 *
Donald G. Johnson 5,000 * 5,000 --- *
Douglas G. Koch 13,500 * 13,500 --- *
Thomas Kohnen 5,000 * 5,000 --- *
Peter J. McDonnell 5,000 * 5,000 --- *
Hugo Nano 5,000 * 5,000 --- *
Emanuel S. Rosen 5,000 * 5,000 --- *
Rogelio Villareal 5,000 * 5,000 --- *
George Griffin 240,000 * 240,000 --- *
</TABLE>
36
<PAGE> 40
PLAN OF DISTRIBUTION
Some or all of the Offered Shares may be offered for sale and sold from
time to time by the Selling Securityholders in the over-the-counter market (or
any national securities exchange or interdealer quotation system on which the
Common Stock may then be listed), or in privately negotiated transactions (which
may include block transactions) or otherwise. In addition, the Selling
Securityholders may engage in short sales and other transactions in the Common
Stock or derivatives thereof, and may pledge, sell, deliver or otherwise
transfer the Offered Shares in connection therewith. This Prospectus may be used
by the Selling Securityholders or by any broker-dealer who may participate in
sales of the Offered Shares. Participating broker-dealers may act as agents or
principals or both and may receive commissions, discounts or concessions in
connection with sales or other transfers of Offered Shares. The Company has not
entered into any agreements or arrangements relating to the sale of the Offered
Shares.
The Company has agreed to pay the expenses of registering the Offered
Shares on behalf of the Selling Securityholders, other than broker-dealer
commissions, discounts or concessions and any legal fees incurred by the Selling
Securityholders in connection with sales of the Offered Shares. The Company and
the Selling Securityholders have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1995 and for each of the two years in the period ended December 31, 1996,
appearing in this Prospectus and Registration Statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The consolidated balance sheet as of December 31, 1997 and the
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1997 included in this Prospectus have been included
herein in reliance on the report of PRICEWATERHOUSECOOPERS LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Offered Shares
will be passed upon for the Company by Holleb & Coff, Chicago, Illinois. Eric M.
Fogel, a partner with the law firm of Holleb & Coff, is presently the Secretary
of the Company and certain of such firm's partners own shares of Common Stock.
37
<PAGE> 41
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents heretofore filed by the Company with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act (File No.
0-17816) are hereby incorporated herein by reference: (i) current report on Form
8-K dated June 26, 1997 (filed July 11, 1997); (ii) amendment to the current
report on Form 8-K dated June 26, 1997 (filed August 13, 1997); (iii) annual
report on Form 10-K for the year ended December 31, 1997 (filed April 6, 1998);
and (iv) quarterly reports on Form 10-Q for the quarters ended March 31, 1998
(filed May 14, 1998) and June 30, 1998 (filed August 14, 1998).
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is incorporated or deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, UPON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY
OF ANY OR ALL OF THE FOREGOING DOCUMENTS INCORPORATED BY REFERENCE HEREIN (OTHER
THAN EXHIBITS TO ANY SUCH DOCUMENT UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO SUCH DOCUMENT). REQUESTS FOR SUCH COPIES SHOULD
BE DIRECTED TO THE SECRETARY OF SUNRISE, 47265 FREMONT BOULEVARD, FREMONT,
CALIFORNIA 94538; TELEPHONE (510) 623-9001.
38
<PAGE> 42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Coopers & Lybrand L.L.P.1, Independent Accountants..............................F-2
Report of Ernst & Young LLP, Former Independent Auditors..................................F-3
Consolidated Balance Sheets as of December 31, 1997
and 1996............................................................................F-4
Consolidated Statements of Operations for the Years
Ended December 31, 1997, 1996 and 1995..............................................F-5
Consolidated Statement of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995........................................F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995....................................................F-7
Notes to Consolidated Financial Statements................................................F-8
Schedule II Valuation and Qualifying Accounts.............................................F-21
Condensed Consolidated Statements of Operations --
Six Months ended June 30, 1998 and 1997 (unaudited).................................F-22
Condensed Consolidated Balance Sheets -- June 30, 1998
(unaudited) and December 31, 1997...................................................F-23
Condensed Consolidated Statements of Cash Flows --
Six Months ended June 30, 1998 (unaudited)..........................................F-24
Notes to Condensed Consolidated Financial Statements......................................F-25
</TABLE>
- ----------
1 Coopers & Lybrand L.L.P. is now known as PRICEWATERHOUSECOOPERS LLP.
F-1
<PAGE> 43
REPORT OF COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Sunrise Technologies International, Inc.:
We have audited the accompanying consolidated balance sheet of Sunrise
Technologies International, Inc. as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. We have also audited the financial statement schedule for
the year ended December 31, 1997. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit. The consolidated
financial statements of Sunrise Technologies International, Inc. for the years
ended December 31, 1996 and 1995, were audited by other auditors, whose report,
dated March 10, 1997, included an explanatory paragraph that described the
Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sunrise
Technologies International, Inc. and its subsidiaries as of December 31, 1997,
and the consolidated results of their operations and their cash flows for the
year then ended, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
March 6, 1998
F-2
<PAGE> 44
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
Palo Alto, California
March 10, 1997
F-3
<PAGE> 45
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
-------- --------
(in thousands,
except share data)
<S> <C> <C>
A S S E T S
Current assets:
Cash and cash equivalents..................................... $ 1,958 $ 647
Accounts receivable, net of allowance of $85 and $140
in 1997 and 1996 ............................................ 312 472
Inventories, net .............................................. 127 2,135
Prepaid and other expenses .................................... 140 288
-------- --------
Total current assets ................................................. 2,537 3,542
Property and equipment, net .......................................... 204 199
Other non-current assets ............................................. 208 --
-------- --------
Total assets.................................................. $ 2,949 $ 3,741
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................. $ 31 $ --
Accounts payable .............................................. 284 1,586
Accrued payroll and related expenses .......................... 221 209
Accrued warranty .............................................. 25 199
Other accrued expenses ........................................ 594 475
-------- --------
Total current liabilities ............................................ 1,155 2,469
Long term debt, net of current portion ............................... 945 --
-------- --------
Total liabilities ............................................. 2,100 2,469
-------- --------
Commitments and contingencies (Note 3)
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized,
none issued or outstanding .................................. -- --
Common stock, $0.001 par value; 75,000,000 shares authorized,
32,307,990 and 27,868,613 shares issued and outstanding
at December 31, 1997 and 1996, respectively ................. 32 28
Additional paid-in-capital .................................... 38,151 31,688
Deferred compensation ......................................... (272) --
Accumulated deficit ........................................... (37,062) (30,444)
-------- --------
Total stockholders' equity .................................. 849 1,272
-------- --------
Total liabilities and stockholders' equity................ $ 2,949 $ 3,741
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 46
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
------- ------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net revenues............................................. $ 2,839 $ 5,654 $ 5,294
Cost of revenues......................................... 2,546 4,016 3,657
------- ------- -------
Gross profit............................................. 293 1,638 1,637
------- ------- -------
Other costs and expenses:
Engineering and development........................ 964 1,326 1,218
Sales, marketing and regulatory.................... 2,718 3,632 2,277
General and administrative......................... 3,686 2,700 2,329
------- ------- -------
Total other costs and expense................. 7,368 7,658 5,824
------- ------- -------
Loss from operations..................................... (7,075) (6,020) (4,187)
Gain on sale of dental assets............................ 1,740 --- ---
Interest income (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.
F-5
<PAGE> 47
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN DEFERRED TREASURY ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION STOCK DEFICIT
---------- ------ ------- ------------ -------- -----------
(in thousands, except share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............ 10,459,286 $10 $22,312 $_____ $(619) (20,346)
Sale of common stock, net of offering
costs............................... 15,100,000 15 7,528 ----- --- ---
Cancellation of treasury stock........ (275,000) -- (619) ----- 619 ---
Other................................. (4,570) -- (25) ----- --- ---
Net loss.............................. --- -- -- ----- --- (4,130)
---------- --- ------- ----- ----- -------
Balance at December 31, 1995............ 25,297,716 25 29,196 ----- --- (24,476)
Sale of common stock, net of offering
costs............................... 2,333,412 3 2,242 ----- --- ---
Exercise of warrants and options...... 243,252 -- 243 ----- --- ---
Other................................. 12,233 -- 7 ----- --- ---
Net loss.............................. --- -- -- ----- --- (5,968)
---------- --- ------- ----- ----- -------
Balance at December 31, 1996............ 27,868,613 28 31,688 ----- --- (30,444)
Issuance of warrants and beneficial
conversion features in association
with 1997 Notes..................... -- 1,838 ----- --- ---
Conversion of 1997 Notes.............. 2,902,566 3 2,599 ----- --- ---
Exercise of warrants.................. 1,270,531 1 1,073 ----- --- ---
Exercise of options................... 247,913 -- 279 ----- --- ---
Sale of shares under Employee Stock
Purchase Plan....................... 18,367 -- 15 ----- --- ---
Deferred compensation related to
stock option grants................. --- -- 659 (659) --- ---
Amortization of deferred compensation. --- -- --- 387 --- ---
Net loss.............................. --- -- --- ----- --- (6,618)
---------- --- ------- ----- ----- ---------
Balance at December 31, 1997............ 32,307,990 $32 $38,151 $(272) $ --- $(37,062)
========== === ======= ===== ===== =========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
----------
(in thousands, except share amounts)
<S> <C>
Balance at December 31, 1994............ $ 1,357
Sale of common stock, net of offering
costs............................... 7,543
Cancellation of treasury stock........ ---
Other................................. (25)
Net loss.............................. (4,130)
-------
Balance at December 31, 1995............ 4,745
Sale of common stock, net of offering
costs............................... 2,245
Exercise of warrants and options...... 243
Other................................. 7
Net loss.............................. (5,968)
-------
Balance at December 31, 1996............ 1,272
Issuance of warrants and beneficial
conversion features in association
with 1997 Notes..................... 1,838
Conversion of 1997 Notes.............. 2,602
Exercise of warrants.................. 1,074
Exercise of options................... 279
Sale of shares under Employee Stock
Purchase Plan....................... 15
Deferred compensation related to
stock option grants................. ---
Amortization of deferred compensation. 387
Net loss.............................. (6,618)
-------
Balance at December 31, 1997............ $ 849
=======
</TABLE>
See accompanying notes.
