<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 SEPTEMBER 30, 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
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SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0148208
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION NUMBER)
OR ORGANIZATION)
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, 46,146,229 shares outstanding as of
November 12, 1999.
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<PAGE> 2
INDEX
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations -- Three and
nine months ended September 30, 1999 and 1998............... 3
Condensed Consolidated Balance Sheets -- September 30, 1999
and December 31, 1998....................................... 4
Condensed Consolidated Statements of Cash Flows -- Nine
months ended September 30, 1999 and 1998.................... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 14
Item 2. Changes in Securities and Use of Proceeds................... 14
Item 6. Exhibits and Reports on Form 8-K............................ 14
SIGNATURES........................................................... 15
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1999 1998 1999 1998
------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues.................................... $ 6 $ 180 $ 21 $ 504
Cost of revenues................................ 616 615 1,540 1,499
------- ------- -------- --------
Gross margin.................................... (610) (435) (1,519) (995)
------- ------- -------- --------
Other costs and expenses:
Engineering and development................... 954 621 3,465 1,618
Sales, marketing and regulatory............... 2,023 822 5,094 2,480
General and administrative.................... 1,330 1,060 5,022 4,909
------- ------- -------- --------
Total operating expenses.............. 4,307 2,503 13,581 9,007
------- ------- -------- --------
Loss from operations............................ (4,917) (2,938) (15,100) (10,002)
Interest income................................. 181 89 704 289
Interest expense................................ (1,048) (719) (5,687) (3,222)
------- ------- -------- --------
Net loss.............................. $(5,784) $(3,568) $(20,083) $(12,935)
======= ======= ======== ========
Net loss per share, basic and
diluted............................. $ (0.13) $ (0.10) $ (0.47) $ (0.38)
======= ======= ======== ========
Shares used in calculation of basic and diluted
net loss per share............................ 45,746 34,311 43,101 33,707
======= ======= ======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 14,639 $ 9,889
Accounts and other receivables, net....................... 256 135
Inventories............................................... 1,312 11
Other current assets...................................... 1,093 314
-------- --------
Total current assets.............................. 17,300 10,349
Property and equipment, net............................... 1,285 900
Other non-current assets.................................. 222 230
-------- --------
Total assets...................................... $ 18,807 $ 11,479
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 35 $ 730
Accounts payable.......................................... 808 694
Accrued liabilities....................................... 2,023 2,152
-------- --------
Total current liabilities......................... 2,866 3,576
Notes payable and other long-term liabilities............... 9,864 7,703
-------- --------
Total liabilities................................. 12,730 11,279
Commitments and contingencies (Note 8)
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, 45,946,299 and 38,160,720 shares issued and
outstanding at September 30, 1999 and December 31,
1998, respectively..................................... 46 38
Additional paid-in capital................................ 83,523 60,087
Notes receivable from common stock........................ (2,206) (5,000)
Deferred compensation..................................... (320) (42)
Accumulated deficit....................................... (74,966) (54,883)
-------- --------
Total stockholders' equity........................ 6,077 200
-------- --------
Total liabilities and stockholders' equity........ $ 18,807 $ 11,479
======== ========
</TABLE>
See accompanying notes
4
<PAGE> 5
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FOR OPERATING ACTIVITIES:
Net loss.................................................... $(20,083) $(12,935)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 306 121
Amortization of deferred compensation.................. 335 2,815
Amortization of debt issuance costs.................... 8 195
Warrant accretion and beneficial conversion features
associated with 1997, 1998 and 1999 Notes............. 5,072 2,186
Issuance of common stock for services.................. -- 150
Provision for excess and obsolete inventory............ 12 (161)
Warrants issued to consultants in lieu of cash......... 1,081 --
Provision for doubtful accounts........................ (8) --
Conversion of accrued interest on notes payable........ 578 403
Changes in assets and liabilities:
Accounts receivable.................................... (113) 116
Inventories............................................ (1,313) 288
Other current assets................................... (779) (317)
Other non-current assets............................... -- (218)
Accounts payable....................................... 114 265
Other accrued liabilities.............................. (129) 632
Other long-term liabilities............................ (255) 244
-------- --------
Total adjustments................................. 4,909 6,719
-------- --------
Net cash used in operating activities....................... (15,174) (6,216)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (691) (469)
-------- --------
Net cash used in investing activities....................... (691) (469)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on capital lease obligations...................... (29) (26)
Issuance of common stock, net of offering costs........... 6,644 1,200
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................... 20,615 10,510
-------- --------
Net increase in cash and cash equivalents................... 4,750 3,825
Cash and cash equivalents at beginning of period............ 9,889 1,958
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 14,639 $ 5,783
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
SUNRISE TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
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 September
30, 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 and the Amendment No. 1 to the Form 10-K/A
filed with the Securities and Exchange Commission.
