<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
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 -- 48,300,222 shares as of August 7, 2000.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<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
six months ended June 30, 2000 and 1999................... 1
Condensed Consolidated Balance Sheets -- June 30, 2000 and
December 31, 1999......................................... 2
Condensed Consolidated Statements of Cash Flows -- Three and
six months ended June 30, 2000 and 1999................... 3
Notes to Condensed Consolidated Financial Statements -- June
30, 2000.................................................. 4
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................. 7
Quantitative and Qualitative Disclosures About Market
Item 3. Risk...................................................... 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use Proceeds...................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
Item 5. Other Information........................................... 12
Item 6. Exhibits and Reports on Form 8-K............................ 12
Signatures........................................................... 14
</TABLE>
i
<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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
2000 1999 2000 1999
-------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues..................................... $ 424 $ 3 $ 442 $ 16
Cost of revenues................................. 1,414 542 2,133 925
-------- ------- -------- --------
Gross loss....................................... (990) (539) (1,691) (909)
-------- ------- -------- --------
Operating expenses:
Research and development....................... 945 1,144 1,963 2,511
Sales, marketing and regulatory................ 3,382 1,692 5,963 3,072
General and administrative..................... 5,599 1,270 7,031 3,691
-------- ------- -------- --------
Total operating expenses............... 9,926 4,106 14,957 9,274
-------- ------- -------- --------
Loss from operations............................. (10,916) (4,645) (16,648) (10,183)
Interest income................................ 174 246 418 523
Interest expense............................... (1,119) (1,434) (11,664) (4,640)
-------- ------- -------- --------
Net loss......................................... $(11,861) $(5,833) $(27,894) $(14,300)
======== ======= ======== ========
Net loss per share, basic and diluted............ $ (0.25) $ (0.14) $ (0.60) $ (0.34)
======== ======= ======== ========
Shares used in calculation of basic and diluted
net loss per share............................. 46,752 43,106 46,579 41,757
-------- ------- -------- --------
</TABLE>
See accompanying notes.
1
<PAGE> 4
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 5,312 $ 10,643
Accounts receivable, net.................................. 951 327
Inventories, net.......................................... 7,920 1,973
Other current assets...................................... 1,719 462
--------- --------
Total current assets.............................. 15,902 13,405
Property and equipment, net............................... 1,800 1,280
Patents, net.............................................. 8,271 --
Other non-current assets.................................. 262 220
--------- --------
Total assets...................................... $ 26,235 $ 14,905
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 10,260 $ 5,028
Accounts payable.......................................... 1,575 416
Accrued liabilities....................................... 2,059 2,205
--------- --------
Total current liabilities......................... 13,894 7,649
Notes payable and other long-term liabilities............... 2,274 5,155
--------- --------
Total liabilities................................. 16,168 12,804
--------- --------
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,
48,169,934 and 46,321,157 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively... 48 46
Additional paid-in capital................................ 123,932 85,139
Notes receivable for common stock......................... (1,550) (1,550)
Deferred compensation..................................... (3,441) (506)
Accumulated deficit....................................... (108,922) (81,028)
--------- --------
Total stockholders' equity........................ 10,067 2,101
--------- --------
Total liabilities and stockholders' equity........ $ 26,235 $ 14,905
========= ========
</TABLE>
See accompanying notes.