F-6
<PAGE> 48
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 obligations . 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.
F-7
<PAGE> 49
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.
F-8
<PAGE> 50
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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.
F-9
<PAGE> 51
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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>
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) (1,655)
-------- --------
Property and equipment, net............................. $ 204 $ 199
======== ========
</TABLE>
F-10
<PAGE> 52
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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.
F-11
<PAGE> 53
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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>
F-12
<PAGE> 54
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities for 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Deferred tax assets: 1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards .. $ 11,100 $ 9,000
Research credits (expire 2005-2009) 700 600
Other ............................. 500 600
-------- --------
Total deferred tax asset .................. 12,300 10,200
Valuation allowance for deferred tax assets (12,300) (10,200)
-------- --------
Net deferred tax assets ................... $ -- $ --
======== ========
</TABLE>
As of December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $30,000,000 and $11,000,000, respectively.
The change in the Company's valuation allowance from 1996 to 1997 was an
increase of $2,100,000. The net operating loss and credit carryforwards will
expire at various dates through 2012 if not utilized.
The ownership change provisions of the Internal Revenue Code of 1986 and
similar state provisions would limit utilization of the carryforwards should
there be a substantial change in the Company's ownership. The annual limitation
may result in the expiration of net operating losses and credits before
utilization.
3. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain of its facilities and equipment under a
noncancellable operating lease. Rent expense was $233,000, $290,000 and $281,000
in 1997, 1996 and 1995, respectively.
The following is a schedule by year of future minimum lease payments at
December 31, 1997:
<TABLE>
<CAPTION>
Operating
Leases
(in thousands)
------------
<S> <C>
Year ending December 31,
1998......................................................... $147
1999......................................................... 155
2000......................................................... 162
2001......................................................... 14
----
Total minimum payments required...................................... $478
====
</TABLE>
F-13
<PAGE> 55
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 of a discount related to the warrants of
$772,000, interest of $155,000 on the 1997 Notes and capital lease obligations
of $94,000. Future payments of $32,000, $1,686,000 and $30,000 are due in fiscal
years 1998, 1999 and 2000, respectively.
Warrants
The Company has granted the note holders participating in the 1997 Notes
Placement warrants to purchase 2,538,328 shares of common stock. The warrants
are exercisable at a purchase price of $1.00 per share and expire in February
and March 2002. The warrants issued had a fair value of approximately $1.25 per
warrant, at the time of issuance. The fair value of these warrants has been
reflected as additional consideration for the 1997 Notes, recorded as a discount
on the debt and accreted as interest expense to be amortized over the life of
the 1997 Notes.
F-14
<PAGE> 56
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
F-15
<PAGE> 57
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
value of the common stock at the date of grant, except that options granted to
stockholders owning greater than 10 percent of the total voting power of all
classes of stock of the Company must have an exercise price of not less than 110
percent of the fair market value at the date of grant. Nonstatutory options must
be at least 85 percent of fair market value at the date of grant. Options
granted generally provide that 25 percent of the shares subject thereto become
exercisable one year after the date of grant and 1/36 of the remaining shares
subject to the option become exercisable each month thereafter. The 1988 Plan
expires in November 1998.
In 1997, the Company adopted the 1997 Stock Option Plan (the "1997
Plan") under which employees, directors and consultants may be granted incentive
or nonstatutory stock options. Under the 1997 Plan, incentive stock options must
be granted at an exercise price of not less than the fair market value of the
common stock at the date of grant, except that options granted to stockholders
owning greater than 10 percent of the total voting power of all classes of stock
of the Company must have an exercise price of not less than 110 percent of the
fair market value at the date of grant. Nonstatutory options must be at least 85
percent of fair market value at the date of grant. Options granted generally
provide that 1/48 of the shares subject to the option become exercisable each
month after the grant. The 1997 Plan expires in 2007.
The fair value of each option grant is estimated at the date of grant
using the Black-Scholes pricing model with the following weighted average
assumptions for grants in 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Risk-free interest................................. 6.15% 5.70%
Expected life...................................... 4.8 years 4.8 years
Volatility......................................... 95.5% 95.5%
Dividend yield..................................... -- --
</TABLE>
F-16
<PAGE> 58
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the Company's option activity as of December 31, 1997,
1996, and 1995 and changes during the year ending on those dates are as follows:
<TABLE>
<CAPTION>
Shares Outstanding Options Weighted Average
Available ---------------------------- ----------------
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.
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
$1.76-$3.75 8,000 8.3 $2.87 7,664 8.3 $2.87
$3.76-$4.75 1,564,300 9.7 $3.97 63,632 9.6 $3.89
--------- --- ----- --------- --- -----
4,360,455 7.9 $2.16 1,476,112 6.6 $1.18
========= === ===== ========= === =====
</TABLE>
F-17
<PAGE> 59
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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,
F-18
<PAGE> 60
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
respectively (the "Lares Note"). Although the Company anticipates collecting
interest and principal on the Lares Note, collection is not reasonably assured
due to the subordination of the Lares Note to Lares' bank and the Company
intends to recognize proceeds from the sale and interest on the note as cash is
received. The gain on sale of the Dental Assets is comprised as follows:
<TABLE>
<CAPTION>
in thousands
------------
<S> <C>
Cash proceeds from the sale of the dental assets................... $ 4,000
Less: Inventory and equipment sold................................. (1,498)
ADT transfer fee................................................. (275)
Transaction fees................................................. (237)
Other costs...................................................... (250)
-------
Gain on sale of dental assets.................................... $ 1,740
=======
</TABLE>
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)
<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>
F-19
<PAGE> 61
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
F-20
<PAGE> 62
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and at end
of Period Expenses Deductions Other of Period
--------- ---------- ---------- ----- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Reserves and allowances deducted
from assets accounts:
Allowance for uncollectible accounts $ 450 $ 25 $ (450) $ -- $ 25
Allowance for inventory $ 513 $ 250 $ (295) $ -- $ 468
Year ended December 31, 1996
Reserves and allowances deducted
from assets accounts:
Allowance for uncollectible accounts $ 25 $ 115 $ -- $ -- $ 140
Allowance for inventory $ 468 $ -- $ (118) $ -- $ 350
Year ended December 31, 1997
Reserves and allowances deducted
from assets accounts:
Allowance for uncollectible accounts $ 140 $ 176 $ (232) $ -- $ 84
Allowance for inventory $ 350 $ 397 $ (100) $ -- $ 647
Allowance for uncollectible notes -- $ 1,500 -- $ -- $ 1,500
</TABLE>
F-21
<PAGE> 63
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues ...................................... $ 222 $ 1,454 $ 324 $ 2,463
Cost of revenues .................................. 625 1,001 884 1,959
-------- -------- -------- --------
Gross profit ...................................... (403) 453 (560) 504
-------- -------- -------- --------
Other costs and expenses:
Engineering and development .................... 515 262 997 535
Sales, marketing and regulatory ................ 1,165 784 1,658 1,443
General and administrative ..................... 2,917 1,200 3,849 1,906
-------- -------- -------- --------
Total other costs and expenses .......... 4,597 2,246 6,504 3,884
-------- -------- -------- --------
Loss from operations .............................. (5,000) (1,793) (7,064) (3,380)
Gain on sale of dental assets ..................... -- 1,740 -- 1,740
Interest income ................................... 99 21 200 32
Interest expense .................................. (712) (131) (2,503) (943)
-------- -------- -------- --------
Net loss ................................ $ (5,613) $ (163) $ (9,367) $ (2,551)
======== ======== ======== ========
Net loss per share, basic and diluted ............. $ (0.17) $ (0.01) $ (0.28) $ (0.09)
======== ======== ======== ========
Shares used in calculation of basic and diluted net
loss per share .................................. 33,801 27,886 33,404 27,879
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-22
<PAGE> 64
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 8,448 $ 1,958
Accounts receivable, net ................................. 374 312
Inventories, net ......................................... 42 127
Other current assets ..................................... 259 140
-------- --------
Total current assets .................................. 9,123 2,537
Property and equipment, net .............................. 458 204
Other non-current assets ................................. 40 208
-------- --------
Total assets ..................................... $ 9,621 $ 2,949
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................ $ 34 $ 31
Accounts payable ......................................... 419 284
Deferred revenues ........................................ 160 --
Accrued payroll and related expenses ..................... 263 221
Accrued warranty and other expenses ...................... 702 619
-------- --------
Total current liabilities ............................. 1,578 1,155
Long-term debt, net of current portion ..................... 6,773 945
Other long-term liabilities ................................ 432 --
-------- --------
Total liabilities ..................................... 8,783 2,100
-------- --------
Stockholders' equity:
Preferred Stock, $0.001 par value, 2,000 shares
authorized, none issued or outstanding ................. -- --
Common Stock, $.001 par value, 75,000 shares
authorized, 34,137 and 32,308 shares issued and
outstanding at June 30, 1998 and December 31, 1997,
respectively ........................................... 34 32
Additional paid-in capital ............................... 47,470 38,151
Deferred compensation .................................... (237) (272)
Accumulated deficit ...................................... (46,429) (37,062)
-------- --------
Total stockholders' equity ............................ 838 849
-------- --------
Total liabilities and stockholders' equity $ 9,621 $ 2,949
======== ========
</TABLE>
See accompanying notes.
