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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER 1-10428
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0148208
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3400 WEST WARREN AVENUE, FREMONT, CA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 623-9001
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(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. [ ]
As of March 31, 2001, the aggregate market value based on the closing sales
price on that date of the common equity held by non-affiliates of the Registrant
was approximately $95,932,000.
Indicate the number of shares outstanding of Registrant's common stock as
of March 31, 2001: 51,164,000 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE FOLLOWING DOCUMENTS PART OF THIS FORM 10-K INTO WHICH
ARE INCORPORATED BY REFERENCE INTO THIS FORM 10-K: THE DOCUMENT IS INCORPORATED BY REFERENCE:
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SUNRISE TECHNOLOGIES PART III
INTERNATIONAL, INC. PROXY
STATEMENT FOR 2001 ANNUAL MEETING
OF STOCKHOLDERS
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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.
The Company's main focus has been the development and production of its
holmium laser corneal shaping product or process known as Laser Thermal
Keratoplasty (the "Hyperion(TM) LTK System"). On June 30, 2000, the U.S. Food
and Drug Administration (the "FDA") approved the Company's Hyperion(TM) LTK
System for the temporary reduction of hyperopia in patients with +0.75 to +2.50
diopters of MRSE with less than or equal to +/-0.75 diopters of astigmatism, who
are 40 years of age or older with documented stability of refraction for the
prior 6 months, as demonstrated by a change of less than or equal to 0.50D in
spherical and cylindrical components of the manifest refraction. The magnitude
of correction with this treatment diminishes over time, with some patients
retaining some or all of their refractive correction. New labeling says that,
based upon existing information for the clinical parameters used in the clinical
trial, the Company's model for the average longevity for the procedure indicates
that some of the effect lasts 10 years and beyond. Age related drift towards
hyperopia contributes to the loss of effect after the initial two years.
However, nomograms that are already available outside of the U.S. treat up to
+5.625 diopters, and data indicates the effects can last longer than a patients'
lifetime.
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. On February 21, 2001 the Company signed a
settlement agreement with Lares Research on the payment of the outstanding debt.
The Settlement Agreement provides that Lares will pay the Company $700,000 by
April 20, 2001, in full redemption of an outstanding note obligation owing to
the Company in principal amount of $1,500,000. As of March 31, 2001, $600,000
had been received. This note has been in default and had been fully reserved.
The Company has developed holmium:YAG laser-based systems that utilize a
patented process for shrinking collagen developed by Dr. Bruce Sand (the "Sand
Process") in correcting ophthalmic refractive conditions. A holmium laser is an
abbreviation for the full description: "chromium-sensitized Holmium-Thulium
doped Yttrium Aluminum Garnet Laser". This is an optically pumped solid-state
laser using a xenon flash lamp. The output is in the form of pulses, whose
duration depends on the flash-lamp circuitry from about 120 to 180 microseconds.
The wavelength of the pulsed laser beam is 2120 nm. The active medium for which
the laser is named is a cylindrical rod 4 mm in diameter and 3.5 inches long.
Since mid-1992, the Company has focused a significant portion of its
efforts on engineering and development of the Hyperion(TM) 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 Hyperion(TM) 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 Hyperion(TM) 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 -- Hyperion(TM) LTK System" in this
section.
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The Company has incurred substantial losses in the past nine years which
have seriously depleted its working capital. At December 31, 2000, these
aggregate consolidated net losses equaled approximately $119,075,000. Management
believes that its existing cash balances and other potential financing
alternatives, if realized, will be sufficient to meet the Company's near-term
capital and operating requirements. However, at December 31, 2000, and March 31,
2001, $3,000,000 and $6,600,000, respectively, of the $7,000,000 currently
available to the Company on its one-year revolving line of credit with a
commercial lender had been drawn down by the Company, and will be repayable on
June 29, 2001. Although the Company believes that this lender will extend this
line of credit for another year, formal discussions with the lender have not yet
commenced and there can be no assurance that this extension will ultimately be
approved. The Company's independent accountants have issued a "going" concern
opinion on its financial statements at December 31, 2000. See "Report of
PricewaterhouseCoopers LLP, Independent Accountants and Note 1 to the Company's
Consolidated Financial Statements."
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
The Hyperion(TM) 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., F.A.C.S., 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 Hyperion(TM) 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 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 Hyperion(TM) LTK System could be applied successfully and safely to correct
certain refractive error.
On June 30, 2000, the U.S. Food and Drug Administration approved the
Company's Hyperion(TM) LTK System for the temporary reduction of hyperopia in
patients with +0.75 to +2.50 diopters of MRSE with less than or equal to +/-0.75
diopters of astigmatism, who are 40 years of age or older with documented
stability of refraction for the prior 6 months, as demonstrated by a change of
less than or equal to 0.50D in spherical and cylindrical components of the
manifest refraction. The magnitude of correction with this treatment diminishes
over time, with some patients retaining some or all of their refractive
correction. The new labeling says that, based upon existing information for the
clinical parameters used in the clinical trial, the Company's model for the
average longevity for the procedure indicates that some of the effect lasts 10
years and beyond and that age-related drift towards hyperopia contributes to the
loss of effect after the initial two years. Nomograms that are already available
outside of the U.S. treat up to +5.625 diopter, and data indicates effects can
last longer than a patients' lifetime.
The Hyperion LTK System has been approved by the following countries:
Argentina, Australia, Austria, Belgium, Canada, Croatia, Denmark, Dominican
Republic, Finland, France Great Britain, Greece, Germany, Hong Kong, Iceland,
Israel, Italy, Luxemberg, Mexico, The Netherlands, Norway, Portugal, Saudi
Arabia, Spain, Sweden, and Turkey.
Sales of the Hyperion(TM) LTK System in the United States commenced on June
30, 2000. Prior to that time the Company had extremely limited sales, following
local regulatory approvals, of the Hyperion(TM) LTK System overseas, primarily
in Europe, for the treatment of hyperopia and astigmatism commencing in December
1993.
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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 ISO 9001 certification is required for doing business with
certain customers and vendors, especially international customers and vendors.
The Hyperion(TM) LTK System incorporates a holmium laser system into a
delivery system that is built into a custom optics to perform the LTK procedure.
The Hyperion(TM) 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 circles of energy, 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 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 approval process in the U.S.
has been expensive and time consuming. The Company has and will continue to
focus its efforts in the U.S. and limited resources on its technology for the
treatment higher levels of hyperopia than those currently approved by the FDA,
for presbyopia, and for treatment of overcorrected LASIK or PRK. To date, use of
the Hyperion(TM) LTK System for treatment of the aforementioned have not been
approved by the FDA, and there can be no assurance that the agency will grant
such approvals.
The FDA imposes various requirements on manufacturers and sellers of
products under its jurisdiction, such as labeling, manufacturing practices,
advertising and promotional practices, record keeping and reporting
requirements. The FDA also may require post-market testing and surveillance
programs to monitor a product's effects.
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 sells its products through a small direct
sales force that works in conjunction with U.S. Medical, Inc. ("US Medical") a
privately owned company that specializes in sales of medical equipment including
lasers. In late December 2000, the Company entered into an exclusive (with
certain exceptions) one-year United States distribution agreement (which may be
extended to a second year by agreement of the parties). US Medical employs over
30 sales representatives. In January 2001, the Company purchased 480,000 shares
of common stock of US Medical at $5.00 per share that represents approximately
4% of the outstanding common shares. International sales are made through
established medical equipment distributors overseas. The Company has established
relationships with distributors in Great Britain, France, Sweden, Israel, South
Africa and South Korea.
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 include presentations at conventions and trade shows, customer
training by Company personnel and sponsorship of teaching
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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 2000, the Company recorded $6,459,000 in research and development
expenses primarily relating to development of the LTK System. Related expenses
were $4,774,000 and $2,107,000 in 1999 and 1998, 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. Clinical testing and sale of the Company's products are subject to
obtaining applicable regulatory approvals, of which there can be no assurance.
The Company's research and development activities are conducted in-house as well
as by outside sources, including consultants and universities.
The laser industry is characterized by extensive research and rapid
technological change. Development by others of new or improved products,
processes or technologies may make product development by the Company obsolete
or less competitive. The Company will be required to devote continuing efforts
and funds to further developments and enhancements for its existing products and
for its research and development of new technologies and products. There can be
no assurance the Company will be able to successfully adapt its operations to
evolving markets and technologies and fund the development of new medical
products to achieve possible technological advantages.
Production
The Company manufactures its ophthalmic lasers from parts, components and
subassemblies obtained from a number of unaffiliated suppliers, and the Company
designs the software incorporated into a microprocessor purchased from an
unaffiliated third party. Prototype production and all manufacturing, assembly
and testing activities take place at its Fremont, California facility. Although
some of the parts and components used by the Company to manufacture its products
are available from multiple sources, the Company currently purchases most 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.
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 may 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
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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 U.S. patents
filed by Dr. Sand, as the inventor, have issued, and have been assigned to the
Company. As a result of the Emmetropix acquisition, the Company acquired an
issued United States patent and a pending European regional patent derived from
the application leading to the 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 over 45 issued
utility patents on the LTK System and/or method for shrinking collagen in the
United States and internationally. These patents encompass both the apparatus
for treatment with the LTK System and the method of shrinking collagen in the
cornea. The Company is the owner of several United States and foreign patents
issued to Dr. Bruce J. Sand. United States Patent No. 4,976,709 (the "709
patent"), issued on December 11, 1990, was the first of these United States
patents to issue. The term of the "709 patent is set to expire on December 11,
2007. On August 10, 2000 the Company applied for an extension of the term of the
"709 patent pursuant to Section 515 of the Federal Food, Drug and Cosmetic Act,
21 U.S.C. Section 301 et seq. The application seeks an extension of the patent
term to June 11, 2012. A final determination concerning the Company's
eligibility for a term extension regarding the "709 patent and any term of such
an extension is not expected before August 10, 2001. The Company also has over
30 pending patent applications on the LTK System and/or the method for shrinking
collagen in the United States and internationally.
On June 16, 2000, the Company entered into an Amended and Restated Patent
and Technology Assignment Agreement whereby Dr. Bruce J. Sand, M.D., F.A.C.S.
agreed to assign to the Company irrevocably and on an exclusive basis the patent
rights and related technology of Dr. Sand's patent application for the
prevention of regression of refractive keratoplasty. Included in the agreement
is the purchase of all patents and future royalty obligations related to the
previously licensed "Sand" patents, the result of which will be the avoidance of
future cash outflows related to these royalty obligations. As part of this
agreement, the Company issued to Dr. Sand a warrant to purchase 750,000 shares
of our common stock at an exercise price of $0.01 per share, exercisable at any
time prior to June 16, 2005. Dr. Sand agreed that he would sell no more than
250,000 of such shares in any of our fiscal quarters. In addition, for legal
services rendered by Edward Vincent King, Jr., Dr. Sand's attorney, we issued a
warrant to purchase 67,500 shares of our Common Stock on the same terms as the
warrant issued to Dr. Sand and Mr. King, Jr. agreed not to sell more than 22,500
shares in any of our fiscal quarters. On June 21, 2000 Dr. Sand and Mr. King
exercised all of their respective warrants to purchase shares of common stock.
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
Hyperion(TM) 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 Alcon, through its
acquisition of Summit, are the leading manufacturers of excimer refractive
surgical systems. While the Company believes the LTK technology offers several
distinct advantages over the use of excimer lasers for treating hyperopia,
including ease of use and decreased invasiveness, both VISX and Alcon have
significantly greater financial resources than the Company and have received FDA
approval for their respective excimer laser products for treating myopia
(nearsightedness),
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astigmatism and hyperopia. In addition, certain of the Company's competitors,
including Alcon, have developed LTK devices for the treatment of hyperopia,
although the Company does not believe that Alcon's LTK device has received FDA
clearance. The Company believes its Hyperion(TM) LTK is superior to those of its
competitors. To the Company's knowledge, none of the Company's competitors is
currently engaged in United States clinical trials to approve their LTK devices
for treating hyperopia.