2
<PAGE> 5
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FOR OPERATING ACTIVITIES:
Net loss.................................................. $(27,894) $(14,300)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 345 189
Amortization of deferred compensation.................. 4,360 315
Amortization of debt issuance costs.................... 1 8
Warrant accretion and beneficial conversion features
associated with 1997, 1998 & 1999 Notes............... 11,156 4,160
Issuance of warrants and non-qualified stock options... -- 1,081
Conversion of accrued interest on notes payable........ 193 578
Increase/(decrease) in inventory reserve............... (72) 28
Changes in assets and liabilities:
Accounts receivable.................................... (624) (112)
Inventories............................................ (5,875) (581)
Other current assets................................... (1,257) (149)
Non-current assets..................................... (43) --
Accounts payable....................................... 1,159 221
Other accrued liabilities.............................. (146) (383)
Other long-term liabilities............................ 152 (386)
-------- --------
Total adjustments................................. 9,349 4,969
-------- --------
Net cash used in operating activities....................... (18,545) (9,331)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (865) (511)
-------- --------
Net cash used in investing activities....................... (865) (511)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt obligations............................ (87) (17)
Issuance of common stock, net of offering costs........... 2,823 5,606
Issuance of redeemable convertible notes, net of issuance
costs.................................................. 11,217 10,000
Proceeds from issuance of promissory notes................ -- 4,000
Proceeds from issuance of debt obligations................ 126 --
-------- --------
Net cash provided by financing activities................... 14,079 19,588
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... (5,331) 9,738
Cash and cash equivalents at beginning of period............ 10,643 9,889
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 5,312 $ 19,627
======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Warrants issued to acquire patents........................ $ 8,271 $ --
======== ========
Conversion of 2000 Notes into common stock................ $ 558 $ --
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 6
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(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 June 30,
2000 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, 1999 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 June 30, 2000 has an accumulated deficit of $108,922,000. 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 other certain
products under development. Management also recognized the need for infusion of
cash. In January 2000, the Company raised approximately $11,200,000, net of
offering costs, in the form of convertible debentures and warrants. In June
2000, the Company secured a $10,000,000 revolving line of credit from a
commercial banking company guaranteed by certain Company assets and assets of
one of the Company's investors. As of June 30, 2000, no portion of the revolving
line of credit has been drawn. In the event needed working capital is not
raised, the Company also has the option of scaling back its expenditures to
conserve cash until additional financing or other alternative business solutions
are implemented.
2. 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. 6,272,615 and 8,372,519 common equivalent
shares as of June 30, 2000 and 1999 respectively, have been excluded from the
shares used to calculate diluted EPS, as their effect is anti-dilutive.
3. 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>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.......................................... $4,069 $1,589
Work-in-process........................................ 3,834 344
Finished goods......................................... 17 40
------ ------
Inventory, net......................................... $7,920 $1,973
====== ======
</TABLE>
4
<PAGE> 7
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
4. PATENT
On June 16, 2000, we entered into an Amended and Restated Patent and
Technology Assignment Agreement whereby Dr. Bruce J. Sand, M.D., F.A.C.S. agreed
to assign to the Company irrevocably and on an exclusive basis the Patent Rights
and Related Technology and Dr. Sand's patent for the prevention of regression of
refractive keratoplasty. As part of this agreement, the Company issued to Dr.
Sand a warrant to purchase 750,000 shares of our common stock at an exercise
price of $0.01 per share, exercisable at any time prior to June 16, 2005. Dr.
Sand agreed that he would sell no more than 250,000 of such shares in any of our
fiscal quarters. In addition, for legal services rendered by Edward Vincent
King, Jr., Dr. Sand's attorney, we issued a warrant to purchase 67,500 shares of
our Common Stock on the same terms as the warrant issued to Dr. Sand and Mr.
King, Jr. agreed not to sell more than 22,500 shares in any of our fiscal
quarters. The $8,271,000 value of this patent was based on the fair value of the
warrants issued, calculated using the Black Scholes Valuation Model and will be
amortized over the life of the patent, estimated to be ten years.
5. ISSUANCE OF 2000 CONVERTIBLE DEBENTURES
On January 11, 2000, the Company completed a $11,700,000 ($11,200,000 net
of offering costs) private placement of convertible debentures with warrants.
These debentures are convertible into the Company's common stock at a conversion
price of $5.916 per share, at the option of the holder, and mature in June 2002.
The debentures bear an interest rate of 7% per annum, payable in kind or cash at
the option of the Company, and is payable quarterly. There are two types of
associated warrants issued in connection with the debentures. Type A are
five-year warrants with an exercise price of $6.803 per share. Type B warrants
are two-year warrants with an exercise price of $6.803 per share and were called
by the Company on June 28, 2000 when the provision was met of the Company's
closing stock price closing equal to or higher than $7.823 for a continuous
period of twenty trading days.
In May, 2000 approximately $2,000,000 of the January 2000 Convertible Debt
financing was converted into 388,088 shares of common stock at an at a
conversion price of $5.916 per share. In June, 2000 approximately 287,375 Type B
warrants associated with the January 2000 Convertible Debt financing were
exercised at an exercise price of $6.803 per share.