F-23
<PAGE> 65
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FOR OPERATING ACTIVITIES:
Net loss ............................................ $ (9,367) $ (2,551)
-------- --------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................... 75 94
Amortization of deferred compensation ............ 2,622 --
Amortization of debt issuance costs .............. 182 --
Gain on sale of dental assets .................... -- (1,740)
Warrant accretion and beneficial conversion
features associated with 1997 and 1998 Notes ... 1,950 863
Issuance of common stock for services ............ 150 --
Provision for doubtful accounts .................. -- 30
Changes in assets and liabilities:
Accounts receivable .............................. (62) (308)
Inventories ...................................... 85 202
Other current assets ............................. (119) 168
Accounts payable ................................. 135 (1,137)
Other accrued liabilities and deferred revenue ... 285 339
Other long-term liabilities ...................... 432 --
-------- --------
Total adjustments ..................................... 5,735 (1,489)
-------- --------
Net cash used in operating activities ................. (3,632) (4,040)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .................. (329) --
-------- --------
Net cash used in investing activities ............... (329) --
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on capital lease obligations ................ (13) --
Issuance of common stock, net of offering costs ..... 1,128 190
Issuance of redeemable convertible notes ............ 9,350 3,743
Proceeds from sale of dental assets ................. -- 4,000
Costs associated with sale of dental assets ......... -- (411)
Capitalization of debt issuance costs ............... (14) --
-------- --------
Net cash provided by financing activities ........... 10,451 7,522
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............. 6,490 3,482
Cash and cash equivalents at beginning of period ...... 1,958 647
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............ $ 8,448 $ 4,129
======== ========
</TABLE>
See accompanying notes.
F-24
<PAGE> 66
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
1. BASIS OF PRESENTATION
The Company develops, manufactures and markets laser systems for
applications in ophthalmology. Prior to June 26, 1997, the Company had also
developed, manufactured and marketed lasers and air abrasive cavity preparation
systems for use in dentistry. A substantial portion of the Company's revenues
(80% for the first six months of 1997) were derived from the domestic and
international sales of the Company's dental laser and air abrasive products.
The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries after elimination of all material
intercompany balances and transactions. Certain reclassifications have been made
to prior year amounts in order to conform to the current presentation.
The condensed consolidated financial data for the three and six-month
periods ended June 30, 1998 and 1997 are unaudited, but include all adjustments
(consisting only of normal recurring adjustments) that management of the Company
believes to be necessary for fair presentation of the financial position and
results of operations for the periods presented. Interim results are not
necessarily indicative of results for the full year. The financial statements
should be read in conjunction with the audited financial statements for the year
ended December 31, 1997 included in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
The preparation of unaudited financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. NET LOSS PER 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.
7,580,557 and 920,522 common equivalent shares as of June 30, 1998 and 1997,
respectively, have been excluded from the shares used to calculate diluted EPS
as their effect is anti-dilutive.
3. REVENUE RECOGNITION
Revenues are recognized at time of shipment, net of any allowances for
future obligations or trade-in rights. A provision for the estimated future
cost of warranty is made at the time a sale is recorded.
F-25
<PAGE> 67
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 1998
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consisted of the following on the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................ $ 265 $ 416
Work-in-process.......................... 123 167
Finished goods........................... 300 190
------ ------
688 773
Less reserves............................ (646) (646)
------ ------
Inventory, net........................... $ 42 $ 127
====== ======
</TABLE>
5. COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," effective
January 1, 1998. This statement requires the disclosure of comprehensive income
and its components in a full set of general purpose financial statements.
Comprehensive income is defined as net income plus revenues, expenses, gains and
losses that, under generally accepted accounting principles, are excluded from
net income. The Company does not have any components of comprehensive income
which are excluded from net income for the three and six months ended June 30,
1998 and 1997 and, as such, no separate statement of comprehensive income has
been presented.
6. ISSUANCE OF REDEEMABLE CONVERTIBLE NOTES
In January 1998, the Company completed an approximately $9,350,000
private placement of convertible notes (convertible into the Company's common
stock) with warrants. The promissory notes are convertible at any time, at the
option of the holder. The notes bear interest at a rate of 12%, payable-in-kind
semi-annually (additional convertible notes), and convert at a price of $3.00
per share. The notes have a maturity date of January 2001 and the Company has an
option to extend the maturity date of the notes for an additional two years for
additional warrant consideration. Warrants to purchase 1,870,000 shares of the
Company's common stock were issued as part of this private placement with an
exercise price of $3.00 per share and an expiration date of January 2003. The
warrants issued had a fair value of approximately $1.87 per warrant at the time
of issuance. The fair value of these warrants has been reflected as additional
consideration for the convertible notes, recorded as a discount on the debt and
accreted as interest expense to be amortized over the life of the convertible
notes.
F-26
<PAGE> 68
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 1998
7. SALE OF DENTAL ASSETS
In June 1997, the Company completed the sale of the Company's assets
associated with the Company's dental laser, air abrasive and composite curing
systems (the "Dental Assets") to Lares Research. The purchase price paid for the
Dental Assets was $5,500,000, consisting of $4,000,000 in cash paid at closing
and $1,500,000 in the form of a promissory note, with two installments due in
three and four years, respectively (the "Lares Note"). Although the Company
anticipates collecting interest and principal on the Lares Note, due to
subordination of the Lares Note to its Bank, collection is not reasonably
assured and the Company intends to recognize proceeds from the sale and interest
on the Lares Note as cash is received.
8. SUBSEQUENT EVENTS
On July 10, 1998, the Company had the annual shareholders meeting. At
such meeting, the Company's stockholders elected Dr. Michael S. McFarland and
Mr. Timothy A. Marcotte as Class II Directors of the Company and ratified the
appointment of PricewaterhouseCoopers LLP as the Company's independent auditors
for the year ending December 31, 1998.
On August 7, 1998, the Company's application for listing on the NASDAQ
National Market System ("NMS") was approved by the NASDAQ Stock Market, Inc. The
Company's shares of common stock, under the trading symbol SNRS, commenced
trading on the NASDAQ NMS on August 13, 1998.
F-27
<PAGE> 69
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made hereby, and if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Selling Securityholders. This Prospectus does not
constitute an offer to sell or the solicitation of any offer to buy any security
other than the shares of Common Stock offered by this Prospectus, nor does it
constitute an offer to sell or a solicitation of any offer to buy the shares of
Common Stock by anyone in any jurisdiction in which such offer or solicitation
is not authorized, or in which the person making such offer or solicitation is
not qualified to do so, or to any person to whom it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus, nor any sale
made hereunder shall, under any circumstances, create any implication that there
has not been a change in the facts set forth in this Prospectus or in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to the date hereof.
================================================================================
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information..................... 1
Disclosure Regarding......................
Forward-Looking...........................
Statements................................ 1
Prospectus Summary........................ 2
Risk Factors.............................. 4
Selected Financial .......................
Information............................... 10
Business.................................. 12
Management's Discussion and
Analysis of Financial Condition
and Results of Operation................ 20
Management................................ 32
Description of Capital....................
Stock..................................... 33
Share Ownership by Principal
Stockholders and Management............. 39
Use of Proceeds........................... 40
Selling Securityholders................... 41
Plan of Distribution...................... 45
Experts................................... 45
Legal Matters............................. 46
Incorporation of Certain Information
by Reference............................ 46
Index to Consolidated Financial
Statements.............................. F-1
</TABLE>
================================================================================
6,807,915 Shares
SUNRISE TECHNOLOGIES
INTERNATIONAL, INC.
Common Stock
----------
PROSPECTUS
----------
September ___, 1998
================================================================================
<PAGE> 70
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company and the Selling
Securityholders in connection with the sale of the Common Stock being
registered. All amounts are estimates except the registration fee.
Amount to be Paid
<TABLE>
<S> <C>
SEC Registration Fee..................................................... $ 6,808
Printing................................................................. 25,000
Legal Fees and Expenses.................................................. 75,000
Accounting Fees and Expenses............................................. 15,000
Blue Sky Fees and Expenses............................................... 15,000
Transfer Agent and Registrar Fees........................................ 5,000
Miscellaneous............................................................ 18,192
--------
Total............................................................... $160,000
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the General Corporation Law of the State of
Delaware (the "Delaware Law") grants corporations the right to limit or
eliminate the personal liability of their directors in certain circumstances in
accordance with provisions therein set forth. The Sunrise Certificate contains a
provision eliminating director liability to the Company and its stockholders for
monetary damages for breach of fiduciary duty as a director. The provision does
not, however, eliminate or limit the personal liability of a director: (i) for
any breach of such director's duty of loyalty to the Company or its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) under the Delaware
statutory provision making directors personally liable, for improper payment of
dividends or improper stock purchases or redemptions; or (iv) for any
transaction from which the director derived an improper personal benefit. This
provision offers persons who serve on the Company's Board protection against
awards of monetary damages resulting from breaches of their duty of care (except
as indicated above). As a result of this provision, the ability of the Company
or a stockholder thereof to successfully prosecute an action against a director
for a breach of his duty of care is limited. However, the provision does not
affect the availability of equitable remedies such as an injunction or
rescission based upon a director's breach of his duty of care. The Commission
has taken the position that the provision will have no effect on claims arising
under federal securities laws.
Section 145 of the Delaware Law grants corporations the right to
indemnify their directors, officers, employees and agents in accordance with the
provisions therein set forth. The Company's By-laws provide that the corporation
shall, subject to limited exceptions, indemnify its directors and executive
officers to the fullest extent not prohibited by the Delaware Law. The Company's
By-laws provide further that the Company shall have the power to indemnify its
other officers, employees and other agents as set forth in the Delaware Law.
Such indemnification rights include reimbursement for expenses incurred by such
director, executive officer, other officer, employee or agent in advance of the
final disposition of such proceeding in accordance with the applicable
provisions of the Delaware Law.
II-1
<PAGE> 71
The Company has entered into agreements with certain of its directors
and officers pursuant to which the Company has agreed to indemnify such
directors and officers to the fullest extent permitted under applicable law. In
addition, the Company has purchased insurance containing customary terms and
conditions as permitted by law on behalf of its directors and officers, which
may cover liabilities under the Securities Act of 1933, as amended (the
"Securities Act").