Summit, prior to its acquisition by Alcon, discontinued its clinical trials
for treating hyperopia with its holmium laser system in 1996. However, any
alternative treatment offered by VISX or Alcon may be perceived as having a
competitive advantage because of the name recognition being created by the
current promotion of their excimer laser products and the fact that VISX and
Alcon 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, while not cutting or removing tissue.
Export Sales
In 2000, approximately 4% of the Company's gross revenues, or $558,000,
were international as compared to approximately 71% in 1999 and 98% in 1998.
International sales prior to 2000 did not include sales of the Hyperion(TM) LTK
System which was launched domestically and in the International markets in 2000.
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 and service work has
been $1,759,000. In the case of sales by international distributors, all product
services are provided by such distributor.
Employees
At December 31, 2000, the Company had 132 full-time equivalent employees
(including its executive officers), 81 in manufacturing, engineering and
development, 28 in marketing, sales and regulatory, and 23 in administration. In
the first week of January this total number was reduced to 111. On January 3,
2001, the Company completed a "reduction in force" (RIF) of 21 employees. Each
employee received a severance payment as follows: hourly employees -- 2 weeks
plus 2 weeks for every year worked, salary employees -- four weeks plus 2 weeks
for ever year worked, managers -- 12 weeks plus 2 weeks for every year worked,
and directors -- 20 weeks plus 2 weeks for every year worked. In full payment of
the severance awards the Company granted 107,273 shares out of the Supplemental
Employee Stock Plan in lieu of cash. 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.
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Information Regarding the Executive Officers
The following persons currently serve as executive officers of the Company:
NAME AGE POSITION
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C. Russell Trenary, III.............. 43 President and Chief Executive Officer and Director
Peter E. Jansen...................... 64 Vice President, Finance and Chief Financial Officer
John N. Hendrick..................... 49 Chief Operating Officer
Jeannie G. Cecka..................... 38 Vice President, Clinical and Regulatory Affairs
Paul M. Malin........................ 47 Vice President, International Sales and Marketing and
Worldwide Business Development
Richard T. VanRyne................... 54 Vice President, U.S. Sales and Marketing
C. Russell Trenary III was appointed Chairman of the Board in October 2000
in addition to being named President and Chief Executive Officer of Sunrise
Technologies International, Inc. in June 1997. In November 1996, Mr. Trenary was
promoted to the Company's President and Chief Operating Officer position, and
was also appointed to its Board of Directors. He was appointed President and
Chief Operating Officer of Laser Biotech, Inc., a wholly-owned subsidiary of
Sunrise, in April 1996. From 1995 until the time he joined Sunrise, Mr. Trenary
served as Senior Vice President of Sales and Marketing for Vidamed, Inc., a
small, early-stage medical device company. His prior experience includes many
positions at a Fortune 500 company, Allergan, Inc., from 1986 to 1995, most
recently as Senior Vice President, General Manager of AMO Surgical Products, an
ophthalmic business. Mr. Trenary joined American Hospital Supply Corporation in
1981 and has been involved with surgical ophthalmic technologies for 19 of the
past 20 years. He received a master's degree in business administration from
Michigan State University in 1981, and a B.S. degree from Miami University in
Ohio in 1979.
Mr. Jansen was appointed Vice President, Finance and Chief Financial
Officer of the Company on May 28, 1999. Prior to joining the Company, Mr. Jansen
served as Chief Financial Officer of CoCenSys, Inc., a biopharmaceutical
company, from 1996 to 1998. From 1994 to 1996, Mr. Jansen served as Chief
Executive Officer of PhytoMedica Health Products, Inc., a biopharmaceutical
company, and from 1992 to 1994, Mr. Jansen was Senior Vice President and Chief
Financial Officer of Genelabs Technologies, Inc., a biotechnology company. Prior
thereto, from 1975 to 1992, Mr. Jansen held various financial executive
positions with Abbott Laboratories.
John N. Hendrick was nominated to serve as a member of the Board of
Directors in April 2000. Mr. Hendrick has served as Chief Operating Officer of
the Company since March 2000. From 1994 until 2000, he served as Chief Operating
Officer of VidaMed, Inc., a urological company developing treatments for benign
prostate hyperplasia. From 1990 until 1994, Mr. Hendrick served as Vice
President of Operations for Allergan Medical Optics, a division of Allergan,
Inc., which manufactures vision care products, where he was responsible for
ophthalmic product and process development, worldwide manufacturing and quality
assurance. Ms. Cecka was appointed Vice President, Clinical and Regulatory
Affairs of the Company in August 1996. From February 1996 to August 1996, Ms.
Cecka was Quality Systems Auditor at Tuv Product Service. From March 1995 to
February 1996, Ms. Cecka was Director of Clinical and Regulatory Affairs at
MedAcoustics, Inc. From September 1992 to March 1995, Ms. Cecka was Manager of
Clinical Research for Baxter Novacor, a developer and marketer of left
ventricular assist devices. Prior to September 1992, Ms. Cecka spent seven years
at Allergan, Inc. holding positions ranging from Manager, Clinical Affairs to
Director, Worldwide Clinical Research.
Mr. Malin was appointed Vice President, International Sales and Marketing
and Worldwide Business Development of the Company in September 1998. Prior to
joining the Company in May 1996, Mr. Malin was the Director of Marketing at
IRIDEX Corporation, a medical device manufacturer of ophthalmic laser products
from July 1995 to May 1996. From October 1983 to July 1995, Mr. Malin held
various senior sales and marketing positions at Allergan, Inc.
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Mr. VanRyne was appointed Vice President, U.S. Sales and Marketing of the
Company in September 1998. From August 1997 to September 1998, Mr. VanRyne was
the Company's Director of Sales and Marketing for the Americas. Prior to joining
the Company, Mr. VanRyne was the Director of New Business Development at
MedLogic Global Corporation, a manufacturer of wound healing products, from
April 1996 to August 1997. From April 1995 to April 1996, Mr. VanRyne was a
consultant for medical device marketing and educational strategy. From 1986 to
April 1995, Mr. VanRyne was employed by Allergan, Inc. in a variety of senior
sales and marketing positions.
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, loses, losses 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 risk factors 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 cash and reduced
our stockholders' equity and we have an accumulated deficit of $119,075,000 at
December 31, 2000. Our current operations continue to be cash flow negative,
limiting our cash resources. Working capital at December 31, 2000 amounted to
approximately $6,332,000. We expended a significant amount of cash during the
first three quarters of 2000 in the ramp-up of manufacturing capabilities,
build-up of materials and components for the production of the Hyperion(TM) LTK
System and our market preparation for the launch on the domestic and
international markets. We may need to expend additional cash resources in 2001
for the continued marketing of the Hyperion(TM) LTK System in the domestic and
international markets. Sales to the domestic market began subsequent to June 30,
2000 following the final FDA approval. Sales of the Hyperion(TM) LTK System can
also be made to certain international markets where it is approved by the local
regulatory authorities. However, given that this technology is new to the
market, and therefore unproven, there is no assurance that expected results will
be attained. If we continue to incur losses, and if revenue from sales or new
funds from debt or equity instruments are insufficient to maintain the current
and planned expenditure rate, it will be necessary to extensively curtail our
operations until we implement an appropriate solution. See "Risk
Factors -- There is no assurance future capital will be available to us;
additional capital will dilute the holdings of our stockholders."
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THERE IS NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE TO US; ADDITIONAL CAPITAL
WILL DILUTE THE HOLDINGS OF OUR STOCKHOLDERS.
We funded our negative cash flows during 1998, 1999 and 2000 by the sale of
additional equity and convertible debt with warrants. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II, Item 7 of this Annual Report. At December 31, 2000, after consummation
of a notes placement in January (approximate net proceeds of $11,200,000) and
securing a $10,000,000 revolving line of credit facility with a bank in June
2000, our cash and cash equivalents were approximately $975,000. As of March 31,
2001, approximately $400,000 remained on the revolving line of credit, as the
additional $3,000,000 will only be available if the guarantor pledges additional
assets.
There can be no assurance that we will not require additional capital. We
cannot assure that additional financing will be available, or if available, that
it will be available on terms favorable to us or our stockholders. As described
elsewhere in this document, our independent auditors have issued a "going"
concern opinion on our December 31, 2000 financial statements. If funds are not
available to satisfy our short-term and long-operating requirements, we may
limit our operations until an appropriate solution is implemented, suspend our
operations in their entirety or, under certain circumstances, seek protection
from creditors.
Our stockholders have no preemptive rights. If we:
- commence a subsequent public or private offering of common stock,
convertible debt or preferred stock; or
- issue securities upon exercise of warrants to consultants or other
parties providing goods or services to us in lieu of or in addition to
cash consideration,
any stockholders, who do not participate in any future stock issuance, will
experience dilution of their equity investment. At this time, we cannot
determine the potential dilution to our stockholders.
OUR HYPERION(TM) LTK SYSTEM IS SUBJECT TO STRINGENT ONGOING REGULATION BY THE
FDA AND SIMILAR HEALTH AUTHORITIES, AND IF THE FDA'S APPROVAL OF OUR PRE-MARKET
APPROVAL APPLICATION FOR OUR HYPERION(TM) LTK SYSTEM IS RESTRICTED, OR REVOKED,
OR IF THE FDA DELAYS OR FAILS TO APPROVE EXPANDED INDICATIONS FOR THE LTK SYSTEM
WE COULD FACE PROBLEMS THAT WOULD IMPAIR OUR ABILITY TO GENERATE FUNDS FROM
OPERATIONS.
The FDA and similar health authorities in foreign countries extensively
regulate our activities. The FDA regulates the Hyperion(TM) LTK System under the
Food, Drug & Cosmetic Act as a Class III medical device. Class III medical
devices must have a premarket approval application, or PMA, approved by the FDA
before commercial sales in the United States commence. The PMA process (and
underlying clinical studies) has been lengthy and required substantial
commitments of our financial resources and our management's time and effort. The
Company received PMA approval for the temporary reduction of hyperopia for the
Hyperion(TM) LTK on June 30, 2000. Restrictions on or revocation of the FDA
approval for reasons including but not limited to good manufacturing practices
quality systems, safety or other reasons could hinder or prevent the continued
marketing of the Hyperion(TM) LTK System. Consequently, FDA action could 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 obtain timely, if at all, the
required FDA approval for any expanded indications for our currently approved
product for which we may seek approvals. The FDA will subject us to pervasive
and continuing regulation for this and any products that we manufacture or
distribute.
We have received a CE (European Community) mark of approval on our
Hyperion(TM) LTK System device that allows us to sell the device in the
countries comprising the European Community. In addition to the CE mark,
however, some foreign countries may require separate individual foreign
regulatory clearances. We cannot assure that we will be able to obtain
regulatory clearances for other products in the United States or foreign
markets.
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WE ARE A ONE-PRODUCT COMPANY AND DEPEND ON THE HYPERION(TM) LTK SYSTEM AND
MARKET ACCEPTANCE OF THAT SYSTEM IS UNCLEAR.
The Hyperion(TM) LTK System is our only product currently on the market. We
intend to concentrate our efforts primarily on the continued development of the
Hyperion(TM) LTK System and will be dependent upon the successful manufacturing
and marketing of that system to generate revenues. We have only recently
introduced the Hyperion(TM) LTK System commercially in the United States on June
30, 2000. There can be no assurance that the ophthalmic community or the general
population will accept the Hyperion(TM) 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 Hyperion(TM) LTK System may
be affected adversely by:
- its costs;
- the amount of training required for the proper use of the machine;
- characteristics 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;
- the possibility of unknown side effects;
- the degree of usage by the ophthalmic community as a treatment
alternative for hyperopia; and
- how quickly competitive companies can develop and obtain FDA approval for
novel treatment methods for hyperopia.