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Investments and Hedging Activities" which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
July of 1999, the FASB issued Statement of Financial Standards No. 137 ("SFAS
137"), "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133," which defers the effective
date to all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company has not yet evaluated the effects of this change on its operations. The
Company will adopt SFAS 133 as required for its first quarterly filing of the
fiscal year 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides guidance
for revenue recognition under certain circumstances. The Company believes that
SAB 101 will not have a material impact on its financial position or results of
operations.
In March 2000, The Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25
5
<PAGE> 8
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
("FIN 44"). This Interpretation clarified the definition of employee for
purposes of applying Accounting Practice Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"), the criteria for determining whether a
plan qualifies as a non-compensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation covers specific events that occur after
either December 15, 1998, or January 12, 2000. Management believes that FIN 44
will not have a material effect on the financial position or results of
operations of the Company.
6
<PAGE> 9
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; any restrictions
or revocations that the Food and Drug Administration ("FDA") may impose on our
Hyperion(TM) LTK System that received the FDA's approval of the Company's
pre-market approval application; 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.
Our working capital is seriously depleted due to our substantial losses in
the past eight 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 Hyperion(TM) Laser Thermal Keratoplasty (the "Hyperion(TM) 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. We 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 $9,300,000, net of offering costs, in the
form of promissory notes with warrants in January 1998 (the "1998 Notes
Placement"), and approximately $11,800,000, net of offering costs, from the sale
of common stock in December 1998 (the "1998 Equity Offering"). In January 1999,
we raised $10,000,000, net of offering costs, in the form of promissory notes
with warrants (the "1999 Notes Placement"). In January 2000, we raised
$11,200,000, net of offering costs, in a private placement in the form of
convertible debentures and warrants (the "2000 Notes Placement"). In addition,
in June 2000, we secured a $10,000,000 revolving line of credit with a
commercial banking company.
On January 13, 2000, $5,000,000 of the principal amount of the 1999 Notes
became convertible into the Company's Common Stock at a conversion price of
$4.00 per share when the Ophthalmic Devices Panel (the "ODP") unanimously voted
to recommend that the FDA approve the Company's LTK System in the United States
for the temporary reduction of low to moderate hyperopia with conditions
relating to patient symptoms, longevity of effect and the effect of retreatment.
On June 30, 2000 the remaining $5,000,000 balance of the principal amount of the
1999 Notes became convertible at a conversion price of $8.00 with final FDA
approval. As of June 30, 2000 neither portion of the Notes have been converted
by the holder.
On January 27, 2000 the Company announced that it had passed its
ISO9001/EN46001 certification audit for the Company's quality system and
therefore is certified for the International Organization for Standards ISO
9001, European Commission EN 46001 and CE marking (European Community Seal of
Approval).
On June 30, 2000 the FDA gave final approval for Sunrise's Hyperion(TM) LTK
System in the United States for the temporary reduction of low to moderate
hyperopia with conditions relating to labeling regarding patient symptoms,
longevity of effect and the effect of retreatment.
FINANCIAL CONDITION
As of June 30, 2000, the Company had $5,312,000 in cash and cash
equivalents. The Company's operating activities used $18,545,000 in the six
months ended June 30, 2000 and $9,331,000 in cash during the
7
<PAGE> 10
same period in 1999. Substantial portions of the 1999 and 2000 losses were
funded with the proceeds of a series of private placements. The 1999 Notes
Placement had aggregate net proceeds of approximately $10,000,000 and the 2000
Notes Placement generated aggregate net proceeds of $11,200,000.
The Company's current operations continue to be cash flow negative,
limiting the Company's working capital resources. Working capital at June 30,
2000 amounted to approximately $2,008,000. At December 31, 1999, working capital
amounted to approximately $5,756,000. The Company's ability to continue as a
going concern is dependent upon performing profitably or obtaining further
financing. The Company has invested a significant portion of its working capital
during the first quarter of 2000 in the ramp-up of manufacturing capabilities,
build-up of materials and components for the production of the Hyperion(TM) LTK
System and its market preparation for the launch on the domestic and
international markets. We expect to spend approximately $1,903,000 for
additional capital expenditures in fiscal year 2000. The Company believes that
its current working capital, together with the $10,000,000 revolving line of
credit which has not been used to date, is sufficient to support out operational
needs over the coming months. We also believe that the revenue and influx of
cash from the sale of our recently approved Hyperion(TM) LTK System will
steadily replenish our working capital over the coming months. Sales to the
domestic market have begun subsequent to June 30, 2000 following the final FDA
approval. However, given that this technology is new to the market, and
therefore unproven, there is no assurance that expected results will be
attained. Sales of the Hyperion(TM) LTK System can also be made to certain
international markets where it is approved by the local regulatory authorities.
