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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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. 1-10428
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 77-0148208
(STATE OR OTHER JURISDICTION OF (I. R. S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3400 WEST WARREN AVENUE, FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 623-9001
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant was approximately $351,032,000 as of March 10,
2000.
The number of shares of the registrant's Common Stock issued and
outstanding as of March 10, 2000 was 46,414,401.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed prior to April 30,
2000, pursuant to Regulation 14A of the Securities Exchange Act of 1934 are
incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Sunrise Technologies International, Inc. (the "Company") develops,
manufactures and markets laser systems for applications in ophthalmology.
Substantially all of the Company's business activities, including engineering
and development, manufacturing, assembly and testing, take place at the
Company's facility in Fremont, California. Prior to June 26, 1997, the Company
developed, manufactured and marketed lasers and air abrasion cavity preparation
systems for use in dentistry. On June 26, 1997, the Company sold its dental
business and assets to Lares Research of Chico, California for $4,000,000 in
cash and $1,500,000 in interest-bearing notes due in June 2000 and June 2001.
Since mid-1992, the Company has focused a significant portion of its
efforts on engineering and development of its holmium laser corneal shaping
product or process, known as Laser Thermal Keratoplasty (the "LTK System"), for
the treatment of refractive error of the eye, such as hyperopia (farsightedness)
and presbyopia (age-related loss of near focusing ability). Until late 1998,
refractive surgery in the United States, outside of certain clinical studies,
was solely for the treatment of myopia. Myopia is a refractive disorder that the
Company has not targeted to treat with its LTK System due to the lack of
available resources to pursue that market segment and also due to the number of
competitors already offering products to treat that condition. The Company saw
the treatment of hyperopia and presbyopia as potentially large markets for
products based on its technology. These markets were not being well served by
other companies with products or potential products for refractive surgery. The
combination of these factors led the Company to focus its efforts on hyperopia
and presbyopia. The LTK System is based in part on patented technology acquired
in the Company's acquisitions of in-process technology from Laser Biotech, Inc.
("Laser Biotech") and Emmetropix Corporation ("Emmetropix") in 1992. See
"Products -- LTK System" in this Section.
The Company has incurred substantial losses in the past eight years, which
have seriously depleted its working capital. Sales of its existing ophthalmic
products at current levels will not be sufficient to sustain the continued
development and regulatory licensing of the LTK System. The Company has been
able to raise additional working capital for all aspects of its business through
the private placement of its Common Stock and convertible notes with warrants.
These private placements raised a total of $15,296,000 in new capital, for the
Company in 1994, 1995 and 1996, approximately $3,700,000 net of offering costs
in the form of promissory notes with warrants in 1997 (the "1997 Notes
Placement"), approximately $9,300,000, net of offering costs, in the form of
promissory notes with warrants in January 1998 (the "1998 Notes Placement"),
approximately $11,800,000, net of offering costs, from the sale of Common Stock
in December 1998 (the "1998 Equity Offering"), $10,000,000, net of offering
costs, in the form of promissory notes with warrants in January 1999 (the "1999
Notes Placement") and approximately $11,200,000, net of offering costs, in the
form of convertible debentures with warrants in January 2000 (the "2000
Debentures").
The Company was incorporated in 1987 under the laws of the State of
California and was reincorporated in 1993 under the laws of the State of
Delaware.
PRODUCTS
LTK System
In April 1992, the Company acquired Laser Biotech through a merger of a
wholly-owned subsidiary of the Company with Laser Biotech (the "Merger"). Laser
Biotech was founded in 1986 by Bruce J. Sand, M.D., FACS, to research and
develop a precision laser instrument for eye surgery. In connection with the
Merger, the Company also acquired certain patent and patent applications held by
Dr. Sand covering a patented technique for reshaping the cornea using a laser.
The LTK System alters the shape of the cornea to correct refractive disorders
such as hyperopia and presbyopia without removing corneal tissue. The procedure
employs a laser to shrink, selectively, the collagen in the cornea, changing the
curvature of the cornea and thereby changing the refractive power of the eye. By
comparison, excimer laser systems for corneal reshaping developed by Summit
Technologies, Inc. ("Summit") and VISX, Inc. ("VISX") remove parts of the cornea
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to achieve changes in refraction. Laser Biotech conducted pre-clinical studies
to gain preliminary information on the efficacy and safety of the product, which
resulted in positive indications that the LTK System could be applied
successfully and safely to correct certain refractive error.
The Company received an Investigational Device Exemption ("IDE") from the
Food and Drug Administration (the "FDA") to begin Phase I clinical trials of the
LTK System on human subjects in the first quarter of 1992. Phase I trials
commenced in June 1992 using a prototype LTK System designed and developed by
the Company. Sunrise completed Phase I of the clinical work for the LTK System
and filed its results with the FDA in June 1993. In September 1993, the Company
received clearance to begin Phase IIa clinical trials for the treatment of
hyperopia. The trials were conducted at the Doheny Eye Institute at the
University of Southern California and Baylor University and were completed in
November 1994. On September 5, 1996, the FDA authorized the Company to treat an
additional 100 subjects at five United States locations in a continuation of
Phase IIa clinical trials using a treatment algorithm developed by Sunrise in
the course of the initial Phase IIa clinical trials and in the course of studies
conducted by ophthalmologists in Mexico, Germany, Belgium, Italy and Canada. On
March 31, 1997, the Company added three new investigators to its Phase IIa
clinical study for hyperopia. On July 18, 1997, the Company received FDA
approval to treat the fellow eye of patients who had one eye treated as part of
the clinical trial for hyperopia six months after the first eye was treated. On
August 7, 1997, the Company received approval from the FDA to treat an
additional 100 patients as part of its Phase IIa clinical trial for hyperopia,
bringing the total patients approved for treatment at that time to 228.
On September 25, 1997, the Company received approval to treat 60 patients
at four sites for the condition known as presbyopia. Presbyopia is the
age-related loss of near vision. This clinical trial employs a technique known
as monovision to treat presbyopia. A patient with presbyopia utilizes one eye
primarily for distance vision and the other eye primarily for reading, or near
vision. A fifth site was added on March 30, 1998. On October 8, 1998, the
Company received approval to treat an additional 20 patients in its expanded
clinical trial for presbyopia. As of March 10, 2000, the Company has treated 67
patients under this clinical study.
On October 8, 1997, the Company received approval to re-treat patients in
its clinical study. As of March 10, 2000, ten eyes of ten patients have been
treated.
On November 19, 1997, the Company completed enrollment in its Phase IIa
clinical trial for hyperopia and also received approval to begin Phase III of
its clinical trial for hyperopia with an additional 200 patients to be treated
at the existing eight clinical sites and up to seven additional clinical sites.
The Company added three clinical sites, bringing the total to 11 sites. On
February 24, 1998, the Company announced that it had received approval to treat
the fellow eye of patients enrolled in its clinical study for hyperopia on the
same day, as opposed to the earlier requirement to wait six months before
treating fellow eyes. On June 30, 1998, the Company announced that it had
completed enrollment for the Phase III investigation, the final phase of the
study for treatment of low to moderate hyperopia. As of March 10, 2000, 399
primary eyes and 279 fellow eyes of 399 patients have been treated.
On March 12, 1998, the Company announced that it had received approval to
initiate a new clinical study to treat patients with the LTK System who were
overcorrected after receiving treatment for myopia (nearsightedness) from LASIK
procedures or excimer laser systems which are manufactured by other companies.
As of March 10, 2000, the Company has treated 3 eyes of the 10 patients under
this clinical study.
On April 7, 1998, the Company received approval to begin a sub-study to
investigate treatment of hyperopia between 2.75 to 4.0 diopters using a modified
laser nomogram. As of March 10, 2000, 20 eyes of the 20 patients have been
treated.
On October 14, 1999, the Company received approval to modify the algorithm
for treatment of hyperopia in the range of 1.25 to 5.625 diopters for sixty
patients at eight clinical sites. As of March 10, 2000, 12 patients have been
treated.
The Company has obtained FDA clearance to export the LTK System to most
European countries, Turkey, Saudi Arabia, Canada, Mexico, Brazil, China, Korea,
Hong Kong, the Bahamas, South Africa and other countries, although such sales
are subject to the individual regulatory authority of each country.
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Following local regulatory approvals, the Company commenced marketing the LTK
System overseas, primarily in Europe, for the treatment of hyperopia and
astigmatism in December 1993. To date, international sales of the LTK System
have been limited. Revenue in the United States cannot reasonably be expected
before the second half of 2000 at the earliest, and is dependent on final FDA
approval.
As of March 10, 2000, the Company had treated approximately 763 eyes with
the LTK System in its United States clinical trials. On December 14, 1998, the
Company submitted its premarket approval application ("PMA") for low hyperopia
to the FDA. On January 28, 1999, the FDA determined that the PMA for low
hyperopia was suitable for filing. At a July 22, 1999 meeting of the Ophthalmic
Devices Panel ("ODP"), an advisory committee of the U.S. Food and Drug
Administration ("FDA"), the ODP requested additional long-term data and
recommended to the FDA not to approve the Sunrise LTK System at that time. In
October 1999, the Company prepared an amendment to its PMA which contained a
substantial increase in the number of patients followed through two years
compared to that presented at the July ODP meeting. On January 13, 2000, the ODP
unanimously voted to recommend that the FDA approve the Sunrise 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. Final FDA approval is expected sometime within
three to nine months from the January 13, 2000 ODP approval, although we can not
be certain we will obtain that approval within that time frame, if at all. See
"Government Regulation" and "Patents and Licenses" in this Section and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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).
The LTK System incorporates a holmium laser system into a delivery system
that is built into a custom slit-lamp to perform the LTK procedure. A slit-lamp
is a binocular microscope used regularly by ophthalmologists to examine an eye
binocularly under high magnification. The LTK System delivers eight simultaneous
laser beams disposed in a circle of varying diameter. This system allows for
easy alignment on the patient's eye and the delivery of multiple laser
exposures, each less than two seconds.
GOVERNMENT REGULATION
The Company's products are subject to significant government regulation in
the United States and other countries. In order to test clinically, produce and
market products for human diagnostic and therapeutic use, the Company must
comply with mandatory procedures and safety standards established by the FDA and
comparable foreign regulatory agencies. Typically, such standards require
products to be approved by the government agency as safe and effective for their
intended use before being marketed for human applications. The clearance process
is expensive and time consuming, and no assurance can be given that any agency
will grant clearance to the Company to sell its products for routine clinical
applications or that the time for the clearance process will not be extensive.
Devices such as the LTK System may be marketed in the United States only
after the FDA has approved a PMA for the device. Under the PMA procedure, the
applicant must obtain an IDE before beginning the substantial clinical testing
required to determine the safety, efficacy and potential hazards of the
products. The preparation of a PMA is significantly complex and time consuming.
The minimum review period under a PMA is 180 days from the date of filing. The
FDA often responds with requests for additional information or clinical reports
that can extend the review period substantially beyond 180 days. The Company
submitted its PMA with the FDA for approval to sell its LTK System in the United
States for hyperopia on December 14, 1998. FDA approval is expected sometime
within three to nine months from the January 13 ODP approval, although we can
not be certain we will obtain that approval within that time frame, if at all.
The Company has, and will continue, to focus its efforts and limited resources
on its technology for the treatment of hyperopia and presbyopia.
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The FDA imposes various requirements on manufacturers and sellers of
products under its jurisdiction, such as labeling, manufacturing practices,
record keeping and reporting requirements. The FDA also may require post-market
testing and surveillance programs to monitor a product's effects. All of the
Company's products will require regulatory approval from the FDA. There can be
no assurance that the appropriate approvals from the FDA will be granted for the
Company's products, that the process to obtain such approvals will not be
excessively expensive or lengthy or that the Company will have sufficient funds
to pursue such approvals. The failure to receive requisite approvals for the
Company's products or processes, when and if developed, or significant delays in
obtaining such approvals, will prevent the Company from commercializing its
products as anticipated and will have a material adverse effect on the business
of the Company.
The Company is also subject to regulation under the provisions of the Food,
Drug and Cosmetic Act relating to Product Radiation Control which, among other
things, requires laser manufacturers to: (i) file new product and annual
reports; (ii) maintain quality control, product testing and sales records; (iii)
incorporate certain design and operating features in lasers sold to end-users;
and (iv) certify and label each laser sold to conform to all applicable
standards for such lasers. Various warning labels must be affixed and certain
protective devices installed, depending on the class of the product. The FDA's
Center for Devices and Radiological Health is empowered to seek fines and other
remedies for violations of the regulatory requirements.
Marketing and Sales
In the United States, the Company plans to sell its products through a
small direct sales force. International sales will be made through established
medical equipment distributors overseas. The Company has established
relationships with distributors in Great Britain, Belgium, France, the
Netherlands and South Africa.
The extent and nature of the Company's marketing efforts are determined by
a number of factors, including the number of specialists in the area and the
characteristics of the laser applications. The establishment of a successful
distributor network requires providing the distributors with sales instruments
(brochures, clinical data, research papers, educational videos, etc.). Such
marketing efforts are expected to include presentations at conventions and trade
shows, customer training by Company personnel and sponsorship of teaching
seminars, clinical presentations and research by others. The Company also hires
additional marketing and sales consultants from time to time to assist in the
marketing of its products.
Research and Development
The Company's success will depend substantially upon its ability to
develop, manufacture and market innovative new products.
In 1999, the Company recorded $4,774,000 in research and development
expenses primarily relating to development of the LTK System. Related expenses
were $2,107,000 and $964,000 in 1998 and 1997, respectively. The Company
continues to explore several other types of lasers with varying characteristics
in order to find the optimal interactions with tissues in specific medical
applications. Since the sale of the Company's dental business and assets in June
1997 to an unaffiliated party, the Company no longer expends any of its funds on
the research and development of dental lasers or other dental products. Clinical
testing and sale of the Company's products are subject to obtaining applicable
regulatory approvals, of which there can be no assurance. The Company's research
and development activities are conducted in-house as well as by outside sources,
including consultants and universities.
The laser industry is characterized by extensive research and rapid
technological change. Development by others of new or improved products,
processes or technologies may make product development by the Company obsolete
or less competitive. The Company will be required to devote continuing efforts
and funds to further developments and enhancements for its existing products and
for its research and development of new technologies and products. There can be
no assurance the Company will be able to successfully adapt its operations to
evolving markets and technologies and fund the development of new medical
products to achieve possible technological advantages.
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Production
The Company manufactures its ophthalmic lasers from parts, components and
subassemblies obtained from a number of unaffiliated suppliers, and the Company
designs the software incorporated into a microprocessor purchased from an
unaffiliated third party. Prototype production and all manufacturing, assembly
and testing activities take place at its Fremont, California facility. Although
some of the parts and components used by the Company to manufacture 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. The
Company continually evaluates ways to minimize any impact to its business from
any potential part or component shortage through inventory stockpiling and
design changes to afford opportunities for multiple sources of supply for these
key components.
In addition, the Company has attempted to negotiate with the University of
Miami to reach agreement regarding the non-exclusive use of a component of the
delivery system used in the LTK System that was jointly developed by the Company
and the University. The Company believes that it will be able to make reasonable
arrangements with the University. If, however, the Company is unable to conclude
negotiations with the University successfully, the Company may have no rights in
the delivery system presently configured in the LTK System. If the Company is
forced to redesign the LTK System, such redesign efforts could be time
consuming, expensive and prolong FDA review.