Promotional efforts by suppliers of products or procedures that are
alternatives to the Hyperion(TM) LTK System, including eyeglasses, contact
lenses and laser and non-laser surgical procedures, may also adversely affect
the marketplace for the Hyperion(TM) LTK System. Any failure to achieve broad
market acceptance of the Hyperion(TM) 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 HYPERION(TM) LTK
SYSTEM IS CURRENTLY AVAILABLE, BUT FUTURE COMPLICATIONS OR SIDE EFFECTS MAY
OCCUR.
We have developed substantial clinical data on the safety and efficacy of
the Hyperion(TM) LTK System in correcting hyperopia (farsightedness). Potential
complications and side effects reported in studies to date from the use of the
Hyperion(TM) LTK System include:
- mild foreign body sensation;
- temporary increased light sensitivity;
- modest fluctuations in refractive capabilities during healing;
- unintended over or under corrections;
- regression of effect; and
- induced astigmatism.
Further testing of the Hyperion(TM) LTK System in clinical could reveal
other complications and side effects which could bear on the long-term safety
and efficiency of the Hyperion(TM) LTK, any which could have a material adverse
effect on our business.
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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 Hyperion(TM) 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 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 Hyperion(TM) 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 Hyperion(TM) 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. Finally, litigation, regardless of the merits of the claim or
outcome, could consume a great deal of our time and money and would divert
management time and attention away from our core business.
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 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, 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 EFFECT 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.
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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 Hyperion(TM) 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 currently 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, Bausch & Lomb and Alcon are
the leading manufacturers of excimer refractive surgical systems. VISX, Bausch &
Lomb and Alcon and 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) or astigmatism.
Any alternative treatment offered by VISX, Bausch & Lomb or Alcon, however, will
have a competitive advantage because they already have established a base of
customers that are currently using their products.
WE MAY BECOME INVOLVED IN PRODUCT LIABILITY LITIGATION, WHICH MAY SUBJECT US TO
LIABILITY AND DIVERT MANAGEMENT ATTENTION.
The testing and marketing of laser systems for applications in
ophthalmology entail inherent risks, which could result in product liability or
other claims based upon injuries or alleged injuries associated with a defect in
the product's performance and which may not become evident for a number of
years. Although we are not currently involved in any product liability
litigation, we could become a party to litigation in the future as a result of
an alleged injury. Litigation, regardless of the merits of the claim or outcome,
could consume a great deal of our time and money and would divert management
time and attention away from our core business. We maintain limited product
liability insurance coverage. We may be adversely affected by a successful
product liability claim in excess of any insurance coverage. There can be no
assurance that product liability insurance coverage will continue to be
available to us in the future on reasonable terms or at all.
WE ARE DEPENDENT ON OUR MANAGEMENT AND KEY PERSONNEL TO SUCCEED.
Our principal executive officers and key personnel have extensive
experience with our Hyperion(TM) 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 manufacture, sell and market the product. Such events would
probably have a negative impact on our business and financial condition.
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 December 31, 2000, we had 50,867,848 shares
outstanding.
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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 requirements, developments or disputes relating to
patent or proprietary rights and public concern as to the safety and efficacy of
the procedures for which the Hyperion(TM) 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.
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 us 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:
- acquires beneficial ownership of 15% or more of us; or
- 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.
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 Company's operations activities.
ITEM 3. LEGAL PROCEEDINGS
On July 13, 1999, the Company filed suit 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) for defamation. The action
arose after the defendants took short positions in the publicly traded shares of
the
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Company, immediately after which the defendants allegedly issued materially
false, misleading and negative written reports on the Company for the purpose of
driving down the price of the Company's Common Stock for the benefit of the
short position takers. In July 2000, the court entered a Notice of Default, but
has not yet entered a default judgment against the defendants. The court has
assigned this matter to mediation, which is scheduled to take place in the
second quarter of 2001.
In June 2000, A.M. Hochstadt, an individual, filed a complaint in the
Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County,
Florida alleging common law fraud and negligent misrepresentations against the
Company and C. Russell Trenary, III and Paul Malin, executive officers of the
Company. The complaint seeks damages in excess of the jurisdictional amount of
$75,000. On July 28, 2000, the defendants removed the lawsuit to the United
States District Court for the Southern District of Florida. Mr. Trenary and Mr.
Malin have filed motions to dismiss for lack of personal jurisdiction, and the
Company filed a motion to dismiss for forum non conveniens and for failure to
state a cause of action. The parties have agreed to a stay of discovery pending
resolution of the motions to dismiss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
As of December 31, 2000, there were approximately 900 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.
The table below sets forth the reported high and low bid quotations of the
Company's common stock as reported on the Nasdaq National Market System from
January 1, 1999 to December 31, 2000 for the periods indicated.
PRICE FOR COMMON STOCK(1)
QUARTER ENDED HIGH LOW
------------- ------ -----
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
March 31, 2000...................................... 16.00 7.00
June 30, 2000....................................... 12.25 5.06
September 30, 2000.................................. 9.94 5.66
December 31, 2000................................... 7.69 1.44
---------------
(1) Bid and ask prices are quoted on the Nasdaq National Market System 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 30, 2001, the closing price
of the common stock as reported on the Nasdaq National Market System was $1.875
per share.
Dividends
The Company has not declared or paid any cash dividends on its common stock
during the past three years. 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
On September 29, 2000 the Company issued shares of Common Stock in reliance
with Regulation D under the Securities Act of 1933 upon conversion of notes
issued in January 1999.
In January 2000, the Company completed a $11,200,000, net of offering
costs, private placement under Regulation D 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. During 2000,
holders converted $2,800,000 of the debentures into common stock. A placement
fee was paid to Dunwoody in the amount of $483,000, plus warrants to purchase
100,000 shares of common stock.
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
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$7.823 for a continuous period of twenty trading days. On June 29, 2000, the
Company called all of the Type B warrants effective August 14, 2000. Of the ten
holders of Type B warrants, eight elected to exercise their warrants
representing 443,741 shares or approximately 90% of the type B warrants
originally issued and for which the Company received approximately $3,000,000.
In June 2000, the Company issued the Master Warrant as described elsewhere
in this document to the David A. Brewer Trust in reliance upon Regulation D.
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 selected consolidated financial data should be read in
connection with the Consolidated Financial Statements and related Notes and "
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this document. The consolidated statement of
operations data for each of the three years in the period ended December 31,
2000, 1999, and 1998 and the balance sheet at December 31, 2000 and 1999 are
derived from the audited consolidated financial statements included elsewhere in
this document. The consolidated statement of operations data for the years ended
December 31, 1997 and 1996, and the balance sheet at December 31, 1998, 1997,
and 1996 are derived from audited consolidated financial statements not included
in this document. Our historical results are not necessarily indicative of the
results to be expected in future periods. See Notes to our Consolidated
Financial Statements for a detailed explanation of the determination of the
shares used to compute basic and diluted net loss per share.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
Net revenues.......................... $ 13,401 $ 26 $ 594 $ 2,839 $ 5,654
Gross profit (loss)................... 3,520 (2,333) (1,548) 293 1,638
Operating costs and expenses.......... 30,490 18,875 12,718 7,368 7,658
Loss from operations.................. (26,970) (21,208) (14,266) (7,075) (6,020)
Gain on sale of dental assets......... -- -- -- 1,740 --
Interest income....................... 383 955 399 99 65
Interest expense...................... (11,263) (5,890) (3,950) (1,376) (13)
Other expense......................... (197) (2) (4) (6) --
Net loss.............................. (38,047) (26,145) (17,821) (6,618) (5,968)
Net loss per share, basic and
diluted............................. (0.79) (0.60) (0.52) (0.23) (0.23)
Shares used in calculation of basic
and diluted net loss per share...... 48,076 43,867 34,164 28,550 26,414
Total assets.......................... 28,526 14,905 11,749 2,949 3,741
Long term obligations................. 8,867 5,155 7,703 945 --
Total stockholders' equity............ 9,362 2,101 200 849 1,272
Working capital....................... 6,332 5,756 6,773 1,382 1,073
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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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.
Our working capital is seriously depleted due to our substantial losses in
the past nine years. Our independent auditors have issued a "going concern"
opinion on our December 31, 2000 financial statements. See "Report of
PricewaterhouseCoopers LLP, Independent Accountants," and Note 1 to the
Company's Consolidated Financial Statements.
Sales of our existing ophthalmic products at current levels will not be
sufficient to sustain the continued development and regulatory licensing of our
holmium laser corneal shaping product or process known as the Hyperion(TM) 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.
In June 2000, the Company secured a one-year $10,000,000 revolving line of
credit from a commercial banking company guaranteed by certain Company assets
and assets of one of the Company's investors. In connection with the secured
credit line, The David A. Brewer Trust agreed to guaranty any advance under the
line. Of this amount, the Company is currently entitled to draw down a maximum
of $7,000,000 until such time as the guarantor agrees to pledge collateral of at
least $3,000,000 to secure the guaranty and terms acceptable to the bank. As
compensation for the guaranty, pursuant to a Master Warrant (the "Master
Warrant"), which may be exercised in whole or in part at any time and from time
to time, the Trust will receive (i) 25,000 shares of Common Stock of the Company
whether or not the secured credit line is drawn upon, (ii) 0.000195 shares of
Common Stock of the Company per $1.00 drawn from the line for each day such
amount remains outstanding, (iii) 25,000 shares of Common Stock of the Company
per $1,000,000 drawn by the Company up to $7,000,000 (on a prorated basis) and
(iv) 0.000289 shares Common Stock of the Company per $1.00 drawn down by the
Company in excess of $7,000,000 for each day such amount remains outstanding.
The determination of the warrants issuable under clause (iv) is subject to
offset by the warrants to be issued under clause (iii). The exercise price of
shares of the Company's Common Stock issuable upon exercise of the Master
Warrant is $5.00 per share, and the Master Warrant is exercisable for five years
from the date of issuance. As of December 31, 2000, and March 31, 2001,
$3,000,000 and $6,600,000, respectively, of the $7,000,000 currently available
to the Company on its one-year revolving line of credit had been drawn down by
the Company, and will be repayable on June 29, 2001. Although the Company
believes that this lender will extend this line of credit for another year,
formal discussions with the lender have not yet commenced and there can be no
assurance that this extension will ultimately be approved.
On January 13, 2000, $5,000,000 of the principal amount of the 1999 Notes
became convertible into the Company's common stock at a conversion price of
$4.00 per share when the Ophthalmic Devices Panel ("ODP") unanimously voted to
recommend that the FDA approve the Hyperion(TM) LTK System in the United States
for the temporary reduction of low to moderate hyperopia with conditions
relating to patient symptoms, longevity of effect and the effect of
re-treatment. On June 30, 2000 the remaining $5,000,000 balance of the principal
amount of the 1999 Notes became convertible at conversion price of $8.00 with
final FDA approval. On September 29, 2000 all of the 1999 Notes were converted
into the Company's common stock.
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The Company's current operations continue to be cash flow negative, further
straining our working capital resources. A portion of our cash expenditures
amounting to $2,049,000 were for capital equipment in fiscal year 2000. At our
current rate of cash expenditures, we will probably need to raise additional
working capital during 2001 to fund operations. No assurance can be given that
additional financing will be available, or if available, that it will be
available on terms favorable to us and to our stockholders. If funds are not
available to satisfy both our short-term and long-term operating requirements,
we may be required to limit or suspend our operations in their entirety or,
under certain circumstances, be forced to seek protection from creditors. Our
long-term ability to continue as a going concern is dependent upon performing
profitably or obtaining further financing. The effects of inflation are not
currently material to the Company.
LIQUIDITY
As of December 31, 2000, the Company had $975,000 in cash and cash
equivalents.
Cash used for operating activities was $27,354,000 for the twelve months
ended December 31, 2000 as compared to $20,659,000 for 1999. The majority of the
cash used for operating activities in 2000 was used to fund the net loss of
$38,047,000 partially offset by depreciation and amortization and non-cash
interest and compensation expense of $18,195,000. Operating cash was also
utilized in the growth of inventory and accounts receivable of $13,495,000
offset by the growth of accounts payable and deferred revenue and deposits of
$5,893,000.