There is no assurance the Company will be able to raise sufficient working
capital, if needed, from the capital markets or through debt instruments.
Management believes that if revenues from sales or new funds from debt or equity
instruments are insufficient to maintain the current expenditure rate, it will
be necessary to extensively curtail its operations until an appropriate solution
is implemented.
RESULTS OF OPERATIONS
Revenues of $424,000 and $ $442,000 for the three- and six-month periods
ended June 30, 2000 represent an increase of $421,000 and $426,000 from revenues
of $3,000 and $16,000 for the same periods in 1999. This increase is due to the
sale of two Hyperion units to clinical investigators in the United States during
the second quarter of 2000.
Costs of revenues and the resulting negative margin for the three- and
six-month periods ended June 30, 2000 reflect charges of unabsorbed
manufacturing labor and overhead.
Research and development expenses totaled $945,000 and $1,963,00 for the
three- and six-month periods ended June 30, 2000, compared to $1,144,000 and
$2,511,000 for the same periods in 1999. The 17% and 22% decrease in engineering
and development expenses compared to those of 1999 was primarily due to the
lower expenditures in development costs of the LTK System.
Sales, marketing and regulatory costs were $3,382,000 and $5,963,000 for
the three- and six-month periods ended June 30, 2000, compared to $1,692,000 and
$3,072,000 for the same periods in 1999. The 100% and 94% increase in sales,
marketing and regulatory expenses in the second quarter and year-to-date of
2000, respectively was due to the increase in marketing efforts in preparation
of the Hyperion(TM) LTK System market launch.
General and administrative expenses were $5,599,000 and $7,031,000 for the
three- and six-month periods ended June 30, 2000, compared to $1,270,000 and
$3,691,000 for the same periods of 1999. Approximately $4,278,000 and
$4,360,000, respectively of general and administrative expenses in the second
quarter and year-to-date of 2000 was attributed to non-cash option charges and
expense related to the determination of the fair value of warrants and
non-qualified stock options issued in lieu of cash, compared to comparable
expenses of $14,000 and $1,397,000 for the same period of 1999.
Net interest and other expense for the three- and six-month periods ended
June 30, 2000 of $945,000 and $11,246,000 represent non-cash interest charges
pursuant to the 1998, 1999 and 2000 Notes Placements and related warrants,
compared to $1,188,000 and $4,117,000 for the same periods of 1999. For the
three- and six-month periods ending June 30, 2000, approximately $909,000 and
$11,156,000 or 96% and 99% respectively,
8
<PAGE> 11
of the Company's net interest expense was due to non-cash charges incurred in
connection with the 1998, 1999 and 2000 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 1999 and 2000.
The net loss for the three- and six-month periods ended June 30, 2000 of
$11,861,000 and $27,894,000 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 $5,187,000 and
$15,516,000 or 44% and 56% of the net loss, was primarily attributable to
non-cash charges associated with debt financings, warrants and non-qualified
stock options.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Investments and Hedging Activities" which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
July of 1999, the FASB issued Statement of Financial Standards No. 137 ("SFAS
137"), "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133," which defers the effective
date to all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company has not yet evaluated the effects of this change on its operations. The
Company will adopt SFAS 133 as required for its first quarterly filing of the
fiscal year 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides guidance
for revenue recognition under certain circumstances. The Company believes that
SAB 101 will not have a material impact on its financial position or results of
operations.
In March 2000, The Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25 ("FIN 44"). This
Interpretation clarified the definition of employee for purposes of applying
Accounting Practice Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation covers specific events that occur after either December 15, 1998,
or January 12, 2000. Management believes that FIN 44 will not have a material
effect on the financial position or results of operations of the Company.
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 cash and cash equivalents 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.
It is not possible to anticipate the level of interest and the rates past
2000. Changes in interest rates have no impact on our debt as the 1998 Notes,
1999 Notes and 2000 Notes bear fixed interest rates of 12%, 5% and 7%,
respectively.
