<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NO. 0-10428
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0148208
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3400 W. WARREN AVENUE, FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 623-9001
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Common Stock, $0.001 Par Value -- 42,278,602 outstanding shares as of April 15,
1999.
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<PAGE> 2
INDEX
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Operations -- Three months
ended March 31, 1999 and 1998.......................... 1
Consolidated Balance Sheets -- March 31, 1999 and December
31, 1998............................................... 2
Consolidated Statements of Cash Flows -- Three months
ended March 31, 1999 and 1998.......................... 3
Notes to Consolidated Financial Statements -- March 31,
1999................................................... 4
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................. 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................... 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................... 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................... 12
SIGNATURES.................................................. 13
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net revenues................................................ $ 13 $ 102
Cost of revenues............................................ 384 255
------- -------
Gross loss.................................................. (371) (153)
Other costs and expenses:
Engineering and development............................... 1,366 482
Sales, marketing and regulatory........................... 1,378 493
General and administrative................................ 2,423 932
------- -------
Total other costs and expenses.............................. 5,167 1,907
------- -------
Loss from operations........................................ (5,538) (2,060)
Interest income........................................... 277 101
Interest expense.......................................... (3,207) (1,791)
------- -------
Net loss.................................................... $(8,468) $(3,750)
======= =======
Net loss per share, basic and diluted....................... $ (0.21) $ (0.11)
======= =======
Shares used in calculation of basic and diluted net loss per
share..................................................... 40,392 33,208
======= =======
</TABLE>
See accompanying notes.
1
<PAGE> 4
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 21,378 $ 9,889
Accounts and other receivables, net....................... 173 135
Inventories, net.......................................... 201 11
Other current assets...................................... 300 314
-------- --------
Total current assets.............................. 22,052 10,349
Property and equipment, net............................... 1,129 900
Other non-current assets.................................. 223 230
-------- --------
Total assets...................................... $ 23,404 $ 11,479
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 83 $ 730
Accounts payable.......................................... 981 694
Accrued liabilities....................................... 1,857 2,152
-------- --------
Total current liabilities......................... 2,921 3,576
Notes payable and other long-term liabilities............... 11,164 7,703
-------- --------
Total liabilities................................. 14,085 11,279
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value, 2,000,000 shares
authorized, none issued or outstanding
Common Stock, $0.001 par value, 75,000,000 shares
authorized, 42,102,296 and 38,160,720 shares issued and
outstanding at March 31, 1999 and December 31, 1998,
respectively........................................... 42 38
Additional paid-in capital................................ 74,532 60,087
Notes receivable from common stock........................ (1,550) (5,000)
Deferred compensation..................................... (354) (42)
Accumulated deficit....................................... (63,351) (54,883)
-------- --------
Total stockholders' equity........................ 9,319 200
-------- --------
Total liabilities and stockholders' equity.................. $ 23,404 $ 11,479
======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 5
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FOR OPERATING ACTIVITIES:
Net loss.................................................. $(8,468) $(3,750)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 89 34
Amortization of deferred compensation.................. 301 586
Amortization of debt issuance costs.................... 7 169
Warrant accretion and beneficial conversion features
associated with 1997, 1998 and 1999 Notes............. 2,881 939
Issuance of common stock for services.................. -- 140
Warrants issued to consultants in lieu of cash......... 1,081 432
Conversion of accrued interest on notes payable........ 578 --
Changes in assets and liabilities:
Accounts receivable.................................... (38) 198
Inventories............................................ (190) (60)
Other current assets................................... 14 24
Accounts payable....................................... 287 193
Other accrued liabilities.............................. (295) (332)
Other long-term liabilities............................ (312) 146
------- -------
Total adjustments........................................... 4,403 2,469
------- -------
Net cash used in operating activities....................... (4,065) (1,281)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (318) (38)
------- -------
Net cash used in investing activities....................... (318) (38)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on capital lease obligations...................... (9) (12)
Issuance of common stock, net of offering costs........... 1,881 342
Issuance of redeemable convertible notes, net of issuance
costs.................................................. 10,000 9,350
Proceeds from promissory notes............................ 4,000 --
Capitalization of debt issuance costs..................... -- (14)
------- -------
Net cash provided by financing activities................... 15,872 9,666
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 11,489 8,347
Cash and cash equivalents at beginning of period............ 9,889 1,958
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $21,378 $10,305
======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary after elimination of all inter-company
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 periods ended March 31,
1998 and 1999 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, 1998 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
The Company has incurred significant losses for the last several years and
at March 31, 1999 has an accumulated deficit of $63,351,000. 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. The
Company raised approximately $10,000,000 net of offering costs, in the form of
promissory notes with warrants in January 1999. There can be no assurance that
additional funds can be raised on terms acceptable to the Company, if at all.