Cash used for investing activities was $2,049,000 for the twelve-months
ended December 31, 2000 for purchase of capital expenditures. Capital
expenditures generally had been comprised of purchases of computer hardware and
software as well as leasehold improvements related to leased facilities.
Cash provided by the financing activities was $19,727,000 for the
twelve-months ended December 31, 2000 comprised primarily of the net proceeds
from the January 2000 debt financing of $11,217,000, the issuance of common
stock of $4,872,000 and $3,000,000 drawn down from our $10,000,000 bank
revolving credit line on which an additional $400,000 currently remains
available to the Company.
The Company has incurred net losses in the past nine years and there can be
no assurance that the Company will attain profitability. At December 31, 2000,
the Company had aggregated consolidated net losses of $119,075,000. In order to
continue its operations, the Company must achieve profitable operations or
obtain additional funds through equity or debt financing, collaborative or other
arrangements with other companies, bank financing, and other sources.
Management believes that its existing cash balances together with other
potential financing alternatives if realized, will be sufficient to meet the
Company's capital and operating requirements for the near term if the Company's
one year revolving line of credit expiring June 29, 2001 is extended for an
additional year. See "Overview" above. If expenditures required to achieve the
Company's plans are greater than projected, or if the Company is unable to
generate sufficient cash flow from sale of its products, the Company will need
to seek additional sources of capital. There can be no assurance that the
Company will be able to obtain additional debt or equity financing on terms
acceptable to the Company, or at all. If adequate funds are not available, the
Company could decide to delay development or commercialization of certain
products, to license to third parties the rights to commercialize certain
products or technologies that the Company would otherwise seek to commercialize
internally, or to reduce the marketing, customer support, or other resources
devoted to product development. Accordingly, the failure of the Company to
obtain sufficient funds on acceptable terms could have a material adverse effect
on the Company's business, results of operations and financial condition.
Management is currently working towards achieving its profitability by
pursuing its goal of successfully marketing of its products throughout the
United States and internationally. The failure of the Company to win increased
acceptance of its products by medical providers could have a material adverse
effect on the Company's business, results of operations and financial
conditions.
Our current operations continue to be cash flow negative, limiting the
Company's working capital resources. Working capital at December 31, 2000
amounted to approximately $6,332,000. At December 31,
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1999, working capital amounted to approximately $5,756,000. Our ability to
continue as a going concern is dependent upon performing profitably or obtaining
further financing. We have invested a significant portion of our working capital
during 2000 in the ramp-up of manufacturing capabilities, build-up of materials
and components for the production of the Hyperion(TM) LTK System and its market
preparation for the launch on the domestic and international markets. We had
product revenue of $11,300,000 for the six month period following the FDA
approval on June 30, 2000. This figure was lower than we had expected. The
resultant shortfall in our year 2000 revenues generated less cash inflows than
planned and has consequently placed great strain on our working capital. At
December 31, 2000, we had drawn down $3,000,000 from our available $10,000,000
guaranteed bank credit line and by March 31, 2001 we had drawn down $6,600,000
and $400,000 remained available for borrowing, as the other $3,000,000 will only
be available if the guarantor pledges additional assets. In early January 2001
we announced plans to reduce spending by approximately $20,000,000 during the
current fiscal year that would include a down sizing of the Company. These
reduction efforts are being implemented and are expected to significantly reduce
the current cash outflows. Clearly, as we move forward into 2001, our best
solution to improve our working capital shortage is by increasing cash from the
sale of Hyperion(TM) LTK System units. This effort is our utmost priority,
however, given the general US economic slow down and the fact that our
Hyperion(TM) LTK System is still in its infancy in terms of market acceptance,
we can not assure that sufficient revenues to cover our working capital needs
will be obtained. Alternatively, we may need to consider raising funds on the
capital markets, but there is no assurance that new funds can be raised or that,
if raised, they would be at prices acceptable to our stockholders. We believe
that if revenues from sales or new funds from debt or equity instruments are
insufficient to maintain the current expenditure rate, it will be necessary to
extensively curtail our operations until an appropriate solution is implemented.
RESULTS OF OPERATIONS
Revenues
Revenues of $13,401,000 for the year ended December 31, 2000 compare
favorably to those of the same periods for 1999 and 1998 at $26,000 and $594,000
respectively, due to the fact that sales of our new Hyperion(TM) LTK System
started on June 30, 2000 following its FDA approval. Procedure revenues are
comprised of revenues from enablement fees and amounted to $1,301,000 for the
year ended December 31, 2000. The Company did not receive procedure revenues in
1999 and 1998. Procedure Enablements are required to be used each time a
procedure is performed using the Hyperion LTK System.
Service and other revenues are comprised of revenues from the recognition
of first-year service revenues and other miscellaneous revenues and amounted to
$800,000 for the twelve-months of 2000 as compared with $26,000 and $594,000 for
1999 and 1998 respectively.
Costs of Revenues
Total cost of revenues for the year ended December 31, 2000 were $9,881,000
as compared with $2,359,000 and $2,142,000 for 1999 and 1998 respectively. Cost
of revenues for product sales totaled $7,453,000 for the year ended December 31,
2000. Cost of revenues for enablements totaled $1,000 for the year ended
December 31, 2000. Cost of revenues for service and other revenues totaled
$2,427,000 for the year ended December 31, 2000 as compared to $2,359,000 and
$2,142,000 for 1999 and 1998 respectively. Costs of revenues for product sales
reflect charges for production costs inclusive of manufacturing labor, overhead,
unabsorbed manufacturing costs and shipping costs. Cost of revenues for
procedures represents the cost of the media (activated cards) being utilized to
deliver the enablements. Cost of revenue for service and other revenues include
costs of the Company's technical and service department and other direct costs
associated with miscellaneous revenues. The resultant gross margin for the year
2000 was $3,520,000, an improvement over the same periods for 1999 and 1998
because the year 2000 was the first one in which the Company had sales of its
new Hyperion(TM) LTK System which were $11,300,000. Gross losses for 1999 and
1998 were $2,333,000 and $1,548,000, respectively.
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Expenses
Research and development expenses totaled $6,459,000 for the year ended
December 31, 2000, compared to $4,774,000 and $2,107,000 for the same periods in
1999 and 1998. Research and development expenses consist primarily of payroll
and related expenses incurred for enhancement to and maintenance of the
Hyperion(TM) LTK System, amortization of patent costs, expenditures related to
the development of other refractive applications of the Hyperion(TM) LTK System
and other operating costs. Included in the research and development expenses for
the year 2000 was non-cash charges of $2,443,000 related to the fair market
value of warrants and non-qualified stock options issued to consultants and
employees in lieu of cash. The 35% and 207% increases for the year in research
and development expenses compared to those of 1999 and 1998 were primarily due
to the initial development and follow-on product improvements for the LTK
System.
Sales, marketing and regulatory expenses were $15,036,000 year ended
December 31, 2000, compared to $7,182,000 and $3,824,000 for the same periods in
1999 and 1998. Included in the sales, marketing and regulatory expenses for the
year 2000 was $1,298,000 of non-cash charges related to the fair market value of
warrants and non-qualified stock options issued to consultants and employees in
lieu of cash. Sales and marketing expenses consist primarily of advertising and
other marketing expenses, compensation and employee related expenses, sales
commissions, and travel costs. The 109% and 293% increases in sales, marketing
and regulatory expenses in 2000 as compared to 1999 and 1998, respectively, were
due to the increase in marketing efforts in preparation and market launch of the
Hyperion(TM) LTK System.
General and administrative expenses were $8,995,000 year ended December 31,
2000, compared to $6,919,000 and $6,787,000 for the same periods of 1999 and
1998 respectively. Included in the general and administrative expenses for the
year 2000 was $2,383,000 of non-cash charges related to the issuance of non-
qualified stock options issued to employees in lieu of cash. General and
administrative expenses consist primarily of employee-related expenses, legal
fees and compensation and fees for professional services. The 30% and 33%
increases in general and administrative expenses for 2000 were due to the
increase in infrastructure expenses to support the Hyperion(TM) LTK system.
Approximately $6,125,000 of the operating expenses for the year ended
December 31, 2000 was attributed to non-cash expenses related to the fair value
of warrants and non-qualified stock options issued in lieu of cash, compared to
comparable expenses of $1,887,000 and $2,105,000 for the same periods of 1999
and 1998.
Interest and other expense for the year ended December 31, 2000 of
$11,263,000 represent primarily non-cash interest charges pursuant to the 1998,
1999 and 2000 Notes Placements, the Silicon Valley Bank line-of-credit guarantee
and related warrants, compared to $5,892,000, and $3,954,000 for the same
periods of 1999 and 1998 respectively. For the year ending December 31, 2000,
approximately $10,336,000 or 92% of the Company's net interest expense were due
to non-cash charges incurred in connection with the 1998, 1999 and 2000 Notes
Placement and the Silicon Valley line-of-credit guarantee as compared with
$5,160,000 or 86% and $974,000 or 25% for 1999 and 1998 respectively. The fair
market value of the warrants, the conversion features and the placement costs of
such notes are recorded as non-cash interest expense in 1999 and 2000. The
Company has accounted for a beneficial conversion feature embedded in the
debentures in accordance with Emerging Issues Task Force Issue No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios." In determining the amount of
beneficial conversion feature, the Company first allocated the gross proceeds
from the sale of the 2000 Notes and the warrants based on their relative fair
values at the January 11, 2000 issuance date, resulting in $8,028,000 of the
proceeds assigned to the 2000 Notes and $3,672,000 assigned to the warrants. The
warrants were valued at the issuance date using the Black Scholes option pricing
model. Interest expense of $3,672,000 relating to the discount on the 2000 Notes
associated with the warrants is being recognized as interest expense over the
period that the 2000 Notes are outstanding. As the value of the beneficial
conversion feature exceeded the amount of the proceeds assigned to the 2000
Notes, the amount of the beneficial conversion feature is limited to the
$8,028,000 allocated to the 2000 Notes.
The beneficial conversion feature, amounting to $8,028,000, represents an
additional interest yield on the debt that may be converted at any time at the
option of the holders into common stock. Accordingly, the
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beneficial conversion feature has been recorded as an immediate charge to
interest expense in January 2000. In addition, the debentures have certain
contingent rights and preferences that, if perfected, could cause the Company to
record an incremental beneficial conversion feature charge.
For the year ended December 31, 2000 we incurred net losses of $38,047,000
compared to $26,145,000 and $17,821000 for 1999 and 1998 respectively. Included
in the loss for 2000 was $ 16,461,000 attributable to non-cash charges as
compared with $7,047,000 and $2,815,000 for 1999 and 1998 respectively. Our
Hyperion(TM) LTK System was approved by the FDA for marketing and sales in the
United States in late June 2000. Consequently, we had no significant revenues to
offset our expenses during the first two quarters of the current year. The third
quarter was the first reporting period in which we had material revenues from
the sales of our newly approved Hyperion(TM) LTK System and for which we were
able to partially offset our operating expenses from the gross margin
originating from these sales.
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.
Management believes that SFAS 133 will not have a material effect on the
financial position or results of operations of the Company. In July 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 will adopt
SFAS 133 as of January 1, 2001. Management believes that SFAS 133 will not have
a material effect on the financial position or results of operations of the
Company.
FORWARD LOOKING STATEMENTS AND ADDITIONAL RISK FACTORS
All statements contained herein that are not historical facts including,
but not limited to, statements regarding the Company's plans for future
development and operation of its business, are based on current expectations.
These statements are forward-looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially are the following: a lack of
sufficient capital to finance the Company's business plan on terms satisfactory
to the Company; changes in labor, equipment and capital costs; any restrictions
or revocations that the FDA may impose on our holmium laser corneal shaping
product or process known as the Hyperion(TM) Laser Thermal Keratoplasty (the
Hyperion(TM) LTK System) that received the FDA's pre-market approval;
competitive factors, such as the introduction of new technologies and
competitors into the ophthalmic laser business; general business and economic
conditions; and the other risk factors described from time to time in the
Company's reports filed with the Securities and Exchange Commission ("SEC"). The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made.