ITEM 16. EXHIBITS
Exhibit Description
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
4.1 Form of Rights Agreement, dated as of October 24, 1997, between
the Company and ChaseMellon Shareholder Services, L.L.C., as
rights agent(8)
4.2 Form of 12% Subordinated Pay-In-Kind Note Due 2001(9)
4.3 Form of Registration Rights Agreement(9)
5 OPINION RE LEGALITY
5.1 Opinion of Holleb & Coff as to the legality of the Offered Shares
being registered
10 MATERIAL CONTRACTS
10.1 Patent License Agreement between the Company and Patlex
Corporation dated January 1, 1990(3)
10.2 Agreement between the Company and the University of Miami,
Department of Ophthalmology, dated October 28, 1991(2)
10.3 Joint Development and Exclusive Manufacturing Agreement dated
April 17, 1993 between the Company and Danville Engineering,
Inc.(1)
10.4 Settlement Agreement between the Company and American Dental
Laser, Inc., dated February 4, 1993 (confidential treatment has
previously been granted for portions of this exhibit)(4)
10.5 License Agreement between the Company and American Dental Laser,
Inc., dated February 4, 1993 (confidential treatment has
previously been granted for portions of this exhibit)(4)
10.6 Settlement Agreement between the Company and American Dental
Technologies, dated July 30, 1996(6)
*10.7 Form of Indemnification Agreement between the Company and each of
its officers and directors(3)
II-2
<PAGE> 72
*10.8 1988 Stock Option Plan, as amended(5)
10.9 Form of U.S. Note and Warrant Purchase Agreement relating to the
Regulation D private placement of 5% convertible notes due 1999
and warrants in February and March 1997 (7)
10.10 Form of Offshore Note and Warrant Purchase Agreement relating to
the Regulation S private placement of 5% convertible notes due
1999 and warrants in March 1997(7)
10.11 Form of Change of Control Agreement by and between the Company
and its President and Chief Executive Officer(8)
10.12 Form of Change of Control Agreement by and between the Company
and its executive officers (other than the President and Chief
Executive Officer)(8)
10.13 Form of Indemnification Agreement by and between the Company and
its executive officers(8)
10.14 Form of U.S. Note and Warrant Purchase Agreement related to the
Regulation D private placement of 12% Convertible Subordinated
Pay-In-Kind Notes Due 2001 and accompanying Warrants in January
1998(9)
10.15 Form of Amended and Restated Change of Control Agreement by and
between the Company and its President and Chief Executive
Officer(11)
10.16 Form of Amended and Restated Change of Control Agreement by and
between the Company and its executive officers (other than the
President and Chief Executive Officer)(11)
10.17 Lease Agreement with Bayside Spinnaker Partners III, as lessor,
for the lease of facilities at 47265 Fremont Boulevard, Fremont,
California, dated January 23, 1998 (10)
10.18 Sublease between Avant! Corporation, as sub-sublandlord, the
Company, as sub-subtenant, Cirrus Logic, Inc., as sublandlord,
Avant! Corporation, as subtenant, Renco Investment Company, as
landlord, and Cirrus Logic, Inc., as tenant for the lease of
facilities at 3400 West Warren Avenue, Fremont, California
23 CONSENTS OF EXPERTS AND COUNSEL
23.1 Consent of PricewaterhouseCoopers L.L.P., Independent Accountants
23.2 Consent of Ernst & Young LLP, Former Independent Auditors
23.3 Consent of Holleb & Coff (included in Exhibit 5.1)
24 POWER OF ATTORNEY (INCLUDED ON THE SIGNATURE PAGE)
* Compensatory plan or management contract
II-3
<PAGE> 73
(1) Incorporated by reference from the registrant's Annual Report on Form
10-K for the year ended December 31, 1994 (File No. 0-17816)
(2) Incorporated by reference from the registrant's Annual Report on Form
10-K for the year ended December 31, 1991 (File No. 0-17816)
(3) Incorporated by reference from the registrant's Registration Statement
on Form S1, as amended (File No. 33-36768)
(4) Incorporated by reference from the registrant's Annual Report on Form
10-K for the year ended December 31, 1992 (File No. 0-17816)
(5) Incorporated by reference from the registrant's Registration Statement
on Form S18, as amended (File No. 33-27029-LA)
(6) Incorporated by reference from the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996 (File No. 0-17816)
(7) Incorporated by reference from the registrant's Current Report on Form
8-K dated March 12, 1997 (File No. 0-17816)
(8) Incorporated by reference from the registrant's Current Report on Form
8-K dated October 24, 1997 (File No. 0-17816)
(9) Incorporated by reference from the registrant's Current Report on Form
8-K dated January 26, 1998 (File No. 0-17816)
(10) Incorporated by reference from the registrant's Annual Report on Form
10-K for the year ended December 31, 1997 (File No. 0-17816)
(11) Incorporated by reference from the registrant's Current Report on Form
8-K dated May 8, 1998 (File No. 0-17816)
II-4
<PAGE> 74
ITEM 17. UNDERTAKINGS
PURSUANT TO ITEM 512(a) OF REGULATION S-K
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
PURSUANT TO ITEM 512(h) OF REGULATION S-K
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Fremont, state of California, on September 29, 1998.
Sunrise Technologies International, Inc.
By: /s/ C. Russell Trenary, III
-------------------------------------
C. Russell Trenary, III
President and Chief Executive Officer
II-6
<PAGE> 76
POWERS OF ATTORNEY
Each person whose signature appears below hereby appoints C. Russell Trenary
and Timothy A. Marcotte, and each of them severally, acting alone and without
the other, his true and lawful attorney-in-fact with authority to execute in the
name of each such person, and to file with the Securities and Exchange
Commission, together with any exhibits thereto and other documents therewith,
any and all amendments (including without limitation post-effective amendments)
to this registration statement, and to sign any registration statement for the
same offering covered by this registration statement that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act, necessary or
advisable to enable the registrant to comply with the Securities Act and any
rules, regulations and requirements of the Securities and Exchange Commission in
respect thereof, which amendments may make such changes in this registration
statement as the aforesaid attorney-in-fact deems appropriate.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
September 29, 1998 /s/ C. Russell Trenary, III
- ------------------ --------------------------------------
Date C. Russell Trenary, III
President, Chief Executive Officer and
Director
(Principal Executive Officer)
September 29, 1998 /s/ Timothy A. Marcotte
- ------------------ --------------------------------------
Date Timothy A. Marcotte
Chief Financial Officer (Principal
Financial Officer and
Principal Accounting Officer) and
Director
September 29, 1998 /s/ Joseph D. Koenig
- ------------------ --------------------------------------
Date Joseph D. Koenig
Chairman of the Board and Director
September 29, 1998 /s/ R. Dale Bowerman
- ------------------ --------------------------------------
Date R. Dale Bowerman
Director
September 29, 1998 /s/ Michael S. McFarland, M.D.
- ------------------ --------------------------------------
Date Michael S. McFarland, M.D.
Director
II-7
<PAGE> 77
EXHIBIT INDEX
Exhibit Description
------- -----------
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
4.1 Form of Rights Agreement, dated as of October 24, 1997, between
the Company and ChaseMellon Shareholder Services, L.L.C., as
rights agent(8)
4.2 Form of 12% Subordinated Pay-In-Kind Note Due 2001(9)
4.3 Form of Registration Rights Agreement(9)
5 OPINION RE LEGALITY
5.1 Opinion of Holleb & Coff as to the legality of the Offered Shares
being registered
10 MATERIAL CONTRACTS
10.1 Patent License Agreement between the Company and Patlex
Corporation dated January 1, 1990(3)
10.2 Agreement between the Company and the University of Miami,
Department of Ophthalmology, dated October 28, 1991(2)
10.3 Joint Development and Exclusive Manufacturing Agreement dated
April 17, 1993 between the Company and Danville Engineering,
Inc.(1)
10.4 Settlement Agreement between the Company and American Dental
Laser, Inc., dated February 4, 1993 (confidential treatment has
previously been granted for portions of this exhibit)(4)
10.5 License Agreement between the Company and American Dental Laser,
Inc., dated February 4, 1993 (confidential treatment has
previously been granted for portions of this exhibit)(4)
10.6 Settlement Agreement between the Company and American Dental
Technologies, dated July 30, 1996(6)
*10.7 Form of Indemnification Agreement between the Company and each of
its officers and directors(3)
*10.8 1988 Stock Option Plan, as amended(5)
10.9 Form of U.S. Note and Warrant Purchase Agreement relating to the
Regulation D private placement of 5% convertible notes due 1999
and warrants in February and March 1997 (7)
10.10 Form of Offshore Note and Warrant Purchase Agreement relating to
the Regulation S private placement of 5% convertible notes due
1999 and warrants in March 1997(7)
10.11 Form of Change of Control Agreement by and between the Company
and its President and Chief Executive Officer(8)
10.12 Form of Change of Control Agreement by and between the Company
and its executive officers (other than the President and Chief
Executive Officer)(8)
10.13 Form of Indemnification Agreement by and between the Company and
its executive officers(8)
10.14 Form of U.S. Note and Warrant Purchase Agreement related to the
Regulation D private placement of 12% Convertible Subordinated
Pay-In-Kind Notes Due 2001 and accompanying Warrants in January
1998(9)
10.15 Form of Amended and Restated Change of Control Agreement by and
between the Company and its President and Chief Executive
Officer(11)
10.16 Form of Amended and Restated Change of Control Agreement by and
between the Company and its executive officers (other than the
President and Chief Executive Officer)(11)
10.17 Lease Agreement with Bayside Spinnaker Partners III, as lessor,
for the lease of facilities at 47265 Fremont Boulevard, Fremont,
California, dated January 23, 1998 (10)
10.18 Sublease between Avant! Corporation, as sub-sublandlord, the
Company, as sub-subtenant, Cirrus Logic, Inc., as sublandlord,
Avant! Corporation, as subtenant, Renco Investment Company, as
landlord, and Cirrus Logic, Inc., as tenant for the lease of
facilities at 3400 West Warren Avenue, Fremont, California
23 CONSENTS OF EXPERTS AND COUNSEL
23.1 Consent of PricewaterhouseCoopers L.L.P., Independent Accountants
23.2 Consent of Ernst & Young LLP, Former Independent Auditors
23.3 Consent of Holleb & Coff (included in Exhibit 5.1)
24 POWER OF ATTORNEY (INCLUDED ON THE SIGNATURE PAGE)
* 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 Quarterly Report on Form
10-Q for the quarter ended September 30, 1996 (File No. 0-17816)
(7) Incorporated by reference from the registrant's Current Report on Form
8-K dated March 12, 1997 (File No. 0-17816)
(8) Incorporated by reference from the registrant's Current Report on Form
8-K dated October 24, 1997 (File No. 0-17816)
(9) Incorporated by reference from the registrant's Current Report on Form
8-K dated January 26, 1998 (File No. 0-17816)
(10) Incorporated by reference from the registrant's Annual Report on Form
10-K for the year ended December 31, 1997 (File No. 0-17816)
(11) Incorporated by reference from the registrant's Current Report on Form
8-K dated May 8, 1998 (File No. 0-17816)
<PAGE> 1
EXHIBIT 5.1
[HOLLEB & COFF LETTERHEAD]
OPINION OF HOLLEB & COFF
September 28, 1998
Sunrise Technologies International, Inc.