9
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITES AND USE OF PROCEEDS
On January 11, 2000, the Company completed a private placement of
convertible debentures in the aggregate principal amount of approximately
$11,700,000 and related warrants. The proceeds of the private placement to the
Company was approximately $11,200,000 cash, net of offering costs. In May, 2000
approximately $2,000,000 was converted into 388,088 shares of common stock at a
conversion price of $5.916 per share.
Investors were also issued two classes of warrants in connection with the
debentures. Class A warrants represent rights to purchase an aggregate of
494,426 shares of the Company's Common Stock at an exercise price of $6.803 per
share and have an expiration date of January 11, 2005. Class B warrants
represent rights to purchase an aggregate of 494,426 shares of the Company's
Common Stock at an exercise price of $6.803 per share, and were called by the
Company on June 28, 2000 when the provision was met of the Company's stock
closing bid price exceeding $7.823 for a period of 20 consecutive trading days.
287,375 Class B warrants were exercised by June 30, 2000 and the majority of the
remaining Class B warrants are expected to be exercised on or before August 14,
2000.
On June 16, 2000, the Company entered into an Amended and Restated Patent
and Technology Assignment Agreement, a Royalty Acceleration Agreement and other
related agreements (the "Sand Agreements") with Bruce J. Sand, M.D., F.A.C.S.
("Dr. Sand"). Under the Sand Agreements, the Company issued to Dr. Sand a
warrant to purchase 750,000 shares of the common stock of the Company at an
exercise price of $0.01 per share, with an expiration date of June 16, 2005. Dr.
Sand agreed that he would sell no more than 250,000 of such shares in any fiscal
quarter of the Company. In addition, for legal services rendered by Edward
Vincent King, Jr., Dr. Sand's attorney, the Company issued a warrant to purchase
67,500 shares of the Company's common stock, with the same terms as the Sand
Warrant and of which the holder agreed not to sell more than 22,500 shares in
any fiscal quarter of the Company. The warrants were granted pursuant to an
exemption under Section 4(2) of the Securities Act.
On June 29, 2000, the Company entered into a Loan and Security Agreement
with Silicon Valley Bank whereby the Bank has agreed to provide a secured
revolving credit line in an amount up to $10,000,000. The credit line has a
one-year term, and advances made under the secured credit line bear interest at
the Bank's prime rate. The line of credit is secured by all the assets of the
Company, other than the Company's intellectual property. In connection with the
secured credit line, The David A. Brewer Trust agreed to guaranty any advance
under the line. As compensation for the guaranty, pursuant to a Master Warrant
(the "Master Warrant"), which may be exercised in whole or in part at any time
and from time to time, the Trust will receive (i) 25,000 shares of Common Stock
of the Company whether or not the secured credit line is drawn upon, (ii)
0.000195 shares of Common Stock of the Company per $1.00 drawn from the line for
each day such amount remains outstanding, (iii) 25,000 shares of Common Stock of
the Company per $1,000,000 drawn by the Company up to $7,000,000 (on a prorated
basis) and (iv) 0.000289 shares Common Stock of the Company per $1.00 drawn down
by the Company in excess of $7,000,000 for each day such amount remains
outstanding. The determination of the warrants issuable under clause (iv) is
subject to offset by the warrants to be issued under clause (iii). The exercise
price of shares of the Company's Common Stock issuable upon exercise of the
Master Warrant is $5.00 per share, and the Master Warrant is exercisable for
five years from the date of issuance. As of June 30, 2000 no amount has been
drawn down from the secured line of credit.
10
<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of shareholders on June 8, 2000. All of
the matters voted on by the stockholders were approved. The results are as
follows:
PROPOSAL 1
The following directors were elected as Class I directors of the company,
each to serve a three-year term expiring upon the annual meeting of stock
holders to be held in 2003 and until his successor is elected and qualified:
<TABLE>
<CAPTION>
FOR AUTHORITY WITHHELD
---------- ------------------
<S> <C> <C>
R. Dale Bowerman............................... 43,672,603 632,923
John Hendrick.................................. 43,723,506 582,020
</TABLE>
PROPOSAL 2
The proposal to ratify the appointment of PricewaterhouseCoopers LLP as
independent accountants for the Company for the year ending December 31, 2000
was approved.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED BROKER NON-VOTE
---------- ------- --------- ---------------
<S> <C> <C> <C>
43,974,896.. 224,517 106,113 None
</TABLE>
PROPOSAL 3
The proposal to approve the adoption of the Company's 2000 Long-Term Equity
Compensation Plan was approved.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED BROKER NON-VOTE
---------- --------- --------- ---------------
<S> <C> <C> <C>
41,197,874.. 2,893,098 216,154 1,600
</TABLE>
PROPOSAL 4
The proposal to approve the adoption of the Company's 2000 Non-employee
Director's Stock Option Plan was approved.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED BROKER NON-VOTE
---------- --------- --------- ---------------
<S> <C> <C> <C>
41,024,420.. 3,056,580 225,126 600
</TABLE>
The proposals above are described in the detail in the Company's definitive
proxy statement dated May 8, 2000 for the Annual Meeting of the Stockholders
held on June 8, 2000.