2. CONCENTRATION OF RISK
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 the United States, U.S. Treasury and U.S. Agency obligations. 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.
The Company's activities are subject to extensive regulation by the Food
and Drug Administration ("FDA") and similar health authorities in certain
foreign countries. The Laser Thermal Keratoplasty ("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 Premarket Approval Application ("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 both U.S. and foreign 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
4
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1999
approvals before being sold in the United States and certain other countries.
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 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.
3. 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.
4. NET LOSS PER SHARE
Basic Earnings Per Share ("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. 7,934,417 and 5,381,447 common equivalent
shares as of March 31, 1999 and 1998 respectively, have been excluded from the
shares used to calculate diluted EPS, as their effect is anti-dilutive.
5. 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.
5
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1999
6. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
value and consisted of the following on the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials........................................ $ 201 $ 11
Work-in-process...................................... -- 20
Finished goods....................................... 186 166
----- -----
387 197
Less reserves........................................ (186) (186)
----- -----
Inventory, net....................................... $ 201 $ 11
===== =====
</TABLE>
Most components used in the Company's laser systems are purchased from
outside sources. Although some of the parts and components used by the Company
in producing its products are available from multiple sources, the Company
currently purchases each of its components from a single source in an effort to
obtain volume discounts. Lack of availability of any of these parts and
components could result in production delays, increased costs or costly redesign
of the Company's products.
7. INCOME TAXES
Income taxes are recorded under the liability method. Under this method
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates in effect for the year in which the differences are
expected to reverse.
8. ISSUANCE OF 1999 CONVERTIBLE NOTES
In January 1999, the Company completed a $10,000,000 private placement of
convertible notes with warrants. The 1999 Notes are convertible into shares of
the Company's Common Stock at predetermined prices, bear interest at the rate of
5% payable-in-kind semi-annually (additional convertible notes), and contain
certain conversion features. The single purchaser of the 1999 Notes will be
required, on the date the Company receives conditional approval from the
Ophthalmic Devices Panel of the FDA related to the pre-market approval
application filed by the Company with the FDA in December 1998 related to the
LTK System (the "Panel Approval"), to convert one-half of the principal amount
of the 1999 Notes into shares of the Company's Common stock at a conversion
price of $4.00 per share. The investor will also be required, on the date the
Company receives FDA approval to market the LTK System in the United States (the
"FDA Approval"), to convert the remaining portion of the 1999 Notes into shares
of Common Stock at a conversion price of $8.00 per share.
Warrants to purchase 148,950 shares of the Company's Common Stock were
issued in conjunction with the 1999 Notes with an exercise price of $.01 per
share and an expiration date of December 31, 2003. The 1999 Warrants issued had
a fair value of approximately $5.93 per Warrant at the time of issuance. The
fair value of the 1999 Warrants will be reflected as additional consideration
for the 1999 Notes, recorded as a discount on the debt and accreted as interest
expense to be amortized over the life of the 1999 Notes.
The Company recorded approximately $2,500,000 as non-cash expenses
associated with the debt financing costs and amortization of deferred
compensation of warrants issued in connection with the 1999 financings.
6
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1999
9. LEGAL PROCEEDINGS
Danville Manufacturing, Inc. (d.b.a. Danville Engineering) ("Danville")
filed a suit in the Superior Court of California, County of Contra Costa,
against the Company, claiming monetary damages for disputed invoices of
approximately $200,000 and alleging misappropriation of intellectual property.
(Danville Manufacturing, Inc. d/b/a/ Danville Engineering v. Sunrise
Technologies International, Inc. C98-02123) The Company entered into a
settlement agreement with Danville Engineering on April 21, 1999. Pursuant to
this agreement, the Company agreed to pay to Danville $120,000 and assign to
Danville a secured promissory note in the principal amount of $1,500,000 issued
by Lares Research, a California corporation, in connection with the sale of the
Company's dental business on June 26, 1997. The note is subject to offset for
certain claims by Lares Research and Danville has a 90 day option either to
reject the note and reassign it to the Company, in which event the Company will
pay Danville an additional $200,000, or accept the note, in which event the
proceeds, less any costs of collection, will be split equally between the
Company and Danville.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
All statements contained herein that are not historical facts including,
but not limited to, statements regarding the Company's plans for future
development and operation of its business, are based on current expectations.