The Company has incurred significant losses for the last several years and
at September 30, 1999 has an accumulated deficit of $74,966,000. 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 pursuing Food and Drug Administration ("FDA") approval for the
Company's Laser Thermal Keratoplasty System ("LTK System") for the treatment of
hyperopia (farsightedness) and increasing sales efforts in international markets
to broaden the customer base for its new instrument, the Hyperion(TM) LTK
System, which is in final stages of development. Management also recognizes that
additional cash may be needed, although at this juncture, neither the amount nor
the timing has been contemplated and there can be no assurance that additional
funds can be raised on terms acceptable to the Company if at all. The Company
raised approximately $10,000,000, net of offering costs, in the form of
convertible promissory notes with warrants in January, 1999.
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, in 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 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 Pre-Market Approval ("PMA")
application 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 final FDA approval in the United States for intended uses of the LTK System,
or for any other devices for 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.
6
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SUNRISE TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
In addition, the introduction of the Company's products in foreign
countries may require obtaining both U.S. and 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 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.
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. To calculate diluted EPS, 7,596,433 and
6,889,621 common equivalent shares were excluded for the period ended September
30, 1999 and 1998 respectively, as their effect is anti-dilutive.
5. 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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.............................................. $ 987 $ 11
Work-in-process............................................ 289 20
Finished goods............................................. 234 166
------ -----
1,510 197
Less reserves.............................................. (198) (186)
------ -----
Inventory, net............................................. $1,312 $ 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
for the manufacture of its products are available from multiple sources, many of
the Company's components are purchased from a single source in an effort to
establish strong vendor relationships and long term supplier commitments. The
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.
6. 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 semi-annually in cash or by the issuance of additional convertible
notes at
7
<PAGE> 8
SUNRISE TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
the Company's option, and contain certain conversion features. The single
purchaser of the 1999 Notes will be required 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, on the date the Company receives
conditional approval for the PMA application from the Ophthalmic Devices Panel
of the FDA. The investor will also be required to convert the remaining portion
of the 1999 Notes into shares of Common Stock at a conversion price $8.00 per
share, on the date the Company receives FDA approval to market the LTK System in
the United States.
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 $0.01 per
share and an expiration date of December 31, 2003. The 1999 Warrants issued had
a fair market value of approximately $5.93 per Warrant at the time of issuance
based on the Black Scholes Valuation Model. The fair market 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 $2,523,000 as non-cash expenses
associated with the debt financing costs and amortization of deferred
compensation of warrants issued in connection with the 1999 financings.
In June 1999 the Company announced a warrant acceleration program to all of
the Company's warrant holders pursuant to which the holders were able to
exercise all or part of their warrants in exchange for an unsecured promissory
note instead of cash. The notes matured on October 15, 1999 and bore interest at
the rate of 8%, increasing to 12% if not paid when due. As of November 12, 1999,
a warrant to purchase 150,000 shares has been exercised pursuant to this program
and a $656,250 promissory note has been issued to the Company by warrant
holders. As of November 10, 1999, this note remains outstanding.
7. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Investments and Hedging Activities." The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. To date, the Company has not engaged in
derivative and hedging activities.
8. 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 an 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.