The Company's ophthalmic laser systems have been designed in a modular
fashion to facilitate the assembly process. The Company intends to utilize
modular design and construction concepts in connection with its future products.
The Company will require additional engineering and manufacturing staffing as
new products are introduced into the marketplace. Any loss of availability of a
key system component could result in a material adverse change to the Company's
business, financial condition and results of operations.
Potential Liability
The testing and use of human health care products entail an inherent risk
of physical injury to patients and resultant product liability or malpractice
litigation. While the Company has obtained product liability coverage in the
amount of $10,000,000 with an umbrella policy for an additional $10,000,000,
such coverage is limited, and there can be no assurance that such coverage will
be sufficient to protect it from all risks to which it may be subject. Those
costs of defending a product liability or malpractice action could have a
material adverse impact on the Company, even if the Company were to prevail
ultimately.
Patents and Licenses
In the merger of Laser Biotech into the Company, the Company acquired an
issued United States patent and pending United States and foreign patent
applications previously assigned to Laser Biotech by Dr. Bruce Sand, the
inventor of the patent and founder of Laser Biotech. The issued patent covers a
method for using a laser to shrink collagen in the human body, with specific
application to the cornea. Since the merger, five more patents filed by Dr.
Sand, as the inventor, have been allowed, and have been assigned to the Company.
As a result of the Emmetropix acquisition, the Company now has one issued United
States patent and one pending European regional patent application based on the
issued United States patent, which the Company believes may be useful in further
developing its Laser Thermal Keratoplasty product. In addition, the Company has
filed a patent application covering the LTK System it developed to make use of
the LTK procedure. The Company owns 66 issued patents on the LTK System and
method for shrinking collagen in the United States and internationally. These
patents protect the Company's technology while the LTK System is undergoing
clinical trials for approval to market the LTK System in the United States and
encompass both the apparatus for treatment with the LTK System and the method of
shrinking collagen in the cornea. These patents begin to expire in 2009. The
Company also has 43 pending patent applications on the LTK System and the method
for shrinking collagen in the United States and internationally.
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Competition
The vision correction industry is subject to intense competition. The
significant competitive factors in the industry include price, convenience,
success relative to vision correction, acceptance of new technologies, patient
satisfaction and government approval. Patients with hyperopia can achieve vision
correction with eyeglasses, contact lenses and possibly with other technologies
and surgical techniques currently under development, such as corneal implants,
human lens replacement, intra-ocular implantable contact lenses and surgery
using different types of lasers. The success of any competing alternative to the
LTK System for treating hyperopia could have a material adverse effect on the
Company's business, financial condition and results of operations. Most of the
Company's competitors have substantially greater financial capabilities for
product development and marketing than the Company, which may enable such
competitors to market their products or procedures to the consumer and to the
ophthalmic community in a more effective manner.
The excimer laser is the dominant laser used for the treatment of
refractive disorders. In the United States, VISX and Summit are the leading
manufacturers of excimer refractive surgical systems. While the Company believes
the LTK System offers several distinct advantages over the use of excimer lasers
for treating hyperopia, including ease of use and decreased invasiveness, both
VISX and Summit have significantly greater financial resources than the Company
and have received FDA approval for their respective excimer laser products for
treating myopia (nearsightedness), astigmatism and hyperopia. In addition,
certain of the Company's competitors, including Summit, have developed LTK
devices for the treatment of hyperopia. The Company believes its LTK System is
superior to those of its competitors and that use of Summit's holmium laser
system for LTK may violate certain of the Company's patents. None of the
Company's competitors is currently engaged in United States clinical trials to
approve their LTK devices for treating hyperopia.
Further, Summit discontinued its clinical trials for treating hyperopia
with its holmium laser system in 1996. However, any alternative treatment
offered by VISX or Summit will have a competitive advantage because of the name
recognition being created by the current promotion of their excimer laser
products for correcting myopia (nearsightedness) using lasers and the fact that
VISX and Summit have an established base of customers that are currently using
their products.
The Company believes the potential use of its process of shrinking collagen
is more attractive than competitive methods of treating certain refractive
errors because it can address refractive error with minimal invasiveness to the
cornea. There can be no assurance, however, that the method can be reduced to
practice using a reliable laser system, or that the Company will receive
regulatory approvals or successfully market such a product.
Export Sales
In 1999, approximately 71% of the Company's gross revenues, or $25,500,
were international as compared to approximately 98% in 1998 and 38% in 1997.
Warranty and Service
The Company provides a limited warranty on its laser systems. This warranty
is limited to 12 months from date of shipment by the Company. The Company
provides services to systems out of warranty worldwide for a fee. The Company's
laser products include microprocessors and software that perform self-checks
upon start-up and during operation. In addition, the systems feature software
that allows service personnel to perform diagnostic checks in the field. The
Company currently provides support services by telephone to customers with
operational and service problems and makes necessary repairs at its plant or at
the laser site.
To date, actual costs incurred related to warranty work have been minimal.
In the case of sales by distributors, all product services are provided by such
distributor.
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Employees
At December 31, 1999, the Company had 63 full-time equivalent employees
(including its executive officers), 27 in manufacturing, engineering and
development, 20 in marketing, sales and regulatory, and 16 in administration. In
addition, the Company has retained a number of consultants to assist with its
product development, regulatory activities and investor relations.
The Company is primarily dependent upon its engineering and development
employees and consultants for the development and improvement of existing and
proposed products. The Company's future success will depend in a large part upon
its ability to attract and retain highly qualified engineering and management
personnel, and its ability to continue to train and retain highly skilled
technical and marketing personnel. None of the Company's employees are
represented by a labor organization. The Company maintains various benefit plans
and has good employee relations.
Cautionary Statements -- Risk Factors
In the interest of providing the Company's stockholders and potential
investors with certain Company information, including management's assessment of
the Company's future potential, certain statements set forth herein contain or
are based on projections of revenue, income, earnings per share and other
financial items or relate to management's future plans and objectives or to the
Company's future economic performance. Such statements are "forward-looking
statements" within the meaning of Section 27A(I) of the Securities Act of 1933,
as amended, and in Section 21E(I) of the Securities Exchange Act of 1934, as
amended.
Although any forward-looking statements contained herein or otherwise
expressed by or on behalf of the Company are, to the knowledge and in the
judgment of the officers and directors of the Company, expected to prove true
and to come to pass, management is not able to predict the future with absolute
certainty. Accordingly, stockholders and potential investors are hereby
cautioned that certain events or circumstances could cause actual results to
differ materially from those projected or predicted. In addition,
forward-looking statements are based on management's knowledge and judgment as
of the date hereof, and the Company does not intend to update any
forward-looking statements to reflect events occurring or circumstances existing
hereafter.
In particular, the Company believes the following facts could impact
forward-looking statements made herein or in future written or oral releases and
by hindsight, prove such statements to be overly optimistic and unachievable.
WE HAVE SUSTAINED LOSSES IN THE PAST AND WE EXPECT TO REPORT LOSSES IN THE
FUTURE
We have incurred substantial losses that have depleted our working capital
and reduced our stockholders' equity. In addition, we expect that our business
will continue to be a significant consumer of cash. Unless and until the FDA
approves the domestic sale of the LTK System for performing laser thermal
keratoplasty, our revenues will not be sufficient to cover our operating costs.
We do not expect FDA approval, however, until sometime within three to nine
months from the January 13, 2000 ODP approval, although we can not be certain we
will obtain that approval within that time frame, if at all.
We funded our negative cash flows during 1997, 1998 and 1999 by the sale of
additional equity and convertible debt with warrants. At December 31, 1998,
after consummation of the 1998 Notes Placement (approximate net proceeds of
$9,300,000) and the 1998 Equity Offering (approximate net proceeds of
$11,800,000), cash and cash equivalents of the Company were approximately
$9,889,000. In January 1999 we raised $10,000,000 net of offering expenses
through the 1999 Notes Placement. The December 31, 1999 cash and cash
equivalents were $10,643,000. In January 2000, we raised approximately
$11,200,000 by means of a convertible debenture with warrants. Due to the
uncertainty of the timing of final FDA approval of the LTK system and
consequently its market launch, it is reasonable to expect that we will need to
raise additional working capital during 2000 to fund our activities. There can
be no assurance that additional funds can be
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raised on terms acceptable to the Company, if at all. Any additional equity or
debt offerings will dilute the holdings of our stockholders.
We expect to report operating losses during 2000. The losses will come
primarily from the expenses of the FDA approval process and underlying clinical
studies related to the LTK System, the cost to ramp up manufacturing of the
initial production units and the preparation costs associated with the market
launch of the LTK System. We will not have any domestic revenues from this
product line unless and until we obtain the FDA approval. Our international
revenues will not be sufficient to cover the costs of the approval process or
our general operating expenses.
NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE; ADDITIONAL CAPITAL WILL DILUTE
THE HOLDINGS OF OUR STOCKHOLDERS
Our stockholders have no preemptive rights. If we:
1. Commence a subsequent public or private offering of Common Stock,
convertible debt, or Preferred Stock; or
2. Issue Preferred Stock or shares of Common Stock upon exercise of
warrants to consultants or other parties providing goods or services to us
in lieu of or in addition to cash consideration.
Our stockholders, who do not participate in any future stock issuance, will
experience dilution of their equity investment in the Company. At this time, we
cannot determine the potential dilution to our stockholders.
We cannot assure that additional financing will be available, or if
available, that it will be available on terms favorable to our Company and our
stockholders. If funds are not available to satisfy our short-term and long-term
operating requirements, we may limit or suspend our operations in the entirety
or, under certain circumstances, seek protection from creditors. Our recent debt
and equity offerings contained terms adverse to our then existing stockholders.
It is possible that future financing undertaken prior to the commencement of
sales of the LTK System in the United States may contain terms that could result
in similar or more substantial dilution than that incurred by our stockholders
from the 1998 Notes Placement, the 1998 Equity Offering, the 1999 Notes
Placement and the 2000 Debentures.
WE COULD EXPERIENCE SUBSTANTIAL DELAY IN RECEIVING AND MAY NOT CONTINUE TO
RECEIVE NECESSARY APPROVAL FROM THE FDA OF OUR PRE-MARKET APPROVAL APPLICATION
FOR OUR LASER THERMAL KEROTOPLASTY SYSTEM.
The FDA and similar health authorities in foreign countries extensively
regulate our activities. The FDA regulates the LTK System, under the Food, Drug
& Cosmetic Act, as a Class III medical device. Class III medical devices must
have a PMA approved by the FDA before commercial sales in the United States
commence. The PMA process (and underlying clinical studies) is lengthy, the
outcome is difficult to predict, and the process requires substantial
commitments of our financial resources and our 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. Consequently, delays would
impair our ability to generate funds from operations, which in turn would have a
material adverse effect on our business, financial condition and results of
operations.
We cannot be certain that we will be able to timely obtain, if at all, the
required approval of our PMA in the United States for our intended uses of the
LTK System, or for any other devices for which we may seek approvals or
clearances. The FDA will subject us to pervasive and continuing regulation for
any products that we manufacture or distribute.
A new FDA regulation requires disclosure of the financial interests of
clinical investigators. This new regulation applies to all new PMAs submitted on
or after February 2, 1999. The purpose of this new regulation is to assist the
FDA in determining if, and to what extent, the clinical studies supporting a
marketing application may have been subject to investigator bias. Some of our
current 11 clinical investigators of the
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<PAGE> 10
LTK System have financial interests in the Company that meet the threshold for
disclosure under this new FDA regulation. It is not possible to predict,
however, what impact, if any, the disclosure of these interests would have on
the FDA's review of the PMA the Company submitted for the LTK System.
We received a CE (European Community) Mark of approval on our LTK device
that allows us to sell the device in these countries of the European Community.
In addition to the CE Mark, however, some foreign countries may require separate
individual foreign regulatory clearances. Although we have sold our products in
approximately 15 countries, sales of the LTK System require rigorous regulatory
approvals before we can sell them in the United States and certain other
countries. We cannot assure that we will be able to obtain regulatory clearances
for our products in the United States or other foreign markets.
WE DEPEND ON THE LTK SYSTEM AND MARKET ACCEPTANCE OF THAT SYSTEM IS UNCLEAR
We intend to continue to concentrate our efforts primarily on the
development of the LTK System and will be dependent upon the successful
development of that system to generate revenues. We have not yet commercially
introduced the LTK System in the United States. There can be no assurance that
if approved by the FDA, the ophthalmic community or the general population will
accept the LTK System as an alternative to existing methods of treating
refractive vision disorders. Many ophthalmologists may have already invested
significant time and resources in developing expertise in other corrective
ophthalmic techniques. Acceptance of the LTK System may be affected adversely by
- its costs,
- concerns related to its safety and efficacy,
- the general resistance to use of laser procedures on the eye,
- the effectiveness of alternative methods of correcting refractive vision
disorders,
- the lack of long-term follow-up data, or
- the possibility of unknown side effects.
Promotional efforts by suppliers of products or procedures which are
alternatives to the LTK System, including eyeglasses, contact lenses and laser
and non-laser surgical procedures, may also adversely affect the marketplace for
the LTK System. Any failure to achieve broad market acceptance of the LTK System
will have a material adverse effect on our business, financial condition and
results of operations.
CLINICAL DATA ABOUT THE LONG-TERM SAFETY AND EFFICACY OF THE LTK SYSTEM IS
CURRENTLY AVAILABLE, BUT WE MAY BE REQUIRED TO UNDERTAKE FURTHER TESTING
We have developed substantial clinical data on the safety and efficacy of
the LTK System in correcting hyperopia (farsightedness). Following the ODP
recommendation to approve the LTK system for temporary reduction of hyperopia in
January 2000, the FDA is reviewing the data submitted in the PMA and is in the
process of completing the inspections and labeling review needed to determine
whether the LTK System is safe and effective for the treatment of hyperopia.
This final FDA determination may take from three to nine months from the date of
the PMA submission and we think that any approval of our PMA will not be
forthcoming before the second quarter of 2000, at the earliest.
Potential complications and side effects reported in clinical studies to
date from the use of the LTK System include:
- mild foreign body sensation,
- temporary increased light sensitivity,
- modest fluctuations in refractive capabilities during healing,
- unintended over or under-corrections,
- regression of effect, and
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<PAGE> 11
- induced astigmatism.
The FDA may require the Company to conduct further testing of the LTK
System, thereby delaying the Company's efforts to generate revenue, or limit the
scope of the FDA approval, thereby limiting the market for the LTK System.
OUR PRODUCT EMPLOYS PROPRIETARY TECHNOLOGY AND THIS TECHNOLOGY MAY INFRINGE ON
THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES
We hold United States process and apparatus patents for the use of holmium
lasers in non-destructive cornea shaping. Other parties, however, hold process
and apparatus patents relating to shaping the cornea with holmium lasers.
Generally, an apparatus patent contains claims to a new and useful machine or
device. A process patent generally contains claims to a new and useful process,
art, or method, which may include a new use of a known process, machine,
manufacture, composition of matter, or material. We believe that we are not
infringing on any patents held by others. However, if patents held by others
were adjudged valid and interpreted broadly in an adversarial proceeding, they
could be deemed to cover one or more aspects of our holmium laser corneal
shaping systems, use of the LTK System, or other procedures. Any claims for
patent infringement could be time-consuming, result in costly litigation, divert
technical and management personnel, or require us to develop non-infringing
technology or to enter into royalty or licensing agreements. We cannot be
certain that we will not be subject to one or more claims for patent
infringement, that we would prevail in any such action, or that our patents will
afford protection against competitors with similar technology.