Our Hyperion(TM) LTK System is a new introduction to the United States and
international markets. Although our expectations are that we should continue to
see growth in our sales in the coming quarters, we face many other
uncertainties. These uncertainties, in addition to general economic conditions
in the United States, include:
- degree of acceptance by the ophthalmic community of the Hyperion(TM) LTK
System as a treatment alternative for hyperopia; and
- how quickly can competitive companies develop and obtain FDA approval for
novel treatment methods for hyperopia.
There can be no assurance that we can achieve continued growth in our
sales, quarter to quarter.
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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 except for payments of salaries and
expenses to certain employees located in foreign countries.
The fair value of the Company's cash and cash equivalents or related income
would not be significantly impacted by changes in interest rates since the
investment maturities are short and the interest rates on these investments are
usually fixed. Debt from draw-downs on our bank revolving credit line incurs
interest at the banks prime rate which rate changes from time to time.
It is not possible to anticipate the level of interest rates going forward.
Changes in interest rates have no impact on our debt as the 1998 Notes, 1999
Notes and 2000 Notes bear fixed interest rates of 12%, 5% and 7%, respectively.
Our $10,000,000 revolving line of credit with Silicon Valley Bank, of which we
had drawn down $3,000,000 as of December 31, 2000 and as of March 31, 2001 had
drawn down $6,600,000, carries an interest rate based on the bank's prime rate,
which is currently 8.5%. If the prime rate was to increase significantly and the
Company was to draw down the entire revolving credit line, the interest costs of
such financing would be substantially higher than our current interest costs.
The following table presents the future principal cash flows or amounts and
related weighted average interest rates expected by year for our existing cash
and cash equivalents and debt instruments:
EXPECTED MATURITY DATE
(AS OF DECEMBER 31, 2000)
------------------------------------------------
2001 2002 2003 TOTAL FAIR VALUE
------ ------ ---- ------ ----------
(IN THOUSANDS)
ASSETS:
Cash and cash equivalents............. $ 975 $ -- $ -- $ 975 $ 975
Weighted average interest rate........ 4% -- -- -- --
LIABILITIES:
Fixed rate lease obligation........... $ 306 $ 306 $255 $ 867 $ 674
Fixed rate long-term debt
obligation.......................... $ -- $8,900 $ -- $8,900 $8,900
Variable rate short-term debt
obligation.......................... $3,034 $ -- $ -- $3,034 $3,000
Weighted average interest rate........ 9.5% 7% 10%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference to the financial statements and supplementary
data included in Item 14 of Part III of this Form 10-K annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and nominees for directors for the Company
is included in the Company's Proxy Statement for the 2001 Annual Meeting of
Stockholders, and is hereby incorporated by reference.
For information regarding the executive officers of the Company, reference
is made to the section entitled "Executive Officers of the Company" in Part I,
Item I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the 2001 Annual Meeting
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Executive Compensation of Certain Beneficial Owner's
and Management" in the 2001 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 2001 Annual Meeting Proxy Statement is incorporated herein by reference.
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25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheets -- December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
3. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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)
4.13 Form of Warrant dated January 11, 2000, issued to Dunwoody
Brokerage Services, Inc.(9)
4.14 Form of Warrant dated as of June 16, 2000 issued by Sunrise
Technologies International, Inc. to Bruce J. Sand(10)
4.15 Form of Warrant dated as of June 16, 2000 issued by Sunrise
Technologies International, Inc. to Edward Vincent King,
Jr.(10)
10.1 Patent License Agreement between the Company and Patlex
Corporation dated January 1, 1990(11)
10.2 Agreement between the Company and the University of Miami,
Department of Ophthalmology, dated October 28, 1991(12)
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26
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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(13)
*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)(13)
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(14)
10.13 Form of Note and Warrant Purchase Agreement(6)
*10.14 The 1997 Stock Option Plan(15)
*10.15 The 1999 Long-Term Equity Compensation Plan(16)
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)
10.17 Royalty Acceleration Agreement dated as of June 16, 2000
between Sunrise Technologies International, Inc. and Bruce
J. Sand(10)
10.18 Amended and Restated Patent and Technology Assignment
Agreement dated as of June 16, 2000 between Sunrise
Technologies International, Inc. and Bruce J. Sand(10)
10.19 Loan and Security Agreement dated June 29, 2000 between
Silicon Valley Bank and Sunrise Technologies International,
Inc.(10)
10.20 Negative Pledge Agreement dated as of June 29, 2000 between
Sunrise Technologies International, Inc. and Silicon Valley
Bank(10)
10.21 Third Party Pledge and Security Agreement dated June 29,
2000 between Sunrise Technologies International, Inc. and
Silicon Valley Bank(10)
10.22 Agreement dated as of July 3, 2000 between David A. Brewer
Trust and Sunrise Technologies International, Inc.(10)
*10.23 2001 Employee Stock Purchase Plan(17)
*10.24 2000 Long-Term Equity Compensation Plan(18)
*10.25 2000 Non-Employee Stock Option Plan(18)
*10.26 Supplemental Employee Stock Option Plan(18)
10.27 Distribution Agreement dated December 28, 2000 between
Sunrise Technologies International, Inc. and U.S. Medical,
Inc.
22.1 Power of Attorney (included on the signature pages to this
Form 10-K annual Report)
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
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27
---------------
* 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)
(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 Annual Report on Form 10-K
for the year ended December 31, 1999 (File No. 001-10428)
(10) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed with the commission on July 17, 2000 (File No. 001-10428)
(11) Incorporated by reference from the registrant's Registration Statement on
Form S-1, as amended (File No. 33-36768)
(12) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 (File No. 0-17816)
(13) Incorporated by reference from the registrant's Current Report on Form 8-K
dated May 8, 1998 (File No. 0-17816)
(14) Incorporated by reference from the registrant's Registration Statement on
Form S-2 dated September 29, 1998 (File No. 333-64975)
(15) Incorporated by reference from the registrant's Registration Statement on
Form S-8 dated March 2, 1999 (File No. 333-73211).
(16) Incorporated by reference from the registrant's Registration Statement on
Form S-8 dated November 24, 1999 (File No. 333-91669)
(17) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 dated December 29, 2000 (File No. 333-52924)
(18) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 dated December 29, 2000 (File No. 333-52922)
(b) REPORTS ON FORM 8-K
Registrant did not file any reports on Form 8-K for the quarter ended
December 31, 2000.
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REPORT OF PRICEWATERHOUSECOOPERS LLP, 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 25 present fairly, in all material
respects, the financial position of Sunrise Technologies International, Inc. and
its subsidiary ("the Company") at December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule in the index appearing under Item 14(a)(2) on page
25 present fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule 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 of America, 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 our opinion.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
losses from operations and negative cash flows from operations that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 19, 2001, except as to Note 13,
which is as of February 21, 2001
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29
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands except share and per share data)
DECEMBER 31,
---------------------
2000 1999
--------- --------
Current assets:
Cash and cash equivalents................................. $ 975 $ 10,643
Accounts receivable, net of allowance of $132 and $3 in
2000 and 1999.......................................... 3,268 3
Inventories, net.......................................... 11,981 1,973
Prepaid and other expenses................................ 405 786
--------- --------
Total current assets.............................. 16,629 13,405
Property and equipment, net............................... 2,528 1,280
Intangibles, net.......................................... 7,995 --
Other non-current assets.................................. 1,374 220
--------- --------
Total assets...................................... $ 28,526 $ 14,905
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under a line of credit......................... $ 3,034 $ --
Current portion of long-term debt......................... 112 5,000
Current portion of capital lease obligations.............. 195 28
Accounts payable.......................................... 3,162 416
Accrued liabilities....................................... 1,564 2,045
Deferred revenue.......................................... 1,047 --
Deposits.................................................. 1,183 160
--------- --------
Total current liabilities......................... 10,297 7,649
Long term debt, net of current portion...................... 7,175 5,064
Capital lease obligations, net of current portion........... 479 --
Deferred revenue, net of current portion.................... 1,077 --
Other long-term liabilities................................. 136 91
--------- --------
Total liabilities................................. 19,164 12,804
--------- --------
Commitments and Contingencies (Note 6)
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, 50,867,848 and 46,321,157 shares issued and
outstanding at December 31, 2000 and 1999,
respectively........................................... 51 46
Additional paid-in-capital................................ 129,116 85,139
Notes receivable for common stock......................... -- (1,550)
Deferred compensation..................................... (730) (506)
Accumulated deficit....................................... (119,075) (81,028)
--------- --------
Total stockholders' equity........................ 9,362 2,101
--------- --------
Total liabilities and stockholders' equity........ $ 28,526 $ 14,905
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
30
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Revenues:
Product.................................................. $ 11,300 $ -- $ --
Procedure................................................ 1,301 -- --
Service and other........................................ 800 26 594
-------- -------- --------
Total revenues................................... 13,401 26 594
-------- -------- --------
Cost of revenues:
Product.................................................. 7,453 -- --
Procedure................................................ 1 -- --
Service and other........................................ 2,427 2,359 2,142
-------- -------- --------
Cost of revenues........................................... 9,881 2,359 2,142
-------- -------- --------
Gross profit (loss)........................................ 3,520 (2,333) (1,548)
-------- -------- --------
Operating costs and expenses:
Engineering and development.............................. 6,459 4,774 2,107
Sales, marketing and regulatory.......................... 15,036 7,182 3,824
General and administrative............................... 8,995 6,919 6,787
-------- -------- --------
Total operating costs and expenses......................... 30,490 18,875 12,718
-------- -------- --------
Loss from operations....................................... (26,970) (21,208) (14,266)
Interest income............................................ 383 955 399
Interest expense........................................... (11,263) (5,890) (3,950)
Other expense, net......................................... (197) (2) (4)
-------- -------- --------
Net loss................................................... $(38,047) $(26,145) $(17,821)
======== ======== ========
Net loss per share, basic and diluted...................... $ (0.79) $ (0.60) $ (0.52)
======== ======== ========
Shares used in calculation of basic and diluted net loss
per share................................................ 48,076 43,867 34,164
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
30
31
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL NOTES RECEIVABLE TOTAL
------------------- PAID-IN DEFERRED FOR COMMON ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION STOCK DEFICIT EQUITY
---------- ------ ---------- ------------ ---------------- ----------- -------------
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
Repayments 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
Issuance of 2000 debentures
with beneficial conversion
feature...................... 8,028 8,028
Issuance of warrants in
connection with the 2000
debentures................... -- -- 4,704 -- -- -- 4,704
Issuance of warrants to
guarantor.................... 716 716
Issuance of warrants and stock
options...................... -- -- 14,623 (6,352) -- -- 8,271
Amortization of deferred
compensation................. 6,128 6,128
Exercise of warrants........... 1,538,384 2 3,726 -- -- -- 3,728
Exercise of options............ 301,986 -- 874 -- -- -- 874
Issuance of shares upon
conversion
of debt...................... 2,632,943 3 12,586 -- -- -- 12,589
Reserve of promissory notes.... (1,550) 1,550
Issuance of shares in
connection with employee
stock purchase plan.......... 73,378 -- 270 -- -- -- 270
Net loss....................... -- -- -- -- -- (38,047) (38,047)
---------- --- -------- ------- ------- --------- --------
Balance at December 31, 2000... 50,867,848 $51 $129,116 $ (730) $ -- $(119,075) $ 9,362
========== === ======== ======= ======= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
31
32
SUNRISE TECHNOLOGIES INTERNATIONAL, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(38,047) $(26,145) $(17,821)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,077 429 182
Amortization of deferred compensation..................... 6,128 238 3,477
Amortization of debt issuance costs....................... 710 12 210
Beneficial conversion feature............................. 8,028 2,425 --
Warrant accretion associated with the 1998, 1999, and 2000
Notes................................................... 1,443 2,723 2,605
Issuance of common stock for services..................... -- -- 150
Issuance of warrants and stock options to consultants for
services rendered....................................... -- 1,648 --
Issuance of warrants to guarantor......................... 127 -- --
Write-off of interest on promissory notes................. 376 -- --
Forgiveness of employee loans............................. 25 -- --
Provision for obsolete inventory.......................... 93 79 --
Provision for doubtful accounts........................... 129 (8) --
Conversion of accrued interest to notes payable and common
stock................................................... 682 46 557
Changes in assets and liabilities:
Accounts receivable....................................... (3,394) (184) 177
Inventories............................................... (10,101) (2,041) 116
Other current assets...................................... (70) (157) (174)
Other non-current assets.................................. (7) (2) (218)
Accounts payable.......................................... 2,746 (278) 410
Accrued liabilities....................................... (481) 53 1,151
Deferred revenue.......................................... 3,147 -- --
Other liabilities......................................... 45 503 642
-------- -------- --------
Net cash used in operating activities....................... (27,354) (20,659) (8,536)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.......................... (2,049) (800) (878)
-------- -------- --------
Net cash used in investing activities..................... (2,049) (800) (878)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on capital lease obligations........................ (28) (38) (47)
Proceeds from capital lease obligations..................... 666 -- --
Payments received on promissory notes....................... -- 4,000 --
Issuance of common stock, net of offering costs............. 4,872 8,251 8,042
Proceeds from issuance of debt obligations.................. 3,500 -- --
Payments on debt obligations................................ (500) -- --
Issuance of redeemable convertible notes.................... 11,217 10,000 9,350
-------- -------- --------
Net cash provided by financing activities................. 19,727 22,213 17,345
-------- -------- --------
Net increase (decrease) in cash and equivalents............. (9,668) 754 7,931
Cash and cash equivalents at beginning of year.............. 10,643 9,889 1,958
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 975 $ 10,643 $ 9,889
======== ======== ========
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION
Cash paid for interest...................................... $ 274 $ 454 $ 284
======== ======== ========
Cash paid for income taxes.................................. $ 9 $ 10 $ 5
======== ======== ========
NONCASH FINANCING ACTIVITIES
Promissory notes issued in exchange for common stock........ $ -- $ 550 $ 5,000
======== ======== ========
Reserve of promissory notes................................. $ 1,550 $ -- $ --
======== ======== ========
Write-off of unamortized portion of warrants and offering
costs..................................................... $ 1,417 $ -- $ --
======== ======== ========
Issuance of warrants to guarantor........................... $ 589 $ -- $ --
======== ======== ========
Warrants issued to acquire patents.......................... $ 8,271 $ -- $ --
======== ======== ========
Conversion of 1998, 1999, and 2000 notes and accrued
interest into common stock................................ $ 13,358 $ 10,601 $ 1,222
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
32
33
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
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, International Inc.