47265 Fremont Blvd.
Fremont, California 94538
Ladies and Gentlemen:
We have acted as special counsel for Sunrise Technologies International,
Inc., a Delaware corporation (the "Company"), in connection with the Company's
Registration Statement on Form S-2, as amended (the "Registration Statement")
being filed by the Company under the Securities Act of 1933, as amended, with
respect to 6,807,914 shares (the "Shares") of the Company's common stock, par
value $.001 per share (the "Common Stock"), which may be disposed of from time
to time by the selling securityholders (the "Selling Securityholders") named
therein.
In connection with the preparation of the Registration Statement and this
letter, we have examined, considered and relied solely upon the following
documents (collectively, the "Documents"): the Registration Statement; the
Company's Amended and Restated Certificate of Incorporation as filed with the
Secretary of State of the State of Delaware; Bylaws; a Certificate of Good
Standing of the Company issued on September 21, 1998 by the Secretary of State
of the State of Delaware; the forms of U.S. Note and Warrant Purchase Agreements
between certain of the Selling Securityholders and the Company (collectively,
the "1998 Warrant Agreement"); certain minutes of the meetings of the Company's
Board of Directors; a certificate of the Company's president; and such matters
of law as we have considered necessary or appropriate for the expression of the
opinions contained herein.
In rendering the opinions set forth below, we have assumed without
investigation the genuineness of all signatures and the authenticity of all
documents submitted to us as originals, the conformity to authentic original
documents of all documents submitted to us as copies, and the veracity of the
Documents. As to questions of fact material to the opinions hereinafter
<PAGE> 2
HOLLEB & COFF
ATTORNEYS AT LAW
Sunrise Technologies International, Inc.
September 28, 1998
Page 2
expressed, we have relied upon the representations and warranties of the Company
made in the Documents. We would call your attention to the fact that Eric M.
Fogel, a partner of this law firm, also acts as the Secretary of the Company and
certain of our firm's partners own shares of the Company's Common Stock.
Based solely upon and subject to the Documents, and subject to the
qualification set forth below, we are of the opinion that the Shares have been
duly authorized and when the Shares have been duly delivered against payment
therefor, as contemplated in the 1998 Warrant Agreement, the Shares will be
validly issued, fully paid and nonassessable.
Although we have acted as counsel to the Company in connection with certain
other matters, our engagement is limited only to matters which have been
specifically referred to us. Consequently, there may exist matters of a legal
nature involving the Company in connection with which we have not been consulted
and have not represented the Company. This opinion letter is limited to the
matters stated herein and no opinions may be implied or inferred beyond the
matters expressly stated herein. The opinions expressed herein are as of the
date hereof, and we assume no obligation to update or supplement such opinions
to reflect any facts or circumstances that may hereafter come to our attention
or any changes in law that may hereafter occur.
This opinion is solely for the information of the addressee hereof, and is
not to be quoted in whole or in part or otherwise referred to, nor is it to be
filed with any governmental agency or other person without a prior written
consent. Other than the addressee and ChaseMellon Shareholder Services, L.P., no
one is entitled to rely on this opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the prospectus contained in the Registration Statement.
Very truly yours,
/s/ Holleb & Coff
HOLLEB & COFF
/ks
<PAGE> 1
EXHIBIT 10.18
1 BASIC SUB-SUBLEASE TERMS
Base Monthly
Rent: Months Base Monthly Rent
1-12 $72,600 ($1.32 per square foot)
Base Monthly Rent for each one (1)- year period following the
first such period shall be increased by an amount equal to four
percent (4%) of the Base Monthly Rent in the immediately
preceding one (1)-year period. See Paragraphs 4 and 5.
Brokers: Sub-Sublandlord's
Broker: CB Richard Ellis, Inc.
Sub-Subtenant's
Broker: CB Richard Ellis, Inc.
Commencement
Date: August 15, 1998
Rent Commencement
Date: See Paragraph 4.A
Expiration
Date: April 7, 2004
Landlord: Renco Investment Company
Sublandlord: Cirrus Logic, Inc.
Master
Lease: That certain Lease dated March 29, 1995 between Landlord, as
landlord, and Sublandlord, as tenant, as amended by that certain
First Amendment to Lease dated for reference purposes as of
October 3, 1995.
Master
Sublease: That certain Sublease executed on October 8, 1997 between
Sublandlord, as sublandlord, and Sub-Sublandlord, as subtenant.
Subleased
Premises: A portion of that certain building consisting of approximately
55,000 square feet located at 3400 West Warren Avenue, Fremont,
California. See Recitals A and B and Paragraph 1.
Security
Deposit: Two Hundred Seventeen Thousand Eight Hundred Dollars ($217,800)
<PAGE> 2
Sub-
Subtenant: Sunrise Technologies International, Inc., a Delaware corporation
Sub-Subtenant's
Address
for Notices: Prior to Commencement:
47265 Fremont Blvd.
Fremont, CA 94538
After Commencement:
3400 West Warren Avenue
Fremont, CA 94538
Attn: Chief Financial Officer
or to such other address as Sub-Subtenant shall designate.
Sub-
Sublandlord: Avant! Corporation, a Delaware corporation
Sub-Sublandlord's
Address
for Notices: 46871 Bayside Parkway
Fremont, CA 94538
Attn: General Counsel and Chief Financial Officer
with copies (of default notices only) to:
Robert Gunderson, Esq.
Gunderson, Dettmer & Stough
155 Constitution Avenue
Menlo Park, CA 94025
or to such other address as Sub-Sublandlord shall designate
Exhibits: Exhibit A - Master Lease
Exhibit B - Master Sublease
Exhibit C - Lab and Shipping Area
2
<PAGE> 3
SUBLEASE
This Sublease ("Sublease") is made on July 30, 1998, between Avant!
Corporation, a Delaware corporation ("Sub-Sublandlord"), whose address is 46871
Bayside Parkway, Fremont, California 94538 and , Sunrise Technologies
International, Inc., a Delaware corporation ("Sub-Subtenant"), whose address is
47265 Fremont Blvd., CA 94538, as a Sublease under that certain master sublease
executed on October 8, 1997 ("Master Sublease") entered into by Cirrus Logic,
Inc., a California corporation, as sublandlord, and Avant! Corporation, a
Delaware corporation, as subtenant, and that certain master lease dated March
29, 1995, entered into by Renco Investment Company, a California general
partnership, as landlord ("Landlord"),and Cirrus Logic, Inc., a California
corporation, as tenant, as amended by the First Amendment to Lease dated for
reference purposes as of October 3, 1995, (collectively the "Master Lease"), a
copy of which Master Lease and Master Sublease are attached hereto as Exhibit A
and Exhibit B, respectively.
R E C I T A L S
A. Pursuant to the Master Sublease, Sub-Sublandlord subleases from
Sublandlord a portion of that certain building located at 3400 West Warren
Avenue, City of Fremont, State of California, comprised of approximately 55,000
rentable square feet as outlined in red on Exhibit A to the Master Lease (the
"Subleased Premises").
B. Sub-Subtenant desires to sublease from Sub-Sublandlord, and
Sub-Sublandlord desires to sublease to Sub-Subtenant, the entire Subleased
Premises, together with certain appurtenances thereto, consisting of
approximately fifty five thousand (55,000) rentable square, it being agreed for
purposes of this Sublease that the Subleased Premises contain such number of
rentable square feet.
A G R E E M E N T
NOW, THEREFORE, the parties hereto, in consideration of the foregoing and of
the mutual promises contained herein and for other good and valuable
consideration, agree as follows:
1. Subleased Premises. Sub-Sublandlord hereby leases to Sub-Subtenant and
Sub-Subtenant hereby leases from Sub-Sublandlord the Subleased Premises as set
forth in more detail in Section 2.1 of the Master Lease, which Section 2.1 is
incorporated into this Sublease. Any defined terms used herein shall have the
meaning ascribed to them in the Master Lease and the Master Sublease unless
specifically defined herein. Notwithstanding anything herein to the contrary,
the Subleased Premises shall be reduced by the areas shown on Exhibit C (the
"Lab Area" and the "Shipping Area"). Sub-Sublandlord shall have the right to
continue to occupy the Lab Area from the Commencement Date until the earlier of
(a) the date Sub-Sublandlord vacates the Lab Area or (b) April 1, 1999. Sub-
Sublandlord shall have the right to continue to occupy one-half of the Shipping
Area until the earlier
3
<PAGE> 4
of (a) the date Sub-Sublandlord vacates the Shipping Area or (b)April 1, 1999,
which date shall be extended day for day by each day that Sub-Sublandlord is
delayed in relocating its shipping function to __________Bayside Parkway,
Fremont for reasons beyond Sub-Sublandlord's reasonable control. In no event
shall Sub-Sublandlord be responsible for the payment of Rent or Additional Rent
for the Lab Area or the Shipping Area to Sub-Subtenant.