If a court determines that the LTK System infringes, directly or
indirectly, a patent in a particular market, the court may enjoin us from
making, using and selling such system. Furthermore, we may be required to pay
damages or obtain a royalty-bearing license, if available, on acceptable terms.
Alternatively, if a license is not offered or available, we may be required to
redesign those aspects of the LTK System held to infringe, directly or
indirectly, to avoid such infringement. Any redesign could delay reintroduction
of our products into certain markets, or may be so significant as to be
impractical. If redesign efforts were impractical, we could be prevented from
manufacturing and selling the infringing products, which would have a material
adverse effect on our business, financial condition and results of operations.
A COMPONENT OF THE LTK SYSTEM MAY BE COVERED BY A PATENT OWNED OR LICENSED BY A
PARTY UNRELATED TO US WHICH MAY CAUSE US TO REDESIGN THE LTK SYSTEM, WHICH COULD
DELAY COMMERCIALIZATION
A component of the LTK delivery system is possibly covered by a patent
owned by the University of Miami or licensed to another party. We believe that
we will be able to conclude a satisfactory arrangement with the University of
Miami or its licensee. If, however, we are unable to reach a successful
agreement, we may have no rights to the component of the delivery system
presently configured in the LTK System. If we are forced to redesign the LTK
System, such redesign efforts could be time consuming, expensive and prolong FDA
review.
A SIGNIFICANT NUMBER OF OUR SHARES ARE ELIGIBLE FOR SALE AND THEIR SALE COULD
DEPRESS THE MARKET PRICE OF OUR STOCK
Sales of substantial amounts of our common stock (including shares issued
upon exercise of outstanding options and warrants and shares issued upon
conversion of convertible notes) in the public market could depress the market
price of our common stock. As of March 10, 2000, we had 46,414,401 shares
outstanding and 9,667,499 shares reserved for issuance upon exercise of options
and warrants or conversion of convertible notes.
LACK OF AVAILABILITY OF KEY SYSTEM COMPONENTS COULD RESULT IN DELAYS, INCREASED
COSTS, OR COSTLY REDESIGN OF OUR PRODUCT
Although some of the parts and components used by us to manufacture our
products are available from multiple sources, we currently purchase most of our
components from single sources in an effort to obtain volume discounts. Lack of
availability of any of these parts and components could result in production
delays,
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<PAGE> 12
increased costs, or costly redesign of our products. We continually evaluate
ways to minimize any impact to our business from any potential part or component
shortage through inventory stockpiling and design changes to afford
opportunities for multiple sources of supply for these essential components. Any
loss of availability of an essential system component could result in a material
adverse change to our business, financial condition and results of operations.
THE SUCCESS OF COMPETITIVE PRODUCTS COULD HAVE AN ADVERSE AFFECT ON OUR BUSINESS
The vision correction industry is intensely competitive. The significant
competitive factors in the industry include
- price,
- convenience,
- success relative to vision correction,
- acceptance of new technologies,
- patient satisfaction, and
- government approval.
Patients with hyperopia (farsightedness) can achieve vision correction with
eyeglasses, contact lenses and possibly with other technologies and surgical
techniques currently under development, such as
- corneal implants,
- human lens replacement,
- intra-ocular implantable contact lenses, and
- surgery using different types of lasers.
The success of any competing alternative to the LTK System for treating
hyperopia could have a material adverse effect on our business, financial
condition and results of operations. Most of our competitors have substantially
greater financial capabilities for product development and marketing than we do.
These financial capabilities enable our competitors to market their products or
procedures to the consumer and to the ophthalmic community in a more effective
manner.
The excimer laser is the dominant laser used for the treatment of
refractive disorders. In the United States, VISX and Summit are the leading
manufacturers of excimer refractive surgical systems. Both Summit and VISX
excimer laser are currently approved for treating hyperopia in the United
States. We believe the LTK System offers several distinct advantages over the
use of excimer lasers for treating hyperopia, including ease of use,
non-invasiveness and a better safety record. From an ophthalmologist's
standpoint, the LTK system is also attractive because the procedure is quicker
than the excimer, which allows him to perform more procedures per period of time
than the excimer. Both VISX and Summit, however, have significantly greater
financial resources than we do and have received FDA approval for their
respective excimer laser products for treating myopia (nearsightedness),
hyperopia (farsightedness) and astigmatism. Summit discontinued its clinical
trials for treating hyperopia with its holmium laser system in 1996. Any
alternative treatment offered by VISX or Summit, however, will have a
competitive advantage because they already have an established customer base
currently using their products.
WE ARE DEPENDENT ON OUR MANAGEMENT AND KEY PERSONNEL TO SUCCEED
Our principal executive officers and key personnel have extensive
experience with our LTK System, the research and development efforts needed to
bring it to market, the development of marketing and sales programs for its
launch and the necessary services to be provided to our customers to support the
system. The loss of the services of any of our executive officers or other key
personnel, or our failure to attract and retain other skilled and experienced
personnel, could have a material adverse effect on our ability to continue the
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<PAGE> 13
FDA approval process for the LTK System and adversely affect our ability to
manufacture, sell and market the product. Such events would probably have a
negative impact on our business and financial condition.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER
The provisions of
- our Certificate of Incorporation, as amended;
- our Bylaws, as amended; and
- the Delaware General Corporation Law (the Delaware Law)
may have the effect of delaying, discouraging, inhibiting, preventing or
rendering more difficult an attempt to obtain control of the Company by means of
a tender offer, business combination, proxy contest or otherwise. These
provisions include
- charter authorization of "blank check" preferred stock,
- classification of the Board of Directors,
- a restriction on the ability of the stockholders to take actions by
written consent, and
- a Delaware Law provision imposing restrictions on business combinations
with certain interested parties.
In addition, we adopted a Stockholder Rights Plan. Under this Plan, each
issued and outstanding share of our Common Stock has associated with it one
Right to purchase a share of our Common Stock from us at a price of $70, subject
to adjustment. These Rights will be exercisable if a person or group either:
1. acquires beneficial ownership of 15% or more of the Company; or
2. commences a tender or exchange offer upon consummation of which
such person or group would beneficially own 15% or more of the Common
Stock.
We will be entitled to redeem the Rights at $.001 per Right at any time
until ten days following a public announcement that a 15% position has been
acquired.
THE MARKET PRICE OF OUR STOCK HAS HISTORICALLY BEEN VOLATILE
The volatility of our common stock imposes a greater risk of capital losses
on stockholders as compared to less volatile stocks. In addition, such
volatility makes it difficult to ascribe a stable valuation to a stockholder's
holdings of our common stock. Factors such as announcements of technological
innovations, changes in marketing, product pricing and sales strategies or new
products by our competitors, changes in domestic or foreign governmental
regulations or regulatory approval processes, developments or disputes relating
to patent or proprietary rights and public concern as to the safety and efficacy
of the procedures for which the LTK System is used, have and may continue to
have a significant impact on the market price of our common stock. Moreover, the
possibility exists that the stock market (and in particular the securities of
technology companies such as ours) could experience extreme price and volume
fluctuations unrelated to operating performance.
ITEM 2. FACILITIES
The Company leases a 55,000 square foot facility at 3400 West Warren
Avenue, Fremont, California, which currently serves as its executive offices and
research and production facility. The facility lease expires in April 2004 and
requires base payments on average of approximately $79,000 per month, subject to
standard pass-throughs and escalations. Management of the Company believes that
the facility can accommodate the expected increases in additional headcount and
operations activities.
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<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS
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") published 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. Both complaints have been settled in principal pending documentation.
Neither settlement will have a material impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
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<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
As of December 31, 1999, there were 935 holders of record of the Company's
common stock. Price information for the Company's common stock may be obtained
from the Nasdaq National Market System and prior to August 13, 1998, the common
stock was traded in the over-the-counter market.
The table below sets forth the reported high and low bid quotations of the
Company's common stock as reported on the OTC Bulletin Board through August 12,
1998 and the reported high and low bid quotations of the Company's common stock
as reported on the Nasdaq National Market System from August 13, 1998 to
December 31, 1999 for the periods indicated.
PRICE FOR COMMON STOCK(1)
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ------ -----
<S> <C> <C>
March 31, 1998.............................. $ 7.53 $2.91
June 30, 1998............................... 10.38 5.56
September 30, 1998.......................... 8.19 3.91
December 31, 1998........................... 7.38 3.75
March 31, 1999.............................. 14.00 5.88
June 30, 1999............................... 14.94 8.75
September 30, 1999.......................... 20.38 2.75
December 31, 1999........................... 14.56 4.50
</TABLE>
- ---------------
(1) Bid and ask prices are quoted on the Nasdaq National Market System and the
OTC Bulletin Board in increments of 1/32. Certain of the bid and ask prices
set forth in this table have been rounded to the nearest cent.
The over-the-counter market quotations provided herein may reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. On March 10, 2000, the closing price
of the common stock as reported on the Nasdaq National Market System was $7.563
per share.
Dividends
In the past three years, the Company has not declared or paid any cash
dividends on its common stock. The Company currently intends to retain any and
all future earnings to finance its business. Accordingly, the Company does not
anticipate paying cash or other dividends on its Common Stock in the foreseeable
future.
Recent Sales of Unregistered Securities
In January 1999, the Company completed a $10,000,000 private placement of
convertible notes with warrants. These notes are convertible into the Company's
Common Stock at predetermined prices and bear interest at the rate of 5%
payable-in-kind semi annually. The securities were sold pursuant to Regulation D
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
to an accredited investor, as defined in Rule 501 of Regulation D. One-half of
the notes became convertible into the Company's Common Stock at a conversion
price of $4.00 per share upon the January 13, 2000, ODP recommendation to the
FDA to approve the LTK System. The remaining one-half of the notes are
convertible at $8.00 per share upon final FDA approval.
In January 2000, the Company completed a $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, 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 are payable quarterly.
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<PAGE> 16
There are two types of associated warrants issued in connection with the
debentures. Type A warrants are five year warrants with an exercise price of
$6.803. Type B warrants are two year warrants with an exercise price of $6.803
and are callable at the Company's option once the closing stock price is equal
to or higher than $7.823 for a continuous period of twenty trading days.
The proceeds of these offerings have been used by the Company for the
funding of clinical trials, research and development activities, and general
corporate purposes.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data derived from
the audited financial statements for the years ended December 31, 1995, 1996,
1997, 1998 and 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net revenues........................... $ 5,294 $ 5,654 $ 2,839 $ 594 $ 26
Gross profit........................... 1,637 1,638 293 (1,548) (2,333)
Operating expenses..................... 5,824 7,658 7,368 12,718 18,875
Loss from operations................... (4,187) (6,020) (7,075) (14,266) (21,208)
Gain on sale of dental assets.......... -- -- 1,740 -- --
Interest income........................ 69 65 99 399 955
Interest expense....................... (12) (13) (1,376) (3,950) (5,890)
Other expense, net..................... -- -- (6) (4) (2)
Net loss............................... (4,130) (5,968) (6,618) (17,821) (26,145)
Net loss per share, basic and
diluted.............................. $ (0.28) $ (0.23) $ (0.23) $ (0.52) $ (0.60)
Shares used in calculation of basic and
diluted net loss per share........... 14,935 26,414 28,550 34,164 43,867
Total assets........................... $ 6,689 $ 3,741 $ 2,949 $ 11,479 $ 14,905
Long term obligations.................. -- -- 945 7,703 10,155
Total stockholders' equity............. 4,745 1,272 849 200 2,101
Working capital........................ 4,541 1,073 1,382 6,773 10,765
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for information regarding disposition of the Company's
dental business and assets.
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<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, manufactures and markets laser systems for
applications in ophthalmology. 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 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 Laser Thermal Keratoplasty System (the "LTK System"). We have been
able to raise additional working capital for all aspects of our business through
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 $9,300,000, 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 approximately $11,200,000, net of
offering costs, in the form of convertible debentures (the "2000 Debentures")
with warrants.
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 expect to need to raise additional working capital during 2000
to fund operations. We spent approximately $800,000 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 us
and our stockholders. In the event needed additional working capital is not
raised, the Company has the option of scaling back its expenditures to conserve
cash until such financing or alternative business solutions are implemented.
REVENUES
The Company's revenues have historically been comprised primarily of sales
related to its dental products (none in 1999 and 1998, 69% in 1997). Revenues of
$26,000 and $594,000 in 1999 and 1998, respectively, reflect sales of its
ophthalmic products. Approximately $1,968,000 of 1997 revenues were attributable
to the dental business that was sold in June 1997. Revenues for the ophthalmic
business for 1997 were $871,000.
GROSS MARGIN
Gross margins were a negative $2,333,000 and $1,548,000 in 1999 and 1998,
respectively, and a positive $293,000 in 1997. The negative margin in 1999 is
reflective of having no material sales during the year while incurring
manufacturing costs for the development of prototype LTK instruments. The
negative gross margin in 1999 was substantially higher than that of 1998 because
in 1999 we invested significantly in the development of the LTK instrument, the
Hyperion. The 1998 negative gross margin was driven essentially by inventory
write-downs from obsolete parts and components of the Sun 1000 LTK System that
was being discontinued.
RESEARCH AND DEVELOPMENT
Research and development expenses were $4,774,000, $2,107,000 and $964,000
for the years ended December 31, 1999, 1998 and 1997, respectively. The 127%
increase in 1999 over 1998 for these expenses was driven by the investment in
the development of the new LTK System, including a 59% increase in headcount and
additional consulting fees. Engineering and development expenses of $2,107,000
in 1998, representing a 119% increase from the 1997 level, were also due to
development of the LTK System.
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<PAGE> 18
SALES, MARKETING AND REGULATORY
Sales, marketing and regulatory expenses were $7,182,000, $3,824,000 and
$2,718,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
The 88% increase in this category of expenses in 1999 as compared to 1998 was
due in part to costs associated with higher patient enrollment in clinical
trials -- 763 patients in 1999 compared to 608 patients in 1998 -- and the
expansion of clinical studies for hyperopia and presbyopia. The most significant
expenditures of the regulatory process were those relative to costs of the
submission of the original PMA, the preparation for the July 1999 ODP meeting
and the preparation of the amendments to the PMA leading to the January 2000 ODP
meeting. Sales and marketing expenditures also increased in 1999 as compared to
1998 as we initiated the preparation of our marketing plan for product launch of
the LTK system.
Distribution of LTK lasers in international markets has been performed by
selected distributors with the assistance of our own internal sales and
marketing team. For the US market, once we have received FDA approval, we plan
to sell our laser systems directly to ophthalmologists and ophthalmic laser
service organizations. We do not anticipate final FDA approval before the second
quarter of 2000.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $6,919,000, $6,787,000, and
$3,686,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
General and administrative expenses in 1999 were in line with those of 1998 with
only a 2% increase reflecting our emphasis on keeping overhead as low as
possible while making investments intended to help achieve our milestones such
as FDA approval and product development. The increase in general and
administrative expenses for 1998 as compared to 1997 of approximately 84% was,
in major part, due to the non cash charges in recognition of the fair value of
warrants granted to consultants in lieu of cash compensation. This charge in
1998 amounted to approximately $2,105,000 of which $905,000 was a result of
warrants issued in 1997 and $1,200,000 resulted from warrants issued in 1998.
The warrants issued in 1997 were amortized over a vesting period of two years.
The 1998 warrants were fully vested in 1998 and amortized fully in that year. An
additional compensation expense of approximately $1,000,000 in 1998 originated
from warrants granted to a consultant for his services.