ITEM 5. OTHER INFORMATION
As a matter of information and with sincere regret, we announced in a Press
Release dated June 12, 2000 that our non-executive Chairman of the Board of
Directors, Joseph D. Koenig, passed away at the age of 70.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1 Royalty Acceleration Agreement dated as of June 16, 2000
between Sunrise Technologies International, Inc. and Bruce
J. Sand.(*)
10.2 Amended and Restated Patent and Technology Assignment
Agreement dated as of June 16, 2000 between Sunrise
Technologies International, Inc. and Bruce J. Sand.(*)
10.3 Warrant dated as of June 16, 2000 issued by Sunrise
Technologies International, Inc. to Bruce J. Sand.(*)
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.4 Warrant dated as of June 16, 2000 issued by Sunrise
Technologies International, Inc. to Edward Vincent King,
Jr.(*)
10.5 Loan and Security Agreement dated June 29, 2000 between
sunrise Technologies International, Inc. and Silicon Valley
Bank.(*)
10.6 Negative Pledge Agreement dated as of June 29, 2000 between
Sunrise Technologies International, Inc. and Silicon Valley
Bank.(*)
0.7 Third Party Pledge and Security Agreement dated June 29,
2000 between Sunrise Technologies International, Inc. and
Silicon Valley Bank.(*)
10.8 Agreement dated as of July 3, 2000 between David A. Brewer
Trust and Sunrise Technologies International, Inc.(*)
27 Financial Data Schedule
</TABLE>
---------------
(*) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated July 17, 2000.
b. REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the second quarter of 2000.
The Company filed a Report on Form 8-K dated July 17, 2000 to report that
under Item 5, the Company received final FDA approval, secured a $10,000,000
line of credit and entered into an Amended and Restated Patent and Technology
Assignment Agreement, a Royalty Acceleration Agreement and other related
agreements with Bruce J. Sand, M.D., F.A.C.S.
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.
<TABLE>
<S> <C>
Date: August 11, 2000 By: /s/ C. RUSSELL TRENARY, III
-------------------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 2000 By: /s/ PETER E. JANSEN
-------------------------------------------------
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
</TABLE>
13
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION.
------- ------------
<S> <C>
10.1 Royalty Acceleration Agreement dated as of June 16, 2000
between Sunrise Technologies International, Inc. and Bruce
J. Sand.(*)
10.2 Amended and Restated Patent and Technology Assignment
Agreement dated as of June 16, 2000 between Sunrise
Technologies International, Inc. and Bruce J. Sand.(*)
10.3 Warrant dated as of June 16, 2000 issued by Sunrise
Technologies International, Inc. to Bruce J. Sand.(*)
10.4 Warrant dated as of June 16, 2000 issued by Sunrise
Technologies International, Inc. to Edward Vincent King,
Jr.(*)
10.5 Loan and Security Agreement dated June 29, 2000 between
sunrise Technologies International, Inc. and Silicon Valley
Bank.(*)
10.6 Negative Pledge Agreement dated as of June 29, 2000 between
Sunrise Technologies International, Inc. and Silicon Valley
Bank.(*)
10.7 Third Party Pledge and Security Agreement dated June 29,
2000 between Sunrise Technologies International, Inc. and
Silicon Valley Bank.(*)
10.8 Agreement dated as of July 3, 2000 between David A. Brewer
Trust and Sunrise Technologies International, Inc.(*)
27 Financial Data Schedule
</TABLE>
---------------
(*) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated July 17, 2000.
14