On July 13, 1999, the Company filed two suits in the United States District
Court for the Northern District of California against (i) Sturza's Institutional
Research, Inc. and Evan Sturza (Number C99-3393
8
<PAGE> 9
SUNRISE TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
CQAL); and (ii) Avalon Research Group, Inc. ("ARG") (Number C99-3394 CAL) for
defamation. Sturza's Institutional Research ("SIR") publishes a weekly
newsletter to its investor-subscribers and others. SIR analyzes publicly traded
companies in the healthcare sector. SIR is part of a family of companies under
common control in medical technology investment. ARG specialized in writing,
publishing, and selling weekly written investment and money management reports
on publicly traded companies. ARG's reports are available to paying subscribers
and others. The complaint alleges that SIR, ARG, and others associated with them
issued and disseminated a report which defamed the Company and led to the
devaluation of the Company's shares. Both complaints request injunctive relief,
including the cessation of the publication of all misleading statements, a
retraction, and payment of monetary damages.
9
<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 our plans for future development and
operation of our 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 our business on terms satisfactory to the Company; changes in labor,
equipment and capital costs; our inability to obtain the necessary
authorizations from the FDA to enable us to market our products domestically;
competitive factors, such as the introduction of new technologies and
competitors into the ophthalmic laser business; general business and economic
conditions; litigation; and the other risk factors described from time to time
in our reports filed with the Securities and Exchange Commission ("SEC"). We
wish to caution readers not to place undue reliance on any such forward-looking
statements, which are made based on our views as of this date.
Sunrise develops, manufactures and markets laser systems for applications
in ophthalmology. Substantially all of our business activities, including
engineering, 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.
Over the last seven years Sunrise has not been profitable. Since early
1997, following a management reorganization and refocus of business strategies
from the dental devices to ophthalmic devices, our Company has devoted its
capital and human resources to the development of the holmium laser corneal
shaping instrument, which utilizes a process known as the LTK System. These
development efforts have consumed significant amounts of our working capital and
required us to seek additional cash to support their continuation. The Company
does not currently sell its ophthalmic devices in the United States and will not
be able to until it receives approval from the FDA. Sales of our ophthalmic
instruments in international markets will not, for the near future, yield
sufficient cash to sustain our operations. Up to now we have been able to raise
additional working capital through the private placements of our common stock
and convertible notes with warrants. These private placements raised an
aggregate of $15,296,000 in 1994, 1995 and 1996 in the form of new equity. In
February and March of 1997 we raised approximately $3,700,000 in the form of
promissory notes with warrants. Again in January, 1998 we raised approximately
$9,350,000 through convertible promissory notes with warrants followed by
another round of financing of approximately $11,800,000 in the form of a common
stock offering in December of that year. Once again in January of 1999 we raised
$10,000,000 in the form of convertible promissory notes with warrants.
The Company's current operations continue to be cash flow negative, which
continues to strain our working capital resources. At our current rate of cash
expenditures, we may need to raise additional working capital to fund
operations. 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.
The PMA for the LTK System was filed with the FDA in December 1998. We
appeared before the Ophthalmic Devices Panel, an advisory committee of the FDA,
on July 22, 1999 to present the results of our clinical trial for the correction
of hyperopia from +0.75 to +2.50 diopters. The Panel requested additional
long-term data and recommended that the FDA not approve the LTK System at that
time.
Since the July 22, 1999 panel meeting, we have prepared an amendment to the
PMA application for the reduction of hyperopia within the range of +0.75 to +2.5
diopters. We have had several meetings with the FDA Ophthalmic Devices Branch to
review our PMA submission and on November 2, 1999 we filed an amended PMA. We
expect to return to the Panel in the first quarter of 2000 for a review of this
amended PMA. The amended PMA contains a substantial increase in the number of
patients followed through two
10
<PAGE> 11
years compared to that presented at the July Panel meeting and quantifies and
explains postoperative changes that LTK patients may experience in refractive
effect over time.
FINANCIAL CONDITION
As of September 30, 1999, the Company had $14,639,000 in cash and cash
equivalents. The Company's operating activities used $15,174,000 in the nine
months ended September 30, 1999 and used $6,216,000 in cash during the same
period in 1998. Substantial portions of the 1998 and 1999 operations were funded
with the 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 also
raised $11,800,000 in the form of a common stock offering in December 1998.
Our current operations continue to be cash flow negative, limiting our
working capital resources. Working capital at September 30, 1999 amounted to
approximately $14,434,000. At December 31, 1998, working capital amounted to
approximately $6,773,000. Our 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 mid 2000.