The Company's general and administrative expenses consist primarily of: (i)
salaries and benefits of administrative and certain executive personnel; (ii)
product liability, officer and director liability and other corporate insurance
premiums; (iii) accounting, legal and other fees related to patent and general
corporate matters; and (iv) provisions for the Company's allowance for bad debts
and non-cash expenses associated with the issuance of certain warrants and
non-statutory stock options.
INTEREST INCOME AND EXPENSE
Interest income was $955,000, $399,000 and $99,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. The significant increase in
interest income in 1999 over 1998 was due to higher average cash balances in
1999 compared to 1998 and $279,000 in interest accrued for Promissory Notes
issued to third parties in 1999 with an average interest rate of 8.5% interest.
The increase in interest income of 1998 compared to 1997 was due to higher
average cash balances in 1998 compared to 1997, maintained in interest bearing
accounts.
Interest expense was $5,890,000, $3,950,000 and $1,376,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. Approximately $5,160,000,
or 88%, of our interest expense in 1999 was due to non-cash expenses incurred in
connection with the 1998 and 1999 Notes Placement. The fair value of the
warrants, the conversion features and the placement costs of such notes were
recorded as non-cash interest expense in 1999. The 1999 Notes and 1998 Notes
bear a stated interest rate of 5% and 12%, respectively. The effective rate of
interest of such notes, which includes the amortization of the fair value of the
warrants, is approximately 16% and 26%, respectively. In 1998, approximately
$2,815,000, or 71%, of the Company's interest expense was due to non-cash
expenses incurred in connection with the 1998 and 1997 Notes Placement. The fair
value of the warrants, the conversion features and the placement costs of such
notes were recorded as non-cash interest expense in 1998. The 1998 Notes and
1997 Notes bear a stated interest rate of
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<PAGE> 19
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
26% and 21%, respectively.
The 2000 Debenture financing will generate non-cash charges over the
funding period which, for purposes of recognizing the full effect of such
non-cash charges, could extend to the year 2005. For the full year 2000, we
anticipate a non-cash charge of close to $12,800,000. Of this amount,
approximately $9,400,000 is a one-time, non-cash charge based on the difference
between the debenture conversion price of $5.916 and the stock market closing
price for Sunrise's stock of $10.688 on January 11, 2000. In addition, the
valuation of the 1,088,882 warrants issued with respect to the 2000 Debenture
financing, using Black-Scholes valuation model, will result in an estimated
non-cash charge for the year 2000 of approximately $3,400,000.
INCOME TAXES
At December 31, 1999, 1998 and 1997, all net deferred tax assets were
computed in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" and have been fully offset by a valuation
allowance.
NET LOSSES
The Company reported losses of $26,145,000, $17,821,000 and $6,618,000 in
1999, 1998 and 1997, respectively. The net loss in 1999 was due to minimal
product revenue; under-utilization of the expanded manufacturing capacity;
increased marketing, sales and regulatory efforts; increased personnel costs;
and non-cash expenses. The non cash expenses are associated with the
amortization of deferred compensation of approximately $1,887,000 from the
issuance of warrants and non-qualified stock options to consultants in lieu of
cash and approximately $5,160,000 associated with warrants issued in connection
with the 1998 and 1999 Notes Placement.
The net loss in 1998 was similarly due to lower product revenues,
under-utilization of manufacturing capacity, non-cash expenses associated with
amortization of deferred compensation of approximately $2,105,000, warrants
issued in connection with the 1997 and 1998 Notes Placements of approximately
$2,815,000 and non-statutory stock option expenses of approximately $974,000,
which resulted from the acceleration of stock options vesting for certain former
employees.
The net loss in 1997 was due also to the low level of revenues, excess
manufacturing capacity and inventory, the Company's continuing clinical trials
for hyperopia and presbyopia, expenses associated with the Company's issuance of
convertible debt with warrants and certain non-statutory stock options, and the
Company's need to maintain its basic corporate infrastructure, offset by the
gain from the sale of the Company's dental business in June 1997. Although total
operating expenses were reduced by 4% from 1996, the reduction was not
sufficient to return the Company to profitability in 1997.
We expect to report net losses during 2000. The losses will come primarily
from the expenses of the FDA approval process, the underlying clinical studies
related to the LTK System and the expenses associated with maintaining our basic
corporate infrastructure. We will not have any material domestic revenues from
the LTK system product line unless and until FDA approval is obtained. On the
other hand our international revenues are not projected to be sufficient to
cover the expenses of maintaining the basic corporate infrastructure and our
costs of the continuing clinical trials for hyperopia and presbyopia.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had $10,643,000 in cash and cash equivalents.
Our operating activities used $20,659,000 in cash during 1999 and $8,536,000
during the same period in 1998.
On January 1, 1999, we raised $10,000,000 by issuing convertible notes and
accompanying warrants to purchase common stock. 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. One-half of the principal amount of the
1999 Notes became convertible into shares of the Company's common stock at a
conversion price of $4.00 per share after we
19
<PAGE> 20
received conditional approval from the ODP for the LTK System. The investor will
also be required to convert the remaining portion of the 1999 Notes into shares
of common stock at a conversion price of $8.00 per share on the date the Company
receives FDA approval to market the LTK System in the United States.
Substantial portions of the 1997 and 1998 losses were funded with the
proceeds from the sale of our dental business in June 1997 and from a series of
private placements and equity offerings. The 1997 Notes Placement and 1998 Notes
Placement had aggregate net proceeds of approximately $3,700,000, (gross
proceeds of $4,100,000) and $9,350,000, respectively.
On December 4, 1998, we completed a private placement of approximately
$11,800,000 in shares of Common Stock. The subscription price was $3.50 per
share, which represents a 20% discount from the average of the closing sale
price of our common stock, as reported on the Nasdaq National Market System, on
each of the last ten consecutive Nasdaq National Market System trading days in
October 1998. Of the total proceeds, $5,000,000 from the 1998 Equity Offering
was received in the form of promissory notes due on March 15, 1999 bearing
interest at a rate of 9% per annum. Of the $5,000,000 in promissory notes,
$1,000,000 is currently outstanding and has not been repaid.
The Company's debt service obligations consist of interest, payable in cash
or in-kind, accruing at a rate of 12% per annum on the $168,644 in principal and
interest on the 1998 Notes as of December 31, 1999, and 5% per annum on the
$10,500,000 of principal and interest on the 1999 Notes as of December 31, 1999.
The Company also pays $5,800 per month on leases for computer and office
equipment. The warrants issued in connection with the 1999 Notes Placement and
1998 Notes Placement had a fair value of approximately $5.93 and $1.87 per
warrant, respectively, at the time of issuance. The fair value of these warrants
has been reflected as additional consideration for the convertible notes,
recorded as a discount on the debt and accreted as interest expense to be
amortized over the life of the convertible notes. This amortization of interest
expense associated with the warrants will reduce net income through the term of
the 1998 and 1999 Notes, but will have no effect on future cash flows from
operations.
Our current operations continue to be cash flow negative, limiting our
working capital resources. Working capital at December 31, 1999 amounted to
approximately $10,765,000. In January 2000 we raised an additional $11,200,000,
net of closing costs. Our existing cash resources, as supplemented by these
proceeds, may not be sufficient to fund our year 2000 activities. At the
Company's current rate of cash expenditures, it is likely that we may need to
raise additional working capital during 2000. At December 31, 1998, working
capital amounted to approximately $6,773,000. The Company spent approximately
$800,000 for capital expenditures in calendar year 1999 and expects to spend
more than that amount for capital expenditures in fiscal year 2000. We expect
our expenses to increase in 2000 due to the ramp up to manufacture initial
production units of our LTK System and the preparation costs associated with the
anticipated market launch of the LTK System.
No assurance can be given that additional financing will be available, or
if available, that it will be available on terms favorable to the Company and
its Stockholders. In the event needed additional working capital is not raised,
the Company has the option of scaling back its expenditures to conserve cash
until such financing or alternative business solutions are implemented.
CONVERSION
A single currency called the Euro was introduced in Europe on January 1,
1999. Eleven of the 15 member countries of the European Union have adopted the
Euro as their common legal currency. Fixed conversion rates between these
participating countries' existing currencies (the "Legal Currencies") and the
Euro were established. The Legal Currencies are scheduled to remain legal tender
as denominations of the Euro until at least January 1, 2002 (but not later than
July 1, 2002). During this transition period, parties may settle transactions
using either the Euro or a participating country's legal currency.
We do not expect the conversion to the Euro will have a material impact on
our financial position or results of operations since the majority of our
business transactions are recorded in U.S. currency.
20
<PAGE> 21
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.
ITEM 7A. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated balance sheets at December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flow for
each of the three years ended December 31, 1999, 1998 and 1997 and the notes
thereto appear beginning at page 27.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable
21
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Directors and Executive Officers" located in the
Registrant's Proxy Statement to be filed pursuant to Regulation 14A for its
Annual Meeting of Stockholders on June 8, 2000 (the "2000 Annual Meeting Proxy
Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the 2000 Annual Meeting
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owner's and
Management" in the 2000 Annual Meeting Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions" in
the 2000 Annual Meeting Proxy Statement is incorporated herein by reference.
22
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following documents are filed as part of this report:
<TABLE>
<CAPTION>
PAGE IN THIS
ANNUAL REPORT ON
FORM 10-K
----------------
<S> <C>
Report of Independent Accountants........................... 26
Consolidated Balance Sheets -- December 31, 1999 and 1998... 27
Consolidated Statements of Operations*...................... 28
Consolidated Statement of Stockholders' Equity*............. 29
Consolidated Statements of Cash Flows*...................... 30
Notes to Consolidated Financial Statements.................. 31
</TABLE>
- ---------------
* For the years ended December 31, 1999, 1998 and 1997
2. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............ 43
</TABLE>
All other schedules have been omitted as they are not required, not
applicable or the required information is included in the financial statements
or notes thereto.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1 Asset Purchase Agreement dated as of March 26, 1997, by and
between the Company and Lares Research, a California
corporation(1)
3.1 Certificate of Incorporation, as amended(2)
3.2 Bylaws(2)
4.1 Form of Rights Agreement, dated as of October 24, 1997,
between the Company and ChaseMellon Shareholder Services,
L.L.C., as rights agent(3)
4.2 Form of Warrant issued to Pennsylvania Merchant Group(4)
4.3 Form of 12% Subordinated Pay-In-Kind Note Due 2001(5)
4.4 Form of Registration Rights Agreement(5)
4.5 Form of 5% Convertible Subordinated Pay-In-Kind Note due
2001(6)
4.6 Form of Warrant for the Purchase of Common Stock(6)
4.7 Form of Registration Rights Agreement(6)
4.8 Form of Amendment to Rights Agreement, dated as of May 3,
1999, between the Company and ChaseMellon Shareholder
Services, L.L.C., as rights agent(7)
4.9 Form of 7% Convertible Debenture dated January 11, 2000(8)
4.10 Form of A Warrant dated January 11, 2000(8)
4.11 Form of B Warrant dated January 11, 2000(8)
4.12 Registration Rights Agreement dated January 11, 2000 among
the Company, The Tail Wind Fund, Ltd., LBI Group Inc., Jeddy
Development Inc., Donald Sanders M.D., PhD., Donald Wanda
Sanders IRA, CIBC Oppenheimer Corp., as Custodian, Meyer
Temkin and Charles D. Kelman, M.D. (8)
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
4.13 Form of Warrant dated January 11, 2000, issued to Dunwoody
Brokerage Services, Inc.
10.1 Patent License Agreement between the Company and Patlex
Corporation dated January 1, 1990(9)
10.2 Agreement between the Company and the University of Miami,
Department of Ophthalmology, dated October 28, 1991(10)
10.3 Settlement Agreement between the Company and American Dental
Laser, Inc., dated February 4, 1993 (confidential treatment
has previously been granted for portions of this exhibit)(4)
10.4 License Agreement between the Company and American Dental
Laser, Inc., dated February 4, 1993 (confidential treatment
has previously been granted for portions of this exhibit)(4)
10.5 Settlement Agreement between the Company and American Dental
Technologies, dated July 30, 1996 (1)
*10.6 Form of Indemnification Agreement between the Company and
each of its officers and directors(9)
*10.7 1988 Stock Option Plan, as amended(5)
*10.8 Form of Indemnification Agreement by and between the Company
and its executive officers(3)
10.9 Form of U.S. Note and Warrant Purchase Agreement related to
the Regulation D private placement of 12% Convertible
Subordinated Pay-In-Kind Notes Due 2001 and accompanying
Warrants in January 1998(5)
*10.10 Form of Amended and Restated Change of Control Agreement by
and between the Company and its President and Chief
Executive Officer(12)
*10.11 Form of Amended and Restated Change of Control Agreement by
and between the Company and its executive officers (other
than the President and Chief Executive Officer)(12)
10.12 Sublease between Avant! Corporation, as sub-sublandlord, the
Company, as sub-subtenant, Cirrus Logic, Inc., as
sublandlord, Avant! Corporation, as subtenant, Renco
Investment Company, as landlord, and Cirrus Logic, Inc., as
tenant for the lease of facilities at 3400 West Warren
Avenue, Fremont, California(13)
10.13 Form of Note and Warrant Purchase Agreement(6)
*10.14 The 1997 Stock Option Plan(14)
*10.15 The 1999 Long-Term Equity Compensation Plan(15)
10.16 Purchase Agreement dated January 11, 2000 between the
Company and the Tail Wind fund, Ltd., LBI Group, Inc., Jeddy
Development, Inc., Donald Sanders M.D., PhD., Donald Sanders
IRA, CIBC Oppenheimer Corp., as Custodian, Monica Sanders,
Kendra Sanders, Wanda Sanders IRA, CIBC Oppenheimer Corp. as
Custodian, Meyer Temkin and Charles D. Kelman, M.D.(8)
21.1 Subsidiaries of the Company
22 Power of Attorney (included on the signature pages to this
Form 10-K)
23 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
27 Financial Data Schedule
</TABLE>
- ---------------
* Compensatory plan or management contract
(1) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1996 (File No. 1-10428)
(2) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1994 (File No. 0-17816)
24
<PAGE> 25
(3) Incorporated by reference from the registrant's Current Report on Form 8-K
dated October 24, 1997 (File No. 0-17816)
(4) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1992 (File No. 0-17816)
(5) Incorporated by reference from the registrant's Current Report on Form 8-K
January 26, 1998 (File No. 0-17816)
(6) Incorporated by reference from the registrant's Current Report on Form 8-K
dated January 1, 1999 (File No. 1-10428)
(7) Incorporated by reference from the registrant's Current Report on Form 8-K
filed September 30, 1999 (File No. 0-17816)
(8) Incorporated by reference from the registrant's Current Report on Form 8-K
filed January 14, 2000 (File No. 0-17816)
(9) Incorporated by reference from the registrant's Registration Statement on
Form S-1, as amended (File No. 33-36768)
(10) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 (File No. 0-17816)
(11) Incorporated by reference from the registrant's Registration Statement on
Form S-18, as amended (File No. 33-27029-LA)
(12) Incorporated by reference from the registrant's Current Report on Form 8-K
dated May 8, 1998 (File No. 0-17816)
(13) Incorporated by reference from the registrant's Registration Statement on
Form S-2 dated September 29, 1998 (File No. 333-64975)
(14) Incorporated by reference from the registrant's Registration Statement on
Form S-8 dated March 2, 1999 (File No. 333-73211).