These statements are forward-looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially are the following: a lack of
sufficient capital to finance the Company's business plan on terms satisfactory
to the Company; changes in labor, equipment and capital costs; the Company's
inability to obtain the necessary authorizations from the Food and Drug
Administration ("FDA") to enable it to market its products domestically;
competitive factors, such as the introduction of new technologies and
competitors into the ophthalmic laser business; general business and economic
conditions; and the other risk factors described from time to time in the
Company's reports filed with the Securities and Exchange Commission ("SEC"). The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made.
The Company develops, manufactures and markets laser systems for
applications in ophthalmology. Substantially all of our business activities,
including engineering and development, manufacturing, assembly and testing take
place at our facility in Fremont, California. Prior to June 26,1997, we
developed, manufactured and marketed lasers and air abrasion cavity preparation
systems for use in dentistry.
Our working capital is seriously depleted due to our substantial losses in
the past seven years. Sales of our existing ophthalmic products at current
levels will not be sufficient to sustain the continued development and
regulatory licensing of our holmium laser corneal shaping product or process
known as the Laser Thermal Keratoplasty (the "LTK System"). We have been able to
raise additional working capital for all aspects of our business through the
private placements of our common stock and convertible notes with warrants.
These private placements raised $15,296,000 in 1994, 1995 and 1996 in new
equity. We also raised approximately $3,700,000 in the form of promissory notes
with warrants in February and March 1997 (the "1997 Notes Placement"). We raised
approximately $9,350,000, net of offering costs, in the form of promissory notes
with warrants in January 1998 (the "1998 Notes Placement"), and approximately
$11,800,000, net of offering costs, from the sale of common stock in December
1998 (the "1998 Equity Offering"). In January 1999, we raised $10,000,000, net
of offering costs, in the form of promissory notes with warrants (the "1999
Notes Placement").
The Company's current operations continue to be cash flow negative, further
straining our working capital resources. At our current rate of cash
expenditures, we may raise additional working capital during 1999 to fund
operations. We expect to spend approximately $1,136,000 for capital expenditures
in fiscal year 1999. No assurance can be given that additional financing will be
available, or if available, that it will be available on terms favorable to our
stockholders and us. If funds are not available to satisfy both our short-term
and long-term operating requirements, we may be required to limit or suspend our
operations in their entirety or, under certain circumstances, be forced to seek
protection from creditors. Our long-term ability to continue as a going concern
is dependent upon performing profitably or obtaining further financing.
RECENT DEVELOPMENTS
On May 10, 1999, the Company announced that senior FDA officials informed
the Company that its Premarket Approval ("PMA") application is tentatively
scheduled for review at the July 22-23 meeting of the FDA Ophthalmic Advisory
Panel. The panel will review the PMA for the LTK System for the treatment of
hyperopia (+.75 to +2.50 diopters).
FINANCIAL CONDITION
As of March 31, 1999, the Company had $21,378,000 in cash and cash
equivalents. The Company's operating activities used $4,065,000 in the three
months ended March 31, 1999 and used $1,281,000 in cash during the same period
in 1998. Substantial portions of the 1998 and 1999 losses were funded with the
8
<PAGE> 11
proceeds of a series of private placements. The 1998 Notes Placement had
aggregate net proceeds of approximately $9,350,000 and the 1999 Notes Placement
generated aggregate net proceeds of $10,000,000.
The Company's current operations continue to be cash flow negative,
limiting the Company's working capital resources. Working capital at March 31,
1999 amounted to approximately $19,131,000. At December 31, 1998, working
capital amounted to approximately $6,773,000. The Company's ability to continue
as a going concern is dependent upon performing profitably or obtaining further
financing. Management believes existing working capital will provide sufficient
funds for the Company's planned operations through 1999.
RESULTS OF OPERATIONS
Revenues of $13,000 for the three month period ended March 31, 1999
represents an 87% decrease from revenues of $102,000 for the same period in
1998. The vast majority of this revenue decline was due to lack of revenue from
equipment sales in the first quarter of 1999.
Costs of revenues and related negative margins for the three-month period
ended March 31, 1999 resulted from the underabsorption of manufacturing overhead
due to the Company's low revenue levels.