RESULTS OF OPERATIONS
Revenues for the three- and nine-month periods ended September 30, 1999
totaled $6,000 and $21,000, respectively, compared to $180,000 and $504,000,
respectively, for the same periods of 1998. Revenues for 1998 were the result of
sales of SUN1000 ophthalmic laser units in international markets and domestic
sales of Paradigm dental units. Sunrise Technologies is no longer engaged in the
sale of dental units and the SUN1000 production was discontinued in 1999 as the
Hyperion(TM) LTK System, the Company's new Laser Thermal Keratoplasty
instrument, is in final stages of development. Revenues for 1999 represent sales
of accessory parts for older machines on the market.
Unabsorbed manufacturing costs and virtually no product sales account for
the negative gross margins for the three- and nine-month periods ended September
30, 1999. These manufacturing costs are those associated with the production of
initial test units of our LTK Hyperion(TM) System.
Engineering and development expenses totaled $954,000 and $3,465,000,
respectively, for the three- and nine-month periods ended September 30, 1999,
compared to $621,000 and $1,618,000, respectively, for the same periods in 1998.
The 114% increase in engineering and development expenses for the nine-month
period of 1999 over 1998 is the result of a significant ramp-up in development
costs of the Hyperion(TM) LTK System.
Sales, marketing and regulatory costs were $2,023,000 and $5,094,000 for
the three- and nine-month periods ended September 30, 1999, compared to $822,000
and $2,480,000 for the same periods in 1998. This increase of 105% for the
nine-month period of 1999 over 1998 is due to an increase in regulatory
activities with the ongoing clinical trials and marketing efforts in preparation
to launch the Hyperion(TM) LTK System.
General and administrative expenses were $1,330,000 and $5,022,000 for the
three- and nine-month periods ended September 30, 1999, compared to $1,060,000
and 4,909,000 for the same periods of 1998. Approximately $1,417,000 of general
and administrative expenses in the nine-month period ending September 30, 1999
are from non-cash costs for warrants issued and compensation charges associated
with the issuance of Non Qualified Stock Options. For the nine months of 1998,
$2,623,000 of general and administrative expenses was attributable to non-cash
expenses. The general and administrative cash expenses for the nine months of
1999 are 58% higher than those for the same period of 1998. Such an increase in
expenses is due to an increase in personnel, facilities and general expenses
associated with the Company's expansion.
Net interest expense for the three- and nine-month periods ended September
30, 1999 were $867,000 and $4,983,000, respectively as compared to $630,000 and
$2,933,000, respectively for the same periods of 1998. Of the total gross
interest expense for the nine months ended September 30, 1999, 89% or $5,082,000
was the result of non-cash charges for the 1999, 1998 and 1997 financings. These
non-cash charges originate from the calculation of the fair market value of
convertible notes and the fair market value of warrants associated with
11
<PAGE> 12
the placement of the convertible notes. The effective financing costs for the
convertible promissory notes, which include the nominal interest rates, the non
cash charges associated with the notes and warrants and the placement costs, are
21% for the 1997 Notes, 26% for the 1998 Notes and 16% for the 1999 Notes.
The net loss for the three- and nine month periods ended September 30, 1999
of $5,784,000 and $20,083,000, respectively, was due to the significant
investment in development, marketing and regulatory activities aimed at
obtaining FDA approval and market launch of our Hyperion(TM) LTK System to treat
hyperopia. There have been no significant product revenues during these periods
to offset these expenses. Approximately $6,499,000, or 32% of the 1999 nine
months net losses were due to non-cash charges, as commented above.