(15) Incorporated by reference from the registrant's Registration Statement on
Form S-8 dated November 24, 1999 (File No. 333-91669)
(b) REPORTS ON FORM 8-K
Not applicable.
(c) EXHIBITS. See (a)3. above.
(d) FINANCIAL SCHEDULES. See (a)2. above.
25
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Sunrise Technologies International, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 23 present fairly, in all material
respects, the financial position of Sunrise Technologies International, Inc. and
its subsidiary (the "Company") at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14(a)(2) on page 23
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 11, 2000
26
<PAGE> 27
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 10,643 $ 9,889
Accounts receivable, net of allowance of $3 and $11 in
1999 and 1998, respectively............................ 327 135
Inventories, net.......................................... 1,973 11
Prepaid and other expenses................................ 471 314
-------- --------
Total current assets.............................. 13,414 10,349
Property and equipment, net............................... 1,271 900
Other non-current assets.................................. 220 230
-------- --------
Total assets...................................... $ 14,905 $ 11,479
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation............... $ 28 $ 38
Current portion of notes payable.......................... 5,000 692
Accounts payable.......................................... 416 694
Accrued liabilities....................................... 2,205 2,152
-------- --------
Total current liabilities......................... 7,649 3,576
Capital lease obligations, less current portion............. -- 28
Notes payable, less current portion......................... 5,065 7,658
Other long-term liabilities................................. 90 17
-------- --------
Total liabilities................................. 12,804 11,279
-------- --------
Commitments and Contingencies (Note 5)
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, 46,321,157 and 38,160,720 shares issued and
outstanding at December 31, 1999 and 1998,
respectively........................................... 46 38
Additional paid-in-capital................................ 85,139 60,087
Deferred compensation..................................... (506) (42)
Notes receivable for common stock......................... (1,550) (5,000)
Accumulated deficit....................................... (81,028) (54,883)
-------- --------
Total stockholders' equity........................ 2,101 200
-------- --------
Total liabilities and stockholders' equity........ $ 14,905 $ 11,479
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 28
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues................................................ $ 26 $ 594 $ 2,839
Cost of revenues............................................ 2,359 2,142 2,546
-------- -------- -------
Gross margin................................................ (2,333) (1,548) 293
-------- -------- -------
Operating expenses:
Research and development.................................. 4,774 2,107 964
Sales, marketing and regulatory........................... 7,182 3,824 2,718
General and administrative................................ 6,919 6,787 3,686
-------- -------- -------
Total operating expenses.................................... 18,875 12,718 7,368
-------- -------- -------
Loss from operations........................................ (21,208) (14,266) (7,075)
Gain on sale of dental assets............................... -- -- 1,740
Interest income............................................. 955 399 99
Interest expense............................................ (5,890) (3,950) (1,376)
Other expense, net.......................................... (2) (4) (6)
-------- -------- -------
Net loss.................................................... $(26,145) $(17,821) $(6,618)
======== ======== =======
Net loss per share, basic and diluted....................... $ (0.60) $ (0.52) $ (0.23)
======== ======== =======
Shares used in calculation of basic and diluted net loss per
share..................................................... 43,867 34,164 28,550
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 29
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL NOTES RECEIVABLE TOTAL
------------------- PAID-IN DEFERRED FOR COMMON ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION STOCK DEFICIT EQUITY
---------- ------ ---------- ------------ ---------------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997..... 27,868,613 $28 $31,688 $ -- $ -- $(30,444) $ 1,272
Issuance of warrants in
connection with 1997 Notes... -- -- 1,838 -- -- -- 1,838
Conversion of 1997 Notes....... 2,902,566 3 2,599 -- -- -- 2,602
Exercise of warrants........... 1,270,531 1 1,073 -- -- -- 1,074
Exercise of options............ 247,913 -- 279 -- -- -- 279
Issuance of shares in
connection with employee
stock purchase plan.......... 18,367 -- 15 -- -- -- 15
Deferred compensation related
to stock option grants....... -- -- 659 (272) -- -- --
Net loss....................... -- -- -- -- -- (6,618) (6,618)
---------- --- ------- ----- ------- -------- --------
Balance at December 31, 1997... 32,307,990 32 38,151 (272) -- (37,062) 849
Issuance of common stock, net
of offering costs, in
connection with 1998 Equity
Offering..................... 3,378,218 3 11,739 -- -- -- 11,742
Issuance of warrants in
connection with 1998 Notes... -- -- 4,283 -- -- -- 4,283
Issuance of warrants and stock
options...................... -- -- 2,602 -- -- -- 2,602
Amortization of deferred
compensation................. -- -- -- 230 -- -- 230
Conversion of 1997 and 1998
Notes........................ 1,074,043 1 1,221 -- -- -- 1,222
Exercise of warrants........... 624,407 1 606 -- -- -- 607
Exercise of options............ 765,564 1 1,458 -- -- -- 1,459
Issuance of shares in
connection with employee
stock purchase plan.......... 10,498 -- 27 -- -- -- 27
Issuance of promissory notes in
connection with 1998 Equity
Offering..................... -- -- -- -- (5,000) -- (5,000)
Net loss....................... -- -- -- -- -- (17,821) (17,821)
---------- --- ------- ----- ------- -------- --------
Balance at December 31, 1998... 38,160,720 38 60,087 (42) (5,000) (54,883) 200
Issuance of warrants in
connection with 1999 Notes... -- -- 3,308 -- -- -- 3,308
Issuance of warrants and stock
options...................... -- -- 2,350 (702) -- -- 1,648
Amortization of deferred
compensation................. -- -- -- 238 -- -- 238
Conversion of 1997 and 1998
Notes........................ 4,087,763 4 10,597 -- -- -- 10,601
Exercise of warrants........... 3,235,077 3 7,208 -- (550) -- 6,661
Exercise of options............ 813,377 1 1,433 -- -- -- 1,434
Issuance of shares in
connection with employee
stock purchase plan.......... 24,220 -- 156 -- -- -- 156
Repayment of promissory
notes........................ -- -- -- -- 4,000 -- 4,000
Net loss....................... -- -- -- -- -- (26,145) (26,145)
---------- --- ------- ----- ------- -------- --------
Balance at December 31, 1999... 46,321,157 $46 $85,139 $(506) $(1,550) $(81,028) $ 2,101
========== === ======= ===== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE> 30
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(26,145) $(17,821) $(6,618)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 429 182 77
Amortization of deferred compensation..................... 238 3,477 387
Amortization of debt issuance costs....................... 12 210 150
Beneficial conversion feature............................. 2,425 -- --
Gain on sale of dental assets............................. -- -- (1,740)
Warrant accretion associated with the 1997, 1998 and 1999
Notes................................................... 2,723 2,605 1,066
Issuance of common stock for services..................... -- 150 371
Issuance of warrants and stock options for services
rendered................................................ 1,648 -- --
Provision for obsolete inventory.......................... 79 -- 397
Provision for doubtful accounts........................... (8) -- 176
Conversion of accrued interest to notes payable........... 46 557 --
Changes in assets and liabilities:
Accounts receivable..................................... (184) 177 (16)
Inventories............................................. (2,041) 116 233
Other current assets.................................... (157) (174) 148
Other non-current assets................................ (2) (218) --
Accounts payable........................................ (278) 410 (1,302)
Other accrued liabilities............................... 53 1,151 (258)
Other liabilities....................................... 503 642 155
-------- -------- -------
Total adjustments.................................. 5,486 9,285 (156)
-------- -------- -------
Net cash used in operating activities....................... (20,659) (8,536) (6,774)
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.......................... (800) (878) (98)
Proceeds from sale of dental assets......................... -- -- 3,449
-------- -------- -------
Net cash provided by (used in) investing activities....... (800) (878) 3,351
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on capital lease obligations........................ (38) (33) (5)
Payments received on promissory notes....................... 4,000 -- --
Issuance of common stock, net of offering costs............. 8,251 8,042 996
Capitalization of debt issuance costs....................... -- (14) (358)
Issuance of redeemable convertible notes, net of issuance
costs..................................................... 10,000 9,350 4,101
-------- -------- -------
Net cash provided by financing activities................. 22,213 17,345 4,734
-------- -------- -------
Net increase in cash and equivalents........................ 754 7,931 1,311
Cash and cash equivalents at beginning of year.............. 9,889 1,958 647
-------- -------- -------
Cash and cash equivalents at end of year.................... $ 10,643 $ 9,889 $ 1,958
======== ======== =======
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION
Cash (paid)/received for interest........................... $ (454) $ (284) $ 13
Cash paid for income taxes.................................. $ 10 $ 5 $ 6
NON-CASH FINANCING ACTIVITIES
Promissory notes issued in exchange for common stock........ $ 550 $ 5,000 $ --
Conversion of 1997 and 1998 notes into common stock......... $ 10,601 $ 1,222 $ 2,602
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 31
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND NATURE OF BUSINESS
Sunrise Technologies International, Inc. (the "Company") develops,
manufactures and markets laser systems and other products for applications in
ophthalmology. The Company was organized as a California corporation in March
1987 and was reincorporated in Delaware in June 1993 as Sunrise Technologies
International, Inc. The Company continues to do business under the name Sunrise
Technologies, Inc.
The Company has incurred significant losses for the last several years and
at December 31, 1999 has an accumulated deficit of $81,028,000. 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 recognizes the need for infusion of cash during
the 2000 fiscal year. In January 2000, the Company raised approximately
$11,200,000, net of offering costs in the form of convertible debentures with
warrants. There can be no assurance that additional funds can be raised on terms
acceptable to the Company, if at all. In the event needed additional working
capital is not raised, the Company has the option of scaling back its
expenditures to conserve cash until such financing or alternative business
solutions are implemented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary after elimination of all inter-company balances
and transactions.
Concentration of Risks
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 and in U.S. Treasury 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.
Certain Risks and Uncertainties
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 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
Premarket Approval Application ("PMA") by the FDA prior to commercial sale in
the United States. The PMA process (and underlying clinical studies) is lengthy,
the outcome is difficult to predict and requires substantial commitments of the
Company's financial resources and management's time and effort. Delays in
obtaining or failure to obtain required regulatory approvals or clearances in
the United States and other countries would postpone or prevent the marketing of
the LTK System and other devices and would impair the Company's ability to
generate funds from operations, which in turn would have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to obtain, in a timely
manner, if at all, the required FDA approval of the Company's PMA 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.
31
<PAGE> 32
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
In addition, the introduction of the Company's products in foreign
countries may require obtaining both US 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 certain foreign
markets.
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 the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on deposit with the Company's
bank and money market funds with a maturity from the date of purchase of 90 days
or less. As of December 31, 1999 and 1998, the Company did not hold any
investments in debt or equity securities.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value. Appropriate allowances are made to reduce the
value of inventories to the net realizable value, where this is below cost. This
may occur where the Company determines that inventories may be slow moving or
obsolete.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the shorter of the estimated useful lives of the
assets, generally one to five years, or the lease term. Upon retirement or sale,
the cost and related accumulated depreciation are removed from the balance sheet
and the resulting gain or loss is reflected in operations. Maintenance and
repairs are charged to operations as incurred.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment when events or circumstances
indicate the carry amount of the asset may not be recoverable. Recovery is
measured by comparison of the carrying amounts to future undiscounted cash flows
expected to be generated by such assets. Should an impairment exist, the
impairment loss would be measured based on the excess carrying value of the
asset over the asset's fair value or discounted estimates of future cash flows.
The Company has not identified any such impairment losses to date.
Revenue Recognition
Revenues are recognized at time of shipment provided no significant
obligations remain and collection of receivables are deemed probable. A
provision for the estimated future cost of warranty is made at the time a sale
is recorded.
Research and Development
Research and development expenditures are charged to operations as
incurred. For the years ended December 31, 1999, 1998 and 1997, the expense was
$4,774,000, $2,107,000 and $964,000, respectively.
32
<PAGE> 33
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Advertising and Sales Promotion Costs
Advertising and sales promotion costs, included in General and
Administrative expenses, are charged to operations as incurred. For the years
ended December 31, 1999, 1998 and 1997, the expense was $1,711,000, $612,000 and
$200,000, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and operating
loss carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in the tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is recorded for loss carryforwards and other deferred tax assets where
it is more likely than not that such loss carryforwards and deferred tax assets
will not be realized.
Computation of Net Loss Per Share
Basic net loss per share ("basic EPS") is computed as net loss divided by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur from common shares issuable
through stock options, warrants and other convertible securities. Common
equivalent shares are excluded from the computation of net loss per share if
their effect is anti-dilutive.
The following is a reconciliation of the numerator (net loss) and
denominator (number of shares) used in the basic and diluted net loss ("diluted
EPS") per share calculation:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
BASIC AND DILUTED EPS:
Net loss.................................. $(26,145) $(17,821) $(6,618)
-------- -------- -------
Average Common Shares Outstanding......... 43,867 34,164 28,550
-------- -------- -------
Basic and diluted EPS..................... $ (0.60) $ (0.52) $ (0.23)
======== ======== =======
</TABLE>
Excluded from the shares used to calculate diluted EPS as their effect is
anti-dilutive were 5,901,357 common equivalent shares in 1999, 7,199,795 common
equivalent shares in 1998 and 7,303,537 common equivalent shares in 1997.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the market price of the Company's stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. For grants of options or warrants to non-employees, compensation
expense is measured using the Emerging Issues Task Force ("EITF") 96-18 model
and the resulting compensation is deferred and amortized to expense over the
vesting period. The Company has adopted the disclosure only provisions of
Statements of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation."
33
<PAGE> 34
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Segment Information
All of the Company's assets are located in the United States. The Company,
which operates in a single industry segment, designs, manufactures, markets and
services medical laser systems. The Company sells its products globally to
customers in the field of ophthalmology. The following is a summary of the
Company's geographic sales:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic............................................. $ 8 $ 11 $1,774
Europe............................................... 4 10 314
Pacific Rim.......................................... -- -- 409
Canada............................................... 9 3 180
South Africa......................................... 5 504 162
Other................................................ -- 66 --
--- ---- ------
Total...................................... $26 $594 $2,839
=== ==== ======
</TABLE>
The Company does not segregate information related to operating income
generated by its export sales.
Comprehensive Income
The Company has adopted the Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130) effective December 31, 1998.
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components for general-purpose financial statements. Comprehensive
income is defined as net income plus all revenues, expenses, gains and losses
that are excluded from net income in accordance with generally accepted
accounting principles. For the years ended December 31, 1999, 1998 and 1997,
there are no differences between comprehensive income and net income.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable and accounts payable
approximate fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of its debt obligations approximates fair value.
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.
34
<PAGE> 35
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
3. BALANCE SHEET COMPONENTS
Inventory at December 31 consists of :
<TABLE>
<CAPTION>
1999 1998
------ ----
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $1,589 $11
Work-in-process............................................. 344 --
Finished goods.............................................. 40 --
------ ---
Inventory, net.............................................. $1,973 $11
====== ===
</TABLE>
Property and equipment at December 31 consists of:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment..................................... $ 598 $ 381
Computer equipment.......................................... 872 663
Furniture and fixtures...................................... 238 87
Leasehold improvements...................................... 485 262
------ ------
2,193 1,393
Less accumulated depreciation and amortization (922) (493)
------ ------
Property and equipment, net................................. $1,271 $ 900
====== ======
</TABLE>
Included in computer equipment is equipment acquired under capital leases
of $103,000 and related accumulated amortization of $77,000 and $43,000 at
December 31, 1999 and 1998, respectively. Depreciation and amortization expense
for the years ended December 31, 1999, 1998 and 1997 was $429,000, $182,000 and
$77,000, respectively.