Until such time as Sub-Sublandlord has permanently vacated the Shipping
Area, Sub-Sublandlord shall procure, pay for and keep in full force and effect,
commercial general liability insurance insuring Sub-Sublandlord against
liability for personal injury,bodily injury, death and damage to property
occurring within the Subleased Premises, or resulting from Sub-Sublandlord's use
or occupancy of the Subleased Premises, or resulting from Sub-Sublandlord's
activities in or about the Subleased Premises with combined single limit
coverage of $1,000,000.00, which insurance shall (i) contain a "broad form
liability" endorsement insuring Sub-Sublandlord's obligation to indemnify Sub-
Subtenant as hereinafter set forth, and (ii) name Sub-Subtenant as an additional
insured thereunder.
Until such time as Sub-Sublandlord has permanently vacated the Lab Area and
the Shipping Area, Sub-Sublandlord shall defend with competent counsel
reasonably satisfactory to Sub-Subtenant any claims made or legal actions filed
or threatened against Sub-Subtenant with respect to the violation of any law, or
the death, bodily injury, personal injury, property damage, or interference with
contractual or property rights suffered by any third party occurring within the
Subleased Premises as a result of Sub-Sublandlord's use or occupancy of the Lab
Area and/or the Shipping Area, and Sub-Sublandlord shall indemnify and
hold Sub-Subtenant, its principals, employees, agents and contractors harmless
from any loss, liability, penalties, or expense whatsoever resulting from Sub-
Sublandlord's use or occupancy of the Lab Area and/or Shipping Area.
Notwithstanding anything to the contrary contained herein, (i) until such
time as Sub-Sublandlord has vacated the Shipping Area, the Base Monthly Rent
shall be reduced by an amount equal to $217.80 ($1.32 per square foot times 165
square feet), and (ii) until such time as Sub-Sublandlord has vacated the Lab
Area, the Base Monthly Rent shall be reduced by an amount equal $1,029.60 ($1.32
per square foot times 780 square feet).
2. Term. The term ("Term") of this Sublease shall commence on the
Commencement Date. Sub-Sublandlord shall deliver possession of the Subleased
Premises to Sub-Subtenant on the Commencement Date, subject to obtaining
Landlord's and Sublandlord's consent as set forth in Paragraph 15 below, and
this Sublease shall terminate on the earliest to occur of (a) April 7, 2004 (the
"Expiration Date"), (b) the date this Sublease is sooner terminated pursuant to
its terms, or (c) the date the Master Lease or Master Sublease are sooner
terminated pursuant to their terms.
3. Delivery and Acceptance. If on or before October 31, 1998,
Sub-Sublandlord is unable to (i) deliver possession of the Subleased Premises to
Sub-Subtenant for any reason whatsoever, or (ii) deliver written evidence of
Landlord's and Sublandlord's consent as set forth in Paragraph 16 below, then as
Sub-subtenant's sole and exclusive remedy, Sub-Subtenant may terminate this
Sublease by written notice to Sub-Sublandlord at any time thereafter until such
possession is delivered, whereupon any monies previously paid by Sub-subtenant
to Sub-Sublandlord shall be reimbursed to Sub- Subtenant and the parties shall
have no further obligation to each other. By taking possession of the Subleased
Premises, Sub-Subtenant conclusively shall be deemed to have accepted the
Subleased
4
<PAGE> 5
Premises in their AS-IS, then-existing condition, without any warranty
whatsoever of Sub-Sublandlord with respect thereto.
4. Rent.
A. Rent Commencement Date. The rent commencement date ("Rent
Commencement Date") shall be the later of (i) September 1, 1998, or (ii) two (2)
weeks following the date of delivery of the Subleased Premises in accordance
with the terms hereof. Sub-Subtenant shall have no obligation to pay Rent
(defined below) for the period between the Commencement Date and the Rent
Commencement Date, although all other terms and conditions of this Sublease
shall be in full force and effect.
B. Base Monthly Rent. Commencing on the Rent Commencement Date,
Sub-Subtenant shall pay to Sub-Sublandlord as base monthly rent ("Base Monthly
Rent") for the Subleased Premises, in monthly installments in advance on or
before the first day of each full calendar month of the Term the amounts
specified in Paragraph 5.A below. Base Monthly Rent for any partial month shall
be payable in advance and shall be prorated based on the actual number of days
during the Sublease Term occurring in such month divided by the total number of
days in such month.
C. First Month's Rent. Notwithstanding Paragraphs 4.A and 4.B hereof, on
the date on which Sub-Subtenant executes this Sublease, Sub-Subtenant shall pay
to Sub-Sublandlord the amount of $72,600, which amount shall be applied against
the Base Monthly Rent for the first full calendar month for which Base Monthly
Rent is due hereunder.
D. Additional Rent. In addition to the above Base Monthly Rent,
commencing on the Rent Commencement Date, Sub-Subtenant shall pay to
Sub-Sublandlord as additional rent ("Additional Rent"), in monthly installments
in advance on or before the first day of each full calendar month of the Term
all amounts payable by Sub-Sublandlord pursuant to Paragraph 4.D. of the Master
Sublease, payable with respect to the time period commencing with the Rent
Commencement Date. Additional Rent for any partial month shall be payable in
advance and shall be prorated based on the actual number of days during the
Sublease Term occurring in such month divided by the total number of days in
such month. The provisions of Sections 3.2 and 3.3 of the Master Lease shall
apply to the payment of Additional Rent, except that the timing of such payments
and the periods for which such payments are due shall be as set forth above in
this Paragraph 4.D. Notwithstanding the foregoing, in the event that Landlord
elects to bill Sublandlord for Additional Rent monthly, as provided in Section
3.2(A)(1) of the Master Lease, and Sublandlord in turn bills Subtenant in the
same manner, then Sub-Subtenant shall pay Sub-Sublandlord the amount set forth
in such bill within seven (7) days after Sub-Subtenant's receipt thereof.
E. Manner and Place of Payment. Base Monthly Rent and Additional Rent
(collectively, "Rent") shall be payable without notice or demand and without any
deduction, offset, or abatement, in lawful money of the United States of
America. Sub-Subtenant shall pay Rent directly to Sub- Sublandlord at the
address set forth in the first paragraph of this Sublease, or such other address
as Sub-Sublandlord may designate in writing from time to time.
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5. Schedule of Base Monthly Rent Payments.
A. The Base Monthly Rent provided for in Paragraph 4.B shall be adjusted
periodically and the Base Monthly Rent for each period shall be as set forth
below:
Sublease Months 1-12: $72,600 per month
Sublease Months 13 through Expiration Date:
Sublease Months 13-24: $75,504 per month
Sublease Months 25-36: $78,524 per month
Sublease Months 37-48: $81,665 per month
Sublease Months 49-60: $84,932 per month
Sublease Months 61-Expiration Date: $88,329 per month
During the Term, the Base Monthly Rent shall be adjusted on each annual
anniversary of the Rent Commencement Date (individually, "Rent Adjustment Date"
and collectively, "Rent Adjustment Dates") by making the Rent Adjustment as
defined in Paragraph 5.B below, and Sub-Subtenant shall thereafter pay the
increased amount of Base Monthly Rent as adjusted until the date next specified
as a Rent Adjustment Date.
B. Rent Adjustment. The term, Rent Adjustment as used in this Sublease,
shall mean to increase the amount of Base Monthly Rent as of the applicable Rent
Adjustment Date to the amount determined by multiplying the amount of the Base
Monthly Rent for the Sublease month immediately preceding the Rent Adjustment
Date in question by One Hundred Four Percent (104%).
6. Security Deposit. Upon execution hereof, Sub-Subtenant shall deposit with
Sub-Sublandlord the sum of Two Hundred Seventeen Thousand Eight Hundred Dollars
($217,800) (the "Security Deposit"), in cash, as security for the performance by
Sub-Subtenant of the terms and conditions of this Sublease. The terms and
conditions of Section 3.7 of the Master Lease shall apply to the Security
Deposit except that the amount is that specified in this Paragraph 6.
7. Other Sublease Terms.
A. Incorporation By Reference. Except as otherwise provided in this
Sublease, the terms, provisions and conditions contained in the Master Lease are
incorporated herein by reference, and are made a part hereof as if set forth at
length; provided, however, that: (i) each reference in such incorporated
sections to "Lease" shall be deemed a reference to "Sublease"; (ii) each
reference to the "Premises" shall be deemed a reference to the "Subleased
Premises" as defined herein; (iii) each reference to "Landlord" and "Tenant"
shall be deemed a reference to "Sub-Sublandlord" and "Sub-Subtenant",
respectively; (iv) with respect to work, services, repairs, restoration,
insurance or the
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performance of any other obligation of Landlord under the Master Lease, the sole
obligation of Sub-Sublandlord shall be to request the same in writing from
Sublandlord as and when requested to do so by Sub-Subtenant, and to use
Sub-Sublandlord's reasonable good faith efforts (provided Sub-Subtenant pays
all reasonable third party out-of-pocket costs incurred by Sub-Sublandlord in
connection therewith, provided that Sub-Sublandlord has notified Sub-Subtenant
in advance that Sub-Sublandlord anticipates incurring such costs and
Sub-Subtenant has given its approval and further providing that Sub-Sublandlord
shall be relieved of its obligation if Sub-Subtenant refuses to approve
reasonable third party out-of-pocket expenses) to obtain Sub-landlord's
performance; (v) with respect to any obligation of Sub-Sublandlord to be
performed under this Sublease, wherever the Master Sublease grants to
Sub-Sublandlord a specified number of days to perform its obligations under the
Master Sublease, except as otherwise provided herein,Sub-Subtenant shall have
one (1) fewer day than Sub-Subtenant would otherwise have to perform the
obligation, including, without limitation, curing any defaults; (vi) except as
set forth in Paragraph 7(A)(iv) above, Sub-Sublandlord shall have no liability
to Sub-Subtenant with respect to (a) representations and warranties made by
Landlord under the Master Lease or Sublandlord under the Master Sublease, (b)
any indemnification obligations of Landlord under the Master Lease or
Sublandlord under the Master Sublease or other obligations or liabilities of
Landlord or Sublandlord with respect to compliance with laws, condition of the
Subleased Premises or Hazardous Materials, and (c) Landlord's or Sublandlord's
repair, maintenance, restoration, upkeep, insurance and similar obligations
under the Master Lease or Master Sublease , regardless of whether the
incorporation of one or more provisions of the Master Lease or Master Sublease
into this Sublease might otherwise operate to make Sub-Sublandlord liable
therefor;(vii) with respect to any approval or consent required to be obtained
from the "Landlord" under the Master Lease or Sublandlord under the Master
Sublease, such approval or consent must be obtained from both Landlord,
Sublandlord, and Sub-Sublandlord and the approval of Sub-Sublandlord may be
withheld if Landlord's or Sublandlord's approval or consent is not obtained; and
(viii) the following provisions of the Master Lease are expressly not
incorporated herein by reference: Section 1.1 (except for L, M, O, P, Q, R and
T), Sections 2.3, 2.4, 2.7, 13.12.D, 15, 18, Exhibit "C", Exhibit "D", and all
of the First Amendment to Lease except Paragraph 1.1G, and the Second Amendment
to Lease.