Going Concern
The Company has incurred significant losses for the last several years and
at December 31, 2000 has an accumulated deficit of $119,075,000. The Company's
future capital needs will require the Company to have profitable operations
and/or obtain additional financing. The Company may continue to suffer
significant net losses and negative cash flow from operations. In addition the
Company's revolving credit line is due in June 2001. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans include increasing sales through increased direct sales and
marketing efforts on existing products. Management also recognizes the need for
infusion of cash during the year ended December 31 2001. In June 2000, the
Company secured a $10,000,000 revolving line of credit from a commercial banking
company guaranteed by certain Company assets and assets of one of the Company's
investors. As of December 31, 2000, $3,000,000 of the revolving credit line has
been drawn and as of March 31, 2001, $6,600,000 has been drawn down and $400,000
remained available for borrowing, as the other $3,000,000 will only be available
if the guarantor pledges additional assets. The Company plans to reduce cash
spending during the current fiscal year that would include a down sizing of the
Company. These reduction efforts are being implemented and are expected to
significantly reduce the current cash outflows. Clearly, as the Company moves
forward into 2001, the best solution to improve working capital shortage is by
increasing cash from the sale of Hyperion(TM) LTK System units.
While the Company is aggressively pursuing these actions, as discussed
above, there can be no assurance that the Company will be successful in its
efforts to achieve future profitable operations, generate sufficient cash from
operations, obtain additional funding sources or renegotiate its line of credit.
The financial statements do not contain adjustments that might result from the
outcome of this uncertainty.
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.
Revenue Recognition
The Company has adopted the provisions of Staff Accounting Bulleting No.
101, "Revenue Recognition in Financial Statements" ("SAB 101") and believes that
its current and historical revenue recognition policy is in compliance with SAB
101. The Company has also applied Emerging Issues Task Force Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10")
retroactively to all periods presented. As a result, for all periods presented,
amounts billed to customers relating to shipping and handling have been
classified as revenue and all related costs are classified as cost of revenue.
The Company recognizes product revenue after shipment of the product, upon
customer confirmation of installation and acceptance, provided there are no
significant contractual obligations remaining, signed agreements are in place,
fees are fixed and determinable and the collection of receivables is deemed
probable. Procedure revenue is recognized upon shipment of key cards that have
been loaded with a specified number of
33
34
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
procedures. Service and other revenues are recognized either ratably over the
period that the services are performed or as products are provided.
Concentration of Credit Risk and Other Risks and Uncertainties
The Company invests its excess cash in deposits with three financial
institutions. Deposits held with banks may exceed the amount of insurance
provided on such deposits. Generally these deposits may be redeemed upon demand
and therefore bear minimal risk.
The Company markets its products to distributors and end users throughout
the world. Sales to international distributors are generally made on open credit
terms. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains an allowance for
potential credit losses and such losses have been within management's
expectations. For the years ended December 31, 2000, 1999 and 1998, no customer
accounted for more than 10% of revenue. As of December 31, 2000, no customer
accounted for greater than 10% of accounts receivable and at December 31, 1999,
1 customer accounted for 75% of accounts receivable.
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. Any products manufactured or
distributed by the Company will be subject to pervasive and continuing
regulation by the FDA. In addition, the introduction of the Company's products
in foreign countries may require obtaining both 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.
The Company's international business is a contributor to the Company's net
revenues and gross profits. Substantially all of the Company's international
sales are denominated in the U.S. dollar and an increase in the value of the
U.S. dollar relative to foreign currencies could make products sold
internationally less competitive.
Reliance on Certain Suppliers
Certain components and services used by the Company to manufacture and
develop its products are presently available from only one or a limited number
of suppliers or vendors. The loss of any of these suppliers or vendors would
potentially require a significant level of hardware and/or software development
to incorporate the products or services into the Company's products.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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, 2000 and 1999, the Company did not hold any
investments in debt or equity securities.
34
35
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a standard cost basis which approximates actual cost on a first-in, first-out
method. Lower of cost or market is evaluated by considering obsolescence,
excessive levels of inventory, deterioration and other factors.
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
In accordance with Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," the Company regularly evaluates its long-lived assets
for indicators of possible impairment by comparison of the carrying amounts to
undiscounted estimated cash flows 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.
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 carry-forwards and other deferred tax assets
where it is more likely than not that such loss carry-forwards and deferred tax
assets will not be realized.
Computation of Net Loss Per Share
Basic net loss per share ("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 per share
calculation:
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BASIC AND DILUTED EPS:
Net loss................................... $(38,047) $(26,145) $(17,821)
Average Common Shares Outstanding.......... 48,076 43,867 34,164
Basic and diluted EPS...................... $ (0.79) $ (0.60) $ (0.52)
======== ======== ========
35
36
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Excluded from the shares used to calculate diluted EPS as their effect is
anti-dilutive was 11,304,599 common equivalent shares in 2000, 7,596,433 common
equivalent shares in 1999 and 7,199,795 common equivalent shares in 1998.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123").
Under APB 25, compensation expense for grants to employees is based on the
difference, if any, on the date of grant, between the fair value of the
Company's stock and the option's exercise price. SFAS 123 defines a "fair value"
based method of accounting for an employee stock option or similar equity
investment. The pro forma disclosure of the difference between compensation
expense included in net loss and the related cost measured by the fair value
method is presented in Note 8.
The Company also adopted FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB
25" ("FIN 44").
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force Issue
No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than
Employees, or in Conjunction with Selling Goods and Services" ("EITF 96-18") and
Financial Accounting Standards Board Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans" ("FIN
28").
Research and Development
Research and development expenditures are charged to operations as
incurred. For the years ended December 31, 2000, 1999 and 1998, the expense was
$6,459,000, $4,774,000 and $2,107,000, respectively.
Advertising and Sales Promotion Costs
Advertising and sales promotion costs are charged to operations as
incurred. For the years ended December 31, 2000, 1999 and 1998, the expense was
$8,087,000, $1,711,000 and $612,000, respectively.
Segment Information
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:
2000 1999 1998
------- ---- ----
(IN THOUSANDS)
Domestic............................................ $ 1,243 $ 8 $ 11
Europe.............................................. 558 4 10
Canada.............................................. -- 9 3
South Africa........................................ -- 5 504
Other............................................... -- -- 66
------- --- ----
Total..................................... $13,401 $26 $594
======= === ====
36
37
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
The Company's assets are located in the United States. The Company does not
segregate information related to operating income generated by its export sales.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts payable and
other accrued liabilities approximate fair value due to their short maturities.
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of its debt obligations approximates fair
value.
New Accounting Pronouncement
In June of 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments 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 will adopt SFAS 133 as of January 1, 2001. the company does not expect
the adoption of SFAS 133 to have a material effect on the financial position or
results of operations of the Company.
3. BALANCE SHEET COMPONENTS
Inventory at December 31 consists of:
2000 1999
------- ------
(IN THOUSANDS)
Raw materials............................................. $ 7,019 $1,589
Work-in-process........................................... 1,510 344
Finished goods............................................ 3,452 40
------- ------
Inventory, net............................................ $11,981 $1,973
======= ======
Property and equipment at December 31 consists of:
2000 1999
------- ------
(IN THOUSANDS)
Machinery and equipment................................... $ 1,794 $ 607
Computer equipment........................................ 1,462 872
Furniture and fixtures.................................... 380 238
Leasehold improvements.................................... 529 485
------- ------
4,165 2,202
Less accumulated depreciation and amortization............ (1,637) (922)
------- ------
Property and equipment, net............................... $ 2,528 $1,280
======= ======
Included in computer equipment is equipment acquired under capital leases
of $8,000 and no related accumulated amortization at December 31, 2000.
Depreciation expense for years ended December 31, 2000, 1999 and 1998 was
$801,000, $429,000 and $191,000, respectively.
37
38
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Accrued liabilities consist of:
2000 1999
------ ------
(IN THOUSANDS)
Accrued payroll and related expenses....................... $ 471 $1,008
Accrued professional fees.................................. 417 427
Accrued regulatory and clinical expenses................... 70 462
Other accrued expenses..................................... 606 148
------ ------
$1,564 $2,045
====== ======
4. PATENT
On June 16, 2000, the Company entered into an Amended and Restated Patent
and Technology Assignment Agreement whereby Dr. Bruce J. Sand, M.D., F.A.C.S.
agreed to assign to the Company irrevocably and on an exclusive basis the Patent
Rights and Related Technology of Dr. Sand's patent application for the
prevention of regression of refractive keratoplasty. Included in the agreement
is the purchase of all patents and future royalty obligations related to the
previously licensed "Sand" patents, the result of which will be the avoidance of
future cash outflows related to these royalty obligations. As part of this
agreement, the Company issued to Dr. Sand a warrant to purchase 750,000 shares
of our common stock at an exercise price of $0.01 per share, exercisable at any
time prior to June 16, 2005. Dr. Sand agreed that he would sell no more than
250,000 of such shares in any of the Company's fiscal quarters. In addition, for
legal services rendered by Edward Vincent King, Jr., Dr. Sand's attorney, the
Company issued a warrant to purchase 67,500 shares of common stock on the same
terms as the warrant issued to Dr. Sand and Mr. King, Jr. agreed not to sell
more than 22,500 shares in any of the Company's fiscal quarters. The $8,271,000
value of this patent was based on the fair value of the warrants issued,
calculated using the Black Scholes Valuation Model and will be amortized over
the life of the patent, estimated to be fifteen years. On June 21, 2000 Dr. Sand
and Mr. King exercised all of their respective warrants to purchase shares of
common stock.