Accrued liabilities consist of:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accrued payroll and related expense.................... $1,008 $ 513
Accrued professional fees.............................. 427 641
Accrued regulatory and clinical........................ 462 456
Other accrued expenses................................. 308 542
------ ------
$2,205 $2,152
====== ======
</TABLE>
4. INCOME TAXES
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory Rate.......................................... (34)% (34)% (34)%
NOL's not benefited which have been reserved............ 34% 34% 34%
--- --- ---
0% 0% 0%
=== === ===
</TABLE>
35
<PAGE> 36
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 23,212 $15,200
Research credits (expire 2005-2013)................ 1,332 950
Other................................................. 700 350
-------- -------
Total deferred tax asset...................... 25,244 16,500
Valuation allowance for deferred tax assets............. (25,244) (16,500)
-------- -------
Net deferred tax assets................................. $ -- $ --
======== =======
</TABLE>
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $61,960,000 and $36,800,000 respectively.
The change in the Company's valuation allowance from 1998 to 1999 was an
increase of $8,744,000. Due to uncertainty surrounding the realization of the
favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its net deferred tax assets.
The ownership change provisions of the Internal Revenue Code of 1986 and
similar state provisions would limit utilization of the carryforwards should
there be a substantial change in the Company's ownership. The annual limitation
may result in the expiration of net operating losses and credits before
utilization.
5. COMMITMENTS
Leases
The Company leases certain of its facilities and equipment under
non-cancelable operating and capital leases with various expiration dates
through 2004. Rent expense was $979,000, $331,000 and $233,000 in 1999, 1998 and
1997, respectively.
The following is a schedule by year of future minimum lease payments at
December 31, 1999:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
(IN THOUSANDS)
<S> <C> <C>
Year ending December 31, 2000............................. $ 946 $30
2001...................................................... 976 --
2002...................................................... 993 --
2003...................................................... 1,033 --
2004...................................................... 272 --
------ ---
Total minimum payments required........................... $4,220 30
Less: Amount representing interest........................ 2
---
Present value of capital lease obligation................. $28
===
</TABLE>
6. LONG-TERM DEBT
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 in-kind (additional convertible notes), and
contain certain conversion features. One-half of the principal amount of the
1999 Notes became
36
<PAGE> 37
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
convertible into the Company's Common Stock at a conversion price of $4.00 per
share upon the January 13, 2000 ODP recommendation to the FDA to approve the LTK
System. The remaining one-half of the 1999 Notes are convertible into 1,250,00
shares of Common Stock at a conversion price of $8.00 per share upon final FDA
approval. Warrants were issued to the investor to purchase 148,950 shares of the
Company's Common Stock at an exercise price of $0.01 per share with an
expiration date of December 31, 2003. In 1999, the Company recognized a non cash
charge of $2,425,000, calculated from the Company's closing stock price of $5.94
on January 1, 1999, less the conversion price of $4.00 for one half of the
notes. In addition, the Company recognized a deferred non-cash charge of
approximately $883,000 for the aggregate fair market value of the warrants based
on the Black-Scholes Model Valuation that is amortized over the life of the 1999
Notes.
As of December 31, 1999, the holder of the 1999 Notes had the option to
convert notes into 2,500,000 shares of the Company's common stock and warrants
into 148,950 shares. During 1999, the Company recorded approximately $2,719,000
as non-cash interest expense and $500,000 as interest expense from the 1999
Notes.
The following table summarizes information about the notes payable balances
as of December 31, as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
1997 5% convertible notes................................ $ -- $ 684
1998 12% convertible notes (including secondary notes)... 169 9,507
1999 5% convertible notes................................ 10,000 --
Unamortized discount relating to stock warrants.......... (611) (2,450)
Accrued interest......................................... 507 609
------- -------
10,065 8,350
Less: current portion of notes payable................... (5,000) (692)
------- -------
$ 5,065 $ 7,658
======= =======
</TABLE>
7. STOCKHOLDERS' EQUITY
Common Stock
In March 1997, the Company completed a private placement of convertible
notes with warrants. In connection with this private placement, the placement
agent received warrants to purchase 230,756 shares of common stock at an
exercise price of $1.00 per share and with expiration dates of February and
March 2002. In addition, the notes were convertible into 4,615,143 shares and
the warrants attached to the notes were convertible into 2,307,572 shares with
an exercise price of $1.00 per share with an expiration date of February and
March 2002. These warrants were fair valued using the Black-Scholes valuation
model and are being amortized over the term of the notes. As of December 31,
1999 all of the notes were converted into 4,615,143 shares and certain warrants
were converted into 2,419,757 shares of common stock. As of December 31, 1999,
there remained warrants outstanding convertible into 118,571 common shares.
37
<PAGE> 38
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
In January 1998, the Company completed a private placement of convertible
notes with warrants. The notes are convertible into 3,116,667 shares of common
stock and the warrants are convertible into 1,870,000 shares of common stock
with an exercise price of $3.00 and an expiration date of January 2003. These
warrants were fair valued using the Black-Scholes valuation model and are being
amortized over the term of the notes. On July 15, 1998 and January 15, 1999,
accrued interest from the 1998 Notes was converted into Secondary Notes for
185,830 and 190,626 common shares, respectively. As of December 31, 1999 certain
of the notes were converted into 3,436,907 shares and certain warrants were
converted into 1,340,000 shares of common stock. As of December 31, 1999, there
remained warrants outstanding and convertible into 530,000 common shares and
56,216 shares convertible from the notes.
In January 1999, the Company completed a $10,000,000 private placement of
convertible notes with warrants. The 1999 Notes are convertible into 1,250,000
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. One-half of the 1999 Notes became
convertible into the Company's Common Stock at a conversion price of $4.00 per
share when conditional approval was received on January 13, 2000 from the ODP
for the LTK System. 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 one-half of the 1999 Notes into shares of
Common Stock at a conversion price of $8.00 per share. Warrants were issued to
the investor to purchase 148,950 shares of the Company's Common Stock at an
exercise price of $0.01 per share with an expiration date of December 31, 2003.
These warrants were fair valued using the Black-Scholes valuation model at the
date of issuance using the following assumptions: dividend yield of 0%, expected
term of warrants 1 year, risk free interest rate of 5.5%, and volatility of
92.36%. These warrants are being amortized over the term of the notes.
In addition to the warrants issued in conjunction with the convertible
notes, the Company issued warrants to employees to purchase 907,000 shares of
common stock during 1999. The Company also issued warrants to consultants to
purchase 190,000, 610,000 and 276,000 shares of common stock for the years ended
December 31, 1999, 1998 and 1997, respectively. The Company calculated the fair
value of each warrant issued to non-employees on the date of issuance using the
Black-Scholes pricing method with the following assumptions: dividend yield of
0%, expected term of the warrants between 5 to 10 years, risk-free interest rate
between 4.75% and 5.5%, and volatility between 92% and 171%.
As of December 31, 1999, there were warrants outstanding to purchase
1,940,521 shares of common stock.
38
<PAGE> 39
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Stock Option Plan
In 1999, the Company adopted the 1999 Long-Term Stock Equity Compensation
Plan (the "1999 Plan") under which employees, directors and consultants may be
granted incentive and non-statutory stock options, stock appreciation rights,
restricted stock, performance units and performance shares. Each option issued
under the Plan must be exercised within the period of 10 years from the date of
grant and the exercise price of an option may not be less than the fair market
value of the underlying shares of common stock on the date of grant. Options
granted generally provide that 1/48th of the shares subject to option become
exercisable each month after the grant. The exercise price of a free standing
stock appreciation right must equal the fair market value of a share of common
stock on the date of grant while the exercise price of a tandem stock
appreciation right issued in connection with the stock option must equal the
option price of the related option. The Compensation Committee may also award
shares of restricted stock and performance units and performance shares upon
such terms and conditions as it shall establish. The 1999 Plan expires in 2009.
In 1997, the Company adopted the 1997 Stock Option Plan (the "1997 Plan")
under which employees, directors and consultants may be granted incentive or
nonstatutory stock options. Under the Plan, incentive stock options must be
granted at an exercise price of not less than the fair market value of the
common stock at the date of grant, except that options granted to shareholders
owning greater than 10 percent of the total voting power of all classes of stock
of the Company must have an exercise price of not less than 110 percent of the
fair market value at the date of grant. Nonstatutory options must be at least 85
percent of fair market value at the date of grant. Options granted generally
provide that 1/48 of the shares subject to the option become exercisable each
month after the grant. The 1997 Plan expires in 2007.
In 1988, the Company adopted the 1988 Stock Option Plan (the "1988 Plan")
under which employees, directors and consultants may be granted incentive or
non-statutory stock options. Under the 1988 Plan, incentive stock options must
be granted at an exercise price of not less than the fair market value of the
common stock at the date of grant, except that options granted to shareholders
owning greater than 10 percent of the total voting power of all classes of stock
of the Company must have an exercise price of not less than 110 percent of the
fair market value at the date of grant. Non-statutory options must be at least
85 percent of fair market value at the date of grant. Options granted generally
provide that 25 percent of the shares subject to the option become exercisable
one year after the date of grant and 1/36th of the remaining shares subject to
the option become exercisable each month thereafter. The 1988 Plan expired in
November 1998.
The fair value of each option grant is estimated at the date of the grant
using the Black-Scholes pricing model with the following weighted average
assumptions for grants in 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate.................... 5.50% 5.03% 6.15%
Expected life.............................. 2.0 years 2.5 years 4.8 years
Volatility................................. 173.1% 101% 95.5%
Dividend yield............................. -- -- --
</TABLE>
39
<PAGE> 40
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
A summary of the Company's option activity as of December 31, 1999, 1998
and 1997 and changes during the years-ending on those dates are as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------------------------------
OPTIONS
AVAILABLE FOR OPTIONS WEIGHTED AVERAGE
GRANT OUTSTANDING EXERCISE PRICE EXERCISE PRICE
------------- ----------- -------------- ----------------
<S> <C> <C> <C> <C>
BALANCE, 01/01/1997................. 296,938 2,512,438 $0.91-$2.87 $ 1.09
Reserved............................ 3,000,000
Granted............................. (2,954,300) 2,954,300 $1.00-$4.44 2.69
Cancelled........................... 858,370 (858,370) $0.75-$2.87 1.18
Exercised........................... -- (247,913) $0.75-$1.06 1.01
---------- --------- -------------
BALANCE, 12/31/1997................. 1,201,008 4,360,455 $1.00-$4.44 2.16
Granted............................. (1,080,500) 1,080,500 $3.00-$9.34 7.47
Cancelled........................... 13,987 (13,987) $1.00-$4.44 3.47
Expired............................. (68,332)
Exercised........................... -- (769,002) $0.75-$4.38 1.37
---------- --------- -------------
BALANCE, 12/31/1998................. 66,163 4,657,966 $1.00-$9.34 3.50
Reserved............................ 2,100,000
Granted............................. (2,468,977) 2,468,977 $3.80-$13.00 10.34
Cancelled........................... 423,458 (423,458) $1.44-$12.62 4.70
Exercised........................... -- (813,377) $1.00-$9.16 1.76
---------- --------- -------------
BALANCE, 12/31/1999................. 120,644 5,890,108 $1.03-$13.00 $ 6.52
========== =========
</TABLE>
As of December 31, 1999, 1998 and 1997, options to purchase 2,126,110,
1,872,292 and 1,621,269 shares, respectively, were vested and of those,
1,109,968, 1,285,636 and 1,547,571 shares, respectively, were immediately
exercisable. The weighted average fair value of those options granted in 1999,
1998 and 1997 was $7.73, $2.54 and $2.08, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -------------------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
REMAINING AVERAGE REMAINING WEIGHTED
NUMBER CONTRACTUAL EXERCISE NUMBER CONTRACTUAL AVERAGE
OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE LIFE (YEARS) EXERCISE PRICE
----------- ------------ -------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.00 - $ 2.00.............. 1,353,541 7.2 $ 1.17 721,659 7.0 $ 1.13
$ 2.01 - $ 4.00.............. 1,255,248 7.9 3.93 182,026 8.1 3.92
$ 4.01 - $ 6.00.............. 397,719 9.4 4.81 52,339 8.2 4.19
$ 6.01 - $ 8.00.............. 813,500 8.3 7.59 25,478 8.3 7.36
$ 8.01 - $10.00.............. 396,300 9.3 8.65 102,218 9.2 8.68
$10.01 - $12.00.............. 1,082,500 10.0 11.77 8,019 9.2 10.84
$12.01 - $13.00.............. 591,300 9.4 12.92 18,229 9.4 9.41
--------- ------ --------- ------
TOTAL.............. 5,890,108 $ 6.52 1,109,968 $ 2.78
========= ====== ========= ======
</TABLE>
40
<PAGE> 41
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Employee Stock Purchase Plan
In June 1992, the Company adopted the 1992 Employee Stock Purchase Plan
under which 200,000 shares have been reserved for issuance. Eligible employees
may purchase common stock at 85 percent of the lower of the closing price of the
stock on the offering date or the exercise date determined by the Board of
Directors. Annual purchases are limited to 10 percent of each employee's
compensation or 4,000 shares per employee. There were 93,741, 69,521 and 59,023
shares issued under the plan as of December 31, 1999, 1998 and 1997,
respectively.
Fair market value for the purchase rights issued under the Purchase Plan is
determined under the Black-Scholes Valuation Model using the following
assumptions for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Risk-free Interest Rates.................. 5.50% 5.03% 6.15%
Expected Life............................. 6 months 6 months 6 months
Volatility................................ 184% 101% 95.5%
Dividend Yield............................ -- -- --
</TABLE>
The weighted average fair market value of those purchase rights granted in
1999, 1998 and 1997 was $6.46, $1.07 and $0.76, respectively.
The Company has adopted the disclosure-only provisions of the Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation." Had compensation cost for the Stock Plans been determined based
on the fair market value at the grant date for awards in 1999, 1998 and 1997
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per share for the years ended December 31, 1999, 1998 and 1997 would have
been increased as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss -- as reported..................... $(26,145) $(17,821) $(6,618)
Net loss -- pro forma....................... (35,122) (23,343) (8,001)
Net loss per share -- as reported........... $ (0.60) $ (0.52) $ (0.23)
Net loss per share -- pro forma............. $ (0.80) $ (0.68) $ (0.28)
</TABLE>
8. EMPLOYEE BENEFIT PLAN
During 1993, the Company established a 401(k) tax-deferred savings plan
under which all employees meeting certain age and service requirements may
contribute up 15% of their eligible compensation (up to a maximum allowed under
IRS rules). Contributions may be made by the Company at the discretion of the
Board of Directors. Contributions by the Company amounted to $25,000, $16,000
and $20,000 in 1999, 1998 and 1997, respectively.