Engineering and development expenses totaled $1,366,000 for the three month
period ended March 31, 1999, compared to $482,000 for the same period in 1998.
The increase in engineering and development expenses from 1998 of 183% was
primarily due to the increase in consulting fees and expenditures of prototype
parts and supplies related to the development of the LTK System and expenditures
related to increased headcount.
Sales, marketing and regulatory costs were $1,378,000 for the three-month
period ended March 31, 1999, compared to $493,000 for the same period in 1998.
The increase in sales, marketing and regulatory expenses in the first quarter of
1999, of approximately 180%, was due to the increase in marketing efforts to
launch the LTK System, higher consulting fees in connection with the ongoing
clinical studies and increased headcount in sales, customer support and
professional education.
General and administrative expenses were $2,423,000 for the three-month
period ended March 31, 1999, compared to $932,000 for the same period of 1998.
The increase of approximately 160% in general and administrative expenses for
the three-month period ended March 31, 1999 as compared to the same period in
1998 was primarily due to the expenses associated with the issuance of warrants
and stock options to consultants of the Company in lieu of cash, increase in
headcount, higher rent and legal expenses. Approximately $1,383,000 of general
and administrative expenses in the first quarter of 1999 was from nonstatutory
option expenses and expense related to fair value of warrants issued to
consultants in lieu of cash as compared to approximately $511,000 of the same
expenses in the first quarter of 1998.
Net interest and other expense for the three month period ended March 31,
1999 of $2,930,000 represents primarily non-cash interest charges pursuant to
the 1998 and 1999 Notes Placements and related warrants, compared to $1,690,000
for the same period of 1998. Approximately $2,887,000, or 99%, of the Company's
net interest expense was due to non-cash expenses incurred in connection with
the 1997, 1998 and 1999 Notes Placement. The fair value of the warrants, the
conversion features and the placement costs of such notes are recorded as
non-cash interest expense in 1998 and 1999. The 1997 Notes, the 1998 Notes and
the 1999 Notes bear a stated interest rate of 5%, 12% and 5%, respectively. The
effective rate of interest of such notes, which includes the amortization of the
fair value of the warrants, is approximately 21%, 26% and 16%, respectively.
The net loss for the three-month period ended March 31, 1999 of $8,468,000
was primarily due to the lack of revenue from the ophthalmic products to offset
the expenses associated with the development, marketing and regulatory approval
of the LTK System and the general expenses associated with the operations of the
Company. Approximately $3,969,000, or 47% of the net loss, was primarily
attributable to non-cash expenses associated with the January 1999 debt
financing costs and warrants issued to consultants in lieu of cash.
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
9
<PAGE> 12
basic corporate infrastructure. In order to continue its current level of
operations beyond 1999 and have sufficient funds to launch the LTK System in the
United States, it will be necessary for the Company to obtain additional working
capital resources, whether from debt or equity sources. If the Company is unable
to obtain additional working capital resources from the placement of debt or
equity instruments or the sale of some of its assets, it may be necessary for
the Company to curtail or suspend operations in their entirety.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium ("Year 2000") approaches. The Year
2000 problem is pervasive and complex, as virtually every computer operation
will be affected in the same way by the rollover of the two-digit year value to
00. The issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its systems for Year 2000 compliance. As of March
31, 1999, the estimated costs of these reprogramming efforts have been
approximately $250,000. It is currently expected that the remaining costs to
complete these reprogramming efforts will be less than $100,000. It is
anticipated that all of the Company's reprogramming efforts will be completed by
September 30, 1999, allowing adequate time for testing. This process includes
obtaining confirmations from the Company's primary vendors that plans are being
developed or are already in place to address processing of transactions in the
year 2000. These confirmations are expected to be obtained in writing by the
Company prior to June 30, 1999. However, there can be no assurance that the
systems of other companies on which the Company's systems rely will also be
converted in a timely manner, or that any such failure to convert by another
company would not have a material adverse effect on the Company's business,
financial condition 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 to properly recognize date-sensitive
information for the Year 2000 and beyond. Although the Company plans to perform
extensive testing of its new product, there can be no assurance that the new
system will function properly until it is deployed in the field and subjected to
extensive use. Any malfunction of a deployed system could have a material
adverse effect on the Company's business, financial condition or results of
operations.