The Company's current operations continue to be cash flow negative, further
straining our working capital resources. Over the coming months we will be
working very diligently together with the FDA to satisfy all of the requirements
that will lead to their approval of our Hyperion(TM) LTK System. We will also be
concentrating marketing efforts on certain international markets to broaden the
knowledge and understanding of the Hyperion(TM) LTK System benefits. These
continued activities would require the use of cash. Although we believe we have
sufficient working capital for the continued development of our Hyperion(TM) LTK
System, we most probably will need additional funds to launch the System in the
United States once we have obtained final approval from the FDA. Additional
working capital resources may come from debt or equity offerings. If we are
unable to raise the necessary working capital in a timely fashion, it may be
necessary for us 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 utilized both internal and external resources to identify,
correct or reprogram, and test its systems for Year 2000 compliance. As of
September 30, 1999, the estimated costs of these reprogramming efforts have been
approximately $250,000. All of the Company's reprogramming efforts and testing
were completed by July 1, 1999. This process included 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 were sent to all primary vendors and the majority have replied
with written confirmations. 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.
We are not expecting to have material accounts receivable exposure, or a
significant amount of pending revenues with any one customer on 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.
12
<PAGE> 13
The Company believes that it has reviewed adequately, together with its
most significant suppliers, the issues related to Year 2000 such that no
additional contingency plans are required at this time.
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%.
13
<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 September 26, 1997. The note is subject to offset
for certain claims by Lares Research and Danville has an 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.
On July 13, 1999, the Company filed two suits in the United States District
Court for the Northern district of California against (i) Sturza's Institutional
Research, Inc. and Evan Sturza (Number C99-3393 CQAL); and (ii) Avalon Research
group, Inc. ("ARG") (Number C99-3394 CAL) for defamation. Sturza's Institutional
Research ("SIR") publishes a weekly newsletter to its investor-subscribers and
others. SIR analyzes publicly traded companies in the healthcare sector. SIR is
part of a family of companies under common control in medical technology
investment. ARG specialized in writing, publishing, and selling weekly written
investment and money management reports on publicly traded companies. ARG's
reports are available to paying subscribers and others. The complaint alleges
that SIR, ARG, and others associated with them issued and disseminated a report
which defamed the Company and led to the devaluation of the Company's shares.
Both complaints request injunctive relief, including the cessation of the
publication of all misleading statements, a retraction, and payment of monetary
damages.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Chapter 1, Title 8, Section 170 of the Delaware Corporation Law provides
that the directors of every corporation may declare and pay dividends either out
of surplus or, in the event that there is no surplus, out of the net profits for
the fiscal year in which the dividend is declared and/or the preceding fiscal
year. The Company has not had surplus during the past Fiscal year and did not
have any surplus during the first three quarters of Fiscal Year 1999 and,
therefore, the Company does not plan to declare and pay dividends on its Common
Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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
September 30, 1999:
(a) Report on Form 8-K dated July 26, 1999 to report that it issued a
press release to announce that it had published a letter to its
Shareholders on the Company website, www.sunrise-tech.com, to respond to
frequently asked questions resulting from the FDA's Opthalmic Devices Panel
recommendation not to approve the Company's Premarket Approval Application
for the Company's laser technology for the treatment of hyperopia.
(b) Report on Form 8-K dated September 30, 1999 to report that the
Board of Directors of the Company had amended the shareholder rights plan
set forth in the Rights Agreement dated as of October 24, 1997 between the
Company and ChaseMellon Shareholder Services, LLC to increase the initial
exercise price of the rights from $20 to $70.
14
<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: November 15, 1999 By: /s/ C. RUSSELL TRENARY, III
-------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 15, 1999 By: /s/ PETER E. JANSEN
-------------------------------------
Vice President, Finance and Chief
Financial Officer
(Principal Financial Officer)
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 14,639,000
<SECURITIES> 0
<RECEIVABLES> 267,000
<ALLOWANCES> 11,000
<INVENTORY> 1,312,000
<CURRENT-ASSETS> 17,300,000
<PP&E> 2,083,000
<DEPRECIATION> 799,000
<TOTAL-ASSETS> 18,807,000
<CURRENT-LIABILITIES> 2,866,000
<BONDS> 0
0
0
<COMMON> 46,000
<OTHER-SE> 6,031,000
<TOTAL-LIABILITY-AND-EQUITY> 18,807,000
<SALES> 6,000
<TOTAL-REVENUES> 6,000
<CGS> 616,000
<TOTAL-COSTS> 616,000
<OTHER-EXPENSES> 4,307,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 867,000
<INCOME-PRETAX> (5,784,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,784,000)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