9. SALE OF DENTAL ASSETS
In June 1997, the Company completed the sale of the Company's assets
associated with its dental laser, air abrasive and composite curing systems (the
"Dental Assets") to Lares Research. The purchase price paid for the Dental
Assets was $5,500,000, consisting of $4,000,000 in cash paid at closing and
$1,500,000 in the form of a promissory note, bearing interest at 8% per annum,
with installments of $1,000,000 of principal plus accrued interest and $500,000
of principal plus accrued interest, due in June 2000 and June 2001, respectively
(the "Lares Note"). Although the Company anticipates collecting interest and
principal on the Lares Note, collection is not reasonably assured due to the
subordination of the Lares Note to Lares' bank and the
41
<PAGE> 42
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Company intends to recognize proceeds from the sale and interest on the note as
cash is received. The gain on sale of the Dental Assets is comprised as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Cash proceeds from the sale of the dental assets............ $4,000
Less: Inventory and equipment sold.......................... (1,498)
ADT transfer fee.......................................... (275)
Transaction fees.......................................... (237)
Other costs............................................... (250)
------
Gain on sale of dental assets............................. $1,740
======
</TABLE>
The Company sold the Dental Assets as of June 1997 and as a consequence,
had effectively no revenues or earnings from the Dental Assets during the second
half of 1997. Revenues from the dental business were $1,968,000 through June
1997. Cost of revenues were approximately $1,738,000 and operating expenses
through June 1997 were $1,980,000. Interest expense and interest income were
$11,000 and $10,000, respectively, through June 1997. The operating loss from
the dental business and the gain on the sale of the dental business were
$1,750,000 and $1,740,000, respectively, in 1997.
The Company is not expecting significant revenues from ophthalmic sales
until the FDA approves the LTK System for sale in the United States.
10. SUBSEQUENT EVENTS
On January 11, 2000, the Company completed an $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, at the option of the holder, and mature in June 2002. The debentures
bear interest at a rate of 7% per annum, payable quarterly in kind or cash at
the option of the Company. 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. Type B warrants are two year warrants with an exercise price of
$6.803 and are callable at the Company's option once the closing stock price is
equal to or higher than $7.823 for a continuous period of twenty trading days.
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 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 labeling regarding patient
symptoms, longevity of effect and the effect of retreatment.
42
<PAGE> 43
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE ADDITIONS BALANCE
AT CHARGED TO AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OTHER OF PERIOD
---------- ---------- ---------- ----- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for uncollectible accounts...... $ 140 $ 176 $(232) $-- $ 84
Allowance for inventory................... $ 350 $ 397 $(100) $-- $ 647
Allowance for uncollectible notes......... $ -- $1,500 $ -- $-- $1,500
Year ended December 31, 1998
Allowance for uncollectible accounts...... $ 84 $ -- $ (73) $-- $ 11
Allowance for inventory................... $ 647 $ -- $(461) $-- $ 186
Year ended December 31, 1999
Allowance for uncollectible accounts...... $ 11 $ -- $ (8) $-- $ 3
Allowance for inventory................... $ 186 $ 79 $ -- $-- $ 265
</TABLE>
43
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of Fremont, State of
California, on the 28th day of March, 2000.
Sunrise Technologies International,
Inc.
By: /s/ C. RUSSELL TRENARY, III
------------------------------------
C. Russell Trenary, III
President and Chief Executive
Officer
POWER OF ATTORNEY
Each of the officers and directors of Sunrise Technologies International,
Inc. whose signature appears below hereby constitutes and appoints C. Russell
Trenary, III and Eric M. Fogel, and each of them, their true and lawful
attorneys-in-fact and agents, with full power and substitution, each with power
to act alone, to sign and execute on behalf of the undersigned any amendment or
amendments to this Report on Form 10-K, and to perform any acts necessary to be
done in order to file such amendment, and each of the undersigned does hereby
ratify and confirm all that such attorneys-in-fact and agents, or their or his
substitutes, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ C. RUSSELL TRENARY, III President and March 28, 2000
- -------------------------------------------------------- Chief Executive Officer
C. Russell Trenary, III
/s/ PETER E. JANSEN Vice President, Finance and March 28, 2000
- -------------------------------------------------------- Chief Financial Officer
Peter E. Jansen (Principal Financial and
Accounting Officer)
/s/ JOSEPH D. KOENIG Director and March 28, 2000
- -------------------------------------------------------- Chairman of the Board
Joseph D. Koenig
/s/ R. DALE BOWERMAN Director March 28, 2000
- --------------------------------------------------------
R. Dale Bowerman
/s/ MICHAEL S. MCFARLAND Director March 28, 2000
- --------------------------------------------------------
Michael S. McFarland
/s/ ALAN H. MAGAZINE Director March 28, 2000
- --------------------------------------------------------
Alan H. Magazine
</TABLE>
44
<PAGE> 45
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1 Asset Purchase Agreement dated as of March 26, 1997, by and
between the Company and Lares Research, a California
corporation(1)
3.1 Certificate of Incorporation, as amended(2)
3.2 Bylaws(2)
4.1 Form of Rights Agreement, dated as of October 24, 1997,
between the Company and ChaseMellon Shareholder Services,
L.L.C., as rights agent(3)
4.2 Form of Warrant issued to Pennsylvania Merchant Group(4)
4.3 Form of 12% Subordinated Pay-In-Kind Note Due 2001(5)
4.4 Form of Registration Rights Agreement(5)
4.5 Form of 5% Convertible Subordinated Pay-In-Kind Note due
2001(6)
4.6 Form of Warrant for the Purchase of Common Stock(6)
4.7 Form of Registration Rights Agreement(6)
4.8 Form of Amendment to Rights Agreement, dated as of May 3,
1999, between the Company and ChaseMellon Shareholder
Services, L.L.C., as rights agent(7)
4.9 Form of 7% Convertible Debenture dated January 11, 2000(8)
4.10 Form of A Warrant dated January 11, 2000(8)
4.11 Form of B Warrant dated January 11, 2000(8)
4.12 Registration rights Agreement dated January 11, 2000 among
the Company, The Tail Wind Fund, Ltd., LBI Group, Inc.,
Jeddy Development Inc., Donald Sanders M.D., PhD., Donald
Sanders IRA, CIBC Oppenheimer Corp. as Custodian, Monica
Sanders, Kendra Sanders, Wanda Sanders IRA, CIBC Oppenheimer
Corp., as Custodian, Meyer Temkin and Charles D. Kelman,
M.D.(8)
4.13 Form of warrant dated January 11, 2000, issued to Dunwoody
Brokerage Services, Inc.
10.1 Patent License Agreement between the Company and Patlex
Corporation dated January 1, 1990(9)
10.2 Agreement between the Company and the University of Miami,
Department of Ophthalmology, dated October 28, 1991(10)
10.3 Settlement Agreement between the Company and American Dental
Laser, Inc., dated February 4, 1993 (confidential treatment
has previously been granted for portions of this exhibit)(4)
10.4 License Agreement between the Company and American Dental
Laser, Inc., dated February 4, 1993 (confidential treatment
has previously been granted for portions of this exhibit)(4)
10.5 Settlement Agreement between the Company and American Dental
Technologies, dated July 30, 1996(1)
*10.6 Form of Indemnification Agreement between the Company and
each of its officers and directors(9)
*10.7 1988 Stock Option Plan, as amended(5)
*10.8 Form of Indemnification Agreement by and between the Company
and its executive officers(3)
10.9 Form of U.S. Note and Warrant Purchase Agreement related to
the Regulation D private placement of 12% Convertible
Subordinated Pay-In-Kind Notes Due 2001 and accompanying
Warrants in January 1998(5)
</TABLE>
45
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
*10.10 Form of Amended and Restated Change of Control Agreement by
and between the Company and its President and Chief
Executive Officer(12)
*10.11 Form of Amended and Restated Change of Control Agreement by
and between the Company and its executive officers (other
than the President and Chief Executive Officer)(12)
10.12 Sublease between Avant! Corporation, as sub-sublandlord, the
Company, as sub-subtenant, Cirrus Logic, Inc., as
sublandlord, Avant! Corporation, as subtenant, Renco
Investment Company, as landlord, and Cirrus Logic, Inc., as
tenant for the lease of facilities at 3400 West Warren
Avenue, Fremont, California(13)
10.13 Form of Note and Warrant Purchase Agreement(6)
*10.14 The 1997 Stock Option Plan (14)
*10.15 The 1999 Long-Term Equity Compensation Plan(15)
10.16 Purchase Agreement dated January 11, 2000 between the
Company and The Tail Wind Fund, Ltd., LBI Group, Inc., Jeddy
Development, Inc., Donald Sanders M.D., PhD., Donald Sanders
IRA, CIBC Oppenheimer Corp., as Custodian, Monica Sanders,
Kendra Sanders, Wanda Sanders IRA, CIBC Oppenheimer Corp. as
Custodian, Meyer Temkin and Charles D. Kelman, M.D.(8)
21.1 Subsidiaries of the Company
22 Power of Attorney (included on the signature pages to this
Form 10-K)
23 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
27 Financial Data Schedule
</TABLE>
- ---------------
* Compensatory plan or management contract
(1) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1996 (File No. 0-10428)
(2) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1994 (File No. 0-17816)
(3) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1992 (File No. 1-17816)
(4) Incorporated by reference from the registrant's Current Report on Form 8-K
dated October 24, 1997 (File No. 0-17816)
(5) Incorporated by reference from the registrant's Current Report on Form 8-K
dated January 26, 1998 (File No. 0-17816)
(6) Incorporated by reference from the registrant's Current Report on Form 8-K
dated January 1, 1999 (File No. 0-10428)
(7) Incorporated by reference from the registrant's Current Report on Form 8-K
filed September 31, 1999 (File No. 0-17816)
(8) Incorporated by reference from the registrant's Current Report on Form 8-K
filed January 14, 1999 (File No. 0-17816)
(9) Incorporated by reference from the registrant's Registration Statement on
Form S-1, as amended (File No. 33-36768)
(10) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1999 (File No. 0-17816)
(11) Incorporated by reference from the registrant's Registration Statement on
Form S-18, as amended (File No., 33-27029-LA)
46
<PAGE> 47
(12) Incorporated by reference from the registrant's Current Report on Form 8-K
dated May 8, 1998 (File No. 0-17816)
(13) Incorporated by reference from the registrant's Registration Statement on
Form S-2 dated September 29, 1998 (File No. 333-64975)
(14) Incorporated by reference from the registrant's Registration Statement on
Form S-8 dated March 2, 1999 (File No. 333-73211)
(15) Incorporated by reference from the registrant's Registration Statement on
Form S-8 dated November 24, 1999 (File No. 333-91669)
47
<PAGE> 1
EXHIBIT 4.13
THIS WARRANT ("WARRANT") HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED
IN THE ABSENCE OF A REGISTRATION STATEMENT COVERING THIS WARRANT UNDER SAID ACT
OR AN EXEMPTION FROM REGISTRATION UNDER SAID ACT.
VOID AFTER 5:00 P.M. EASTERN TIME ON JANUARY 10, 2005 ("EXPIRATION DATE").
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
WARRANT TO PURCHASE SHARES OF
COMMON STOCK, PAR VALUE $.001 PER SHARE
This is to certify that, for VALUE RECEIVED, DUNWOODY BROKERAGE SERVICES,
INC. ("Warrantholder"), is entitled to purchase, subject to the provisions of
this Warrant, from Sunrise Technologies International, Inc., a corporation
organized under the laws of Delaware ("Company"), at any time not later than
5:00 P.M., Eastern Time, on the Expiration Date, at an exercise price per share
equal to $10.68 (the exercise price in effect from time to time hereafter being
herein called the "Warrant Price"), 100,000 shares ("Warrant Shares") of Common
Stock, par value $.001 per share ("Common Stock") of the Company. The number of
Warrant Shares purchasable upon exercise of this Warrant and the Warrant Price
shall be subject to adjustment from time to time as described herein.
This Warrant has been issued pursuant to the terms of the Purchase
Agreement ("Purchase Agreement") dated on or about the date hereof between the
Company and the Warrantholder. Capitalized terms used herein and not defined
shall have the meaning specified in the Purchase Agreement.
Section 1. Registration. The Company shall maintain books for the
transfer and registration of the Warrant. Upon the initial issuance of the
Warrant, the Company shall issue and register the Warrant in the name of the
Warrantholder.
Section 2. Transfers. As provided herein, the Warrant may be
transferred only pursuant to a registration statement filed under the
Securities Act of 1933, as amended ("Securities Act") or an exemption from
registration thereunder. Subject to such restrictions, the Company shall
transfer from time to time, the Warrant, upon the books to be maintained by the
Company for that purpose, upon surrender thereof for transfer properly endorsed
or accompanied
<PAGE> 2
by appropriate instructions for transfer upon any such transfer, and a new
Warrant shall be issued to the transferee and the surrendered Warrant shall be
canceled by the Company.
Section 3.
(a) Exercise of Warrant. Subject to the provisions hereof, the
Warrantholder may exercise the Warrant in whole or in part at any time upon
surrender of the Warrant, together with delivery of the duly executed Warrant
exercise form attached hereto (the "Exercise Agreement"), to the Company during
normal business hours on any business day at the Company's principal executive
offices (or such other office or agency of the Company as it may designate by
notice to the holder hereof), and upon (i) payment to the Company in cash, by
certified or official bank check or by wire transfer for the account of the
Company of the Warrant Price for the Warrant Shares specified in the Exercise
Agreement or (ii) delivery to the Company of a written notice of an election to
effect a "Cashless Exercise" (as defined below) for the Warrant Shares specified
in the Exercise Agreement. The Warrant Shares so purchased shall be deemed to be
issued to the holder hereof or such holder's designee, as the record owner of
such shares, as of the close of business on the date on which this Warrant (or
evidence of loss, theft or destruction thereof) shall have been surrendered, the
completed Exercise Agreement shall have been delivered, and payment shall have
been made for such shares as set forth above. Certificates for the Warrant
Shares so purchased, representing the aggregate number of shares specified in
the Exercise Agreement, shall be delivered to the holder hereof within a
reasonable time, not exceeding two (2) business days, after this Warrant shall
have been so exercised. The certificates so delivered shall be in such
denominations as may be requested by the holder hereof and shall be registered
in the name of such holder or such other name as shall be designated by such
holder. If this Warrant shall have been exercised only in part, then, unless
this Warrant has expired, the Company shall, at its expense, at the time of
delivery of such certificates, deliver to the holder a new Warrant representing
the number of shares with respect to which this Warrant shall not then have been
exercised.
To effect a Cashless Exercise, the holder shall submit to the Company with
the Exercise Agreement, written notice of the holder's intention to do so,
including a calculation of the number of shares of Common Stock to be issued
upon such exercise in accordance with the terms hereof. In the event of a
Cashless Exercise, in lieu of paying the Warrant Price in cash, the holder shall
surrender this Warrant for that number of shares of Common Stock determined by
multiplying the number of Warrant Shares to which it would otherwise be entitled
by a fraction, the numerator of which shall be the difference between the then
current Market Price per share of the Common Stock and the Warrant Price, and
the denominator of which shall be the then current Market Price per share of the
Common Stock. For this purpose, the "Market Price" of the Common Stock shall be
the Market Price on the trading day immediately preceding the date of the
Exercise Agreement.
(b) No Redemption of Warrant. The Company may not redeem this Warrant in
whole or in part.
2
<PAGE> 3
Section 4. Compliance with the Securities Act of 1933. Neither this Warrant
not the Common Stock issued upon exercise hereof nor any other security issued
or issuable upon exercise of this Warrant may be offered or sold except as
provided in this agreement and in conformity with the Securities Act of 1933, as
amended, and then only against receipt of an agreement of such person to whom
such offer of sale is made to comply with the provisions of this Section 4 with
respect to any resale or other disposition of such security. The Company may
cause the legend set forth on the first page of this Warrant to be set forth on
each Warrant or similar legend on any security issued or issuable upon exercise
of this Warrant until the Warrant Shares have been registered for resale under
the Registration Rights Agreement or until Rule 144 is available, unless counsel
for the Company is of the opinion as to any such security that such legend is
unnecessary.