The following provisions of the Master Lease (as well as certain other
provisions specifically identified elsewhere herein), while incorporated herein,
are modified as expressly noted: All obligations of "Landlord" in Article 5,
Section 9.2, Article 10 and Article 11 shall remain the obligations of Landlord
and shall not be deemed to have become the obligations of Sublandlord or
Sub-Sublandlord notwithstanding the incorporation of such provisions into this
Sublease or the Master Sublease. The references to Article 1 in Sections 13.10
and 14.2 shall be deemed to be to the Basic Sublease Terms portion of this
Sublease. References to "Landlord" in the definitions of "Real Property Taxes",
"Landlord's Insurance Costs", "Property Maintenance Costs", and "Property
Operating Expenses" shall be deemed to refer to Landlord only and not to
Sublandlord or Sub-Sublandlord.
B. Assumption of Obligations. This Sublease is and at all times shall be
subject and subordinate to the Master Lease and the rights of Landlord
thereunder and to the Master Sublease and the rights of Sublandlord thereunder.
Sub-Subtenant, Sub-Sublandlord and Sublandlord shall not commit or permit to be
committed on the Subleased Premises any act or omission which shall violate any
term or condition of the Master Lease or the Master Sublease. Sub-Subtenant
hereby
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<PAGE> 8
expressly assumes and agrees: (i) to comply with all provisions of the Master
Lease and the Master Sublease which are assumed by Sub-Subtenant hereunder; and
(ii) to perform all the obligations on the part of the "Tenant" to be performed
under the terms of the Master Lease and on the part of the "Subtenant" under the
terms of the Master Sublease during the term of this Sublease which are assumed
by Sub-Subtenant hereunder. Sub-Subtenant shall not commit or permit to be
committed on the Subleased Premises any act or omission which shall violate any
term or condition of the Master Lease or the Master Sublease. In the event of
termination of Sublandlord's interest as "Tenant" under the Master Lease, or of
Sub-Sublandlord's interest as "Subtenant" under the Master Sublease, for any
reason other than Sub-Sublandlord's default under the Master Sublease, which is
not attributable to Sub-Subtenant's default under this Sublease, this Sublease
shall terminate simultaneously with such termination of Sublandlord's or
Sub-Sublandlord's interest without any liability of Sub-Sublandlord to
Sub-Subtenant. In the event of a conflict between the provisions of this
Sublease and the Master Lease, as between Sublandlord and Subtenant, and of this
Sublease, as between Sub-Sublandlord and Sub-Subtenant, the provisions of this
Sublease shall control.
8. Condition of the Subleased Premises. Except specifically for
Sub-Sublandlord's agreement to (a) deliver possession of the Sublease Premises
in broom clean condition and (b) reasonably repair all damage sustained by the
removal of Sub-Sublandlord's trade fixtures and personal property, Sub-
Subtenant is subleasing the Subleased Premises on an "as-is" basis, and
Sub-Sublandlord has made no representations or warranties, express or implied,
with respect to the condition of the Subleased Premises as of the Commencement
Date. Sub-Sublandlord shall have no obligation whatsoever to make or pay the
cost of any alterations, improvements or repairs to the Subleased Premises,
including, without limitation, any improvement or repair required to comply with
any law, regulation, building code or ordinance (including the Americans with
Disabilities Act of 1990). Sub-Sublandlord shall have no obligation to perform
any of the repairs required to be performed by Landlord under the terms of the
Master Lease.
9. Effect of Conveyance. As used in this Sublease, the term
"Sub-Sublandlord" means the holder of the "Subtenant's" interest under the
Master Sublease. In the event of any assignment or transfer of the "Subtenant's"
interest under the Master Sublease, which assignment or transfer may occur at
any time during the Term hereof, as between Sub-Sublandlord and Sub-Subtenant,
Sub- Sublandlord shall be and hereby is entirely relieved of all covenants and
obligations of Sub- Sublandlord hereunder accruing after the date of such
assignment or transfer, provided such transferee has assumed all covenants and
obligations thereafter to be performed by Sub-Sublandlord hereunder.
Sub-Sublandlord may transfer and deliver any security of Sub-Subtenant to the
transferee of the "Subtenant's" interest under the Master Sublease, and
thereupon Sub-Sublandlord shall be discharged from any further liability with
respect thereto.
10. Signage. Notwithstanding anything to the contrary set forth in this
Sublease, subject to the approval of Landlord, Sub-Subtenant shall have the
right, at Sub-Subtenant's sole cost, to display its corporate logo in one or
more places on the exterior of the Subleased Premises, including, but not
limited to the monument sign presently located on the parcel of real property
upon which the Subleased Premises are located. Sub-Subtenant shall own such
signage (and all rights incidental to such ownership) and shall have the right
to remove such signage at the expiration or sooner termination of this Sublease.
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<PAGE> 9
11. Broker. Sub-Sublandlord and Sub-Subtenant each represent to the other
that they have dealt with no real estate brokers, finders, agents or salesmen
other than those identified in the Basic Sublease Terms hereof. Each party
agrees to hold the other party harmless from and against all claims for
brokerage commissions, finder's fees or other compensation made by any other
agent, broker, salesman or finder as a consequence of said party's actions or
dealings with such agent, broker, salesman, or finder. Sub-Sublandlord shall pay
the brokerage commission due and payable to CB Richard Ellis, Inc. concerning
this Sublease in accordance with CB Richard Ellis, Inc.'s Standard Schedule of
Commissions.
12. Representations. Sub-Sublandlord represents and warrants to
Sub-Subtenant that, (i) to the best of Sub-Sublandlord's knowledge, no default
(or condition which will become a default following the passage of time with or
without the giving of notice) under the Master Sublease on the part of
Sub-Sublandlord or Sublandlord currently exists, (ii) the copy of the Master
Sublease attached hereto as Exhibit B is a true and correct copy of the entire
Master Sublease, and (iii) Sub- Sublandlord will not enter into an amendment of
the Master Sublease which will adversely affect Sub-Subtenant or Sub-Subtenant's
use and occupancy of the Subleased Premises without the prior written consent of
Sub-Subtenant.
13. Permitted Uses. The term "Permitted Use" shall mean the following:
Manufacture, warehousing, repair, and sales and service of electronic equipment
and all related support functions including office, research, and development as
such uses are permitted in Bayside Technology Park and any other lawful uses
with the prior written consent of Sub-Sublandlord, Sublandlord and Landlord,
which consent shall not be unreasonably withheld. Subject to the consent of
Landlord and Sublandlord, Sub-Sublandlord hereby consents to the Sub-Subtenant's
use of the Subleased Premises for the following purposes: Headquarters, office
functions, laboratory research and development, final assembly and testing,
storage and distribution for a manufacturer of lasers that correct eye
disorders.
14. Delivery of Default Notices. Sub-Sublandlord shall deliver to
Sub-Subtenant, within two (2) business days of receipt by Sub-Sublandlord,
copies of any notices of default received by Sub- Sublandlord from Sublandlord
under the Master Sublease.
15. Conditions Precedent. Notwithstanding anything to the contrary set forth
in this Sublease, it shall be an express condition precedent to
Sub-Sublandlord's obligations hereunder that, and this Sublease shall not be
effective unless and until Landlord and Sublandlord have consented in writing to
this Sublease. If Landlord and Sublandlord do not consent in writing to this
Sublease within thirty (30) days after Sub-Sublandlord's execution of this
Sublease, then Sub-Sublandlord may, without any liability to Sub-Subtenant, at
any time thereafter until such approval is obtained, terminate this Sublease
upon written notice to Sub-Subtenant, whereupon any monies previously paid by
Sub- Subtenant to Sub-Sublandlord shall be reimbursed to Sub-Subtenant.
16. Successors. This Sublease shall be binding on and inure to the benefit
of the parties hereto and their respective successors and permitted assigns.
17. Entire Agreement. This Sublease, the Basic Sub-Sublease Terms, and the
provisions of the Master Sublease and Master Lease incorporated herein by the
express terms of this Sublease
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<PAGE> 10
constitute the complete and exclusive agreement among the parties with respect
to the matters contained herein and supersede all prior written or oral
agreements or statements by and among the parties hereto, provided that this
Sublease shall be at all times subject to all of the terms and conditions of the
Master Lease and the Master Sublease.
IN WITNESS WHEREOF, the parties have executed this Sublease as of the day
and year first above written.