The Company is not expecting to have a material accounts receivable
exposure, or significant amount of revenues with any one customer after December
31, 1999 and, therefore, verification of customer Year 2000 compliance is not
being pursued by the Company at this time. Any failure to pay in a timely
manner, or place orders for the Company's products, by a significant number of
individual customers or by a customer with a material accounts receivable
balance, due to Year 2000 compliance issues could have material adverse effects
on the Company's business, financial condition or results of operations.
The Company is currently developing a contingency plan to evaluate business
disruption scenarios, coordinate the establishment of Year 2000 contingency
plans, and identify and implement the strategies. This detailed contingency plan
is expected to be completed by June 30, 1999.
10
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks due primarily to changes
in interest rates. The Company does not use derivatives to alter the interest
characteristics of its investment securities or its debt instruments. The
Company has no holdings of derivative or commodity instruments and does not
transact business in foreign currencies.
The fair value of the Company's investment portfolio or related income
would not be significantly impacted by changes in interest rates since the
investment maturities are short and the interest rates are primarily fixed.
The Company anticipates interest on cash balances for 1999 to be
approximately $710,000 at an estimated average interest rate of 5%. It is not
possible to anticipate the level of interest and the rates past 1999. Changes in
interest rates have no impact on our debt as all notes are at fixed interest
rates between 5% and 12%.
11
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Danville Manufacturing, Inc. (d.b.a. Danville Engineering) ("Danville")
filed a suit in the Superior Court of California, County of Contra Costa,
against the Company, claiming monetary damages for disputed invoices of
approximately $200,000 and alleging misappropriation of intellectual property.
(Danville Manufacturing, Inc. d/b/a/ Danville Engineering v. Sunrise
Technologies International, Inc. C98-02123) The Company entered into a
settlement agreement with Danville Engineering on April 21, 1999. Pursuant to
this agreement, the Company agreed to pay to Danville $120,000 and assign to
Danville a secured promissory note in the principal amount of $1,500,000 issued
by Lares Research, a California corporation, in connection with the sale of the
Company's dental business on June 26, 1997. The note is subject to offset for
certain claims by Lares Research and Danville has a 90 day option either to
reject the note and reassign it to the Company, in which event the Company will
pay Danville an additional $200,000, or accept the note, in which event the
proceeds, less any costs of collection, will be split equally between the
Company and Danville.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
B. REPORTS ON FORM 8-K
The Company filed the following reports on Form 8-K during the period ended
March 31, 1999:
(a) Report on 8-K dated January 1, 1999 to report the sale of $10,000,000
aggregate principal amount five percent (5%) convertible subordinated
pay-in-kind notes due 2001 and accompanying warrants to purchase common stock in
a private placement in reliance on Regulation D under the Securities Act of
1933, as amended;
(b) Report on Form 8-K dated March 10, 1999 to report the termination of
Timothy A. Marcotte's employment as Vice President and Chief Financial Officer,
and the appointment of Tina T. Herbert as Acting Vice President and Chief
Financial Officer, Sylvia Ward as Acting Controller and Phillip E. Meade to
direct activities in the Human Resources function; and
(c) Report on Form 8-K dated March 20, 1999 to report the resignation of
Timothy A. Marcotte as a director of the Company.
12
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNRISE TECHNOLOGIES
INTERNATIONAL, INC.
Date: May 13, 1999 By: /s/ C. RUSSELL TRENARY, III
------------------------------------
President and Chief Executive
Officer
Date: May 13, 1999 By: /s/ TINA T. HERBERT
------------------------------------
Acting Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
13
<PAGE> 16
EXHIBIT INDEX
Exhibit
Number Description
- ------- -------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 21,378,000
<SECURITIES> 0
<RECEIVABLES> 184,000
<ALLOWANCES> 11,000
<INVENTORY> 201,000
<CURRENT-ASSETS> 22,052,000
<PP&E> 1,711,000
<DEPRECIATION> 582,000
<TOTAL-ASSETS> 23,404,000
<CURRENT-LIABILITIES> 2,921,000
<BONDS> 0
0
0
<COMMON> 42,000
<OTHER-SE> 9,277,000
<TOTAL-LIABILITY-AND-EQUITY> 23,404,000
<SALES> 13,000
<TOTAL-REVENUES> 13,000
<CGS> 384,000
<TOTAL-COSTS> 384,000
<OTHER-EXPENSES> 5,167,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,207,000
<INCOME-PRETAX> 8,468,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,468,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,468,000
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