Section 5. Payment of Taxes. The Company will pay any documentary stamp
taxes attributable to the initial issuance of Warrant Shares issuable upon the
exercise of the Warrant; provided, however, that the Company shall not be
required to pay any tax or taxes which may be payable in respect of any transfer
involved in the issue or delivery of any certificates for Warrant Shares in a
name other than that of the registered holder of the Warrant in respect of which
such shares are issued, and in such case, the Company shall not be required to
issue or deliver any certificate for Warrant Shares or any Warrant until the
person requesting the same has paid to the Company the amount of such tax or has
established to the Company's satisfaction that such tax has been paid. The
holder shall be responsible for income taxes due under federal or state law, if
any such tax is due.
Section 6. Mutilated or Missing Warrants. In case the Warrant shall be
mutilated, lost, stolen, or destroyed, the Company shall issue in exchange and
substitution of and upon cancellation of the mutilated Warrant, or in lieu of
and substitution for the Warrant lost, stolen or destroyed, a new Warrant of
like tenor and for the purchase of a like number of Warrant Shares, but only
upon receipt of evidence reasonably satisfactory to the Company of such loss,
theft or destruction of the Warrant, and with respect to a lost, stolen or
destroyed Warrant, reasonable indemnity or bond, if requested by the Company.
Section 7. Reservation of Common Stock. The Company hereby represents and
warrants that there have been reserved, and the Company shall at all applicable
times keep reserved, out of the authorized and unissued Common Stock, a number
of shares sufficient to provide for the exercise of the rights of purchase
represented by the Warrant, and the transfer agent for the Common Stock
("Transfer Agent"), and every subsequent transfer agent for the Common Stock or
other shares of the Company's capital stock issuable upon the exercise of any of
the right of purchase aforesaid, shall be irrevocably authorized and directed at
all times to reserve such number of authorized and unissued shares of Common
Stock as shall be requisite for such purpose. The Company agrees that all
Warrant Shares issued upon exercise of the Warrant shall be, at the time of
delivery of the certificates for such Warrant Shares, duly authorized, validly
issued, fully paid and non-assessable shares of Common Stock of the Company. The
Company will keep a conformed copy of this Warrant on file with the Transfer
Agent and with every subsequent transfer agent for the Common Stock or other
shares of the
3
<PAGE> 4
Company's capital stock issuable upon the exercise of the rights of purchase
represented by the Warrant. The Company will supply from time to time the
Transfer Agent with duly executed stock certificates required to honor the
outstanding Warrant.
Section 8. Warrant Price. The Warrant Price, subject to adjustment as
provided in Section 9, shall, if payment is made in cash or by certified check,
be payable in lawful money of the United States of America.
Section 9. Adjustments. Subject and pursuant to the provisions of this
Section 9, the Warrant Price and number of Warrant Shares subject to this
Warrant shall be subject to adjustment from time to time as set forth
hereinafter.
(a) If the Company shall at any time or from time to time while the
Warrant is outstanding, pay a dividend or make a distribution on its Common
Stock in shares of Common Stock, subdivide its outstanding shares of Common
Stock into a greater number of shares or combine its outstanding shares into a
smaller number of shares or issue by reclassification of its outstanding shares
of Common Stock any shares of its capital stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), then the number of Warrant Shares
purchasable upon exercise of the Warrant and the Warrant Price in effect
immediately prior to the date upon which such change shall become effective,
shall be adjusted by the Company so that the Warrantholder thereafter
exercising the Warrant shall be entitled to receive the number of shares of
Common Stock or other capital stock which the Warrantholder would have received
if the Warrant had been exercised immediately prior to such event. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(b) If any capital reorganization, reclassification of the capital
stock of the Company, consolidation or merger of the Company with another
corporation, or sale, transfer or other disposition of all or substantially all
of the Company's properties to another corporation shall be effected, then, as
a condition of such reorganization, reclassification, consolidation, merger,
sale, transfer or other disposition, lawful and adequate provision shall be
made whereby each Warrantholder shall thereafter have the right to purchase and
receive upon the basis and upon the terms and conditions herein specified and
in lieu of the Warrant Shares immediately theretofore issuable upon exercise of
the Warrant, such shares of stock, securities or properties as may be issuable
or payable with respect to or in exchange for a number of outstanding Warrant
Shares equal to the number of Warrant Shares immediately theretofore issuable
upon exercise of the Warrant, had such reorganization, reclassification,
consolidation, merger, sale, transfer or other disposition not taken place, and
in any such case appropriate provision shall be made with respect to the rights
and interests of each Warrantholder to the end that the provisions hereof
(including, without limitations, provision for adjustment of the Warrant Price)
shall thereafter be applicable, as nearly equivalent as may be practicable in
relation to any shares of stock, securities or properties thereafter
deliverable upon the exercise hereof. The Company shall not effect any such
consolidation, merger, sale, transfer or other disposition unless prior to or
simultaneously with the consummation thereof the successor corporation (if
other than the Company) resulting
4
<PAGE> 5
from such consolidation or merger, or the corporation purchasing or otherwise
acquiring such assets or other appropriate corporation or entity shall assume,
by written instrument executed and delivered to the Company, the obligation to
deliver to the holder of the Warrant such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such holder may be entitled to
purchase and the other obligations under this Warrant. The provisions of this
paragraph (b) shall similarly apply to successive reorganizations,
reclassifications, consolidations, mergers, sales, transfers or other
dispositions.
(c) In case the Company shall fix a record date for the
making of a distribution to all holders of Common Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing corporation) or evidences of indebtedness or assets
(other than cash dividends or cash distributions payable out of consolidated
earnings or earned surplus or dividends or distributions referred to in Section
9(a)), or subscription rights or warrants, the Warrant Price to be in effect
after such record date shall be determined by multiplying the Warrant Price in
effect immediately prior to such record date by a fraction, the numerator of
which shall be the total number of shares of Common Stock outstanding
multiplied by the Market Price per share of Common Stock (as determined pursuant
to Section 3), less the fair market value (as determined by the Company's Board
of Directors in good faith) of said assets or evidences of indebtedness so
distributed, or of such subscription rights or warrants, and the denominator of
which shall be the total number of shares of Common Stock outstanding multiplied
by such current Market Price per share of Common Stock. Such adjustment shall
be made successively whenever such a record date is fixed.
(d) An adjustment shall become effective immediately after
the record date in the case of each dividend or distribution and immediately
after the effective date of each other event which requires an adjustment.
(e) In the event that, as a result of an adjustment made
pursuant to Section 9, the holder of the Warrant shall become entitled to
receive any shares of capital stock of the Company other than shares of Common
Stock, the number of such other shares so receivable upon exercise of the
Warrant shall be subject thereafter to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the provisions with respect
to the Warrant Shares contained in this Warrant.
Section 10. Fractional Interest. The Company shall not be required to
issue fractions of Warrant Shares upon the exercise of the Warrant. If any
fraction of a Warrant Share would, except for the provisions of this Section,
be issuable upon the exercise of the Warrant (or specified portions thereof),
the Company shall round such calculation to the nearest whole number and
disregard the fraction.
Section 11. Benefits. Nothing in this Warrant shall be construed to
give any person, firm or corporation (other than the Company and the
Warrantholder) any legal or equitable right, remedy or claim, it being agreed
that this Warrant shall be for the sole and exclusive benefit of the Company
and the Warrantholder.
5
<PAGE> 6
Section 12. Notices to Warrantholder. Upon the happening of any event
requiring an adjustment of the Warrant Price, the Company shall forthwith give
written notice thereof to the Warrantholder at the address appearing in the
records of the Company, stating the adjusted Warrant Price and the adjusted
number of Warrant Shares resulting from such event and setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based. The certificate of the Company's independent certified
public accountants shall be conclusive evidence of the correctness of any
computation made, absent manifest error. Failure to give such notice to the
Warrantholder or any defect therein shall not affect the legality or validity
of the subject adjustment. At the Warrantholder's request, the Company shall
deliver to the Warrantholder as of a requested date a notice specifying the
number of Warrant Shares into which this Warrant is exercisable as of such date.
Section 13. Identity of Transfer Agent. The Transfer Agent for the Common
Stock is ChaseMellon Shareholder Services, c/o Gloria Pouncil, 235 Montgomery
Street, 23rd Floor, San Francisco, CA 94104, Phone: (415) 643-1427. Forthwith
upon the appointment of any subsequent transfer agent for the Common Stock or
other shares of the Company's capital stock issuable upon the exercise of the
rights of purchase represented by the Warrant, the Company will fax to the
Warrantholder a statement setting forth the name and address of such transfer
agent.
Section 14. Notices. Any notice pursuant hereto to be given or made by
the Warrantholder to or on the Company shall be sufficiently given or made
personally or if sent by an internationally recognized courier by next day or
two day delivery service, addressed as follows:
Sunrise Technologies International, Inc.
3400 West Warren Avenue
Fremont, California 94538
Telephone: (510) 623-9001
Telefax: (510) 623-9009
Attention: Mr. Peter Jansen
Chief Financial Officer
or such other address as the Company may specify in writing by notice to the
Warrantholder complying as to delivery with the terms of this Section 14.
Any notice pursuant hereto to be given or made by the Company to or on
the Warrantholder shall be sufficiently given or made if personally delivered
or if sent by an internationally recognized courier service by overnight or
two-day service, to the address set forth on the books of the Company or, as to
each of the Company and the Warrantholder, at such other address as shall be
designated by such party by written notice to the other party complying as to
delivery with the terms of this Section 14.
6
<PAGE> 7
All such notices, requests, demands, directions and other communications
shall, when sent by courier, be effective two (2) days after delivery to such
courier as provided and addressed as aforesaid.
Section 15. Registration Rights. The initial holder of this Warrant is
entitled to the benefit of certain registration rights in respect of the Warrant
Shares as provided in the Registration Rights Agreement.
Section 16. Successors. All the covenants and provisions hereof by or for
the benefit of the Warrantholder shall bind and inure to the benefit of its
respective successors and permitted assigns hereunder. The Warrantholder may
assign or transfer this Warrant to any transferee only with the prior consent of
the Company, which may not be unreasonably withheld or delayed, provided that
the Warrantholder may assign or transfer this Warrant to any of its affiliates
without the consent of the Company.
Section 17. Governing Law. This Warrant shall be deemed to be a contract
made under the laws of the State of New York, and for all purposes shall be
construed in accordance with the laws of said State.
Section 18. 9.9% and 19.9% Limitations.
(a) Notwithstanding anything to the contrary contained herein, the
number of shares of Common Stock that may be acquired by the holder upon
exercise pursuant to the terms hereof shall not exceed a number that, when added
to the total number of shares of Common Stock deemed beneficially owned by such
holder (other than by virtue of the ownership of securities or rights to acquire
securities that have limitations on the Holder's right to convert, exercise or
purchase similar to the limitation set forth herein), together with all shares
of Common Stock deemed beneficially owned by the holder's "affiliates" (as
defined in Rule 144 of the Securities Act) that would be aggregated for purposes
of determining whether a group under Section 13(d) of the Securities Exchange
Act of 1934, as amended, exists, would exceed 9.99% of the total issued and
outstanding shares of the Company's Common Stock (the "RESTRICTED OWNERSHIP
PERCENTAGE"); provided that (w) each holder shall have the right at any time and
from time to time to reduce its Restricted Ownership Percentage immediately upon
notice to the Company and (x) each holder shall have the right at any time and
from time to time, to increase its Restricted Ownership Percentage immediately
(subject to waiver) in the event of a pending or announced change of control
transaction (including without limitation a transaction that would result in a
transfer of more than 50% of the Company's voting power or equity, or a
transaction that would result in a person or "group" being deemed the beneficial
owner of 50% or more of the Company's voting power or equity).
(b) Each time (a "COVENANT TIME") the holder makes a Triggering
Acquisition (as defined below) of shares of Common Stock (the "TRIGGERING
SHARES") pursuant to the Agreement, the holder will be deemed to covenant that
it will not, during the balance of the day on which such Triggering Acquisition
occurs, and during the 61-day period beginning immediately after that day,
acquire additional shares of Common Stock pursuant to Warrants
7
<PAGE> 8
existing at that Covenant Time, if the aggregate amount of such additional
shares so acquired (without reducing that amount by any dispositions) would
exceed (x) 9.99% of the number of shares of Common Stock outstanding at that
Covenant Time (including the Triggering Shares) minus (y) the number of shares
of Common Stock actually owned by the Holder at that Covenant Time (regardless
of how or when acquired, and including the Triggering Shares). "TRIGGERING
ACQUISITION" means the exercise of the Warrant by the holder; provided, however,
that with respect to the exercise of this Warrant, if the associated issuance of
shares of Common Stock does not occur, such event shall cease to be a Triggering
Acquisition and the related covenant under this paragraph shall terminate. At
each Covenant Time, the Holder shall be deemed to waive any right it would
otherwise have to acquire shares of Common Stock to the extent that such
acquisition would violate any covenant given by the Holder under this paragraph.
(i) The covenant to be given pursuant to this paragraph will be given
at every Covenant Time and shall be calculated based on the circumstances
then in effect. The making of a covenant at one Covenant Time shall not
terminate or modify any prior covenants.
(ii) The Warrantholder may therefore from time to time be subject to
multiple such covenants, each one having been made at a different Covenant
Time, and some possibly being more restrictive than others. The Warrant-
holder must comply with all such covenants then in effect.
(c) Notwithstanding anything contained herein, in no event shall the
Company issue shares of Common Stock hereunder to the extent that the total
number of shares issued or deemed issued to the Investors (when added to the
Underlying Shares and Warrant Shares) under the Purchase Agreement would exceed
19.9% of the Company's issued and outstanding shares of Common Stock on the date
hereof. Instead, the Company shall redeem this Warrant to the extent necessary
at such consideration required to place the Investors in the same economic
position they would have been if not for such limitation. Only shares acquired
pursuant to the Purchase Agreement will be included in determining whether the
limitation would be exceeded for purposes of this paragraph.
[Signature Page Follows]
8
<PAGE> 9
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed as of January 10th, 2000.
SUNRISE TECHNOLOGIES
INTERNATIONAL, INC.
By: /s/ PETER E. JANSEN
-----------------------
Name: Peter E. Jansen
Title: VP Finance & CFO
Attest:
- ---------------------------
9
<PAGE> 1
Exhibit 21.1
SUNRISE TECHNOLOGIES INTERNATIONAL, Inc.
Subsidiaries of the Company
Laser Biotech, Inc.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-72829) and Form S-8 (Nos. 333-91669, 333-73211,
33-27029) of Sunrise Technologies International, Inc. of our report dated
February 11, 2000 relating to the financial statements and financial statement
schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,643,000
<SECURITIES> 0
<RECEIVABLES> 330,000
<ALLOWANCES> (3,000)
<INVENTORY> 1,973,000
<CURRENT-ASSETS> 13,414,000
<PP&E> 2,193,000
<DEPRECIATION> (922,000)
<TOTAL-ASSETS> 14,905,000
<CURRENT-LIABILITIES> 7,649,000
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 84,600,000
<TOTAL-LIABILITY-AND-EQUITY> 14,905,000
<SALES> 26,000
<TOTAL-REVENUES> 26,000
<CGS> 5,000
<TOTAL-COSTS> 2,359,000
<OTHER-EXPENSES> 18,875,000
<LOSS-PROVISION> (11,000)
<INTEREST-EXPENSE> 5,980,000
<INCOME-PRETAX> (26,145,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,145,000)
<EPS-BASIC> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