SUB-SUBTENANT: SUB-SUBLANDLORD:
SUNRISE TECHNOLOGIES AVANT! CORPORATION,
INTERNATIONAL, INC., A DELAWARE CORPORATION
A DELAWARE CORPORATION
By: __________________________ By: ____________________________
Printed Printed
Name: ________________________ Name: __________________________
Its: ________________________ Its: __________________________
Date: ________________________ Date: __________________________
10
<PAGE> 11
EXHIBIT A
MASTER LEASE
[TO BE ATTACHED]
11
<PAGE> 12
EXHIBIT B
MASTER SUBLEASE
[TO BE ATTACHED]
12
<PAGE> 13
EXHIBIT C
LAB AREA AND SHIPPING AREA
[TO BE ATTACHED]
02/20/97
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<PAGE> 14
CONSENT TO SUB-SUBLEASE
[CIRRUS LOGIC/RENCO MASTER LEASE]
[AVANT! CORPORATION/CIRRUS LOGIC, INC. SUBLEASE]
(i) The undersigned Landlord ("LANDLORD"), as landlord under that certain
Lease by and between Landlord and the undersigned Tenant ("TENANT"),
dated March 29, 1995, as amended by the First Amendment to Lease, dated
October 3, 1995 (collectively "MASTER LEASE"), and (ii) The undersigned
Tenant, as sublandlord, under that certain Sublease by and between
Tenant and the undersigned Subtenant ("SUBTENANT"), dated October 10,
1997 (the "SUBLEASE"), hereby consent to the Sublease between Subtenant
and the undersigned Sub-Subtenant ("SUB-SUBTENANT"), attached hereto as
EXHIBIT "A" (the "SUB-SUBLEASE"), subject to the following terms and
conditions:
1. Nothing herein shall be deemed to be a waiver of any term or condition
contained in the above-referenced Master Lease or Sublease. Landlord
shall continue to have all rights and remedies as set forth in the
Master Lease, notwithstanding the terms or conditions of the Sub-
Sublease. Tenant shall continue to have all rights and remedies as set
forth in the Sublease, notwithstanding the terms or conditions of the
Sub-Sublease.
2. Nothing contained herein nor in the Sub-Sublease Agreement shall be
deemed to release the Tenant from any term or condition contained in the
Master Lease and Tenant shall remain fully liable for each and every
term and condition contained in the Master Lease.
3. Nothing contained herein nor in the Sub-Sublease Agreement shall be
deemed to release the Subtenant from any term or condition contained in
the Sublease and Subtenant shall remain fully liable for each and every
term and condition contained in the Sublease.
4. Nothing contained herein shall be deemed to be the consent of the
Landlord to any further sublease or assignment of the premises leased
pursuant to the Master Lease by any of Tenant, Subtenant or
Sub-Subtenant.
5. It is agreed that the Sub-Sublease is being entered into for the express
benefit of Landlord, as well as Tenant and Subtenant, and Landlord is a
third party beneficiary of such Sub- Sublease and Landlord has the
right, but not the duty, to enforce such obligations directly against
Sub-Subtenant (as well as Tenant and Subtenant). Sub-Subtenant has the
right, but not the duty, (i) to enforce the obligations owed to Tenant
by Landlord under the Master Lease, which Sub-Subtenant is a direct
beneficiary thereof, and (ii) to enforce the obligations owed to
Subtenant by Tenant under the Sublease, which Sub-Subtenant is a direct
beneficiary thereof.
Notwithstanding the foregoing, the parties hereto acknowledge and agree
that (a) any sums collected by Landlord with respect to the Sub-Sublease
shall be credited to Tenant's corresponding obligations under the Master
Lease and Subtenant's corresponding obligations
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under the Sublease, (b) Landlord shall not have the right to terminate
the Sub-Sublease or otherwise limit or interfere with Subtenant's rights
with respect to Sub-Subtenant under the Sub-Sublease, except in
conjunction with exercising such rights against Tenant under the Master
Lease and Subtenant under the Sublease as well, and (c) Subtenant shall
have the right (in accordance with the Sub-Sublease) to amend, modify or
terminate the Sub-Sublease without Landlord's consent and without any
liability to Landlord.
6. It is expressly acknowledged by the parties hereto that Landlord has not
analyzed the Sub-Sublease, referred to herein, and is not hereby
agreeing to any term or condition contained therein to the extent any
provisions are inconsistent with the Master Lease or otherwise create
different obligations upon Landlord or create additional rights to
Subtenant or Sub-Subtenant thereunder. Landlord is merely consenting to
such sub-subletting pursuant to the terms and conditions contained
herein and contained in the Master Lease.
7. This Consent must be executed by Landlord, Tenant, Subtenant and
Sub-Subtenant to be effective.
8. Landlord hereby consents to the following addition uses of the premises
demised under the Master Lease: headquarters, office functions,
laboratory research and development, final assembly and testing, storage
and distribution for a manufacturer of lasers that correct eye
disorders.
9. In the event of a default under the Master Lease, Landlord shall deliver
to Sub-Subtenant at the address set forth in the Sub-Sublease any
required notice of default under the Master Lease before Landlord may
enforce any remedy against Sub-Subtenant for such default, including,
but not limited to, the remedy of eviction. Such notices need not
necessarily be delivered to Sub-Subtenant at the same time as delivered
to Tenant, however, Sub-Subtenant (but not Tenant or Subtenant) shall
have the following time periods to cure such default (Tenant shall
continue to have only the time periods to cure as set forth in the
Master Lease): (a) with respect to defaults in the payment of monetary
sums, two (2) calendar days beyond the notice period Tenant is entitled
to under the Master Lease for such default and (b) with respect to all
other defaults and (c) with respect to all other defaults ten (10)
calendar days beyond the notice period Tenant is entitled to under the
Master Lease for such default. It is expressly acknowledged that such
additional cure periods granted to Sub-Subtenant apply only to the
required notices under the Master Lease for a default to exist and such
cure periods do not apply to statutory notices Landlord may be required
to serve under California's unlawful detainer statutes. Any cure by
Sub-Subtenant is without prejudice to either the Landlord's right
against the Tenant under the Master Lease (as may be diminished by any
cure by Sub-Subtenant) or to the Sub-Subtenant's rights against Tenant
under the Sub-Sublease. Landlord further agrees to accept performance of
Tenant's obligations under the Master Lease by Sub-Subtenant as if such
were performed by Tenant.
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10. In the event of a default under the Sublease, Landlord shall deliver to
Sub-Subtenant at the address set forth in the Sub-Sublease any required
notice of default under the Sublease before Landlord may enforce any
remedy against Sub-Subtenant for such default, including, but not
limited to, the remedy of eviction. Such notices need not necessarily be
delivered to Sub-Subtenant at the same time as delivered to Subtenant,
however, Sub-Subtenant (but not Subtenant) shall have the following time
periods to cure such default (Subtenant shall continue to have only the
time periods to cure as set forth in the Sublease): (a) with respect to
defaults in the payment of monetary sums, two (2) calendar days beyond
the notice period Subtenant is entitled to under the Sublease for such
default and (b) with respect to all other defaults and (c) with respect
to all other defaults ten (10) calendar days beyond the notice period
Subtenant is entitled to under the Sublease for such default. It is
expressly acknowledged that such additional cure periods granted to
Sub-Subtenant apply only to the required notices under the Sublease for
a default to exist and such cure periods do not apply to statutory
notices Landlord may be required to serve under California's unlawful
detainer statutes. Any cure by Sub-Subtenant is without prejudice to
either the Landlord's right against the Subtenant under the Sublease (as
may be diminished by any cure by Sub- Subtenant) or to the
Sub-Subtenant's rights against Subtenant under the Sublease. Landlord
further agrees to accept performance of Subtenant's obligations under
the Sublease by Sub-Subtenant as if such were performed by Subtenant.
Landlord shall credit any payments made by Sub-Subtenant to Landlord to
Tenant's corresponding obligation under the Master Lease and to
Subtenant's corresponding obligation under the Sublease.
12. In the event that a cross-default occurs under the Master Lease solely
because of a default under the lease for the Landlord's building located
at 46800 Bayside Parkway, Fremont, California (Renco Building 59), and
Landlord proceeds to terminate the Master Lease as a result thereof,
then in that event: (1) Landlord and Sub-Subtenant shall execute, within
five (5) business days of the date of that the Master Lease is
terminated, the agreement attached hereto as Exhibit B ("DIRECT LEASE")
and (2) Landlord shall not disturb Sub-Subtenant's use and enjoyment of,
and rights to, the Leased Premises (as defined in the Sub-Sublease) as a
result of such default by Tenant as long as Sub-Subtenant complies with
the terms of this section. A prerequisite to Landlord's obligations
under subparts (1) and (2) of this section is that as of the date the
Direct Lease is executed Sub-Subtenant must bring current, through the
date that Sub-Subtenant's rent obligations commence under the Direct
Lease, all obligations that would have been due the Master Lease
(specifically excluding, however, any obligations due under the lease
for Renco Building 59, such as those obligations creating the
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<PAGE> 17
cross-default) if the Master Lease had not been terminated. Furthermore,
Sub-Subtenant acknowledges that it may be named in a proceeding to
terminate the Master Lease if such is required to be brought by
Landlord.
LANDLORD
RENCO INVESTMENT COMPANY,
a California partnership
Dated:___________________ By:_________________________________
Its:________________________________
TENANT
CIRRUS LOGIC, INC.,
a California corporation
Dated:___________________ By:_________________________________
Its:________________________________
SUBTENANT
AVANT! CORPORATION,
a Delaware corporation
Dated:___________________ By:_________________________________
Its:________________________________
SUB-SUBTENANT
SUNRISE TECHNOLOGIES INTERNATIONAL,
INC., a Delaware corporation
Dated:___________________ By:_________________________________
Its:________________________________
17
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration
statement on Form S-2 of Sunrise Technologies International, Inc. of our report
dated March 6, 1998, on our audits of the financial statements and financial
statement schedule of Sunrise Technologies International, Inc. as of December
31, 1997 and for the year then ended which report is incorporated by reference
in the annual report on Form 10-K. We also consent to the reference to our firm
under the caption "Experts."
PricewaterhouseCoopers LLP
San Jose, CA
September 28, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, FORMER INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
to the use of our reports dated March 10, 1997, in the Registration Statement
(Form S-2 No. 333- ) and related Prospectus of Sunrise Technologies
International, Inc. for the registration of 6,807,915 shares of its common
stock.
/S/ Ernst & Young LLP
Palo Alto, California
September 28, 1998