5. TAXES ON INCOME
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
2000 1999 1998
---- ---- ----
Statutory Rate.......................................... (34)% (34)% (34)%
NOL's not benefited which have been reserved............ 34% 34% 34%
--- --- ---
0% 0% 0%
=== === ===
38
39
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Temporary differences and carry-forwards that give rise to a significant
portion of deferred tax assets and liabilities are as follows:
2000 1999
------- -------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards....................... $35,008 $23,212
Research credits (expire 2005 - 2013)............... 1,999 1,332
Other.................................................. 1,778 700
------- -------
Total deferred tax asset....................... 38,785 25,244
Valuation allowance for deferred tax assets.............. (38,785) (25,244)
------- -------
Net deferred tax assets.................................. $ -- $ --
======= =======
As of December 31, 2000 and 1999, the Company had federal and state net
operating loss carry-forwards of approximately $94,436,000 and $49,965,000
respectively. The Company's valuation allowance increased by $8,744,000 from
1998 to 1999 and increased by $13,541,000 from 1999 to 2000. The net operating
loss and credit carry-forwards will expire at various dates through 2018 if not
utilized. 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 carry-forwards 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.
6. COMMITMENTS AND CONTINGENCIES
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 $966,000, $979,000 and $331,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
The following is a schedule by year of future minimum lease payments at
December 31, 2000:
OPERATING CAPITAL
LEASES LEASES
--------- -------
(IN THOUSANDS)
Year ending December 31,
2001...................................................... $ 976 $3
2002...................................................... 993 3
2003...................................................... 1,033 2
2004...................................................... 272 --
------ --
Total minimum payments required................. $3,274 $8
====== ==
Contingencies
The Company is subject to claims and assessments from time to time in the
ordinary course of business. Management does not believe that any such matters,
individually or the aggregate, will have a material effect on the Company's
financial condition.
39
40
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
7. LONG-TERM DEBT
The following table summarizes information about the notes payable balances
as of December 31, as follows:
2000 1999
------- -------
(IN THOUSANDS)
1998 12% convertible notes (including secondary notes)... $ 100 $ 169
1999 5% convertible notes................................ -- 10,000
2000 7% convertible notes................................ 8,900 --
Line of credit........................................... 3,000 --
Unamortized discount relating to stock warrants.......... (1,725) (612)
Accrued interest......................................... 46 507
------- -------
10,321 10,064
Less: current portion of long-term debt.................. (3,146) (5,000)
------- -------
$ 7,175 $ 5,064
======= =======
In June 2000, the Company secured a $10,000,000 revolving line of credit
from a commercial banking company guaranteed by certain Company assets and
assets of one of the Company's investors. In connection with the secured credit
line, The David A. Brewer Trust agreed to guaranty any advance under the line.
As compensation for the guaranty, pursuant to a Master Warrant (the "Master
Warrant"), which may be exercised in whole or in part at any time and from time
to time, the Trust will receive (i) 25,000 shares of Common Stock of the Company
whether or not the secured credit line is drawn upon, (ii) 0.000195 shares of
Common Stock of the Company per $1.00 drawn from the line for each day such
amount remains outstanding, (iii) 25,000 shares of Common Stock of the Company
per $1,000,000 drawn by the Company up to $7,000,000 (on a prorated basis) and
(iv) 0.000289 shares Common Stock of the Company per $1.00 drawn down by the
Company in excess of $7,000,000 for each day such amount remains outstanding.
The determination of the warrants issuable under clause (iv) is subject to
offset by the warrants to be issued under clause (iii). The exercise price of
shares of the Company's Common Stock issuable upon exercise of the Master
Warrant is $5.00 per share, and the Master Warrant is exercisable for five years
from the date of issuance. As of December 31, 2000, the guarantor had earned
151,110 warrants to purchase common stock which the Company has valued, using
the Black-Scholes model, at $716,000. Of the total value, $330,000 was charged
to expense during 2000 and the remainder will be amortized over the remaining
life of the line of credit. As of December 31, 2000, $3,000,000 of the revolving
line of credit had been drawn down and $4,000,000 remained available. The
additional $3,000,000 can only be drawn if the guarantor pledges additional
assets.
On January 11, 2000, the Company completed an $11,700,000 ($11,217,000 net
of offering costs) private placement of convertible debentures with warrants.
These debentures are convertible into the Company's common stock at a conversion
price of $5.916 per share, at the option of the holder, and mature in June 2002.
The debentures bear an interest rate of 7% per annum, payable in-kind or cash at
the option of the Company, and are payable quarterly. The Company has accounted
for a beneficial conversion feature embedded in the debentures in accordance
with Emerging Issues Task Force Issue No. 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios." In determining the amount of beneficial conversion feature,
the Company first allocated the gross proceeds from the sale of the 2000 Notes
and the warrants based on their relative fair values at the January 11, 2000
issuance date, resulting in $8,028,000 of the proceeds assigned to the 2000
Notes and $3,672,000 assigned to the warrants. The warrants were valued at the
issuance date using the Black Scholes option pricing model. Interest expense of
$3,672,000 relating to the discount on the 2000 Notes associated with the
warrants is being recognized as
40
41
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
interest expense over the period that the 2000 Notes are outstanding. As the
value of the beneficial conversion feature exceeded the amount of the proceeds
assigned to the 2000 Notes, the amount of the beneficial conversion feature is
limited to the $8,028,000 allocated to the 2000 Notes.
The beneficial conversion feature, amounting to $8,028,000, represents an
additional interest yield on the debt that may be converted at any time at the
option of the holders into common stock. Accordingly, the beneficial conversion
feature has been recorded as an immediate charge to interest expense in January
2000. In addition, the debentures have certain contingent rights and preferences
that, if perfected, could cause the Company to record an incremental beneficial
conversion feature charge.
There are two types of associated warrants issued in connection with the
debentures. Type A warrants have five-year terms with an exercise price of
$6.803 per share and were allocated a value of $1,953,000. Type B warrants have
two-year terms with an exercise price of $6.803 per share and were allocated a
value of $1,719,000. The type B warrants were called by the Company on June 28,
2000 when the provision was met of the Company's closing stock price closing
equal to or higher than $7.823 for a continuous period of twenty trading days.
Throughout 2000, approximately $2,800,000 of the January 2000 Convertible Debt
financing was converted into 473,292 shares of common stock at a conversion
price of $5.916 per share. Approximately 443,741 Type B warrants associated with
the January 2000 Convertible Debt financing were exercised at an exercise price
of $6.803 per share during 2000.
In September 2000 approximately $50,000 of the 1998 Convertible Financing
was converted into 16,667 shares of common stock at conversion prices of $3.00
per share.
In September 2000 approximately $10,000,000 of the 1999 Convertible
Financings was converted into 1,875,000 shares of common stock at conversion
prices of $4.00 and $8.00 per share.
In January 1999, the Company completed a $10,000,000 private placement of
convertible notes with warrants. The 1999 Notes were converted into 1,250,000
shares of the Company's common stock at a conversion price of $4.00 per share
and into 625,000 shares of common stock at a conversion price of $8.00 per share
during 2000. 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. 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.
8. STOCKHOLDERS' EQUITY
Common Stock
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 were
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, 2000
$10,367,000 of the notes and secondary notes were converted into 3,459,790
shares and certain warrants were converted into 1,340,000 shares of common
stock. As of December 31, 2000 there remained 33,333 shares convertible from the
notes.
In January 1999, the Company completed a $10,000,000 private placement of
convertible notes with warrants. In September 2000 all of the notes were
converted into 1,250,000 shares of common stock at a conversion price of $4.00
per share and 625,000 shares of common stock at a conversion price of $8.00 per
share.
41
42
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
On January 11, 2000, the Company completed an $11,700,000 ($11,217,000 net
of offering costs) private placement of convertible debentures with warrants.
Throughout 2000, approximately $2,800,000 of the January 2000 Convertible Debt
financing was converted into 473,292 shares of common stock at a conversion
price of $5.916 per share. Approximately 443,741 Type B warrants associated with
the January 2000 Convertible Debt financing were exercised at an exercise price
of $6.803 per share during 2000.
Stock Option Plan
In 2000, the Company adopted the 2000 Long-Term Stock Equity Compensation
Plan (the "2000 Plan") under which employees, directors and consultants may be
granted incentive and non-statutory options, stock appreciation rights,
restrictive stock, performance units and performance shares. Each option issued
under the Plan must be exercised within a 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 25% 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 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 2000 Plan
expires in 2010.
In 2000, the Company adopted the 2000 Non-Employee Director's Stock Option
Plan (the "2000 Non-Employee Plan") under which new non-employee directors may
be granted non-statutory stock options. Under the terms of the Plan each person
who is elected or appointed for the first time to be a Non-Employee Director
shall automatically, upon the date of such person's initial election or
appointment to be a Non-Employee Director by the Board or the Company's
stockholders, be granted an option to purchase 60,000 shares of common stock.
Each option issued under the Plan must be exercised within a 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. In addition, the Plan grants an additional option to purchase 60,000
shares of the Company's common stock to each Non-Employee Director at each three
year anniversary date of the initial grant that he or she is still a
Non-Employee Director. The 2000 Non-Employee Plan is still subject to the
approval of the shareholders.
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 options, stock appreciation rights,
restrictive stock, performance units and performance shares. Each option issued
under the Plan must be exercised within a 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
non-statutory 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
42
43
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
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 1/48 of the shares subject to the option become
exercisable each month after the grant. The 1997 Plan expires in 2007.
In 1997, the Board adopted a Stockholder Rights Plan (the "Rights Plan") in
which common stock purchase rights (each, a "Right") were distributed as a
dividend at the rate of one Right for each share of the Company's Common Stock
held by stockholders of record as of the close of business on October 24, 1997.
The Rights will be exercisable only if a person or group acquires beneficial
ownership of 15% or more of the Company's Common Stock, or commences a tender or
exchange offer upon consummation of which such person or group would
beneficially own 15% or more of the Company's Common Stock. The Rights Plan
expires on October 24, 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% 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.
A summary of the Company's option activity as of December 31, 2000, 1999
and 1998 and changes during the year ending on those dates are as follows:
OUTSTANDING OPTIONS
----------------------------------------------------------------
SHARES
AVAILABLE FOR WEIGHTED AVERAGE
GRANT SHARES SHARE PRICE EXERCISE PRICE
------------- --------- -------------- ----------------
BALANCE, 1/1/1998........................... 1,201,008 4,360,455 $1.00 - $ 4.44 $ 2.16
Reserved.................................... --
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
Reserved.................................... 2,100,000(1)
Granted..................................... (1,937,409) 1,937,409 $1.78 - $11.50 $ 6.73
Cancelled................................... 482,184 (482,184) $1.06 - $13.00 $ 7.79
Exercised................................... -- (301,986) $1.03 - $ 5.94 $ 2.94
---------- --------- -------------- ------
BALANCE, 12/31/2000......................... 765,419 7,043,347 $1.03 - $13.00 $ 6.52
========== =========
------------------------
(1) Does not include 180,000 shares of non-employee director options that have
not been granted at December 31, 2000.
43
44
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
As of December 31, 2000, 1999 and 1998, options to purchase 3,355,234,
2,126,110 and 1,872,292 shares, respectively, were vested and of those,
3,227,841, 1,109,968 and 1,285,636 shares, respectively, were immediately
exercisable. The weighted average per share fair market value of those options
granted in 2000, 1999 and 1998 was $5.14, $2.08 and $2.54, respectively.
The following table summarizes information about stock options outstanding
at December 31, 2000:
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
----------- ------------ -------- ----------- ------------ --------------
$ 1.00 - $ 2.00.............. 1,404,389 7.6 $ 1.27 1,241,702 7.4 $ 1.17
$ 2.01 - $ 4.00.............. 941,630 4.8 $ 3.92 739,971 4.8 $ 3.92
$ 4.01 - $ 6.00.............. 391,188 9.7 $ 4.99 104,225 9.5 $ 4.89
$ 6.01 - $ 8.00.............. 1,992,600 8.0 $ 7.31 454,935 6.4 $ 7.58
$ 8.01 - $10.00.............. 688,740 9.0 $ 8.62 206,588 7.9 $ 8.66
$10.01 - $12.00.............. 1,036,000 10.7 $11.70 248,041 10.8 $11.76
$12.01 - $13.00.............. 588,800 9.7 $12.92 232,379 9.7 $12.93
--------- ---- ------ --------- ---- ------
TOTAL.............. 7,043,347 8.3 $ 6.52 3,227,841 7.2 $ 5.14
========= ====== ========= ======
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 2000, 1999 and 1998:
2000 1999 1998
--------- --------- ---------
Risk-free interest rate.................... 5.75% 5.50% 5.03%
Expected life.............................. 2.7 years 2.0 years 2.5 years
Volatility................................. 123.3% 173.1% 101%
Dividend yield............................. -- -- --
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 2000,1999, and 1998
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per share for the years ended December 31, 2000, 1999, and 1998 would have
been increased as follows:
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss -- as reported.................................... $(38,047) $(26,145) $(17,821)
Net loss -- pro forma...................................... (50,708) (35,122) (20,625)
Net loss per share -- as reported.......................... (0.79) (0.60) (0.52)
Net loss per share -- pro forma............................ (1.05) (0.80) (0.60)
Supplemental Employee Stock Plan
In December 2000, the Company adopted the Supplemental Employee Stock Plan
( the "2000 Supplemental Plan") under which 160,000 shares have been reserved
for issuance. Under the Plan eligible employees may be granted stock grants in
connection with performance, restricted stock awards, and severance awards.
According to the Plan an eligible employee is any person who is employed by the
Company who is not an officer at the time of the grant. Grants are subject to
the terms and conditions established by the
44
45
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Awards Committee made up of the President and Chief executive Officer and the
Chief Operating Officer of the Company. The Plan will become effective on
January 1, 2001.
Employee Stock Purchase Plan
In December, 2000 the Company adopted the 2001 Employee Stock Purchase Plan
under which 300,000 shares have been reserved for issuance. Eligible employees
may purchase common stock at the lower of 85% of the fair market value of the
Company's common stock on the last trading date before the offering date or the
fair market value of the Company's common stock on the last trading day that
immediately precedes the purchase date. Annual purchases are limited to 15
percent of each employee's salary up to $12,500 or 3,500 shares per employee.
The 2001 Employee Stock Purchase Plan is still subject to the approval of the
shareholders.
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 73,378, 24,220 and 10,498
shares issued under the plan as of December 31, 2000, 1999 and 1998,
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 2000, 1999 and 1998:
2000 1999 1998
-------- -------- --------
Risk-free Interest Rates.................. 5.75% 5.50% 5.03%
Expected Life............................. 6 months 6 months 6 months
Volatility................................ 123% 184% 101%
Dividend Yield............................ -- -- --
The weighted average per share fair market value of those purchase rights
granted in 2000, 1999 and 1998 was $4.49 $6.46 and $1.07, respectively.
9. 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 approximately
$59,000, $25,000 and $16,000 in 2000, 1999 and 1998 respectively.
10. DISTRIBUTION AND STOCK PURCHASE AGREEMENTS
On December 28, 2000, the Company signed a Distribution and Stock Purchase
Agreement with U.S. Medical, Inc. Under the terms of the Distribution Agreement
the Company appointed U.S. Medical as its exclusive distributor of its products
in the Territory as defined within the Agreement. U.S. Medical committed to
purchase thirty-five units within the 2001 calendar year. At December 31, 2000,
sixteen units had been shipped to U.S. Medical. The Company has deferred the
revenue until installation. Under the terms of the Stock Purchase Agreement, the
Company committed to purchase 480,000 shares of common stock of U.S. Medical at
a price of $5.00 per share which equates to 4% of the outstanding common shares.
On January 31, 2001, the Company completed the transfer of funds to U.S. Medical
and received a stock certificate for the amount of shares purchased.
45
46
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER
------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended December 31, 2000:
Revenues........................................ $ 18 $ 424 $ 9,991 $ 2,968
Gross profit (loss)............................. $ (701) $ (990) $ 5,104 $ 107
Net loss........................................ $(16,033) $(11,861) $(4,134) $(6,019)
Net loss per share.............................. $ 0.35 $ 0.25 $ 0.09 $ 0.12
Year ended December 31, 1999:
Revenues........................................ $ 13 $ 3 $ 6 $ 4
Gross profit (loss)............................. $ (371) $ (539) $ (610) $ (813)
Net loss........................................ $ (8,468) $ (5,833) $(5,784) $(6,060)
Net loss per share.............................. $ 0.21 $ 0.14 $ 0.13 $ 0.12
12. RELATED PARTY TRANSACTIONS
In December 1998, the Company completed a private placement of $11,800,000
of the Company's common stock priced at $3.50 per share. Portions of the gross
proceeds were evidenced by promissory notes bearing interest at a rate of 9% per
annum due on March 15, 1999. One stockholder with beneficial ownership of more
than 5% of the Company's common stock as of March 22, 1999 purchased $2,000,000
of the shares through the issuance of a promissory note, which note was repaid
as of March 22, 1999. In April 1998, the Company loaned $60,000 to an employee.
This loan bears interest at 7% per annum and was due on March 31, 1999 but has
had its maturity renewed at each anniversary date in subsequent years and still
remains outstanding. In March 2000, the Company loaned $100,000 to an employee.
This loan bears interest at an annual rate equal to 6.45% and matures on March
22, 2003 but will be forgiven if the employee is employed by the Company up to
the maturity date. In October 2000, the Company loaned an employee $100,000
pursuant to an employment offer letter dated May 1999.
13. SUBSEQUENT EVENTS
On January 3, 2001, the Company completed a "reduction in force" (RIF) of
21 employees. Each employee received a severance payment as follows: hourly
employees -- 2 weeks plus 2 weeks for every year worked, salary
employees -- four weeks plus 2 weeks for ever year worked, managers -- 12 weeks
plus 2 weeks for every year worked, and directors -- 20 weeks plus 2 weeks for
every year worked. In full payment of the severance awards the Company granted
107,273 options out of the Stock Bonus Plan in lieu of cash. The total cost of
the RIF was $183,000 that will be charged to expense in the first quarter of
2001.
On February 21, 2001 the Company signed a settlement agreement with Lares
Research on the payment of the outstanding debt. The Settlement Agreement
provides that Lares will pay the Company $700,000 by March 31, 2001, in full
redemption of an outstanding note obligation owing to the Company in principal
amount of $1,500,000. As of March 31, 2001, $600,000 had been received. This
note has been in default and had been fully reserved.
46
47
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING AND END OF
OF PERIOD EXPENSES DEDUCTIONS OTHER PERIOD
---------- --------- ---------- ----- ----------
(IN THOUSANDS)
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
Year ended December 31, 2000
Allowance for uncollectible accounts.......... $ 3 $129 $ -- $-- $134
Allowance for inventory....................... $265 $414 $(321) $-- $358
47
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Fremont, State of California on the 6 day of April 2001.
Sunrise Technologies International,
Inc.
By: /s/ C. RUSSELL TRENARY III
------------------------------------
C. Russell Trenary, III
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
NAME POSITION DATE
---- -------- ----
/s/ C. RUSSELL TRENARY III Chairman of the Board, President, April 6, 2001
----------------------------------------------------- Chief Executive Officer and
C. Russell Trenary, III Director
(principal executive officer)
/s/ PETER E. JANSEN Chief Financial Officer April 6, 2001
----------------------------------------------------- (principal financial officer and
Peter E. Jansen principal accounting officer)
/s/ JOHN HENDRICK Chief Operating Officer and April 6, 2001
----------------------------------------------------- Director
John N. Hendrick
/s/ R. DALE BOWERMAN Director April 6, 2001
-----------------------------------------------------
R. Dale Bowerman
/s/ MICHAEL S. MCFARLAND MD Director April 6, 2001
-----------------------------------------------------
Michael S. McFarland, M.D.
/s/ ALAN MAGAZINE Director April 6, 2001
-----------------------------------------------------
Alan H. Magazine
48
49
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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)
4.13 Form of Warrant dated January 11, 2000, issued to Dunwoody
Brokerage Services, Inc.(9)
4.14 Form of Warrant dated as of June 16, 2000 issued by Sunrise
Technologies International, Inc. to Bruce J. Sand(10)
4.15 Form of Warrant dated as of June 16, 2000 issued by Sunrise
Technologies International, Inc. to Edward Vincent King,
Jr.(10)
10.1 Patent License Agreement between the Company and Patlex
Corporation dated January 1, 1990(11)
10.2 Agreement between the Company and the University of Miami,
Department of Ophthalmology, dated October 28, 1991(12)
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(13)
*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)(13)
50
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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(14)
10.13 Form of Note and Warrant Purchase Agreement(6)
*10.14 The 1997 Stock Option Plan(15)
*10.15 The 1999 Long-Term Equity Compensation Plan(16)
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)
10.17 Royalty Acceleration Agreement dated as of June 16, 2000
between Sunrise Technologies International, Inc. and Bruce
J. Sand(10)
10.18 Amended and Restated Patent and Technology Assignment
Agreement dated as of June 16, 2000 between Sunrise
Technologies International, Inc. and Bruce J. Sand(10)
10.19 Loan and Security Agreement dated June 29, 2000 between
Silicon Valley Bank and Sunrise Technologies International,
Inc.(10)
10.20 Negative Pledge Agreement dated as of June 29, 2000 between
Sunrise Technologies International, Inc. and Silicon Valley
Bank(10)
10.21 Third Party Pledge and Security Agreement dated June 29,
2000 between Sunrise Technologies International, Inc. and
Silicon Valley Bank(10)
10.22 Agreement dated as of July 3, 2000 between David A. Brewer
Trust and Sunrise Technologies International, Inc.(10)
*10.23 2001 Employee Stock Purchase Plan(17)
*10.24 2000 Long-Term Equity Compensation Plan(18)
*10.25 2000 Non-Employee Stock Option Plan(18)
*10.26 Supplemental Employee Stock Option Plan(18)
10.27 Distribution Agreement dated December 28, 2000 between
Sunrise Technologies International, Inc. and U.S. Medical,
Inc.
22.1 Power of Attorney (included on the signature pages to this
Form 10-K annual Report)
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
---------------
* 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)
(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)
51
(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 Annual Report on Form 10-K
for the year ended December 31, 1999 (File No. 001-10428)
(10) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed with the commission on July 17, 2000 (File No. 001-10428)
(11) Incorporated by reference from the registrant's Registration Statement on
Form S-1, as amended (File No. 33-36768)
(12) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 (File No. 0-17816)
(13) Incorporated by reference from the registrant's Current Report on Form 8-K
dated May 8, 1998 (File No. 0-17816)
(14) Incorporated by reference from the registrant's Registration Statement on
Form S-2 dated September 29, 1998 (File No. 333-64975)
(15) Incorporated by reference from the registrant's Registration Statement on
Form S-8 dated March 2, 1999 (File No. 333-73211).
(16) Incorporated by reference from the registrant's Registration Statement on
Form S-8 dated November 24, 1999 (File No. 333-91669)
(17) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 dated December 29, 2000 (File No. 333-52924)
(18) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 dated December 29, 2000 (File No. 333-52922)